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). Payment and verification (in case of accrual accounting) stages. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). Ministry of Budget and Public Accounts, 2009, Rfrentiel de comptabilit budgtaire, (France). That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. The line ministries have substantial authority in executing the budget. 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. Lack of adequate control over government expenditure remains a problem in many countries. 6. Several Francophone African countries are taking measures recently to reduce the complementary period to one month. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). Accounting and monitoring of budget execution were carried out by the banking system. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Controls on liabilities or guarantees (contrle de liquidation): This control is applied on the incurrence of a liability or guarantee and again at the payment stage when the liability is extinguished or guarantee is paid. 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. 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. No apportionment (or in-year release of spending authority) mechanism. Approaches to prioritising expenditure where there are competing demands for funding. The allocation of authority and responsibility to various actors for enforcing the controls at each stage of the expenditure cycle varies from one country to another, but some common features can be noted (see Table 2). Section 3. 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. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. To ensure bank reconciliation and reliability of expenditure data used for financial reporting, it is important to compare and reconcile the transactions recorded in the cash book (which records the details of checks issued) with those in the bank statements. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). A complementary period (generally two months)33 is allowed after the close of the fiscal year to process and record payments in respect of commitments that were authorized before the close of the fiscal year, but for which the actual delivery of goods or services has yet to take place. The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. The allocation of responsibility to various actors in the exercise of expenditure controls is heavily influenced by their respective administrative traditions of PFM and level of development. Insufficient allocation for expenditure authorized through standing/permanent legislations. 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. 2. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. Payment order. However, several controls such as control of regularity, verification of goods and services, etc. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. 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. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. 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. Checks and/or electronic transfer instructions bounce due to lack of cash. 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. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. Therefore, unlike the old French system, the key principles here are integration and delegation. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). Ukrainian President Volodymyr Zelenskyy said he met with the secretary-general of the Organization for Economic Cooperation and Development on Tuesday and discussed a "fair tax system for Ukrainians." Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. 2. 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. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. 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 also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. A long check float time is not a good practice as it not only complicates cash management but can also be misused to write and issue checks despite not having enough liquidity in the bank account to cover the value of the check. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. 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. Sometimes called the Westminster system of PFM. 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. In case of relatively simple requirements, a spreadsheet-based application may suffice. In some countries, a powerful accounting organization (. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). As part of the budgetary accounting, commitments and payments made (through the CPs) against each AE are tracked to identify and report on (i) AE approved in budget law; (ii) AE consumed through legal commitments; (iii) AE unused/available for new commitments; (iv) CP authorized in budget law; and (v) payments made or CP consumed (see figure below). Show question Question This may lead to potential arrears. 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. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. 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. _paq.push(['trackPageView']); Thus, the changes will affect the economy. Authorization of expenditure. 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). The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. Cash Management: How Do Countries Perform Sound Practices? 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. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. The distribution of responsibilities between them is typically organized along the following lines: The budget department of the ministry of finance issues regulations on matters related to the execution of the budget, apportions appropriated funds to spending agencies, monitors their expenditures and performance, authorizes in-year budget revisions, and monitors and reports on budget execution. 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. Advancing the procurement cycle and/or streamlining the process to reduce the time lag between reservation and commitment; reserved funds are integrated with the TSA. Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. However, the design and implementation of such a differentiated control arrangement would depend on several factors, including the effectiveness of the internal control and assurance system to identify and alert management to control risks.45, Devolution of Expenditure Control in France, Morocco, and Thailand. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. 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. Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. Types of Fiscal Policy The government has control over both taxes and government spending. The word budget is derived from the Old French bougette ("little bag"). 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 should be supported by adequate monitoring at each stage of the expenditure cycle and ex post auditparticularly external audit to start withto ensure effective compliance. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). Types of Control, Their Key Features and Objectives. The public accountant assumes personal financial responsibility for compliance with regulations and is accountable to the Court of Accounts (Cours des comptes), the supreme audit institution. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. Thailand introduced a hurdle approach in the late 1990s to devolve budget execution control, moving this function from the finance ministrys Bureau of the Budget to line agencies. 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. 5. In some countries, the ministry of finance uses sequestering to prevent such risks. 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). 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 lack of effective expenditure controls not only threatens macroeconomic stability and fiscal discipline, but can also call into question the integrity of the public financial management system and undermine trust in a governments stewardship of public resources. 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. The author is also grateful to K. Douglass for her assistance with data analysis. Overdue liabilities/payables as a percentage of the value of total payment orders issued; PEFA PI-21.2; and PI-25.3. Government expenditure has ballooned over the years. _paq.push(['enableLinkTracking']); 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). Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. Inordinate delay in issuance of spending authority to line agencies. These stages are: 1. A commitment occurs when a formal action, such as placing an order or awarding a contract, is taken that renders the government liable to pay at sometime in the future when the order or contract is honored by its counterpart. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. In some countries, it may conduct its own pre-payment audits prior to executing payments. The expenditure must occur within the time limits applicable to the expenditure authorization. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). 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). When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. 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. This is what constitutes the hierarchical and risk-based control (control modul de la dpense) that Morocco has started to implement since 2008 (based on Decree n 207-1235 of November 4, 2008). ), the verification requires confirmation that the obligation has actually fallen due. 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. Stage of the Expenditure Cycle, Controls, and Actors. 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. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. 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 . When it increases, aggregate demand increases, and we expect the economy to grow higher. These include appropriation control, commitment control, and accounting control. The contralora hence maintains overall control of budget execution. However, even in such cases and in line with the principles of budget comprehensiveness, transparency, and accountability, such expenditures should be included in the budget documentation, and subjected to the same regularity controls discussed in Section III (see Table 1). 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). Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. This used to be the case in all but three countries (Cameroon, Mali and Burkina Faso) of the 12 countries that comprise Sub-Saharan Francophone Africa. A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. 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. There is regular reporting and monitoring of overdue liabilities. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. 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. But, fiscal policy is also used to curtail . For example, the Social Security Act requires the government to provide payments to beneficiaries based on the amount of money they've earned and other factors. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. 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. Capital spending They are for the long term and do not need to be renewed each year. 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. 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 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). 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. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). Payment order issued under exceptional procedure (i.e., bypassing previous stages). Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. 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. The treasury department of the ministry of finance is responsible for maintaining central appropriation and fund accounts, forecasting government cash requirements and raising the necessary finance, supervising government/treasury bank accounts, and monitoring cash balances in these accounts. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. International Monetary Fund Copyright 2010-2021. 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. Since commitments usually mature as payments, their control is an essential part of overall expenditure control and prevention of expenditure arrears.11 A commitment does not mean that a payment will necessarily be made within the same fiscal year. 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. 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. organisations (international central government and UK Local Authorities) and large private sector companies. Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Accrual Budgeting; Opportunities and Challenges, Role of the Legislature in the Budget Process, A Comparison Between Two Public Expenditure Management Systems in Africa, Systemic Weaknesses of Budget Management in Anglophone Africa, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Organization for Economic Cooperation and Development, Managing Public Expenditure: A Reference Book for Transition Countries, Public Expenditure and Financial Accountability (PEFA) assessments, Treasury Single Account: An Essential Tool for Government Cash Management, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Public Sector Governance and Accountability Series, II. Economy Minister Mohd Rafizi Ramli said, if the government is . Non-contractual commitments (subsidies, transfers, etc.) For example, under an accrual-based budgeting system, the ministry of finance may: (i) delegate to spending agencies all decisions on their cash requirements and the timing of cash payments as long as the agencies conform to the expenses authorized on accrual basis; (ii) enforce a cash limit (either at an aggregated level or at a more detailed level) in addition to the amount of accrual-based expense authorized; and/or (iii) allow spending agencies to move cash appropriation into accrual-based expense but not vice versa.20, Commitment-based Expenditure Limits in France. Stage of the beneficiary expeditiously actual delivery and verification ( leading to late,! Simple requirements, a powerful accounting organization ( when no immediate cash transactions are involved have... 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