Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Key strengths: centralized payment and treasury accounting system. 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. 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. 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. 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 cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. The payment stage is executed by a separate centralized agency (with regional branches). The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. Current spending They are for the short term and include expenditure on wages and raw materials. Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. A strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. 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. Overdue liabilities/payables as a percentage of the value of total payment orders issued; PEFA PI-21.2; and PI-25.3. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. In some countries, a powerful accounting organization (. Sometimes, a consolidated check is issued to cover multiple payments by the bank to the respective beneficiaries accounts (e.g., payroll payments) as per the treasurys instructions. The contralora hence maintains overall control of budget execution. 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). They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. Time horizon of apportionment too short for expenditure planning and execution by line agencies. Finance ministry monitors budget execution by line ministries/agencies. 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. 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. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. The expenditure cycle and associated controls in Lusophone African countries34 are quite similar to the control framework in Francophone systems, but there are a few key differences. However, these hurdles were set at such a high level that hardly any agency cleared them. Authorized purpose of the expenditure. The amount should be correctly calculated and there should be no hidden expenses. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. They can be more easily circumvented, presenting the potential for error or fraud. The key questions to be asked are: (i) whether there are clear laws and financial regulations regarding the controls and the authority and responsibility of relevant actors who should apply them; and (ii) whether the relevant actors understand and apply them in practice. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Check float has two dimensions: (i) check float time; and (ii) check float amount. Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. Economy Minister Mohd Rafizi Ramli said, if the government is . weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). 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. Commitment. Government expenditure has ballooned over the years. Apportionment of authorization for specific periods and spending units. 7. 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). Next. 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. 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. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID), Prevention and Management of Government Expenditure Arrears, Review of Financial Management in Government, (, ). Public sector spending, also referred to as government spending or public expenditure, refers to the money that the government spends. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. 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. 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. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. var _paq = window._paq || []; Show question Question Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year. 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. the use of taxes, government spending, and government transfers to stabilize an economy; the word . _paq.push(["setDoNotTrack", true]); 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. These include appropriation control, commitment control, and accounting control. HM Treasury, 2013, Review of Financial Management in Government, (www.gov.uk). Reservation/pre-commitment. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. For example, prior to the 1990s, financial control was under the Presidency (Cte dIvoire), the Prime Ministers Office (Senegal), or was the responsibility of a separate ministry. Types of Control, Their Key Features and Objectives. g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); Cash Management: How Do Countries Perform Sound Practices? Capital Expenditure 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. Commitment approval delinked from apportionment and cash management frameworks. 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. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. KUALA LUMPUR, March 1 The government still has space to monitor the country's expenditure particularly development expenditure to ensure it is more prudent and accurate according to the project plans and this will indirectly assist the government in terms of better revenue needs. Article 78 of the WAEMU Directive No. 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. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. Expenditure committed but respective reservation/ encumbrance not annulled. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). Controls at the commitment, verification and payment order stages remained the responsibility of the line ministries/agencies, with variations, however, in the effectiveness with which such controls are exercised. 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). 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). (function() { As part of the comprehensive reform of its budget framework in 2001, France introduced multiannual commitment authorizations as a means of controlling expenditure obligations and associated payments for programs or projects that span more than one year (e.g., investment projects). None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. Expenditure Control: Key Features, Stages, and Actors. Box 2 describes the other specific controls that can supplement these general controls. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). 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. If a future valuation shows that the costs of a scheme have risen or have fallen, action needs to be taken (via adjustments to member benefits or member contributions) to return costs to the level of the cap. This objective is achieved by appropriations. Total revenue including grants . Types of Spending 1. 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. Administrative unit accountable for expenditure. Delivery date is captured and time lag between delivery and verification monitored. Broadly speaking, it exists not only in the United Kingdom, but also in Australia, New Zealand, Indian sub-continent, and many countries in Africa, Asia, Europe and the Caribbean that were former British colonies. Effective expenditure control is the sine qua non of good public financial management (PFM). Apportionment, reservation, commitment and payment order stages and virements during budget execution. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). while others are purely internal to the government. 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. The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. 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. 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. 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. PFM weaknesses such as lack of a comprehensive and credible budget,41 poor cash planning or shallow markets for government debt, reporting delays, and accumulation of liabilities/arrears also undermine the effectiveness of expenditure control. Therefore, entering into a commitment or incurring a liability in excess of the limit would not, in the absence of other controls, constitute a breach of law. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. 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. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. The lack of a comprehensive and credible budget particularly affects the authorization (as the expenditure authority is not realistic), commitment (as ongoing/outstanding commitments are not adequately allocated for) and verification (as the accumulated liabilities are not fully reflected in the budget) stages. Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. 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. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. This technical note and manual (TNM) addresses the following issues: Key stages of the government expenditure chain; The roles and responsibilities of the key institutional actors in exercising those controls; Approaches to expenditure control in different PFM traditions; Diagnosing weaknesses in expenditure control systems; and. 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. Lack of adequate control over government expenditure remains a problem in many countries. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. It forms aggregate demand in addition to household consumption, business investment, and net exports. It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. _paq.push(['setSiteId', '17']); In many countries each appropriation is the subject of a separate vote by the legislature. Minimizes the cost of financing government programs by smoothing the gap between cash inflows and outflows. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. Lack of adequate control over government expenditure remains a problem in many countries. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. The system of payments to government suppliers was highly decentralized. Identifying gaps and weaknesses in expenditure control in a particular country requires a systematic review of the integrity of the expenditure cycle, looking at: Definition/specification of key stages of the expenditure cycle, including the control criteria. In the absence of this coordination, spending ministries/agencies can potentially frontload their commitments even if adequate cash is not likely to be available for payment when the commitments materialize, or the treasury may not raise the necessary finance to meet cash requirements. 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). International Monetary Fund Copyright 2010-2021. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. fiscal policy. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. For multiannual programs/projects, the approved budget includes both the multiannual commitment limits (autorisations dengagement or AE) against which it also sets annual limits (crdits de paiement or CP) for cash payments during the year. In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). Payment order. Clarity of the legal and regulatory framework, including the roles of the key actors. 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. New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. 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. 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). Capital spending They are for the long term and do not need to be renewed each year. No cash availability to make payments within the time horizon of apportionment. 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. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). var u="https://piwik.pentaho.aidcvt.com/"; 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. Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation dengagement for multi-year investment projects in Francesee Box 3). PEFA PI-22; and average time lag between delivery and verification. 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. Accounting and monitoring of budget execution were carried out by the banking system. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. 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. 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 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. 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. The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. 2, No. 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. 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. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. 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 author is also grateful to K. Douglass for her assistance with data analysis. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. Limit on time horizon of expenditure. The first and each subsequent actuarial valuation report includes valuation results for the purposes of measuring changes in the cost of the pension scheme against the employer cost cap, expressed as a percentage of pensionable pay. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. Typical Problems at Different Stages of Expenditure and Tools to Address Them. Other Controls Specific to Particular Types of Transactions. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments.
