discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. Key Stages of Expenditure Control Framework, Seven key stages of the expenditure cycle, III. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Reservation/pre-commitment. 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." 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. Verification of goods and services (contrle du service fait): This control involves: (i) verification of the goods and/or services delivered by a supplier to ensure that these conform to the specified quality and quantity; and (ii) a calculation of the liability incurred by the government to the supplier. Administrative unit accountable for expenditure. 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. 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. 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 Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Somali Regional State Government), Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Southern Nations, Nationalities and Peoples Region), Timor-Leste Public Expenditure and Financial Accountability Assessment 2018: Public Financial Management Performance Report, https://doi.org/10.5089/9781513574639.005. 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. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. . However, these hurdles were set at such a high level that hardly any agency cleared them. HM Treasury, 2013, Review of Financial Management in Government, (www.gov.uk). The expenditure cycle and associated controls in Francophone African countries derive largely from the French system as it existed prior to 1960s in the French provincial governments (prfectures).30 However, many Francophone African countries not only intensified the centralization of controls in the late 1990s,31 but the minister of finance also became the single and principal payment-authorizing officer (Ordonnateur principal unique).32 The responsibility for financial control is typically centralized in the ministry of finance, with its staff out-posted in the line ministries/spending agencies. Strengthening expenditure control in a particular country can, therefore, sometimes require difficult judgments about whether to reinforce traditional administrative arrangements or seek to modernize them. 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). Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. 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. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. Verification (or certification). Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. Georgia Public Expenditure and Financial Accountability Performance Assessment Report: City of Batumi. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. 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. 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. Ministry of Budget and Public Accounts, 2009, Rfrentiel de comptabilit budgtaire, (France). 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. Francophone and Lusophone. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). 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. 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). Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Article 78 of the WAEMU Directive No. Role of Central and Line Agencies in Various Traditions and Lessons Learned. The annual budget authority is regulated by the ministry of finance which releases warrants (notifications de crdit) specifying a commitment ceiling for each month or quarter. In any case, understanding the seven key stages of the expenditure cycle and associated control systems is also important to effectively design and implement an FMIS. If a liability has been incurred by the end of the fiscal year, this would be enough to report the expense or expenditure against the accrual appropriation. This plan indicates the funds required for operations, typically on a quarterly or monthly basis. For example, most countries with a Francophone tradition of budgeting enforce two types of expenditure limits: (i) the crdit limitatif, which enforces a strict limit; and the crdit valuatif, which is an indicative limit for certain categories of expenditure, e.g., debt service. The actual expenditures may be greater than or less than the budget. 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. The authority for expenditure is given for a specific pre-defined purpose. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. Non-contractual commitments (subsidies, transfers, etc.) Defence Services: They account for nearly 20% of the total revenue expenditure of the Central Government in India. Limit on amount of expenditure. 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. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. Transactions are recognized, classified, and recorded in the books/ general ledger according to a countrys accounting policies/standards and chart of accounts. These valuations measure the full costs of paying pension benefits. 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. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. The system of payments to government suppliers was highly decentralized. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. FSU countries. 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. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. 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. This objective is achieved by appropriations. But, fiscal policy is also used to curtail . For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Control of procurement: Significant public spending takes place through the public procurement system. 1. 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. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ 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. Apportionment, reservation, commitment and payment order stages and virements during budget execution. In general, relatively advanced countries have moved further in the direction of devolving their expenditure control systems than developing countries, but this is not true in all countries. 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. 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 . British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. When looking to strengthen expenditure control, it is therefore important to review the whole expenditure cycle/process instead of focusing on a few stages.36 However, based on experience in different groups of countries, it is possible to identify a set of problems that characterize different expenditure control traditions: British Commonwealth. Apportionment. Spending units may have bank accounts which are a subsidiary of the TSA; such accounts could be zero-balance accounts with commercial banks, with money transferred into them as the payments are approved, and with their balances swept daily into the TSAs top account for cash consolidation. A unit of government, typically a line ministry, department or agency, is assigned the responsibility to ensure that the appropriated resources are spent as intended within the authorized limits. _paq.push(['setSiteId', '17']); The system is unlike that in France where each line minister has always been an Ordonnateur Principal. 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. Some types of budget appropriationsdebt service, for examplemay not be subject to a strict spending limit and may be revised according to developments in interest rates and exchange rates. Government expenditure has ballooned over the years. 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. 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. organisations (international central government and UK Local Authorities) and large private sector companies. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. Types of Control, Their Key Features and Objectives. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. _paq.push(['setTrackerUrl', u+'matomo.php']); ), the verification requires confirmation that the obligation has actually fallen due. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. In some countries, ministries of finance regard expenditure as having taken place when funds are transferred from the ministry of finance or treasury bank accounts to the line ministries (or first-tier spending units). The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. 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. Capital Expenditure not tracked. All Rights Reserved. In cases where a centralized payment system has been established, the individual spending units may prepare the payment orders electronically and submit them to the central unit/treasury for payment through a Financial Management Information System (FMIS). 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. 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. 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. 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. This devolution/decentralization of financial and expenditure control should be gradual and based on predefined competency criteria for line ministries/agencies who should demonstrate that they can operate with higher levels of delegated authority. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. 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). 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). Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. Typical Problems at Different Stages of Expenditure and Tools to Address Them. 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. 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. Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. Payment and verification (in case of accrual accounting) stages. Once a payment order has been issued, payments are made through various instruments including checks, electronic fund transfer (EFT), and sometimes cash, in favor of a supplier or other recipient to discharge the liability. For example, in France, autorisation dengagement authorizes commitment for an investment operation that may entail payments over a multi-year period, while crdit de paiement limits the actual payments during the budget year subject to the overall limit under the respective autorisation dengagement (see Box 3). 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. 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. Limit on time horizon of expenditure. Payment. They can be more easily circumvented, presenting the potential for error or fraud. Reforms could usefully be implemented in phases as follows: In the first phase, the focus should be on establishing basic control functions such as centralized control of apportionments and simplified/streamlined but effective controls42 at other stages of the expenditure cycle, particularly commitment control backed by cash planning43 linked to timely release of funds to spending agencies. The contralora hence maintains overall control of budget execution. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. A full understanding of the budget planning and preparation system is essential, not just to derive expenditure projections but to be able to advise policymakers on the feasibility and desirability of specific budget proposals, from a macroeconomic or microeconomic perspective. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). These include appropriation control, commitment control, and accounting control. 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. 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. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; In addition to reviewing and streamlining the formal procedures defined by the financial regulations, informal and any special procedures and practices that bypass the normal expenditure cycle should be thoroughly reviewed and (to the extent possible) eliminated.44 Business rules and processes should be established to enable faster spending execution to address priority needs rather than relying on informal/special procedures that undermine the effectiveness of the expenditure control framework. Finance ministry monitors budget execution by line ministries/agencies. 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. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. Expenditures. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. The amount should be correctly calculated and there should be no hidden expenses. Cash Management: How Do Countries Perform Sound Practices? Public sector spending, also referred to as government spending or public expenditure, refers to the money that the government spends. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). 1All uses of public funds should be governed by financial regulations. In case of relatively simple requirements, a spreadsheet-based application may suffice. The expenditure must occur within the time limits applicable to the expenditure authorization. _paq.push(["setDoNotTrack", true]); It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. Therefore, there would be no under-execution of the budget under these circumstances. Show answer Answer A public sector spending on goods and services like education or healthcare. 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. In the third phase, a risk-based approach to control (control modul de la dpense) could be introduced, which in essence comprises the replacement of systematic ex ante control at the line item/transaction level by ex post audit and strengthened oversight. 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. In the US, public spending as a share of GDP was 10.5% in 1941, then went up to 44.1% in 1945, and then went back down to 12.2% in 1948. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. These expenditure limits may not be strict limits for all types of expenditure. While expenditure control frameworks differ greatly from country to country, it is nonetheless possible to define, in a generic sense: the key stages of the budget execution cycle; the specific control objectives at each of these stages; and. 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. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Budget modifications during the year are done according to legally prescribed processes (e.g., virements, contingency reserves, and supplementary/revised budgets), transparently, and in a way that promotes governments chosen objectives. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. Should be no under-execution of the total revenue expenditure of the countries have internal audit agencies under ministry. 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