All budgeting usually involves some guesswork. Budgets are a prediction of costs that will be incurred, although it is not unusual for unexpected costs to arise. That's why many organizations and governments use different types of budgets to plan their spending. A recurrent budget stands apart from other budget types because it considers variable, not fixed, costs.
A recurrent budget takes variable revenues into account, as opposed to fixed revenues. For example, a government that uses a recurrent budget includes revenue from taxes in the budget. Government officials know tax revenue will come in, but are unsure of the exact amount until taxes have been paid. A recurrent budget is therefore built upon estimated numbers and usually is created with a healthy cushion in case revenues come in low.
A recurrent budget considers operational costs, such as salaries, utilities and maintenance. Just like variable revenue, these expenses are guaranteed to occur, but the exact figure cannot be known until after the expense has been filed. For example, utility payments may drastically increase during a frigid winter, or an employee may quit mid-year, meaning the salary no longer has to be paid.
Point of a Recurrent Budget
A recurrent budget can help provide better money management. It acknowledges that certain costs cannot be known, and provides room for adjustment. It also helps budget makers know roughly how much money is available for non-recurring expenses. For example, if a recurrent budget is created, officials will know about how much money is left over for fixed costs, such as building new roads. If the budgets were rolled into one, officials may assume they had more or less money than available.
Danger of a Recurrent Budget
Recurrent budgets focus on operational costs over capital costs. Therefore, the expenses in the budget do not go toward improvements, such as infrastructure projects, which have fixed costs. The budget padding to account for unknown expenses takes away funding from non-recurrent budgets on paper. In reality, that means less money for new roads, schools and other improvements.
The flip side of this problem is when government allots too much money into capital budgets because infrastructure improvements are sorely needed. This can leave the government short on expenses it must pay to operate, such as salaries.
Example of a Recurrent Budget
Consider a research project. The variables in research projects include researcher stipends, which vary depending on the project's length. That line item will go into a recurrent budget for the project. However, certain costs are known when budgeting a research project. For example, project coordinators know how much equipment will cost because that is a fixed cost. That line item will go into a separate budget.