The key reforms include clarifying responsibilities for verification of delivery of goods and/or services, ensuring documentary proof of delivery, and eliminating any undue delay between verification and issuance of payment orders. 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. Monetary policy. 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 . Payment order. Box 4 provides a few examples. Current spending They are for the short term and include expenditure on wages and raw materials. 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. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. 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. 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). 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. 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. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. The expenditure must occur within the time limits applicable to the expenditure authorization. The commitment stage is the point at which a potential future obligation to pay is established. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. When it increases, aggregate demand increases, and we expect the economy to grow higher. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. 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. The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. 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. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). 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). Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. Expenditure Control: Key Features, Stages, and Actors. In line with internationally accepted good practice, the payment should be made through a treasury single account (TSA) system.13 Payments by checks are, in most countries, recorded at the point of their issuance. Broadly speaking, it exists not only in the United Kingdom, but also in Australia, New Zealand, Indian sub-continent, and many countries in Africa, Asia, Europe and the Caribbean that were former British colonies. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. 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. bank accounts (as reflected in bank statements). PEFA PI-22; and average time lag between delivery and verification. Payment. Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. Next. 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. Commitment approval is linked to (and cancels) the respective reserved amount. Any perceived risks and/or uncertainties should also be adequately addressed. Authorization of expenditure. Commitment approval delinked from apportionment and cash management frameworks. But, fiscal policy is also used to curtail . However, even in such cases and in line with the principles of budget comprehensiveness, transparency, and accountability, such expenditures should be included in the budget documentation, and subjected to the same regularity controls discussed in Section III (see Table 1). Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. While the answer to this question will depend on specific country context and weaknesses, in general caution should be exercised in the devolution of controls in countries that are at the initial stage of development of PFM systems (e.g., fragile states), or with weak capacity at line agencies to implement the required controls, and/or without strong institutions of ex post oversight (internal and external audit). Effective expenditure control is the sine qua non of good public financial management (PFM). : 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. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. 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. Reservation. Finance ministry does not carry out any form of detailed commitment or payment control. They are also reconciled with bank statements. These stages are: 1. These valuations measure the full costs of paying pension benefits. 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. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. Mainly commitment, verification, payment order and payment stages, but also at other stages. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). 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. As a result, progress stalled and the reform was not pursued further. Capital Expenditure The contralora hence maintains overall control of budget execution. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. It can be spent on a range of different . var _paq = window._paq || []; Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office). Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. At this stage, there is no commitment, but it is known that the expense will be incurred during the budget year and, therefore, the reserved funds should not be used for other activities. A commitment occurs when a formal action, such as placing an order or awarding a contract, is taken that renders the government liable to pay at sometime in the future when the order or contract is honored by its counterpart. The amount should be correctly calculated and there should be no hidden expenses. Inordinate delay in issuance of spending authority to line agencies. Role of Central and Line Agencies in Various Traditions and Lessons Learned. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. 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. Administrative unit accountable for expenditure. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. 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. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Options for strengthening the expenditure control framework. In most cases, funds can be moved quite freely between sub-programs and items within the year. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. Without accounting for the state rollback error, the total general fund revenue and expenditure budget which funds police and fire, parks and recreation and public works is $157.9 million . Types of Control, Their Key Features and Objectives. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. There is also lack of control over agencies with own revenue outside the treasury system. Under a dual accrual and cash budgeting/appropriations framework, there is a need for each agency to make projections of both its anticipated cash requirements as well as incurrence of expenses and liabilities and accumulation/realization of long-term obligations and contingent liabilities. })(); Copy this link, or click below to email it to a friend. 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. Limit on amount of expenditure. As part of the budgetary accounting, commitments and payments made (through the CPs) against each AE are tracked to identify and report on (i) AE approved in budget law; (ii) AE consumed through legal commitments; (iii) AE unused/available for new commitments; (iv) CP authorized in budget law; and (v) payments made or CP consumed (see figure below). 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. Sweden has a separate debt management agency which also administers the TSA system. 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. 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. 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. 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. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. 7. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. while others are purely internal to the government. 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 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. In the British Commonwealth system, there is no complementary period, and at the beginning of a new fiscal year, in principle, no cash transactions pertaining to the previous years budget should take place. 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. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). 6. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Payment. 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. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. Key challenges: need for sufficiently strong capacity in line agencies to implement the required controls (a challenge in fragile states); dispersed expenditure data could make timely financial reporting difficult; and lack of strong oversight (e.g., internal and external audit) and sanctions for non-compliance may create opportunities for fraudulent transactions. The classification of public expenditure can be done in 4 ways: Revenue Expenditure The revenue expenditure is funded through the current revenue of the government that includes taxes and non-tax revenues such as welfare schemes or profits, or incidental incomes. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . Payment orders are issued after documentary proof of verification. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. Expenditure not appropriated/authorized by the start of fiscal year. 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