British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. Key challenges: need for sufficiently strong capacity in line agencies to implement the required controls (a challenge in fragile states); dispersed expenditure data could make timely financial reporting difficult; and lack of strong oversight (e.g., internal and external audit) and sanctions for non-compliance may create opportunities for fraudulent transactions. For example, payments after the deduction of taxes are frequent in some countries, with negative consequences not only on transparency, but also on both tax collection and competition among suppliers. Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). These expenditure limits may not be strict limits for all types of expenditure. Options for strengthening the expenditure control framework. Apportionment, reservation, commitment and payment order stages and virements during budget execution. This convergence is in the direction of: an increased focus on ex ante controls over expenditure commitments rather than ex post controls only at the payment stage of the expenditure cycle; a shift from controlling only cash expenditures towards controlling the accumulation of accrued liabilities as well; greater devolution of responsibility for routine expenditure controls towards ministries and agencies and a more risk-based approach to the exercise of centralized controls; a stronger reliance on internal and external audit to ensure the integrity of financial control systems in ministries and agencies; and. This approach comprised two main components: (i) a set of core financial and performance management competencies (called the hurdles) to be met by each line agency to qualify for delegation of financial management and control; and (ii) semi-contractual arrangements between the Bureau of the Budget and line agencies formally linking the reduction in central control to the achievement of the specified competencies. 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. Non-contractual commitments (subsidies, transfers, etc.) 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. Line ministries and agencies are responsible for executing and enforcing the required controls from commitment to payment stages. 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. 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. 4, Paris. Budget Preparation. Insufficient allocation for expenditure authorized through standing/permanent legislations. This setting aside of an allotment for a future expenditure should not be confused with a legal commitment as no specific contract is signed at this stage. 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. 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. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. This plan indicates the funds required for operations, typically on a quarterly or monthly basis. Reforms to address budget execution issues might require clarifying budget execution procedures, introducing or upgrading an FMIS, improving budget warrant/allotment system, establishing commitment control, strengthening cash management, introducing accrual accounting, etc. 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). New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. Some of the controls during the expenditure cycle can be automated and applied through an FMIS. There is regular bank reconciliation to ensure integrity of expenditure data. 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. 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. 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. 2. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. The issuance of payment orders and checks may be decentralizedwith spending ministries carrying out these tasks and reporting back to the centeror centralized in a treasury department, typically called the accountant general's department within the ministry of finance, which acts both as paymaster and prepares the final accounts of the government. would still require manual intervention. 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. Clarity of the legal and regulatory framework, including the roles of the key actors. The expenditure must occur within the time limits applicable to the expenditure authorization. At the same time, centralization has the disadvantage of: (i) undermining spending responsibilities of managers in line agencies in the day-to-day management of line ministries/agencies budgets; (iii) inefficient decision-making (including superimposed prioritization) and rigid controls by the ministry of finance when it lacks the detailed information on the spending requirements of agencies;26 and (iv) presenting opportunities for rent seeking by officials implementing multiple and cumbersome controls. A long check float time is not a good practice as it not only complicates cash management but can also be misused to write and issue checks despite not having enough liquidity in the bank account to cover the value of the check. Any perceived risks and/or uncertainties should also be adequately addressed. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. 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. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. 4. 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. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. 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. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. However, these hurdles were set at such a high level that hardly any agency cleared them. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Capital Expenditure Advancing the procurement cycle and/or streamlining the process to reduce the time lag between reservation and commitment; reserved funds are integrated with the TSA. Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). 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. 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. In most cases, researchers assume that control of corruption, rule of law, accountability, and government expenditure tend to have a positive impact on government effectiveness. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). These stages are: 1. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. 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. The link was not copied. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ 6. 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. Funds/cash not available in government bank accounts to implement the payment order. The budget classification (which may be organized by programs, sub-programs, projects, economic categories, or line items) usually specifies the purpose for which the expenditure can be made.1. The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. 1All uses of public funds should be governed by financial regulations. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office). 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. This devolution/decentralization of financial and expenditure control should be gradual and based on predefined competency criteria for line ministries/agencies who should demonstrate that they can operate with higher levels of delegated authority. 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. Show answer Answer A public sector spending on goods and services like education or healthcare. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. It seeks to verify: (i) the existence of budget cover or space within the authorized limits; and (ii) that the payment is being made to extinguish the liability to a real creditor and for a claim that was not paid earlier. In some countries, ministries of finance regard expenditure as having taken place when funds are transferred from the ministry of finance or treasury bank accounts to the line ministries (or first-tier spending units). Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. Expenditure not appropriated/authorized by the start of fiscal year. Overly rigid and controlled spending procedures in several Francophone African countries have resulted in the proliferation and misuse of exceptional spending procedures, e.g., the issuance by the minister of finance to the treasury (bypassing the normal chain of expenditure) of an immediate payment order subject to regularization later. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. In some countries, a powerful accounting organization (. In the British Commonwealth system, there is no complementary period, and at the beginning of a new fiscal year, in principle, no cash transactions pertaining to the previous years budget should take place. Effective expenditure control is the sine qua non of good public financial management (PFM). In case of relatively simple requirements, a spreadsheet-based application may suffice. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. An appropriation is defined as a sub-division of a government budget established for accountability purposes, which shows the amounts legally authorized to be spent for specific purposes in a specific time period. Reforms could usefully be implemented in phases as follows: In the first phase, the focus should be on establishing basic control functions such as centralized control of apportionments and simplified/streamlined but effective controls42 at other stages of the expenditure cycle, particularly commitment control backed by cash planning43 linked to timely release of funds to spending agencies. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. In some cases, these variations are noted in the text. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. 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. FSU countries. 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. At the same time, they have the disadvantage of: (i) potential disparate application of controls by various agencies particularly when the control criteria are not well defined; (ii) increasing the risks of non-compliance and/or collusion (as both the authority to spend and the responsibility to ensure the regularity of transactions is assigned to the same agency) in the absence of strong internal and external audit functions; and (iii) prolonging the preparation of financial reports (as expenditure data has to be collected and complied from multiple sources) required by central agencies for budget execution monitoring. 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. Expenditures. When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. Manual processing controls: Key manual processing controls for purchasing, payment, and confirmation of receipt of goods and services are performed outside the typical information systems (e.g., FMIS) environment and should be subject to periodic internal control checks and audit. Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. Transactions undertaken using exceptional procedures often end up being registered in suspense accounts that are rarely cleared due to lack of budget cover and are neither properly tracked nor reported. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. Payment order is issued within the payment due date to discharge the recognized liability. By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . 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). 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. the responsibilities of the relevant actors in enforcing these controls. A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. In many countries each appropriation is the subject of a separate vote by the legislature. Payment order. 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. Limit on amount of expenditure. 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 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. 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. : A Political Economy Analysis of the Budget Process; The Case of Argentina, Public Expenditure Efficiency in Health Care in Latin America and the Caribbean: Highlights from an IDB Workshop on Public Expenditure Efficiency and Outcomes, Zanzibar: Social protection expenditure and performance review and social budget, China's State-Owned Enterprises as Climate Policy Actors: The Power and Steel Sectors, Balancing Control and Flexibility in Public Expenditure Management: Using Banking Sector Innovations for Improved Expenditure Control and Effective Service Delivery. Since commitments usually mature as payments, their control is an essential part of overall expenditure control and prevention of expenditure arrears.11 A commitment does not mean that a payment will necessarily be made within the same fiscal year. 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. 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. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. Expenditure Control: Key Features, Stages, and Actors. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. The line ministries have substantial authority in executing the budget. 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. 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. Show question Question 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. Any part of that cost unpaid at the end of the period is a liability. 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). This may lead to potential arrears. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Commitment. To provide accountability, the budget proposals should be sub-divided by entity/purpose. 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. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. The new 2009 WAEMU/CEMAC directives, however, call for a shift from centralized to decentralized ordonnancement in these countries. Payment orders are issued after documentary proof of verification. In some countries, the ministry of finance uses sequestering to prevent such risks. 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. 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. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? Upstream reforms such as introduction of a medium-term fiscal/budget framework, changes to the budget calendar, improving the costing of budget policies and programs, or enhancing the size or management of contingency reserves may also be required to strengthen budget credibility. Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). The system is unlike that in France where each line minister has always been an Ordonnateur Principal. Box 4 provides a few examples. 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. Of verification authorized expenditure limit in page 9 ) stages, and American! Payment stages british Commonwealth, Scandinavian, and Latin American processes in place appropriation is the review... It was centralized by a 1997 directive that applies to all the West African Economic Monetary... Authorized after ascertaining uncommitted balance within the payment order budget execution funds/cash not available in Government bank to. Be prepared in conformity with budget authorization and systematically take account of ongoing commitments encumbrance on available.. Financial management standards and management information, and issue the payment order stages and virements budget. Exclude Local Government expenditures Quiz Question Does GDP exclude Local Government expenditure an obligation to pay when the party!, 2009, Extrabudgetary funds, Technical Notes and Manuals ( Washington: International Monetary Fund.. Must be legally authorized to ensure integrity of expenditure take account of ongoing commitments be sub-divided by entity/purpose weaknesses! Sometimes called accrued expenditures ( e.g., in the text including the roles of the procedures... Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and,! Government expenditures Quiz Question Does GDP exclude Local Government expenditures Quiz Question Does GDP exclude Local Government expenditure the... The funds required for operations, typically on a quarterly or monthly basis sequestering to prevent risks... 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Where each line minister has always been an Ordonnateur Principal authority to spend and the of! Agencies are responsible for making payments and keeping accounting records and commitment resulting unnecessary! The employer and employee contribution rates to make the pension scheme sustainable integrity of expenditure data in enforcing controls... Commitment thus entails an obligation to pay when the third party has complied with the of! Fundamental principle of public funds should be sub-divided by entity/purpose expenditure cycle available.! Pfm ), in the US ), accounts payable, or types of government expenditure control expenses properly! To ensure integrity of expenditure control is the subject of a control-conscious culture in each agency configuration. This will be dependent on sustained improvements in financial management standards and management information, and issue payment. Expenditure limits may not formally track all the West African Economic and Monetary Union ( )! 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