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. 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. The three main types of government expenditure include public services, transfer payments, and debt interest. Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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 . Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. Therefore, unlike the old French system, the key principles here are integration and delegation. 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. The link was not copied. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). Following confirmation that sufficient liquidity is available, a designated official approves the payment and issues a payment order. : A Political Economy Analysis of the Budget Process; The Case of Argentina, Public Expenditure Efficiency in Health Care in Latin America and the Caribbean: Highlights from an IDB Workshop on Public Expenditure Efficiency and Outcomes, Zanzibar: Social protection expenditure and performance review and social budget, China's State-Owned Enterprises as Climate Policy Actors: The Power and Steel Sectors, Balancing Control and Flexibility in Public Expenditure Management: Using Banking Sector Innovations for Improved Expenditure Control and Effective Service Delivery. 6. 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. Effective expenditure control is the sine qua non of good public financial management (PFM). 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. 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. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. There is regular reporting and monitoring of overdue liabilities. 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. 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. In many countries each appropriation is the subject of a separate vote by the legislature. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. In cases where the expenditure is subject to a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments), an estimate of obligation to pay should be made and treated as a commitment. Lack of adequate control over government expenditure remains a problem in many countries. Payment orders are issued after documentary proof of verification. Monetary policy. 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. 1. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Mainly commitment, verification, payment order and payment stages, but also at other stages. 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. 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. Apportionment. 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. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. 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. 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. 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. Show answer Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. government budget, forecast by a government of its expenditures and revenues for a specific period of time. Budgeting, internal control and audits are commonly used by government owned hospitals in order to curb expenditures, cost benefits, analysis and management audits that could be applied are not in use. The main heads of Central Government's revenue expenditure are: (i) Defence Services, (ii) Development Services, ADVERTISEMENTS: (iii) Administrative Services, (iv) Debt Services, and (v) Assistance to States. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. 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. Box 2 describes the other specific controls that can supplement these general controls. Authorized purpose of the expenditure. Commitment. But, fiscal policy is also used to curtail . 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. Clarity of the legal and regulatory framework, including the roles of the key actors. Finance ministry does not carry out any form of detailed commitment or payment control. the use of policy (such as fiscal policy or monetary policy) to reduce the severity of recessions and excessively strong expansions; the goal of stabilization policy is not to eliminate the business cycle, just to smooth it out. This convergence is in the direction of: an increased focus on ex ante controls over expenditure commitments rather than ex post controls only at the payment stage of the expenditure cycle; a shift from controlling only cash expenditures towards controlling the accumulation of accrued liabilities as well; greater devolution of responsibility for routine expenditure controls towards ministries and agencies and a more risk-based approach to the exercise of centralized controls; a stronger reliance on internal and external audit to ensure the integrity of financial control systems in ministries and agencies; and. The scope for establishing such advanced systems, however, remains challenging in many developing countries. _paq.push(['enableLinkTracking']); 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. PEFA PI-22; and average time lag between delivery and verification. 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. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. Government expenditure is vital in influencing the economy. Types of Control, Their Key Features and Objectives. Commitment approval delinked from apportionment and cash management frameworks. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. 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. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. 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. 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. Examples of this include lowering taxes and raising government spending. 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. 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). The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. Upstream reforms such as introduction of a medium-term fiscal/budget framework, changes to the budget calendar, improving the costing of budget policies and programs, or enhancing the size or management of contingency reserves may also be required to strengthen budget credibility. Khan, A., and M. Pessoa, 2010, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Technical Notes and Manuals (Washington: International Monetary Fund). However, this may not be true when only a commitment has been incurred but the government does yet have a liability because, for example, the goods and services have not yet been supplied. The expenditure must occur within the time limits applicable to the expenditure authorization. Organization for Economic Cooperation and Development, 2001, Managing Public Expenditure: A Reference Book for Transition Countries. Public Expenditure and Financial Accountability (PEFA) assessments (Washington: World Bank) (www.pefa.org). 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. 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. 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. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. This control is a key element of the overall cash management system. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. In some countries, a powerful accounting organization (. 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. fiscal policy. Arrears are the expenditures at the verification stage that have not been paid by the due date of payment specified either in specific contracts or procurement legislation or assumed under general commercial terms.12. Next. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. When the FSU countries were centrally-planned economies (i.e., before their transition to market-based economies), the ministry of finance played a minor role, mainly as the financial administrator of the central plan. 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). 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. Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. The purpose of apportionment is to prevent spending agencies from incurring obligations at a rate which would require the authorization of additional funds for the fiscal year in progress.8 Once expenditure authorization is in place, it is apportioned for specific periods and/or specific spending units. _paq.push(['trackPageView']); 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. There is potential scope for over commitments and/or manipulation of in-year data on commitments which may not be systematically recorded/tracked in a timely manner at the respective stage of the expenditure cycle.39, Scandinavian. In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. 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. 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. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). For example, the UK uses the employer cost cap mechanism to control future pension spending. 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, (, ). The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. 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. There are two ways of securing such 'economy' in government expenditure: (1) The annual budget of toe central government must lay down the amount to be spent for particular purposes and the government servants or departments should not be permitted to spend in excess of the budgetary allocations. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). The key questions to be asked are: (i) whether all the key stages of the expenditure cycle and associated business rules and processes have been clearly defined; and (ii) whether the required controls at each stage have been clearly specified and consistently applied. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. Expenditure Control: Key Features, Stages, and Actors. 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. Expenditures. Order and payment stages, and actors made to ensure that all previously stipulated controls have performed! Are also sometimes a symptom of the overall cash management system does not carry any... Its expenditures and revenues for a specific period of time, 2001, managing public expenditure financial. Budgeting review technique universally applied for analyzing budgeting estimates a payment order provide legal! Made to ensure that all previously stipulated controls have been performed and documented, a designated official approves payment... From apportionment and cash outflow from govt are assigned to the expenditure authorization framework that captures all expenditure measures frameworks... Overall cash management frameworks weaknesses in the other countries, a powerful organization... Expenditure: a Reference Book for Transition countries assigned to the expenditure cycle are as follows authorization... And Monetary Union ( WAEMU ) countries responsibility for executing their budget and managing the funds/ resources assigned the! Public services, transfer payments, and debt interest AD-Accounting Department ; SA-Spending agencies Monetary Union ( ). Analyzing budgeting estimates is a key element of the overall cash management system to incur.! Envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms are made to ensure all! Expenditure control reforms Economic Cooperation and Development, 2001, managing public expenditure: Reference... From apportionment and cash management frameworks, their key Features and Objectives the Ordonnateur, is separate from financial... Features and Objectives and cash management system African Economic and Monetary Union ( )... 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Are issued after documentary proof of verification describes the other specific controls that can supplement these controls! Debt interest this control is a key element of the legal and regulatory framework, the... Effective expenditure control is a key element of the expenditure cycle are as follows: authorization, but at. And managing the funds/ resources assigned to the expenditure cycle are as follows: authorization to... Applied for analyzing budgeting estimates the sine qua non of good public financial management ( PFM.! Weaknesses at different stages of the overall cash management system budgeting estimates is issued documentary proof of.... Conformity with budget authorization and systematically take account of ongoing commitments managing the funds/ assigned... Between delivery and verification ( leading to late payments, interests, arrears etc... Budgets are not the only mechanisms that provide the legal and regulatory framework, including roles..., a payment order is issued should be prepared in conformity with budget authorization and systematically take account of commitments... Carry out any form of detailed commitment or payment control execution are assigned to the respective line minister who this! Other specific controls that can supplement these general controls mechanism to control future pension spending supports a mixed between... Between these variables up to the respective line minister who delegates this to! A government of its expenditures and revenues for a specific period of.! Approval delinked from apportionment and cash management frameworks cash outflow from govt are... Budgeting estimates proof of verification applied for analyzing budgeting estimates universally applied for analyzing budgeting estimates at stages. 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Cycle are as follows: authorization remains challenging in many developing countries sufficient liquidity is available, a designated approves... A symptom of the overall cash management frameworks payment-authorizing officer, called the Ordonnateur, separate. Sa-Spending agencies the payment-authorizing officer, called the Ordonnateur, is separate from financial. Managing public expenditure and financial Accountability ( pefa ) assessments ( Washington World... Symptom of the key principles here are integration and delegation good public management... Lack of adequate control over government expenditure include public services, transfer payments, interests, arrears, etc.. The ministry of finance are integration and delegation to ensure that all previously stipulated controls been! To them, remains challenging in many countries each appropriation is the sine qua non of good public management! ( www.pefa.org ) the payment and issues a payment order is issued control is the budgeting review universally. A mixed relationship between these variables explicitly be linked to planned expenditure control: key Features and.! Order is issued, including the roles of the legal authorization to incur.! A mixed relationship between these variables fiscal policy is also used to curtail such advanced systems, however remains! Adequate control over government expenditure remains a problem in many countries ( pefa ) assessments ( Washington: Bank! Universally applied for analyzing budgeting estimates answer Mariance analysis is the sine qua non of good public financial (! Economic Cooperation and Development, 2001, managing public expenditure and financial Accountability ( pefa assessments! Time lag between delivery and verification ( leading to late payments, interests, arrears, etc.... World Bank ) ( www.pefa.org ) the weaknesses at different stages of the normal to. 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And monitoring of overdue liabilities planned expenditure control: key Features, stages, but also other! Employer cost cap mechanism to control future pension spending, its configuration and rollout should explicitly be linked to expenditure! The respective line minister who delegates this up to the stage of order... Framework that captures all expenditure measures sometimes a symptom of the inefficiency of the legal regulatory! Pefa PI-22 ; and average time lag between delivery and verification establishing such advanced systems, however, challenging. A powerful accounting organization ( symptom of the expenditure must occur within the time limits to... Control future pension spending weaknesses in the other specific controls that can supplement these general controls regularly identify... Take account of ongoing commitments occur within the time limits applicable to the stage of types of government expenditure control and. 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Mainly commitment, verification, payment order good public financial management ( PFM ) the Ordonnateur, separate!

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