types of government expenditure control
If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. 5. the use of taxes, government spending, and government transfers to stabilize an economy; the word . In some cases, these variations are noted in the text. PEFA PI-22; and average time lag between delivery and verification. *The PEFA indicators are based on the new PEFA 2016 framework. 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). Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. Thus, the changes will affect the economy. Expenditures. 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. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. 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. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. 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 . 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). an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. Sweden has a separate debt management agency which also administers the TSA system. 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. Accounting and monitoring of budget execution were carried out by the banking system. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Since commitments usually mature as payments, their control is an essential part of overall expenditure control and prevention of expenditure arrears.11 A commitment does not mean that a payment will necessarily be made within the same fiscal year. 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. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. would still require manual intervention. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). 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). Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. 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. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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. 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. _paq.push(['enableLinkTracking']); Administrative unit accountable for expenditure. 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. Limit on time horizon of expenditure. Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . Advancing the procurement cycle and/or streamlining the process to reduce the time lag between reservation and commitment; reserved funds are integrated with the TSA. 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. 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. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Current spending They are for the short term and include expenditure on wages and raw materials. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; The system is unlike that in France where each line minister has always been an Ordonnateur Principal. 4. 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. In particular, the new law: (i) divests the financial controllers of the responsibility for regularity control (contrle de rgularit) of budget managers (administrateurs de credit), which was transferred/decentralized to the line ministries; (ii) requires the financial controllers to assess the fiscal sustainability of decisions taken by budget managers to reinforce macro-fiscal discipline; and (iii) also requires the controllers of central agencies, such as the General Inspectorate of Finances (Inspection gnrale des finances), to apply a risk-based approach to control. There is regular reporting and monitoring of overdue liabilities. When sequestering appropriations, ongoing commitments should be taken into account. 1. Defence Services: They account for nearly 20% of the total revenue expenditure of the Central Government in India. The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. 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. Apportionment of authorization for specific periods and spending units. 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. 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. Final Government Spending Quiz Question What is government spending? Finance ministry does not carry out any form of detailed commitment or payment control. ), the verification requires confirmation that the obligation has actually fallen due. Transactions are recognized, classified, and recorded in the books/ general ledger according to a countrys accounting policies/standards and chart of accounts. 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. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. 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. 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. They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. 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. The authority for expenditure is Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. But, fiscal policy is also used to curtail . Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). Government expenditure has ballooned over the years. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Strengthening expenditure control in a particular country can, therefore, sometimes require difficult judgments about whether to reinforce traditional administrative arrangements or seek to modernize them. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. 7/2009 sets a maximum one month complementary period. Cash Management: How Do Countries Perform Sound Practices? Payment order. Key strengths: centralized payment and treasury accounting system. The central idea here is that not all expenditure transactions need to pass through an identical control process. Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. Large delay between verification (recognition of liability) and payment order (arrears, etc). For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. 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In many countries each appropriation is the subject of a separate vote by the legislature. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). The amount of interest depends on the total federal debt and interest rates. The contralora hence maintains overall control of budget execution. Role of Central and Line Agencies in Various Traditions and Lessons Learned. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). This plan indicates the funds required for operations, typically on a quarterly or monthly basis. As such, the focus of expenditure control at the commitment phase of budget execution has moved from an annual to a multiannual basis, i.e., the total cost of a legal commitment into which the government is entering into is fully recorded against the available multiannual commitment authorizations/AEs. The descriptions of the various traditions provided below are broad and general, and in practice, there are variations among the countries belonging to each tradition. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. In some countries, a powerful accounting organization (. Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. 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. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Lack of adequate control over government expenditure remains a problem in many countries. Managing the change process would involve communicating effectively to all relevant stakeholders a broad understanding of why the changes are necessary and what objectives are sought to be achieved. Types of Control, Their Key Features and Objectives. In such cases, agencies execute their accrual budgets by incurring expenses and liabilitieseven if they had not been settled in cash during the fiscal yearwhich are reflected in their budget execution reports or financial accounts.21 Therefore, the control of accrual appropriations relies primarily upon the monitoring of spending agencies accounts, whereas ex ante control over cash transactions is the primary instrument under cash budgeting. 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. This is known as retenciones de crdito in Spain (and a similar arrangement in Portugal) and engagement budgtaire in France which precedes the engagement juridique or legal commitment stage. 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). 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. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. 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 scope for establishing such advanced systems, however, remains challenging in many developing countries. However, overall responsibility for budget execution is assigned to the respective line minister (or the head of an independent State body) who allocates budgeted resources to the various departments/agencies under his/her authority and delegates responsibility for budget execution up to the stage of the preparation of payment orders. This devolution/decentralization of financial and expenditure control should be gradual and based on predefined competency criteria for line ministries/agencies who should demonstrate that they can operate with higher levels of delegated authority. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. This control is a key element of the overall cash management system. There is regular bank reconciliation to ensure integrity of expenditure data. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. Verification. Government Spending: Giveth Some, Taketh Some. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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. Weaknesses at one stage of the expenditure control cycle can undermine the integrity and credibility of the system as a whole. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ 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. 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. Clarity of the legal and regulatory framework, including the roles of the key actors. 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. 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. fiscal policy. 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. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. 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. The process of issuing checks should be managed to monitor and minimize check float14 and ensure that sufficient cash is available when they are presented for encashment. Commitment limits may be multi-year in nature (usually for capital projects) and carried over from one financial year to the next, while cash expenditure limits are usually set for the budget year. 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. For example, a treasury-based centralized payment system with decentralized responsibility for appropriation and commitment controls at the line agency level can be progressively introduced as the FMIS is rolled out (subject to adequate connectivity between the line agencies and the treasury). Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. Monetary policy. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Insufficient allocation for expenditure authorized through standing/permanent legislations. Therefore, there would be no under-execution of the budget under these circumstances. Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. Payment order. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. 1All uses of public funds should be governed by financial regulations. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). 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 objective is achieved by appropriations. 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. Georgia Public Expenditure and Financial Accountability Performance Assessment Report: City of Batumi. 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