This deficit provides an indication of the financial health of the economy. fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. The apportionment process is critical to ensuring that expenditure totals are respected and any virements or claims on the contingency reserve are reflected in the revised allocation of appropriations. Show question Question A distinguishing feature of a governments budget, unlike the budget of a typical business entity, is that it is funded primarily via compulsory taxation of citizens and authorized via an act of Parliament. Seven Key Stages of the Expenditure Chain. The strengthening of the expenditure control framework should not be viewed as an independent activity and should be integrated with other PFM reforms, including changes to budget execution processes. To be able to exercise upfront control over the future resource requirements related to pensions, countries implementing accrual budgeting (e.g., the UK, Australia and New Zealand) include the accruing cost and any unfunded liabilities of pension schemes17 within budgetary limits for each government department.18. 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). Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. As a result, progress stalled and the reform was not pursued further. would still require manual intervention. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. Payment order. Payment order is issued within the payment due date to discharge the recognized liability. Limit on amount of expenditure. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). The lack of effective communication between treasury, which uses a cash-based budget execution system, and line agencies, which maintain their own accounting records (normally on accrual basis), leads to problems in reconciling expenditure data. Box 4 provides a few examples. Current spending They are for the short term and include expenditure on wages and raw materials. All Rights Reserved. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Sometimes called the Westminster system of PFM. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. 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. 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. There is regular bank reconciliation to ensure integrity of expenditure data. The various controls applied during the expenditure cycle can be grouped into six main categories. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). Capital Expenditure In the second phase, the focus should be on progressive devolution of controls to spending agencies in parallel with a reinforcement of procedures for auditing and reporting. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). The commitment stage is the point at which a potential future obligation to pay is established. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. In addition to reviewing and streamlining the formal procedures defined by the financial regulations, informal and any special procedures and practices that bypass the normal expenditure cycle should be thoroughly reviewed and (to the extent possible) eliminated.44 Business rules and processes should be established to enable faster spending execution to address priority needs rather than relying on informal/special procedures that undermine the effectiveness of the expenditure control framework. Sweden has a separate debt management agency which also administers the TSA system. This may lead to potential arrears. Apportionment. Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. Economy Minister Mohd Rafizi Ramli said, if the government is . For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Expenditure Control: Key Features, Stages, and Actors. 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). 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. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). Mainly commitment, verification, payment order and payment stages, but also at other stages. 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. Francophone and Lusophone. At this stage, there is no commitment, but it is known that the expense will be incurred during the budget year and, therefore, the reserved funds should not be used for other activities. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. Apportionment of authorization for specific periods and spending units. Types of Spending 1. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. 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. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. 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. They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. 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. Spending units may have bank accounts which are a subsidiary of the TSA; such accounts could be zero-balance accounts with commercial banks, with money transferred into them as the payments are approved, and with their balances swept daily into the TSAs top account for cash consolidation. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. The key players are financial controllers (contrleurs financiers) who are generally under the Budget Department of the ministry of finance and exercise a priori control (in the form of issuance of a visa) at the commitment stage, commitment officers (ordonnateurs) who approve the issuance of payment orders to the Treasury, and public accountants or cashiers (comptables publics) who belong to the public accounting directorate and are responsible for ensuring that the verified bills are paid. The key questions to be asked are: (i) whether all the key stages of the expenditure cycle and associated business rules and processes have been clearly defined; and (ii) whether the required controls at each stage have been clearly specified and consistently applied. In fact, excessive duplication of controls is a common disease in many countries, particularly in Francophone Africa, which not only results in ineffciency in executing expenditure but also leads to rent seeking by officials who intervene at different stages of the expenditure transaction. 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. Commitment approval delinked from apportionment and cash management frameworks. 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. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments. The authorization for expenditure is usually given through the budget law which defines the time horizon for, limits on,5 purpose of, and administrative unit accountable for government expenditure (Box 1).6 To deal with unanticipated spending pressures, some flexibility in the allocation of expenditure between sectors may be allowed subject to clear rules/criteria (e.g., through virements and/or allocation from a contingency reserve). Authorized purpose of the expenditure. 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. 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. Commitment approval is linked to (and cancels) the respective reserved amount. Procurement procedures should provide a fair opportunity for all bidders to compete for government contracts, and be designed to get good value for money and to minimize risks of corruption and patronage. The role of an expenditure control system is to ensure that the level and allocation of government expenditure reflect the will of the legislature as voted for in the budget.3 Expenditure controls should also reflect sound financial management principles, ensuring that public resources are utilized efficiently, incurred obligations are cleared in a timely manner, abuse/ misappropriation of public money is prevented, and private actors compete on a level playing field for government contracts. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. 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. Expenditures. Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). A key point to note here is that without enhancing the capacity of the line agencies to meet the specified competency criteria, such devolution of controls are unlikely to take hold (e.g., the case of Thailand discussed in Box 4). An overview. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. What are the main areas of expenditure for local government? Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. 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. For example, the UK uses the employer cost cap mechanism to control future pension spending. 4. Government expenditures as a share of national output went sharply up and down in these countries, mainly because of changes in defense spending and national incomes. Payment and verification (in case of accrual accounting) stages. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. Some of the controls during the expenditure cycle can be automated and applied through an FMIS. Any part of that cost unpaid at the end of the period is a liability. Key Stages of Expenditure Control Framework, Seven key stages of the expenditure cycle, III. 2. The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . government budget, forecast by a government of its expenditures and revenues for a specific period of time. Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. 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