Any part of that cost unpaid at the end of the period is a liability. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. Verification. Accounting and monitoring of budget execution were carried out by the banking system. To function effectively, this approach requires a high level of capacity in the line agencies with devolved authority, timely and transparent financial reporting, and a strong internal and external audit function. 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. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Government expenditure has ballooned over the years. 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. 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. 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. 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. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Payment and verification (in case of accrual accounting) stages. 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. 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. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. 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. _paq.push(['enableLinkTracking']); Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. 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. The author is also grateful to K. Douglass for her assistance with data analysis. 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. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . 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. It will also usefully guide technical assistance work related to modernization of government budget execution and expenditure control systems, including the design and implementation of IT-based financial management information systems. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 2, No. Warrants/allotments are not used as a cash rationing tool. Apportionment usually follows two steps: (i) apportionment by the ministry of finance, which consists of releasing the appropriation on a quarterly or monthly basis to the line ministries; and (ii) allotment by the line ministries or main spending units of their apportioned appropriations to their subordinate spending units. But, fiscal policy is also used to curtail . Defence Services: They account for nearly 20% of the total revenue expenditure of the Central Government in India. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. 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. Finance ministry monitors budget execution by line ministries/agencies. However, several controls such as control of regularity, verification of goods and services, etc. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. In most cases, funds can be moved quite freely between sub-programs and items within the year. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. 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. Funds/cash not available in government bank accounts to implement the payment order. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, (http://www.issai.org/media/13329/intosai_gov_9100_e.pdf). Limit on time horizon of expenditure. The actual expenditures may be greater than or less than the budget. All Rights Reserved. 7/2009 sets a maximum one month complementary period. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. 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. 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. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. 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. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. Payment order. Budget modifications during the year are done according to legally prescribed processes (e.g., virements, contingency reserves, and supplementary/revised budgets), transparently, and in a way that promotes governments chosen objectives. 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. 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. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); The key reforms include development of expenditure plans by line agencies and submission of these plans to the ministry of finance for decision on apportionment, and preparation of reliable cash flow forecasts to serve as the basis for apportionment. The hurdles were based on the following indicators of performance by the line agencies: (i) budget planning; (ii) output costing; (iii) financial and performance reporting; (iv) financial control arrangements; (v) procurement management; (vi) asset management; and (vii) internal audit. 1All uses of public funds should be governed by financial regulations. 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. The annual budget authority is regulated by the ministry of finance which releases warrants (notifications de crdit) specifying a commitment ceiling for each month or quarter. 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). It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). When several departments in the ministry of finance and other agencies are involved in the supervision of the expenditure cycle, clear business process rules delineating the respective functions of each are required. Stage of the Expenditure Cycle, Controls, and Actors. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. 2. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Reservation. 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. When it increases, aggregate demand increases, and we expect the economy to grow higher. Other specific controls relate to specific types of transactions and are designed to either reinforce macro-fiscal discipline and sustainability (e.g., controls on payroll, pensions, and incurrence or liquidation of liabilities or guarantees) or safeguard the integrity and efficiency of public procurement and payroll systems. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. There is potential scope for over commitments and/or manipulation of in-year data on commitments which may not be systematically recorded/tracked in a timely manner at the respective stage of the expenditure cycle.39, Scandinavian. In case of relatively simple requirements, a spreadsheet-based application may suffice. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). By contrast, British Commonwealth countries do not formally track controls at every stage and typically track only the first and last two stages of the expenditure chain: authorization, payment order, and payment (see also Section IV). Clarity of the legal and regulatory framework, including the roles of the key actors. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. Expenditure Control: Key Features, Stages, and Actors. The amount of interest depends on the total federal debt and interest rates. 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. In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, 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. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Capital spending They are for the long term and do not need to be renewed each year. 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. Effective expenditure control is the sine qua non of good public financial management (PFM). 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. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. 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 . Apportionment. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. 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). multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. Sometimes called the Westminster system of PFM. The key reforms include clarifying responsibilities for verification of delivery of goods and/or services, ensuring documentary proof of delivery, and eliminating any undue delay between verification and issuance of payment orders. Most budget execution control operations are delegated to the line ministries. Payment. The reform strategy and action plan should provide for monitoring the progress. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund). Public sector spending, also referred to as government spending or public expenditure, refers to the money that the government spends. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. 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