while others are purely internal to the government. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. 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 . Commitment. 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. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). A complementary period (generally two months)33 is allowed after the close of the fiscal year to process and record payments in respect of commitments that were authorized before the close of the fiscal year, but for which the actual delivery of goods or services has yet to take place. Under a dual accrual and cash budgeting/appropriations framework, there is a need for each agency to make projections of both its anticipated cash requirements as well as incurrence of expenses and liabilities and accumulation/realization of long-term obligations and contingent liabilities. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Mainly commitment, verification, payment order and payment stages, but also at other stages. No verification/certification system (i.e., payment orders issued without verification). In most cases, funds can be moved quite freely between sub-programs and items within the year. Payment and verification (in case of accrual accounting) stages. 4. 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. var u="https://piwik.pentaho.aidcvt.com/"; The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. In some Latin American countries, e.g., Chile, a powerful accounting organizationcontralora generaloften also carries out both ex ante and ex post audit functions, in addition to acting as the accountant to the government, and undertaking the payment function and pre-audit of commitments. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. Thus, the changes will affect the economy. 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. Section 3. In fact, with the functionalities available from a modern IT-based FMIS, information on budget execution can be made quickly available, and it becomes straightforward for the ministry of finance/treasury to track expenditure transactions as they pass through the various stages of the expenditure cycle, even when transactions are fully administered within line agencies. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. 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. This plan indicates the funds required for operations, typically on a quarterly or monthly basis. Cash Management: How Do Countries Perform Sound Practices? 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. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. 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. In case of relatively simple requirements, a spreadsheet-based application may suffice. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. In some countries, the ministry of finance uses sequestering to prevent such risks. They are also reconciled with bank statements. Inordinate delay in issuance of spending authority to line agencies. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). 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. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. There is also lack of control over agencies with own revenue outside the treasury system. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. In the third phase, a risk-based approach to control (control modul de la dpense) could be introduced, which in essence comprises the replacement of systematic ex ante control at the line item/transaction level by ex post audit and strengthened oversight. Certain sums may be spent under permanent rather than annual legislation. For 2023, proposed government spending is GH205 431 million (25.6% of GDP), 53.5% more than the previous year. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). This includes, but not limited to: failure to check the availability of funding before authorizing expenditure; failure to record and maintain data on commitments; delays in processing of payments; circumvention of controls at key stages, including through collusion; and poor record keeping, including of verification documents. Reservation/pre-commitment. 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. Authorized purpose of the expenditure. Capital spending They are for the long term and do not need to be renewed each year. In many countries each appropriation is the subject of a separate vote by the legislature. But, fiscal policy is also used to curtail . 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 verification requires confirmation that the obligation has actually fallen due. These stages are: 1. 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. 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. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. PEFA PI-22; and average time lag between delivery and verification. When sequestering appropriations, ongoing commitments should be taken into account. The introduction of an FMIS can thus strengthen expenditure controls as the system can replace several key controls that were previously applied manually and systematically track them. The accounting department22 of the ministry of finance issues regulations and guidelines on matters related to the preparation of financial accounts by spending agencies, prepares and issues government-wide financial reports, and conducts regular bank reconciliations. 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. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. This objective is achieved by appropriations. (function() { var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; The process of issuing checks should be managed to monitor and minimize check float14 and ensure that sufficient cash is available when they are presented for encashment. Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Therefore, there would be no under-execution of the budget under these circumstances. 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. Advertisement. 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. 1. In line with internationally accepted good practice, the payment should be made through a treasury single account (TSA) system.13 Payments by checks are, in most countries, recorded at the point of their issuance. 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. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. 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. Commitment approval delinked from apportionment and cash management frameworks. For this purpose, the spending units were grouped into two categories and the devolution of financial and expenditure control started with the best-performing line agencies at the superior level. A unit of government, typically a line ministry, department or agency, is assigned the responsibility to ensure that the appropriated resources are spent as intended within the authorized limits. 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. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. Commitment approval is linked to (and cancels) the respective reserved amount. Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. 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. This principle of separation of responsibility means that no single individual or agency controls all stages of an expenditure transaction.29 The system has also a number of potential redundancies, e.g., the control of regularity is applied both by financial controllers and public accountants. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). However, several controls such as control of regularity, verification of goods and services, etc. not tracked. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . fiscal policy. For example, a treasury-based centralized payment system with decentralized responsibility for appropriation and commitment controls at the line agency level can be progressively introduced as the FMIS is rolled out (subject to adequate connectivity between the line agencies and the treasury). 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. The commitment stage is the point at which a potential future obligation to pay is established. Clarity of the legal and regulatory framework, including the roles of the key actors. 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. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. The various controls applied during the expenditure cycle can be grouped into six main categories. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. Accounting and monitoring of budget execution were carried out by the banking system. 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. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. As these countries transitioned to market-based economies, they established centralized treasury departments under the finance ministry to process payments and exercise control at the payment stage. The three main types of government expenditure include public services, transfer payments, and debt interest. Tailored financial services and climate risk management tools to link small farmers to markets, The Real Actors and the PMP (Policymaking Process), Housing Finance in Chile: Instruments, Actors, and Policies, The Political Economy of Productivity: Actors, Arenas and Policymaking, How Democracy Works: Political Institutions, Actors and Arenas in Latin American Policymaking, Sustainable Forest Management in Latin America: Relevant Actors and Policies, Urban Heritage Conservation in Latin America and the Caribbean: A Task for All Social Actors, Public Financial Management in Latin America: The Key to Efficiency and Transparency, Costa Rica: The Next Stage-Reform without Volatility; A Report, Who Decides on Public Expenditures? 7/2009 sets a maximum one month complementary period. However, overall responsibility for budget execution is assigned to the respective line minister (or the head of an independent State body) who allocates budgeted resources to the various departments/agencies under his/her authority and delegates responsibility for budget execution up to the stage of the preparation of payment orders. Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. These include appropriation control, commitment control, and accounting control. These valuations measure the full costs of paying pension benefits. Similarly, the procedure of using an imprest (dpenses par rgies davance), which does not follow all the control stages and should be used only for urgent minor expenditures, is sometimes used to speed up the expenditure process. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. 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. 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 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. Role of Central and Line Agencies in Various Traditions and Lessons Learned. 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. 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). 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. 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. International Monetary Fund Copyright 2010-2021. A change management strategy should also be developed and implemented, taking into consideration the implications of the reform strategy for diverse stakeholders, from senior officials to agency heads, and the personnel who will support the new systems. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund).
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