To be able to exercise upfront control over the future resource requirements related to pensions, countries implementing accrual budgeting (e.g., the UK, Australia and New Zealand) include the accruing cost and any unfunded liabilities of pension schemes17 within budgetary limits for each government department.18. 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. 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. fiscal policy. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. Certain sums may be spent under permanent rather than annual legislation. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. 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). In some countries, the ministry of finance uses sequestering to prevent such risks. ), the verification requires confirmation that the obligation has actually fallen due. 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. If a future valuation shows that the costs of a scheme have risen or have fallen, action needs to be taken (via adjustments to member benefits or member contributions) to return costs to the level of the cap. 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). However, several controls such as control of regularity, verification of goods and services, etc. Authorized purpose of the expenditure. Advertisement. bank accounts (as reflected in bank statements). 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. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. Insufficient allocation for expenditure authorized through standing/permanent legislations. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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 strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. 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). Budget Preparation. Thailand introduced a hurdle approach in the late 1990s to devolve budget execution control, moving this function from the finance ministrys Bureau of the Budget to line agencies. Expenditure not appropriated/authorized by the start of fiscal year. Delivery date is captured and time lag between delivery and verification monitored. Commitment. 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. 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. Payment order is issued within the payment due date to discharge the recognized liability. 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. Manual processing controls: Key manual processing controls for purchasing, payment, and confirmation of receipt of goods and services are performed outside the typical information systems (e.g., FMIS) environment and should be subject to periodic internal control checks and audit. 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. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. 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. The amount of interest depends on the total federal debt and interest rates. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, (http://www.issai.org/media/13329/intosai_gov_9100_e.pdf). In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. Clarity of the legal and regulatory framework, including the roles of the key actors. The nature of the expenditure limit enforced at each stage depends on the accounting basis used in the budget appropriation framework.19 Specifically: Cash-based budgeting systems primarily enforce a limit on the accumulation and liquidation of cash obligations incurred during the budget year. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. Section 3. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. 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. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. 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 . In some countries, a powerful accounting organization (. 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. 5. These valuations measure the full costs of paying pension benefits. 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. For example, prior to the 1990s, financial control was under the Presidency (Cte dIvoire), the Prime Ministers Office (Senegal), or was the responsibility of a separate ministry. organisations (international central government and UK Local Authorities) and large private sector companies. 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. 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. Current spending They are for the short term and include expenditure on wages and raw materials. Your current browser may not support copying via this button. Payment. government budget, forecast by a government of its expenditures and revenues for a specific period of time. 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. 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. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. 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. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. 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. 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. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Large delay between verification (recognition of liability) and payment order (arrears, etc). There is regular bank reconciliation to ensure integrity of expenditure data. 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. Role of Central and Line Agencies in Various Traditions and Lessons Learned. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. In many cases, a transaction processing system may have to be supplemented by specialized consolidation software to generate the necessary reports in a timely manner. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. 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. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). . 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." As a result, progress stalled and the reform was not pursued further. In cases where the expenditure involves a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments, payments of household benefits, etc. Commitment approval is linked to (and cancels) the respective reserved amount. 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. 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. Canada also shares some of these features. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. 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). Inordinate delay in issuance of spending authority to line agencies. 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. 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. 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