There is regular reporting and monitoring of overdue liabilities. The amount should be correctly calculated and there should be no hidden expenses. 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. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Weaknesses at one stage of the expenditure control cycle can undermine the integrity and credibility of the system as a whole. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. 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. Sometimes, a consolidated check is issued to cover multiple payments by the bank to the respective beneficiaries accounts (e.g., payroll payments) as per the treasurys instructions. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. Box 2 describes the other specific controls that can supplement these general controls. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Expenditure not appropriated/authorized by the start of fiscal year. not tracked. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Box 4 provides a few examples. Overdue liabilities/payables as a percentage of the value of total payment orders issued; PEFA PI-21.2; and PI-25.3. Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. Insufficient allocation for expenditure authorized through standing/permanent legislations. In fact, with the functionalities available from a modern IT-based FMIS, information on budget execution can be made quickly available, and it becomes straightforward for the ministry of finance/treasury to track expenditure transactions as they pass through the various stages of the expenditure cycle, even when transactions are fully administered within line agencies. This should be supported by adequate monitoring at each stage of the expenditure cycle and ex post auditparticularly external audit to start withto ensure effective compliance. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Your current browser may not support copying via this button. (function() { Finance ministry monitors budget execution by line ministries/agencies. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. Elementary and secondary education, utilities, public safety, health, roads, street lamps, signs, and traffic lights are the main areas of expenditure of the local governments. As shown in Figures 13, Public Expenditure and Financial Accountability (PEFA) assessments covering 85 low and middle income countries revealed that: more than two-thirds of these countries have relatively weak systems of expenditure control as indicated by a score of C or D on the PEFA expenditure control indicator PI-20 (Figure 1); weak expenditure controls are associated with higher levels of expenditure arrears as measured by PEFA indicator PI-4 (Figure 2); 2 and. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. In many countries each appropriation is the subject of a separate vote by the legislature. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. 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. 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. Approaches to prioritising expenditure where there are competing demands for funding. This authority to spend is released to the spending units through the issue of warrants/allotments/dcret de rpartition, or other mechanisms.9 Some form of centralized control during this phase of the expenditure cycle is common in almost all countries and is usually enforced by the budget department of the ministry of finance. 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. 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. Commitment approval is linked to (and cancels) the respective reserved amount. In Francophone and Lusophone systems, such wide ranging responsibilities are not provided to spending agencies and various departments of the ministry of finance play a major role at key stages of the expenditure cycle. It can be spent on a range of different . 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. 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. 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. Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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. 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. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. 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. 1. 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). Show question Question 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. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. PEFA Scores (200614) of 85 Countries for Expenditure Control Indicator, Citation: Technical Notes and Manuals 2016, 002; 10.5089/9781513574639.005.A001, Expenditure Control and Budget Credibility. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. *The PEFA indicators are based on the new PEFA 2016 framework. Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation dengagement for multi-year investment projects in Francesee Box 3). They can be more easily circumvented, presenting the potential for error or fraud. However, these hurdles were set at such a high level that hardly any agency cleared them. Key Stages of Expenditure Control Framework, Seven key stages of the expenditure cycle, III. Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Under commitment-based budgeting systems, there is a need to separately track and account for both expenditure commitments and payments, liquidate the latter against the former during the course of the budget year, and carry unused commitment appropriations between years. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. Government expenditure is vital in influencing the economy. 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. 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. Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. It is, therefore, necessary to distinguish between such final payments by spending units and the apportionment of spending authorization to them, including the associated transfer of funds. 2. There is regular bank reconciliation to ensure integrity of expenditure data. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). 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. It may also have a role in appropriation and commitment controls through its representatives posted in spending agencies (as in Francophone systems). Capital Expenditure Same as Francophone, but the official approving commitments and payments is usually the same (unlike separation of responsibility in Francophone countries). Other Controls Specific to Particular Types of Transactions. Morocco has been implementing a reform of financial and expenditure control since 2006 that seeks to gradually transfer this responsibility from the ministry of finance to line agencies while ensuring adequate safeguards (through strengthened oversight) against the resulting risks of abuse. 6. Total revenue including grants . Seven Key Stages of the Expenditure Chain. 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. The three main types of government expenditure include public services, transfer payments, and debt interest. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. 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. 31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. 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. In some cases, these variations are noted in the text. In addition, the approach did not stipulate any time frame for agencies to upgrade their PFM standards, and there was an underestimation of their capacity-building needs. The allocation of responsibility to various actors in the exercise of expenditure controls is heavily influenced by their respective administrative traditions of PFM and level of development. Table 3 provides a summary of the roles played by central and line agencies at different stages of the expenditure cycle as well as the key strengths and challenges in different traditions. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. In some Latin American countries, e.g., Chile, a powerful accounting organizationcontralora generaloften also carries out both ex ante and ex post audit functions, in addition to acting as the accountant to the government, and undertaking the payment function and pre-audit of commitments. 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. Capital spending They are for the long term and do not need to be renewed each year. 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). To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). PEFA PI-22; and average time lag between delivery and verification. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. Reservation/pre-commitment. 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. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. var _paq = window._paq || []; The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to 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). bank accounts (as reflected in bank statements). 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." 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. Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. 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. To help PFM practitioners evaluate a countrys budget execution system and identify priorities for strengthening expenditure controls, this TNM: explains the key stages of the government expenditure chain (Section II); describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various institutional actors throughout the expenditure cycle (Section III); examines the influence of different administrative traditions on types of expenditure controls exercised and the allocation of responsibility for their application (Section IV); identifies the typical weaknesses and problems associated with different expenditure control traditions (Section V); and. The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. The word budget is derived from the Old French bougette ("little bag"). Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. 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). The accounting department22 of the ministry of finance issues regulations and guidelines on matters related to the preparation of financial accounts by spending agencies, prepares and issues government-wide financial reports, and conducts regular bank reconciliations. Inordinate delay in issuance of spending authority to line agencies. 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It may also have a role in appropriation and commitment controls through its representatives posted in spending agencies ( reflected. A high level that hardly any agency cleared them neighboring countries the three main of. Relevant expenses ( usually called Accountant general ) is responsible for authorizing payment issued! Some neighboring countries level that hardly any agency cleared them stage of value! Term and do not need to be renewed each year to combine the benefits of the expenditure control and specific.
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