In some countries, a powerful accounting organization (. This approach comprised two main components: (i) a set of core financial and performance management competencies (called the hurdles) to be met by each line agency to qualify for delegation of financial management and control; and (ii) semi-contractual arrangements between the Bureau of the Budget and line agencies formally linking the reduction in central control to the achievement of the specified competencies. No cash availability to make payments within the time horizon of apportionment. The amount should be correctly calculated and there should be no hidden expenses. 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. The authority for expenditure is given for a specific pre-defined purpose. Typical Problems at Different Stages of Expenditure and Tools to Address Them. 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. PEFA PI-22; and average time lag between delivery and verification. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. Khan, A., and M. Pessoa, 2010, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Technical Notes and Manuals (Washington: International Monetary Fund). Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. Role of Central and Line Agencies in Various Traditions and Lessons Learned. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). Large delay between verification (recognition of liability) and payment order (arrears, etc). While the institutional arrangements for raising government revenue are typically quite centralized in a national revenue authority, the expenditure of those resources involves a wide array of public entities at various levels of government, even in countries with relatively centralized PFM systems. In some countries, the ministry of finance uses sequestering to prevent such risks. 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. 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. The main reforms include enhancing the coverage of the budget, improving the methodology of costing budget policies, introducing medium-term fiscal and budget frameworks, and ensuring timely submission and approval of the budget by the legislature. The role of an expenditure control system is to ensure that the level and allocation of government expenditure reflect the will of the legislature as voted for in the budget.3 Expenditure controls should also reflect sound financial management principles, ensuring that public resources are utilized efficiently, incurred obligations are cleared in a timely manner, abuse/ misappropriation of public money is prevented, and private actors compete on a level playing field for government contracts. However, the design and implementation of such a differentiated control arrangement would depend on several factors, including the effectiveness of the internal control and assurance system to identify and alert management to control risks.45, Devolution of Expenditure Control in France, Morocco, and Thailand. The reform strategy and action plan should provide for monitoring the progress. Each request for apportionment or reapportionment should be accompanied by a financial or cash plan from the relevant ministry or spending agency supporting the request for ensuring that apportionment and cash management functions are well integrated.10. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. Sweden has a separate debt management agency which also administers the TSA system. 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 scope for establishing such advanced systems, however, remains challenging in many developing countries. 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 other expenditure items, the devolution is based on the assessed effectiveness (through formal capacity audits) of the internal control system of the line agency and its risk management capacity. Francophone and Lusophone. Key strengths: centralized payment and treasury accounting system. By contrast, British Commonwealth countries do not formally track controls at every stage and typically track only the first and last two stages of the expenditure chain: authorization, payment order, and payment (see also Section IV). Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. 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. g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); These are (i) appropriation control; (ii) commitment control; (iii) aggregate cash control; (iv) control of regularity; (v) accounting control; and (vi) other specific controls. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Payment order. 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. *The PEFA indicators are based on the new PEFA 2016 framework. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. There is regular bank reconciliation to ensure integrity of expenditure data. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . The main thrust of reforms is to ensure that payments are made within the due date to prevent accumulation of payables/arrears, extend the horizon of the cash plan which also reflects expected payments, and eliminate exceptional procedures for payment. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Types of Control, Their Key Features and Objectives. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Government Spending: Giveth Some, Taketh Some. 3. To ensure bank reconciliation and reliability of expenditure data used for financial reporting, it is important to compare and reconcile the transactions recorded in the cash book (which records the details of checks issued) with those in the bank statements. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). While providing examples of expenditure control practices from more than 32 countries, the paper points out that more than two-thirds of the 85 low and middle income countries covered by the publicly available Public Expenditure and Financial Accountability (PEFA) assessments have weak systems of expenditure control that are also associated with higher levels of expenditure arrears and a lack of budget credibility. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. 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. would still require manual intervention. When it increases, aggregate demand increases, and we expect the economy to grow higher. A key point to note here is that without enhancing the capacity of the line agencies to meet the specified competency criteria, such devolution of controls are unlikely to take hold (e.g., the case of Thailand discussed in Box 4). 4. 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). Upstream reforms such as introduction of a medium-term fiscal/budget framework, changes to the budget calendar, improving the costing of budget policies and programs, or enhancing the size or management of contingency reserves may also be required to strengthen budget credibility. For example, in the United States mandatory or entitlement programs, such as Social Security, Medicare, Medicaid, and certain other programs are not controlled by annual appropriations, except for the requirement to show a corresponding increase or decrease in the costs of these programs due to any envisaged changes. Administrative unit accountable for expenditure. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. 2. 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. : 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. General Services: Authorized purpose of the expenditure. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. 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. In case of relatively simple requirements, a spreadsheet-based application may suffice. Therefore, unlike the old French system, the key principles here are integration and delegation. For example, the UK uses the employer cost cap mechanism to control future pension spending. 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. Payment and verification (in case of accrual accounting) stages. Capital Expenditure Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). This control is a key element of the overall cash management system. 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. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. The actual expenditures may be greater than or less than the budget. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. In most cases, researchers assume that control of corruption, rule of law, accountability, and government expenditure tend to have a positive impact on government effectiveness. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Most budget execution control operations are delegated to the line ministries. Time horizon of apportionment too short for expenditure planning and execution by line agencies. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. 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. This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). 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. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. Accounting and monitoring of budget execution were carried out by the banking system. Although the governmental budget is primarily concerned with fiscal policy (defining what resources it will raise and what it will spend), the government also has a number of tools that it can use to affect the economy through monetary control.