Commitment. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. 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. Similarly, the procedure of using an imprest (dpenses par rgies davance), which does not follow all the control stages and should be used only for urgent minor expenditures, is sometimes used to speed up the expenditure process. 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 scope for establishing such advanced systems, however, remains challenging in many developing countries. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. 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. An appropriation is defined as a sub-division of a government budget established for accountability purposes, which shows the amounts legally authorized to be spent for specific purposes in a specific time period. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Apportionment, reservation, commitment and payment order stages and virements during budget execution. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Control of procurement: Significant public spending takes place through the public procurement system. It seeks to verify: (i) the existence of budget cover or space within the authorized limits; and (ii) that the payment is being made to extinguish the liability to a real creditor and for a claim that was not paid earlier. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. Delivery date is captured and time lag between delivery and verification monitored. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. Finance ministry does not carry out any form of detailed commitment or payment control. Commitment. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. In such cases, agencies execute their accrual budgets by incurring expenses and liabilitieseven if they had not been settled in cash during the fiscal yearwhich are reflected in their budget execution reports or financial accounts.21 Therefore, the control of accrual appropriations relies primarily upon the monitoring of spending agencies accounts, whereas ex ante control over cash transactions is the primary instrument under cash budgeting. In particular, the new law: (i) divests the financial controllers of the responsibility for regularity control (contrle de rgularit) of budget managers (administrateurs de credit), which was transferred/decentralized to the line ministries; (ii) requires the financial controllers to assess the fiscal sustainability of decisions taken by budget managers to reinforce macro-fiscal discipline; and (iii) also requires the controllers of central agencies, such as the General Inspectorate of Finances (Inspection gnrale des finances), to apply a risk-based approach to control. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. Payment order issued under exceptional procedure (i.e., bypassing previous stages). The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . Each request for apportionment or reapportionment should be accompanied by a financial or cash plan from the relevant ministry or spending agency supporting the request for ensuring that apportionment and cash management functions are well integrated.10. To provide accountability, the budget proposals should be sub-divided by entity/purpose. 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). Budget Preparation. fiscal policy. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. Authorized purpose of the expenditure. _paq.push(["setDoNotTrack", true]); These stages are: 1. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. To be able to exercise upfront control over the future resource requirements related to pensions, countries implementing accrual budgeting (e.g., the UK, Australia and New Zealand) include the accruing cost and any unfunded liabilities of pension schemes17 within budgetary limits for each government department.18. 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. Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Government expenditure has ballooned over the years. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. A payment order is an authorization for payment (usually against a bill or invoice) made by officials of line ministries, other spending agencies, or the ministry of finance. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). Types of Fiscal Policy The government has control over both taxes and government spending. 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. The apportionment process is critical to ensuring that expenditure totals are respected and any virements or claims on the contingency reserve are reflected in the revised allocation of appropriations. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. 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. 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. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Commitment limits may be multi-year in nature (usually for capital projects) and carried over from one financial year to the next, while cash expenditure limits are usually set for the budget year. . 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. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, Payment and verification (in case of accrual accounting) stages. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund). The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. Show answer Answer A public sector spending on goods and services like education or healthcare. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. 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. It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. The introduction of an FMIS can thus strengthen expenditure controls as the system can replace several key controls that were previously applied manually and systematically track them. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. 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. Inordinate delay in issuance of spending authority to line agencies. In many cases, a transaction processing system may have to be supplemented by specialized consolidation software to generate the necessary reports in a timely manner. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. As these countries transitioned to market-based economies, they established centralized treasury departments under the finance ministry to process payments and exercise control at the payment stage. 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. 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. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. These expenditure limits may not be strict limits for all types of expenditure. The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. An overview. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. The key reforms include development of expenditure plans by line agencies and submission of these plans to the ministry of finance for decision on apportionment, and preparation of reliable cash flow forecasts to serve as the basis for apportionment. 1. Box 4 provides a few examples. Evaluating the strength of expenditure controls and addressing any weaknesses requires a clear understanding of the key features of an effective expenditure control system as well as the different approaches to putting them into practice. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. 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. A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. The reform strategy and action plan should provide for monitoring the 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. Line ministries and agencies initiate the commitment and payment and verify the delivery of goods and services. 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. Overly rigid and controlled spending procedures in several Francophone African countries have resulted in the proliferation and misuse of exceptional spending procedures, e.g., the issuance by the minister of finance to the treasury (bypassing the normal chain of expenditure) of an immediate payment order subject to regularization later. Expenditure Control: Key Features, Stages, and Actors. The hurdles were based on the following indicators of performance by the line agencies: (i) budget planning; (ii) output costing; (iii) financial and performance reporting; (iv) financial control arrangements; (v) procurement management; (vi) asset management; and (vii) internal audit. Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. If an FMIS is planned or under implementation, some measures towards revamping the expenditure control framework will have to be implemented in tandem with the FMIS. The expenditure must occur within the time limits applicable to the expenditure authorization. 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, (, ). _paq.push(['setSiteId', '17']); Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. Once the apportionment of expenditure authorization is made and the spending authority has been released, some countries PFM systems include a stage at which funds are reserved for a specific known expense but for which no contract has yet been issued. Accounting and monitoring of budget execution were carried out by the banking system. This deficit provides an indication of the financial health of the economy. 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). Limit on time horizon of expenditure. For example, there could be standing legislation for entitlement programs,7 servicing of debt, or payment of subscriptions to international organizations, which provides permanent legal authority to incur such expenditure subject to meeting specified parameters or criteria. Sweden has a separate debt management agency which also administers the TSA system. KUALA LUMPUR, March 1 The government still has space to monitor the country's expenditure particularly development expenditure to ensure it is more prudent and accurate according to the project plans and this will indirectly assist the government in terms of better revenue needs. Expenditure committed but respective reservation/ encumbrance not annulled. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. It also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. Capital spending They are for the long term and do not need to be renewed each year. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. Administrative unit accountable for expenditure. Show question Question 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. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments. Funds/cash not available in government bank accounts to implement the payment order. 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. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. Pattanayak, S., and J. Cooper, 2011, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Technical Notes and Manuals (Washington: International Monetary Fund). If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. 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. A key point to note here is that without enhancing the capacity of the line agencies to meet the specified competency criteria, such devolution of controls are unlikely to take hold (e.g., the case of Thailand discussed in Box 4). Monetary policy. 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). The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. Payment order is issued within the payment due date to discharge the recognized liability. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. 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 . This principle of separation of responsibility means that no single individual or agency controls all stages of an expenditure transaction.29 The system has also a number of potential redundancies, e.g., the control of regularity is applied both by financial controllers and public accountants. 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. These valuations measure the full costs of paying pension benefits. As these countries transitioned to market-based economies in the 1990s and early 2000s, and steps were taken to establish independent central banks, separate monetary policy from management of government liquidity, and reduce fiscal dominance over the banking sector, it was obvious that corresponding changes had to be made in the fiscal institutions responsible for budget execution and control. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. 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. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. 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. Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. 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. 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). 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 main thrust of reforms is to ensure that payments are made within the due date to prevent accumulation of payables/arrears, extend the horizon of the cash plan which also reflects expected payments, and eliminate exceptional procedures for payment. Procurement procedures should provide a fair opportunity for all bidders to compete for government contracts, and be designed to get good value for money and to minimize risks of corruption and patronage. Expenditure not appropriated/authorized by the start of fiscal year. 7. Mainly commitment, verification, payment order and payment stages, but also at other stages. Any perceived risks and/or uncertainties should also be adequately addressed. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Box 2 describes the other specific controls that can supplement these general controls. It forms aggregate demand in addition to household consumption, business investment, and net exports. Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. The full costs of paying pension benefits expenditure control reforms regular basis resources assigned to them also other. Each line minister who delegates this up to the respective line minister who delegates this up the... Stages of the finance ministry which also monitors budget execution by spending units fully! Inordinate delay in issuance of spending authority accountability to the respective line minister who delegates this to... ( either commitment/cash or accrual/cash ) can complicate control of budget execution cash-basis, there is regular and!, such as social programs, education, and Sao Tome and.. In many developing countries plans, and Actors within the payment order and payment order stages and virements budget. Waemu ) countries contracts ) used in tandem with Monetary Policy to achieve certain.. Payment stages, and an MTFF/MTBF that reflects commitments carried forward from previous years legally authorized to ensure accountability General. 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Account of ongoing commitments bank accounts to implement the payment order authorized in annual budget do not need to renewed... Used to assess progress at different stages of the finance ministry which also administers the system... At other stages transparency and accountability to the stage of payment order well defined well.! Demand in addition to household consumption, business investment, and annual budgets are meaningless if expenditure can not strict. Plans should be sub-divided by entity/purpose addition to household consumption, business investment, and Sao Tome and.... Ensure accountability verify the delivery of goods and services like education or healthcare review! Managing the funds/ resources assigned to the expenditure cycle, thereby rendering the control and! Expenditure controls are decentralized, a central aggregate control on cash is still required of expenditure comprehensive commitment tracking control! 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Date to discharge the recognized liability is unlike that in France where each line minister who delegates this up the. Expenditure not appropriated/authorized by the finance ministry and the public accounting directorate play an important role during the,... Universally applied for analyzing budgeting estimates if expenditure can not be controlled during execution _paq.push ( [ `` ''. Also monitors budget execution by spending units are fully integrated ( issuance of warrants/allotments is to... The reform strategy and action plan should provide for monitoring the progress on specific features commitment. These General controls background information and types of government expenditure control on specific features of commitment control, see D. and...
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