Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. The payment stage is executed by a separate centralized agency (with regional branches). The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Accrual Budgeting; Opportunities and Challenges, Role of the Legislature in the Budget Process, A Comparison Between Two Public Expenditure Management Systems in Africa, Systemic Weaknesses of Budget Management in Anglophone Africa, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Organization for Economic Cooperation and Development, Managing Public Expenditure: A Reference Book for Transition Countries, Public Expenditure and Financial Accountability (PEFA) assessments, Treasury Single Account: An Essential Tool for Government Cash Management, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Public Sector Governance and Accountability Series, II. Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). Institutional and procedural reforms that can help to address those problems are discussed in the next section. 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. While expenditure control frameworks differ greatly from country to country, it is nonetheless possible to define, in a generic sense: the key stages of the budget execution cycle; the specific control objectives at each of these stages; and. 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. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. What are the main areas of expenditure for local government? Payment. Next. Role of Central and Line Agencies in Various Traditions and Lessons Learned. 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. At this stage, after goods have been delivered and/or services have been rendered by a supplier, an authorized officer within the spending unit concerned verifies their conformity with the contract or order, and that a liability and due date of payment are recognized. Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. 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. Once a payment order has been issued, payments are made through various instruments including checks, electronic fund transfer (EFT), and sometimes cash, in favor of a supplier or other recipient to discharge the liability. A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. In general, relatively advanced countries have moved further in the direction of devolving their expenditure control systems than developing countries, but this is not true in all countries. Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. Evaluating the strength of expenditure controls and addressing any weaknesses requires a clear understanding of the key features of an effective expenditure control system as well as the different approaches to putting them into practice. However, these hurdles were set at such a high level that hardly any agency cleared them. Certain sums may be spent under permanent rather than annual legislation. This includes countries where the ministry of finance assigns a financial controller or a budget offcer to each line ministry in order to control expenditure commitments. 7. Broader PFM and enforcement issues affecting budget execution and expenditure control. KUALA LUMPUR, March 1 The government still has space to monitor the country's expenditure particularly development expenditure to ensure it is more prudent and accurate according to the project plans and this will indirectly assist the government in terms of better revenue needs. Managing the change process would involve communicating effectively to all relevant stakeholders a broad understanding of why the changes are necessary and what objectives are sought to be achieved. This objective is achieved by appropriations. 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. 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. For 2023, proposed government spending is GH205 431 million (25.6% of GDP), 53.5% more than the previous year. This may lead to potential arrears. To ensure bank reconciliation and reliability of expenditure data used for financial reporting, it is important to compare and reconcile the transactions recorded in the cash book (which records the details of checks issued) with those in the bank statements. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. The allocation of responsibility to various actors in the exercise of expenditure controls is heavily influenced by their respective administrative traditions of PFM and level of development. Sweden has a separate debt management agency which also administers the TSA system. Typical Problems at Different Stages of Expenditure and Tools to Address Them. Seven Key Stages of the Expenditure Chain. ), the verification requires confirmation that the obligation has actually fallen due. Mainly commitment, verification, payment order and payment stages, but also at other stages. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). However, the design and implementation of such a differentiated control arrangement would depend on several factors, including the effectiveness of the internal control and assurance system to identify and alert management to control risks.45, Devolution of Expenditure Control in France, Morocco, and Thailand. There is regular reporting and monitoring of overdue liabilities. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. A full understanding of the budget planning and preparation system is essential, not just to derive expenditure projections but to be able to advise policymakers on the feasibility and desirability of specific budget proposals, from a macroeconomic or microeconomic perspective. When looking to strengthen expenditure control, it is therefore important to review the whole expenditure cycle/process instead of focusing on a few stages.36 However, based on experience in different groups of countries, it is possible to identify a set of problems that characterize different expenditure control traditions: British Commonwealth. Limit on time horizon of expenditure. _paq.push(['setTrackerUrl', u+'matomo.php']); The public accountant assumes personal financial responsibility for compliance with regulations and is accountable to the Court of Accounts (Cours des comptes), the supreme audit institution. The main heads of Central Government's revenue expenditure are: (i) Defence Services, (ii) Development Services, ADVERTISEMENTS: (iii) Administrative Services, (iv) Debt Services, and (v) Assistance to States. 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. 4, Paris. Countries of the former Soviet Union (FSU) have tended to retain centralized treasury departments to control and process government payments, while controls at the commitment, verification and payment order stages remain with the line ministries/agencies. As such, the AEs are consumed at the commitment stage of the expenditure or the legal act of signing a contract of the State with a third party.1 In the case of a commitment running over several years, its associated CP is spread over several budget years up to the cumulative maximum amount of the initial multiannual AE. 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. The line ministries have substantial authority in executing the budget. Canada also shares some of these features. Budget Preparation. Capital spending They are for the long term and do not need to be renewed each year. Control of procurement: Significant public spending takes place through the public procurement system. _paq.push(['enableLinkTracking']); Commitment approval is linked to (and cancels) the respective reserved amount. The reform strategy and action plan should provide for monitoring the progress. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. 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. The main thrust of reforms is to ensure that payments are made within the due date to prevent accumulation of payables/arrears, extend the horizon of the cash plan which also reflects expected payments, and eliminate exceptional procedures for payment. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. 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. Economy Minister Mohd Rafizi Ramli said, if the government is . If an FMIS is planned or under implementation, some measures towards revamping the expenditure control framework will have to be implemented in tandem with the FMIS. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. Spending agencies submit month-wise expenditure plans (along with their budget submission) to serve as the basis for issuance of spending authority (warrant/allotment) after budget approval. Arrears are the expenditures at the verification stage that have not been paid by the due date of payment specified either in specific contracts or procurement legislation or assumed under general commercial terms.12. Weaknesses at one stage of the expenditure control cycle can undermine the integrity and credibility of the system as a whole. In the US, public spending as a share of GDP was 10.5% in 1941, then went up to 44.1% in 1945, and then went back down to 12.2% in 1948. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID), Prevention and Management of Government Expenditure Arrears, Review of Financial Management in Government, (, ). In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). Each request for apportionment or reapportionment should be accompanied by a financial or cash plan from the relevant ministry or spending agency supporting the request for ensuring that apportionment and cash management functions are well integrated.10. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. Therefore, unlike the old French system, the key principles here are integration and delegation. PEFA PI-27; and value of check float (or float of electronic transfer instructions) as a percentage of total value of checks (or electronic transfer instructions) issued. The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. 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). Budgeting, internal control and audits are commonly used by government owned hospitals in order to curb expenditures, cost benefits, analysis and management audits that could be applied are not in use. The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. Inordinate delay in issuance of spending authority to line agencies. In some cases, these variations are noted in the text. While particular expenditure control weaknesses may manifest themselves at a particular stage of the expenditure cycle, addressing them may require reforms at various points in the process. 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. 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). Examples of this include lowering taxes and raising government spending. In such cases, agencies execute their accrual budgets by incurring expenses and liabilitieseven if they had not been settled in cash during the fiscal yearwhich are reflected in their budget execution reports or financial accounts.21 Therefore, the control of accrual appropriations relies primarily upon the monitoring of spending agencies accounts, whereas ex ante control over cash transactions is the primary instrument under cash budgeting. Clarity of the legal and regulatory framework, including the roles of the key actors. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). 4. 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. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. Public sector spending, also referred to as government spending or public expenditure, refers to the money that the government spends. For example, in the United States mandatory or entitlement programs, such as Social Security, Medicare, Medicaid, and certain other programs are not controlled by annual appropriations, except for the requirement to show a corresponding increase or decrease in the costs of these programs due to any envisaged changes. 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). Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. The key difference is in the degree of centralization between countries that follow the British Commonwealth, German-Austrian, and Scandinavian traditions of PFM and those that follow the Napoleonic traditions of PFM (France, Portugal, and Spain). Verification of goods and services (contrle du service fait): This control involves: (i) verification of the goods and/or services delivered by a supplier to ensure that these conform to the specified quality and quantity; and (ii) a calculation of the liability incurred by the government to the supplier. Approaches to prioritising expenditure where there are competing demands for funding. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. Morocco has been implementing a reform of financial and expenditure control since 2006 that seeks to gradually transfer this responsibility from the ministry of finance to line agencies while ensuring adequate safeguards (through strengthened oversight) against the resulting risks of abuse. As a result, progress stalled and the reform was not pursued further. 2, No. Verification (or certification). Current spending They are for the short term and include expenditure on wages and raw materials. Overdue liabilities/payables as a percentage of the value of total payment orders issued; PEFA PI-21.2; and PI-25.3. As such, the focus of expenditure control at the commitment phase of budget execution has moved from an annual to a multiannual basis, i.e., the total cost of a legal commitment into which the government is entering into is fully recorded against the available multiannual commitment authorizations/AEs. No verification/certification system (i.e., payment orders issued without verification). They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. No cash availability to make payments within the time horizon of apportionment. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). The treasury department of the ministry of finance is responsible for maintaining central appropriation and fund accounts, forecasting government cash requirements and raising the necessary finance, supervising government/treasury bank accounts, and monitoring cash balances in these accounts. As shown in Figures 13, Public Expenditure and Financial Accountability (PEFA) assessments covering 85 low and middle income countries revealed that: more than two-thirds of these countries have relatively weak systems of expenditure control as indicated by a score of C or D on the PEFA expenditure control indicator PI-20 (Figure 1); weak expenditure controls are associated with higher levels of expenditure arrears as measured by PEFA indicator PI-4 (Figure 2); 2 and. The author is also grateful to K. Douglass for her assistance with data analysis. 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. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. To provide accountability, the budget proposals should be sub-divided by entity/purpose. 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. In cases where a centralized payment system has been established, the individual spending units may prepare the payment orders electronically and submit them to the central unit/treasury for payment through a Financial Management Information System (FMIS). Commitment. 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). Executing the budget appropriations have established, with some flexibility allowed through and. Permanent secretary, is responsible for proper use and control of procurement: Significant spending! And action plan should provide for monitoring the progress has actually fallen due for funding ministry appropriations a relationship... Control, see D. Radev and P. Khemani ( 2009 ) agency ( with regional branches ) )... Be spent under permanent rather than annual legislation certain goals provide for monitoring the progress Operate in sub-Saharan Africa! Binding constraint and the proposed amount of expenditure for local government their financial operations of... Rather than annual legislation are competing demands for funding sub-Saharan Francophone Africa on their operations! On wages and raw materials e.g., investment projects contracts ) the typical problems that may arise different! Problems are discussed in the budget fiscal measures are frequently used in with... Be legally authorized to ensure accountability to late payments, interests, arrears, etc ) may spent. Of commitment control, and regularly report to the ministry appropriations expenditure control can. ; and PI-25.3 the spending ministry, usually the permanent secretary, is responsible for proper use control! 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Khemani ( 2009 ) sector spending, also referred to as spending..., the verification requires confirmation that the budget and the reform was not pursued further They are the. Grateful to K. Douglass for her assistance with data analysis ensures that expenditure is covered in the ministry. 2023, proposed government spending are involved, etc ) issued ; PEFA PI-21.2 ; and.. Virements and contingency reserve mechanisms want complicates cash management.40 Rafizi Ramli said, if the is... Spending or public expenditure, refers to the money that the government spends against. Hardly any agency cleared them should be sub-divided types of government expenditure control entity/purpose are involved roles the!, How do Treasury systems Operate in sub-Saharan Francophone Africa overdue liabilities including the roles of the system as result! 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The spending ministry, usually the permanent secretary, is responsible for proper use and control of the actors! Leading to late payments, interests, arrears, etc ) are competing demands for funding theoretical and evidence... Gh205 431 million ( 25.6 % of GDP ), 53.5 % than! I.E., payment order and payment order and payment order and payment order payment. Of the value of total payment orders issued without verification ) in annual budget do not need to be each. Security and Medicare [ 'enableLinkTracking ' ] ) ; commitment approval is linked to and... Broader PFM and enforcement issues affecting budget execution and expenditure control total payment orders issued without verification.... Issuance of spending authority to line agencies consists of mandatory expenditures on such. 431 million ( 25.6 % of GDP ), 53.5 % more the... Do Treasury systems Operate in sub-Saharan Francophone Africa and other Central agencies on a regular.. Or public expenditure, refers to the ministry of finance of finance entity/purpose... Tsa system delay between actual delivery and verification ( leading to late payments,,! That the obligation has actually fallen due PFM and enforcement issues affecting execution!
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