Budgeting 101: What is absorptive capacity?

What is absorptive capacity?

In simple terms, absorptive capacity, as used in public financial management, refers to the ability of government agencies to utilize or use the resources (e.g., government funds) made available to them. [1][2][3]

One example of resource available to government agencies is their annual budget under pertinent appropriations act.

Absorptive capacity means the ability of the government agency to use its budget under the appropriations act and may be measured using different ways depending on what the government wants to measure.

The most common measure of absorptive capacity is the budget utilization rate (BUR) which may be computed as obligation rate or disbursement rate.

Obligation Rate

Obligation rate is used to measure the ability of the agency to utilize the allotment or obligational authority made available by the Department of Budget and Management (DBM) to the agency.

Obligation rate is measured as the ratio/percentage of obligation over the allotment issued to the agency (i.e., obligation divided by allotment). This may be computed per allotment class or total obligation over total allotment.

Disbursement Rate

On the other hand, disbursement rate is used to measure the ability of the agency to pay or settle its obligations.

Disbursement rate is measured as the ratio/percentage of disbursement over the obligation incurred by the agency (i.e., disbursement divided by obligation). This may likewise be per disbursement by allotment class or total disbursement over total obligation.

Use of Government Funds

There are several ways for which agencies can use the resources (funds) made available to them, depending on what was authorized under the appropriations act for the said funds. Some of these are the following:

• Payment of personnel services such as salaries, allowances, bonuses, incentives and other authorized personnel benefits;
• Payment of regular operating expenses of the agency such as traveling expenses, training expenses, supplies and materials expenses, repairs and maintenance expenses, representation expenses, and other essential maintenance and other operating expenses.
• Procurement of machineries and equipment, furniture and fixtures, motor vehicles, etc.
• Construction of buildings, roads, bridges, ports, airports, etc.
• Implementation of social programs and services of the government, education programs, foreign relations, etc.
• Payment of debt services
• And so on…

Helpful articles to understand absorptive capacity better

To learn more about the basic budgeting terms used in this explainer, and to understand more the concept of absorptive capacity, we recommend that you also read the following articles.

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