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. 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. 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. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. Pension controls: The liability and associated expense for pensions and other retirement benefits should be recognized at the time the employee's services are rendered. not tracked. the responsibilities of the relevant actors in enforcing these controls. 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. A lack of effective expenditure controls not only threatens macroeconomic stability and fiscal discipline, but can also call into question the integrity of the public financial management system and undermine trust in a governments stewardship of public resources. Monetary policy. 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. This is what constitutes the hierarchical and risk-based control (control modul de la dpense) that Morocco has started to implement since 2008 (based on Decree n 207-1235 of November 4, 2008). an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. _paq.push(['trackPageView']); 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. The amount of interest depends on the total federal debt and interest rates. Legality of the operation is controlled by verifying that the officials approving a transaction have the authority to do so, and that the required supporting documents have been prepared in line with the law/regulations (for audit). 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. It also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. 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. The expenditure must occur within the time limits applicable to the expenditure authorization. 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. 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. 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. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. Funds/cash not available in government bank accounts to implement the payment order. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ Therefore, entering into a commitment or incurring a liability in excess of the limit would not, in the absence of other controls, constitute a breach of law. Seven Key Stages of the Expenditure Chain. The link was not copied. 7/2009 sets a maximum one month complementary period. Control of procurement: Significant public spending takes place through the public procurement system. var u="https://piwik.pentaho.aidcvt.com/"; Limit on time horizon of expenditure. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. 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. The budget should be implemented as formulated and authorized with as little deviation as possible, but there should be room to adjust to changing circumstances (e.g., genuinely unexpected events) by modifying the budget as necessary during the year. The word budget is derived from the Old French bougette ("little bag"). 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. The main goals of fiscal policy are to achieve and maintain full employment, reach a high rate of economic growth, and to keep prices and wages stable. In 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. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Apportionment, reservation, commitment and payment order stages and virements during budget execution. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. 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. 3. Tailored financial services and climate risk management tools to link small farmers to markets, The Real Actors and the PMP (Policymaking Process), Housing Finance in Chile: Instruments, Actors, and Policies, The Political Economy of Productivity: Actors, Arenas and Policymaking, How Democracy Works: Political Institutions, Actors and Arenas in Latin American Policymaking, Sustainable Forest Management in Latin America: Relevant Actors and Policies, Urban Heritage Conservation in Latin America and the Caribbean: A Task for All Social Actors, Public Financial Management in Latin America: The Key to Efficiency and Transparency, Costa Rica: The Next Stage-Reform without Volatility; A Report, Who Decides on Public Expenditures? British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. var _paq = window._paq || []; 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. Payment order issued under exceptional procedure (i.e., bypassing previous stages). Francophone and Lusophone. 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. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). while others are purely internal to the government. Article 78 of the WAEMU Directive No. When it increases, aggregate demand increases, and we expect the economy to grow higher. 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. These include appropriation control, commitment control, and accounting control. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. The key questions to be asked are: (i) whether there are clear laws and financial regulations regarding the controls and the authority and responsibility of relevant actors who should apply them; and (ii) whether the relevant actors understand and apply them in practice. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). Non-contractual commitments (subsidies, transfers, etc.) Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. The authority for expenditure is given for a specific pre-defined purpose. Cash Management: How Do Countries Perform Sound Practices? 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. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. Commitment. 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. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . The author is also grateful to K. Douglass for her assistance with data analysis. Sometimes called the Westminster system of PFM. ), the verification requires confirmation that the obligation has actually fallen due. These expenditure limits may not be strict limits for all types of expenditure. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. While particular expenditure control weaknesses may manifest themselves at a particular stage of the expenditure cycle, addressing them may require reforms at various points in the process. 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. Apportionment. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). 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. Mainly commitment, verification, payment order and payment stages, but also at other stages. Types of Fiscal Policy The government has control over both taxes and government spending. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). Budget Preparation. 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. 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. Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. It will also usefully guide technical assistance work related to modernization of government budget execution and expenditure control systems, including the design and implementation of IT-based financial management information systems. Therefore, after warrant releases, line ministries have the power to: (i) make commitments against their budget appropriations and authorized cash ceilings without reference to the ministry of finance; (ii) issue payment orders to liquidate those commitments that have materialized; and (iii) prepare accounts of their expenditures. 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. 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. 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 main reform at this stage is the introduction of a comprehensive commitment control system, including for multi-year commitments and standing commitments (e.g., salaries, utilities, subsidies, transfers, etc.). 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. This includes, but not limited to: failure to check the availability of funding before authorizing expenditure; failure to record and maintain data on commitments; delays in processing of payments; circumvention of controls at key stages, including through collusion; and poor record keeping, including of verification documents. })(); Copy this link, or click below to email it to a friend. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). The budget classification (which may be organized by programs, sub-programs, projects, economic categories, or line items) usually specifies the purpose for which the expenditure can be made.1. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). Types of Control, Their Key Features and Objectives. A strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. This objective is achieved by appropriations. the use of taxes, government spending, and government transfers to stabilize an economy; the word . _paq.push(['setTrackerUrl', u+'matomo.php']); Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. 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). A distinguishing feature of a governments budget, unlike the budget of a typical business entity, is that it is funded primarily via compulsory taxation of citizens and authorized via an act of Parliament. _paq.push(['setSiteId', '17']); 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. Options for strengthening the expenditure control framework. 1. What are the main areas of expenditure for local government? 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. 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. Payment. (function() { Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. 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. Stage of the Expenditure Cycle, Controls, and Actors. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). The key players are financial controllers (contrleurs financiers) who are generally under the Budget Department of the ministry of finance and exercise a priori control (in the form of issuance of a visa) at the commitment stage, commitment officers (ordonnateurs) who approve the issuance of payment orders to the Treasury, and public accountants or cashiers (comptables publics) who belong to the public accounting directorate and are responsible for ensuring that the verified bills are paid. Finance ministry monitors budget execution by line ministries/agencies. However, these hurdles were set at such a high level that hardly any agency cleared them. Following confirmation that sufficient liquidity is available, a designated official approves the payment and issues a payment order. 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. 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. the use of policy (such as fiscal policy or monetary policy) to reduce the severity of recessions and excessively strong expansions; the goal of stabilization policy is not to eliminate the business cycle, just to smooth it out. This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). 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