Payment order. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. Lack of adequate control over government expenditure remains a problem in many countries. Control of procurement: Significant public spending takes place through the public procurement system. A comprehensive commitment control system is in place that captures not only one-off (purchase order type) but also multi-year (e.g., projects contacts) commitments. Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. 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 main reform at this stage is the introduction of a comprehensive commitment control system, including for multi-year commitments and standing commitments (e.g., salaries, utilities, subsidies, transfers, etc.). 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. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. Reservation/pre-commitment. Authorized purpose of the expenditure. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. The word budget is derived from the Old French bougette ("little bag"). Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. 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. The amount of interest depends on the total federal debt and interest rates. The contralora hence maintains overall control of budget execution. Public sector spending, also referred to as government spending or public expenditure, refers to the money that the government spends. 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. Apportionment, reservation, commitment and payment order stages and virements during budget execution. 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. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. 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. 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 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). This TNM has benefited from review and comments of M. Cangiano, M. Fouad, R. Hughes, R. Allen, R. Boukezia, B. Chevauchez, S. Flynn, D. Gentry, T. Hansen, R. Hurtado Arcos, C. Iles, D. Last, J. Menkulasi, D. Moretti, M. Nozaki, B. Olden, M. Pessoa, J Seiwald, H. van Eden, A. Veloz, B. Wiest, and several other colleagues from both the PFM divisions of FAD. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Payment order issued under exceptional procedure (i.e., bypassing previous stages). 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. 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. The nature of the expenditure limit enforced at each stage depends on the accounting basis used in the budget appropriation framework.19 Specifically: Cash-based budgeting systems primarily enforce a limit on the accumulation and liquidation of cash obligations incurred during the budget year. Although sequestering may sometimes be necessary, it diminishes the predictability of budgeted/authorized expenditure and undermines the credibility of the budget, and therefore should be used only in exceptional circumstances. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. Legality of the operation is controlled by verifying that the officials approving a transaction have the authority to do so, and that the required supporting documents have been prepared in line with the law/regulations (for audit). Payment. Line ministries and agencies initiate the commitment and payment and verify the delivery of goods and services. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). The various controls applied during the expenditure cycle can be grouped into six main categories. 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. 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). Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. 4, Paris. There is regular reporting and monitoring of overdue liabilities. 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. _paq.push(['enableLinkTracking']);
No verification/certification system (i.e., payment orders issued without verification). They are also reconciled with bank statements. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Broader PFM and enforcement issues affecting budget execution and expenditure control. Any perceived risks and/or uncertainties should also be adequately addressed. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). As these countries transitioned to market-based economies in the 1990s and early 2000s, and steps were taken to establish independent central banks, separate monetary policy from management of government liquidity, and reduce fiscal dominance over the banking sector, it was obvious that corresponding changes had to be made in the fiscal institutions responsible for budget execution and control. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. The authority for expenditure is In some countries, a powerful accounting organization (. The reform strategy and action plan should provide for monitoring the progress. while others are purely internal to the government. Total revenue including grants . 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). Expenditure not appropriated/authorized by the start of fiscal year. Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. 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. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? 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. When sequestering appropriations, ongoing commitments should be taken into account. 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. 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. Most budget execution control operations are delegated to the line ministries. 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. 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. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. 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 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. Bank-Qualified Municipal Bonds Marketplace Fairness and RTPA State and Local Tax Deduction (SALT) PolicyStatements Accounting, Auditing and Financial Reporting Budgeting and Financial Management Intergovernmental Relations and Federal Fiscal Policy Public Employee Pension and Benefits Administration None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. _paq.push(['setTrackerUrl', u+'matomo.php']);
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. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Expenditures. Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. PEFA PI-22; and average time lag between delivery and verification. 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. Economy Minister Mohd Rafizi Ramli said, if the government is . var _paq = window._paq || [];
Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Francophone and Lusophone. For example in Austria, as highlighted by external audit a few years ago, there were instances of either delayed or no recording of commitments until their respective payments materialized. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. 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. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Therefore, unlike the old French system, the key principles here are integration and delegation. In cases where the expenditure involves a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments, payments of household benefits, etc. Role of Central and Line Agencies in Various Traditions and Lessons Learned. 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. (function() {
Institutional and procedural reforms that can help to address those problems are discussed in the next section. 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. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). 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. 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. Warrants/allotments are not used as a cash rationing tool. In some countries, one single department may be responsible for both treasury management and accounting functions (which may be discharged by different divisions/units within the same department). 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. Box 4 provides a few examples. Clarity of the legal and regulatory framework, including the roles of the key actors. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. 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. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. 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. Mainly commitment, verification, payment order and payment stages, but also at other stages. PEFA Scores (200614) of 85 Countries for Expenditure Control Indicator, Citation: Technical Notes and Manuals 2016, 002; 10.5089/9781513574639.005.A001, Expenditure Control and Budget Credibility. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). 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). 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). They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. 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. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. However, these hurdles were set at such a high level that hardly any agency cleared them. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. Types of Spending 1. How Do Treasury Systems Operate in sub-Saharan Francophone Africa? 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. In the German-Austrian tradition,35 as in Francophone and Lusophone systems, there is a clear division between the roles of ordering or anordnend (which covers the apportionment of the budget, together with the reservation, commitment, verification and payment order stages) and executing or ausfuehrend (which covers the execution of payments). The commitment stage is the point at which a potential future obligation to pay is established. 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. The scope for establishing such advanced systems, however, remains challenging in many developing 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. In addition, the approach did not stipulate any time frame for agencies to upgrade their PFM standards, and there was an underestimation of their capacity-building needs. Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. 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. Banks were privatized and deregulated, central bank laws introduced firm limits on the amount of credit available to the government, centralized treasury departments were established to raise financing from the private sector on commercial terms, control and process government payments, and report on budget execution through the main treasury account. Payment order is issued within the payment due date to discharge the recognized liability. Checks and/or electronic transfer instructions bounce due to lack of cash. Payment. 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