The present invention discloses a system and method for adaptive adjustment of bit budget that favors the allocation of bits to intra coding frames (I frames). Namely, an encoder is able to dynamically adjust the bit budget for each picture type in an image sequence, thereby effecting proper usage of the available transmission bandwidth and improving the picture quality. In one embodiment, the present invention will allocate more encoding bandwidth to a current Intra coding frame when the average quantization level of inter coding frames (e.g., P and B frames) of a previous group of pictures is relatively high.