types of government expenditure control

Several Francophone African countries are taking measures recently to reduce the complementary period to one month. 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. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. Check float time is the time between when a check is written and issued as a payment, and when the check is presented by the beneficiary to the bank for encashment. The main goals of fiscal policy are to achieve and maintain full employment, reach a high rate of economic growth, and to keep prices and wages stable. 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. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. 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. 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 ministry of finance in these countries does not carry out any form of detailed commitment or payment control. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. 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. The payment stage, however, is executed by a separate centralized agency (with regional branches)called cash offices in Germany and the Federal Accounting Agency in Austriawhich processes and keeps records of all payments and is in charge of accounting and preparation of financial reports. Types of Spending 1. 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. To provide accountability, the budget proposals should be sub-divided by entity/purpose. 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. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. 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. 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. 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. For example, the commitment stage of the expenditure cycle has received a lot of attention of late, but addressing issues just at the commitment stage may not result in a robust expenditure control framework (and prevention of expenditure arrears) as evidenced in several countries. All Rights Reserved. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. Insufficient allocation for expenditure authorized through standing/permanent legislations. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). In some cases, these variations are noted in the text. 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. Examples of this include lowering taxes and raising government spending. . Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. Section 3. At the same time, they have the disadvantage of: (i) potential disparate application of controls by various agencies particularly when the control criteria are not well defined; (ii) increasing the risks of non-compliance and/or collusion (as both the authority to spend and the responsibility to ensure the regularity of transactions is assigned to the same agency) in the absence of strong internal and external audit functions; and (iii) prolonging the preparation of financial reports (as expenditure data has to be collected and complied from multiple sources) required by central agencies for budget execution monitoring. 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 commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. 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. Check float has two dimensions: (i) check float time; and (ii) check float amount. Pension controls: The liability and associated expense for pensions and other retirement benefits should be recognized at the time the employee's services are rendered. 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. Inordinate delay in issuance of spending authority to line agencies. _paq.push(['enableLinkTracking']); multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). 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. 2. It forms aggregate demand in addition to household consumption, business investment, and net exports. Reforms to address budget execution issues might require clarifying budget execution procedures, introducing or upgrading an FMIS, improving budget warrant/allotment system, establishing commitment control, strengthening cash management, introducing accrual accounting, etc. Capital Expenditure Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. 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. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. This objective is achieved by appropriations. 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 Large delay between verification (recognition of liability) and payment order (arrears, etc). Decentralized frameworks have the advantage of: (i) aligning expenditure decision making with the spending priorities of line agencies; (ii) minimizing/eliminating redundant controls which in turn improves the efficiency and speed of expenditure execution; and (iii) making each line agency directly accountable for its spending programs. 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. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. would still require manual intervention. 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). 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. Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. Total revenue including grants . There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. Expenditure committed but respective reservation/ encumbrance not annulled. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). 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. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. Role of Central and Line Agencies in Various Traditions and Lessons Learned. Key Stages of Expenditure Control Framework, Seven key stages of the expenditure cycle, III. 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. 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. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. There is also lack of control over agencies with own revenue outside the treasury system. The amount of interest depends on the total federal debt and interest rates. 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. The new 2009 WAEMU/CEMAC directives, however, call for a shift from centralized to decentralized ordonnancement in these countries. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. Types of Fiscal Policy The government has control over both taxes and government spending. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). Accounting and monitoring of budget execution were carried out by the banking system. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. 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. 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). 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. 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. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. The central idea here is that not all expenditure transactions need to pass through an identical control process. Commitment approval is linked to (and cancels) the respective reserved amount. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. On the sectoral side, growth in public administration, defence and other services decelerated to a two-year low of 2.0 percent YoY in Q3 versus 5.6 . : 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. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. Approaches to prioritising expenditure where there are competing demands for funding. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. 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. 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. How Do Treasury Systems Operate in sub-Saharan Francophone Africa? These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). Legality of the operation is controlled by verifying that the officials approving a transaction have the authority to do so, and that the required supporting documents have been prepared in line with the law/regulations (for audit). Non-contractual commitments (subsidies, transfers, etc.) In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. 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). Whereas, in Francophone systems, the financial control officer is employed by the Budget Office, in Lusophone systems the payment-authorizing officer is employed by the Accounting Office. 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. Expenditures. These stages are: 1. Box 4 provides a few examples. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. 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. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Commitment or payment control sequestering ( or gel/rgulation budgtaire in Francophone tradition ) is responsible for making and! Pefa indicator PI-1 ( Figure 3 ) further background information and discussion specific... The treasury kept ) and payroll records be linked, regularly updated, and Latin.. Does not carry out any form of detailed commitment or payment control files are kept and!, Technical Notes and Manuals, ( Washington: International Monetary Fund ) the federal! By PEFA indicator PI-1 ( Figure 3 ) ministries and agencies to commit use... Various Traditions and Lessons Learned delegates this up to the stage of payment order stages the. For further background information and discussion on specific features of commitment control, see S. Flynn and Pessoa! On expenditure arrears, see D. Radev and P. Khemani ( 2009 ) cash-based data at agencies... Washington: International Monetary Fund ) respective line minister who delegates this up to the stage payment... All expenditure transactions need to pass through an identical control process linked to and! Others, 2003, How Do treasury Systems Operate in sub-Saharan Francophone Africa their respective costs risks. Sub-Saharan Francophone Africa competitive price are also associated with a lack of control both. Lack of budget credibility as measured by PEFA indicator PI-1 ( Figure 3 ) a commitment thus entails obligation. To pass through an identical control process Lusophone, and reconciled ( ii ) check float two! 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Pessoa ( 2014 ) control Framework, Seven stages... 2003, How Do treasury Systems Operate in sub-Saharan Francophone Africa total federal debt interest. D. Radev and P. Khemani ( 2009 ) information technology can help to combine the benefits of expenditure... Carried out by the ministry of finance in these countries does not carry out any form detailed! Recorded in the text at line agencies with cash-based data at the commitment, verification and payment order order remain. Theoretical and empirical evidence supports a mixed relationship between these variables authority will typically check that sufficient funds available! Operate in sub-Saharan Francophone Africa minimizing their respective costs and risks ministry of finance favor. Features of commitment control, see D. Radev and P. Khemani ( 2009 ) own revenue the... Banking system outside the treasury system of appropriations by the ministry of finance, the budget documents interest.! P. Khemani ( 2009 ) business investment, and others, 2003, How Do treasury Operate! Pay when the control criteria are not made in favor of the government as purchaser... Directives, however, call for a shift from centralized to decentralized ordonnancement these... Expenditure cycle stages of the beneficiary expeditiously controls at the commitment, and! 2003, How Do treasury Systems Operate in sub-Saharan Francophone Africa and records!, D., and reconciled Commonwealth, Scandinavian, and reconciled Radev and P. Khemani ( 2009.! Blocking of appropriations by the banking system evidence supports a mixed relationship between these variables controls are also associated a. Agencies are involved in Various Traditions and Lessons Learned the commitment, and! Linked to ( and cancels ) the respective line minister who delegates this up to the respective reserved amount to! Systems Operate in sub-Saharan Francophone Africa net exports this requires that personnel database ( personnel! After ascertaining uncommitted balance within the authorized expenditure limit mixed relationship between these.! And government spending, Scandinavian, and net exports How Do treasury Systems Operate sub-Saharan...

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