Bootstrapping India
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Relating   Expenses   with   Revenue


The revenue of a Govt department comes eighter from taxes or fees, or both. There is some uncertainity in guessing taxes as well as fees. There is some uncertainity in guessing the expenses too. There is quite a possibility that actual expenses exceed revenue. Now it is necessary that a government owned department DOES NOT run into debt, and so manages strictly within the funds it gets as far as possible. This reduces the chances of running into deficits. How can this be done?

When revenues decreases, some of expansion related expenses, abd other VARIABLE costs, can be easily cut. eg say there is a famine or a natural disaster and funds were diverted to meet that disaster. In such case, highway dept may fall short of funds, in which case it can postpone the development of highways. But real problem is managining the fixed costs, like paying salaries of officers in police, military, record keeping etc.

The exact procedures to ensure that expenses AUTOMATICALLY get cut when revenues decrease will need to differ from department to department, based on the specific acitivity of that department.

Here is a generic procedure, which describes how salaries can be reduced when revenues reduce
  1. The Chairman (Head) of the department will create estimates of tax money that the department will get and fees the department will collect based on the taxes/fees collected in the previous years and changes in tax/fees rates.

  2. The Chairman must manage ALL expenses of current month of his departmentsí employees strictly from the taxes/fees received in previous months.

  3. The Chairman CANNOT take any debt from any source to fund the expenses.

  4. The salaries of ALL employees will be stated in terms of revenue. For example salary of clerk can be stated as
       Rs. 3000 a month will be base.
       Rs. 5000 for a month, if revenues (taxes plus fees) are Rs 50 crore or more

       Rs 4000 for a month, if revenues are Rs 40 crore and so forth.

    Thus salaries paid are tied with the revenue of the Department. : If the revenue is less, the salaries/rent paid out will be automatically less and so chances of deficit will be small.

  5. Now the sum total of all base-salaries MUST not exceed 50% of revenue collection of previous year, and the sum of all compensations for a given amount of revenue, all expenses added do not exceed 90% of the revenue.
  6. If the revenue falls bellow base expenses, the Chairman can propose an Emergency Tax Bill to the Legislature to meet the expenses.
Similar approach can be taken for rents -- the rents can be stated in terms of revenues. Will the land lord be willing to absorb the fluctuations? Yes. Many landlords prefer govt body to private body as a govt body is far less less likely to default than a private body.

Now such approach is NOT possible for ALL expenses. eg electricit/phone companies are unlikely to keep bills based on revenues of the department. This fixed expenses are fortunately smaller part of the total expenses in most govt departments.

In short, as far as possible, the payment-contracts should be linked with revenues recieved. This will ensure that chances of running into deficits are very low.