31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); But these funds may take some time to be further transferred to subsidiary spending units under the line ministries and then be spent on the salaries or goods and services that constitute final expenditure. These regulations, among other things, prescribe the establishment of responsibility for financial decisions, the segregation of duties to ensure appropriate checks and balances, and documentation procedures for maintaining a defined audit trail. Francophone and Lusophone. As part of the budgetary accounting, commitments and payments made (through the CPs) against each AE are tracked to identify and report on (i) AE approved in budget law; (ii) AE consumed through legal commitments; (iii) AE unused/available for new commitments; (iv) CP authorized in budget law; and (v) payments made or CP consumed (see figure below). In cases where the expenditure involves a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments, payments of household benefits, etc. the use of taxes, government spending, and government transfers to stabilize an economy; the word . Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Somali Regional State Government), Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Southern Nations, Nationalities and Peoples Region), Timor-Leste Public Expenditure and Financial Accountability Assessment 2018: Public Financial Management Performance Report, https://doi.org/10.5089/9781513574639.005. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. In countries of the British Commonwealth tradition, officials in spending agencies are charged with initiating and authorizing expenditure transactions, from commitment to payment, based on apportionments/allotments/warrants issued by the ministry of finance. In the German-Austrian tradition,35 as in Francophone and Lusophone systems, there is a clear division between the roles of ordering or anordnend (which covers the apportionment of the budget, together with the reservation, commitment, verification and payment order stages) and executing or ausfuehrend (which covers the execution of payments). The payment stage is executed by a separate centralized agency (with regional branches). This is what constitutes the hierarchical and risk-based control (control modul de la dpense) that Morocco has started to implement since 2008 (based on Decree n 207-1235 of November 4, 2008). The descriptions of the various traditions provided below are broad and general, and in practice, there are variations among the countries belonging to each tradition. In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. PEFA PI-22; and average time lag between delivery and verification. But, fiscal policy is also used to curtail . Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. To help PFM practitioners evaluate a countrys budget execution system and identify priorities for strengthening expenditure controls, this TNM: explains the key stages of the government expenditure chain (Section II); describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various institutional actors throughout the expenditure cycle (Section III); examines the influence of different administrative traditions on types of expenditure controls exercised and the allocation of responsibility for their application (Section IV); identifies the typical weaknesses and problems associated with different expenditure control traditions (Section V); and. In some countries, one single department may be responsible for both treasury management and accounting functions (which may be discharged by different divisions/units within the same department). Total revenue including grants . Check float time is the time between when a check is written and issued as a payment, and when the check is presented by the beneficiary to the bank for encashment. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. Broadly speaking, it exists not only in the United Kingdom, but also in Australia, New Zealand, Indian sub-continent, and many countries in Africa, Asia, Europe and the Caribbean that were former British colonies. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. Apportionment of authorization for specific periods and spending units. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation dengagement for multi-year investment projects in Francesee Box 3). Following confirmation that sufficient liquidity is available, a designated official approves the payment and issues a payment order. As a result, progress stalled and the reform was not pursued further. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. While the controls may be well specified and the roles and responsibilities of the key actors clarified in a countrys legal/regulatory framework, problems may still arise due to lack of enforcement. For example, in France, autorisation dengagement authorizes commitment for an investment operation that may entail payments over a multi-year period, while crdit de paiement limits the actual payments during the budget year subject to the overall limit under the respective autorisation dengagement (see Box 3). Whereas, in Francophone systems, the financial control officer is employed by the Budget Office, in Lusophone systems the payment-authorizing officer is employed by the Accounting Office. When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. Administrative unit accountable for expenditure. Decentralized frameworks have the advantage of: (i) aligning expenditure decision making with the spending priorities of line agencies; (ii) minimizing/eliminating redundant controls which in turn improves the efficiency and speed of expenditure execution; and (iii) making each line agency directly accountable for its spending programs. The distribution of responsibilities between them is typically organized along the following lines: The budget department of the ministry of finance issues regulations on matters related to the execution of the budget, apportions appropriated funds to spending agencies, monitors their expenditures and performance, authorizes in-year budget revisions, and monitors and reports on budget execution. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. Banks were privatized and deregulated, central bank laws introduced firm limits on the amount of credit available to the government, centralized treasury departments were established to raise financing from the private sector on commercial terms, control and process government payments, and report on budget execution through the main treasury account. The budget should be implemented as formulated and authorized with as little deviation as possible, but there should be room to adjust to changing circumstances (e.g., genuinely unexpected events) by modifying the budget as necessary during the year. Items of government expenditureItems of government expenditure Functional classification Government expenditures can be classified by the type of service that they provide: Ed tiEducation Health Social Security, Social Insurance and Assistance Defense Foreign Affairs Others: Energy & Natural Resour ces; Transportation . For example, there could be standing legislation for entitlement programs,7 servicing of debt, or payment of subscriptions to international organizations, which provides permanent legal authority to incur such expenditure subject to meeting specified parameters or criteria. For example, the Social Security Act requires the government to provide payments to beneficiaries based on the amount of money they've earned and other factors. Verification. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). Box 4 provides a few examples. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). However, these hurdles were set at such a high level that hardly any agency cleared them. Payment. In cases where the expenditure is subject to a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments), an estimate of obligation to pay should be made and treated as a commitment. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). 5. Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). It forms aggregate demand in addition to household consumption, business investment, and net exports. As these countries transitioned to market-based economies in the 1990s and early 2000s, and steps were taken to establish independent central banks, separate monetary policy from management of government liquidity, and reduce fiscal dominance over the banking sector, it was obvious that corresponding changes had to be made in the fiscal institutions responsible for budget execution and control. In any case, understanding the seven key stages of the expenditure cycle and associated control systems is also important to effectively design and implement an FMIS. It can be spent on a range of different . The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. Next. The expenditure cycle and associated controls in Lusophone African countries34 are quite similar to the control framework in Francophone systems, but there are a few key differences. If a future valuation shows that the costs of a scheme have risen or have fallen, action needs to be taken (via adjustments to member benefits or member contributions) to return costs to the level of the cap. In most cases, funds can be moved quite freely between sub-programs and items within the year. Identifying gaps and weaknesses in expenditure control in a particular country requires a systematic review of the integrity of the expenditure cycle, looking at: Definition/specification of key stages of the expenditure cycle, including the control criteria. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). The main goals of fiscal policy are to achieve and maintain full employment, reach a high rate of economic growth, and to keep prices and wages stable. The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. organisations (international central government and UK Local Authorities) and large private sector companies. Controls on liabilities or guarantees (contrle de liquidation): This control is applied on the incurrence of a liability or guarantee and again at the payment stage when the liability is extinguished or guarantee is paid. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. Effective expenditure control is the sine qua non of good public financial management (PFM). Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) This paper defines and explains key stages of the government expenditure chain and describes the controls applied at each stage, including their objectives and key features as well as centralized vs. decentralized approaches in application of those controls. For example, under an accrual-based budgeting system, the ministry of finance may: (i) delegate to spending agencies all decisions on their cash requirements and the timing of cash payments as long as the agencies conform to the expenses authorized on accrual basis; (ii) enforce a cash limit (either at an aggregated level or at a more detailed level) in addition to the amount of accrual-based expense authorized; and/or (iii) allow spending agencies to move cash appropriation into accrual-based expense but not vice versa.20, Commitment-based Expenditure Limits in France. Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). government budget, forecast by a government of its expenditures and revenues for a specific period of time. 2. However, the complexity of the expenditure chain, the precise nature of the controls exercised at each stage, and the degree of centralization varies considerably across countries and is heavily influenced by their respective administrative traditions. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Elementary and secondary education, utilities, public safety, health, roads, street lamps, signs, and traffic lights are the main areas of expenditure of the local governments. In Francophone and Lusophone systems, such wide ranging responsibilities are not provided to spending agencies and various departments of the ministry of finance play a major role at key stages of the expenditure cycle. It will also usefully guide technical assistance work related to modernization of government budget execution and expenditure control systems, including the design and implementation of IT-based financial management information systems. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Some countries PFM systems explicitly recognize all or most of the above stages and track them through a budgetary accounting system, while others formally track only a few of them.16 For example, the Spanish and Portuguese-speaking countries track all seven stages and the Francophone countries track at least six stages (the reservation stage or engagement budgtaire is also sometimes tracked). The lack of a comprehensive and credible budget particularly affects the authorization (as the expenditure authority is not realistic), commitment (as ongoing/outstanding commitments are not adequately allocated for) and verification (as the accumulated liabilities are not fully reflected in the budget) stages. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. Key strengths: centralized payment and treasury accounting system. })(); Copy this link, or click below to email it to a friend. The purpose of apportionment is to prevent spending agencies from incurring obligations at a rate which would require the authorization of additional funds for the fiscal year in progress.8 Once expenditure authorization is in place, it is apportioned for specific periods and/or specific spending units. Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. In some cases, these variations are noted in the text. In many countries each appropriation is the subject of a separate vote by the legislature. Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). If a liability has been incurred by the end of the fiscal year, this would be enough to report the expense or expenditure against the accrual appropriation. However, this may not be true when only a commitment has been incurred but the government does yet have a liability because, for example, the goods and services have not yet been supplied. Capital spending They are for the long term and do not need to be renewed each year. This authority to spend is released to the spending units through the issue of warrants/allotments/dcret de rpartition, or other mechanisms.9 Some form of centralized control during this phase of the expenditure cycle is common in almost all countries and is usually enforced by the budget department of the ministry of finance. Commitment approval delinked from apportionment and cash management frameworks. 2. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . Most budget execution control operations are delegated to the line ministries. Table 3 provides a summary of the roles played by central and line agencies at different stages of the expenditure cycle as well as the key strengths and challenges in different traditions. This should be supported by adequate monitoring at each stage of the expenditure cycle and ex post auditparticularly external audit to start withto ensure effective compliance. Where countries have cash appropriations and accrual based financial statements, this usually gives rise to differences between budget execution reports and financial statements that require reconciliation. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). This is known as retenciones de crdito in Spain (and a similar arrangement in Portugal) and engagement budgtaire in France which precedes the engagement juridique or legal commitment stage. It also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. In this context, the function of financial and expenditure control has been merged with the treasury and verification of the regularity of certain current expenditures (such as salaries, leases and certain procurement contracts) has been delegated to line agencies at the commitment level. Finance ministry monitors budget execution by line ministries/agencies. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. Thailand introduced a hurdle approach in the late 1990s to devolve budget execution control, moving this function from the finance ministrys Bureau of the Budget to line agencies. When the FSU countries were centrally-planned economies (i.e., before their transition to market-based economies), the ministry of finance played a minor role, mainly as the financial administrator of the central plan. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. They can be more easily circumvented, presenting the potential for error or fraud. The system of payments to government suppliers was highly decentralized. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Commitment limits may be multi-year in nature (usually for capital projects) and carried over from one financial year to the next, while cash expenditure limits are usually set for the budget year. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. 7/2009 sets a maximum one month complementary period. while others are purely internal to the government. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year. The main reforms include enhancing the coverage of the budget, improving the methodology of costing budget policies, introducing medium-term fiscal and budget frameworks, and ensuring timely submission and approval of the budget by the legislature. While providing examples of expenditure control practices from more than 32 countries, the paper points out that more than two-thirds of the 85 low and middle income countries covered by the publicly available Public Expenditure and Financial Accountability (PEFA) assessments have weak systems of expenditure control that are also associated with higher levels of expenditure arrears and a lack of budget credibility. the use of policy (such as fiscal policy or monetary policy) to reduce the severity of recessions and excessively strong expansions; the goal of stabilization policy is not to eliminate the business cycle, just to smooth it out. The amount of interest depends on the total federal debt and interest rates. For example, most countries with a Francophone tradition of budgeting enforce two types of expenditure limits: (i) the crdit limitatif, which enforces a strict limit; and the crdit valuatif, which is an indicative limit for certain categories of expenditure, e.g., debt service. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. The classification of public expenditure can be done in 4 ways: Revenue Expenditure The revenue expenditure is funded through the current revenue of the government that includes taxes and non-tax revenues such as welfare schemes or profits, or incidental incomes. Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . On the sectoral side, growth in public administration, defence and other services decelerated to a two-year low of 2.0 percent YoY in Q3 versus 5.6 . To function effectively, this approach requires a high level of capacity in the line agencies with devolved authority, timely and transparent financial reporting, and a strong internal and external audit function. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred.