government budget, forecast by a government of its expenditures and revenues for a specific period of time. while others are purely internal to the government. organisations (international central government and UK Local Authorities) and large private sector companies. 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. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). Any part of that cost unpaid at the end of the period is a liability. 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. 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). 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. 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. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. As described in detail in the next section, the application of controls at various stages of the expenditure cycle may be centralized within the ministry of finance or decentralized to line ministries and agencies. While providing examples of expenditure control practices from more than 32 countries, the paper points out that more than two-thirds of the 85 low and middle income countries covered by the publicly available Public Expenditure and Financial Accountability (PEFA) assessments have weak systems of expenditure control that are also associated with higher levels of expenditure arrears and a lack of budget credibility. 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 Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. An overview. 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. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). 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 verification requires confirmation that the obligation has actually fallen due. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. Government expenditure has ballooned over the years. 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). Next. The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. 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. 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. _paq.push(['setSiteId', '17']);
Although the governmental budget is primarily concerned with fiscal policy (defining what resources it will raise and what it will spend), the government also has a number of tools that it can use to affect the economy through monetary control. Payment orders are issued after documentary proof of verification. 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. 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. PFM Traditions Influencing the Expenditure Control Framework, Tradition in the former Soviet Union countries, V. Identifying Weaknesses in the Expenditure Control Systems, Weaknesses of different expenditure control systems, Diagnosing weaknesses in a particular country, Specific measures to address expenditure control weaknesses, Monitoring reform progress and managing the change, http://www.issai.org/media/13329/intosai_gov_9100_e.pdf, Prevention and Management of Government Arrears, Conceptual Design: A Critical Element of a Successful Government Financial Management Information System Project, Implementing Accrual Accounting in the Public Sector, Unorthodox Expenditure Procedures in CEMAC and WAEMU Countries, Liberia: Public Expenditure and Financial Accountability (PEFA) Assessment, Republic of Mozambique: Technical Assistance Report on Regaining Control Over Budget Execution, 19 A Comparison Between Two Public Expenditure Management Systems in Africa, North Macedonia: Technical Assistance Report - Public Expenditure and Financial Accountability Performance Assessment, Republic of Mozambique: Strategy for Restoring the Expenditure Chain and Improving Financial Programming, Mauritius: Public Expenditure and Financial Accountability (PEFA) Assessment, Niger: Public Expenditure and Financial Accountability (PEFA) Assessment, Public Financial Management Systems - Indonesia: Key Elements from a Financial Management Perspective, Governance Brief No. Payment order. Administrative unit accountable for expenditure. 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. This control is a key element of the overall cash management system. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. Capital Expenditure What are the main areas of expenditure for local government? The authority for expenditure is 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. There has been a proliferation of special procedures in a number of countries (particularly in Africa) that are designed for the benefit of powerful vested interests (who want a faster spending process for specific transactions, closer tracking of certain resources, and/or the accommodation of special institutional interests/arrangements). The system of payments to government suppliers was highly decentralized. Seven Key Stages of the Expenditure Chain. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. For other expenditure items, the devolution is based on the assessed effectiveness (through formal capacity audits) of the internal control system of the line agency and its risk management capacity. Authorization of expenditure. the use of taxes, government spending, and government transfers to stabilize an economy; the word . 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 system is unlike that in France where each line minister has always been an Ordonnateur Principal. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. 31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). 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. Table 3 provides a summary of the roles played by central and line agencies at different stages of the expenditure cycle as well as the key strengths and challenges in different traditions. 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 It is, therefore, necessary to distinguish between such final payments by spending units and the apportionment of spending authorization to them, including the associated transfer of funds. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. As a result, progress stalled and the reform was not pursued further. In particular, it is important to ensure effective coordination between issuance of warrants/allotments by the budget department and cash planning and management by the treasury so that adequate cash is available for payment when the line ministries/agencies expenditure commitments materialize.23 Similarly, transaction level bank reconciliation by the accounting department and/or line agencies should be coordinated with the treasury departments monitoring of cash balances in various bank accounts. Spending units may have bank accounts which are a subsidiary of the TSA; such accounts could be zero-balance accounts with commercial banks, with money transferred into them as the payments are approved, and with their balances swept daily into the TSAs top account for cash consolidation. The expenditure cycle and associated controls in Francophone African countries derive largely from the French system as it existed prior to 1960s in the French provincial governments (prfectures).30 However, many Francophone African countries not only intensified the centralization of controls in the late 1990s,31 but the minister of finance also became the single and principal payment-authorizing officer (Ordonnateur principal unique).32 The responsibility for financial control is typically centralized in the ministry of finance, with its staff out-posted in the line ministries/spending agencies. 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. 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. Limit on time horizon of expenditure. Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. 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. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Control of procurement: Significant public spending takes place through the public procurement system. The link was not copied. Therefore, after warrant releases, line ministries have the power to: (i) make commitments against their budget appropriations and authorized cash ceilings without reference to the ministry of finance; (ii) issue payment orders to liquidate those commitments that have materialized; and (iii) prepare accounts of their expenditures. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Payment and verification (in case of accrual accounting) stages. 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? Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. 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. Following confirmation that sufficient liquidity is available, a designated official approves the payment and issues a payment order. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. Sometimes called the Westminster system of PFM. 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. 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. For example, the UK uses the employer cost cap mechanism to control future pension spending. 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. 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. 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. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */
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. However, these hurdles were set at such a high level that hardly any agency cleared them. Several Francophone African countries are taking measures recently to reduce the complementary period to one month. 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. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund). Commitment. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. 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. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. 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 . Finance ministry does not carry out any form of detailed commitment or payment control. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. 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). 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. 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. No cash availability to make payments within the time horizon of apportionment. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s);
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