However, the complexity of the expenditure chain, the precise nature of the controls exercised at each stage, and the degree of centralization varies considerably across countries and is heavily influenced by their respective administrative traditions. Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. Payment order. Government Spending: Giveth Some, Taketh Some. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund). 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. the use of taxes, government spending, and government transfers to stabilize an economy; the word . 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. PEFA PI-22; and average time lag between delivery and verification. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. As these countries transitioned to market-based economies, they established centralized treasury departments under the finance ministry to process payments and exercise control at the payment stage. Any part of that cost unpaid at the end of the period is a liability. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. Limit on amount of expenditure. These regulations, among other things, prescribe the establishment of responsibility for financial decisions, the segregation of duties to ensure appropriate checks and balances, and documentation procedures for maintaining a defined audit trail. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). 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. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). 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. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). Administrative unit accountable for expenditure. Current spending They are for the short term and include expenditure on wages and raw materials. 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. A long check float time is not a good practice as it not only complicates cash management but can also be misused to write and issue checks despite not having enough liquidity in the bank account to cover the value of the check. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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. 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). Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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. Georgia Public Expenditure and Financial Accountability Performance Assessment Report: City of Batumi. In particular, it is important to ensure effective coordination between issuance of warrants/allotments by the budget department and cash planning and management by the treasury so that adequate cash is available for payment when the line ministries/agencies expenditure commitments materialize.23 Similarly, transaction level bank reconciliation by the accounting department and/or line agencies should be coordinated with the treasury departments monitoring of cash balances in various bank accounts. 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). Key strengths: line agencies directly accountable for the use/control of their appropriations; and no complementary period. 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. Commitment approval delinked from apportionment and cash management frameworks. 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. Examples of this include lowering taxes and raising government spending. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. The public accountant assumes personal financial responsibility for compliance with regulations and is accountable to the Court of Accounts (Cours des comptes), the supreme audit institution. 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). 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. The author is also grateful to K. Douglass for her assistance with data analysis. Payment order. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. There is potential scope for over commitments and/or manipulation of in-year data on commitments which may not be systematically recorded/tracked in a timely manner at the respective stage of the expenditure cycle.39, Scandinavian. Show question Question A payment order is an authorization for payment (usually against a bill or invoice) made by officials of line ministries, other spending agencies, or the ministry of finance. Article 78 of the WAEMU Directive No. In cases where the expenditure is subject to a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments), an estimate of obligation to pay should be made and treated as a commitment. Overly rigid and controlled spending procedures in several Francophone African countries have resulted in the proliferation and misuse of exceptional spending procedures, e.g., the issuance by the minister of finance to the treasury (bypassing the normal chain of expenditure) of an immediate payment order subject to regularization later. Checks and/or electronic transfer instructions bounce due to lack of cash. Control of procurement: Significant public spending takes place through the public procurement system. Banks were privatized and deregulated, central bank laws introduced firm limits on the amount of credit available to the government, centralized treasury departments were established to raise financing from the private sector on commercial terms, control and process government payments, and report on budget execution through the main treasury account. 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. The link was not copied. However, these hurdles were set at such a high level that hardly any agency cleared them. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. For example, the UK uses the employer cost cap mechanism to control future pension spending. 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). Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. 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. 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 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 commitment stage is the point at which a potential future obligation to pay is established. The expenditure must occur within the time limits applicable to the expenditure authorization. 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). Arrears are the expenditures at the verification stage that have not been paid by the due date of payment specified either in specific contracts or procurement legislation or assumed under general commercial terms.12. Francophone and Lusophone. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). bank accounts (as reflected in bank statements). g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. Mariance analysis is the budgeting review technique universally applied for analyzing budgeting estimates. 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. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Box 4 provides a few examples. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. General Services: 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. 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. Lack of adequate control over government expenditure remains a problem in many countries. 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." In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. 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For multiannual programs/projects, the approved budget includes both the multiannual commitment limits (autorisations dengagement or AE) against which it also sets annual limits (crdits de paiement or CP) for cash payments during the year. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). Once the apportionment of expenditure authorization is made and the spending authority has been released, some countries PFM systems include a stage at which funds are reserved for a specific known expense but for which no contract has yet been issued. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. There is regular reporting and monitoring of overdue liabilities. _paq.push(['trackPageView']); Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). 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 responsibilities of the relevant actors in enforcing these controls. To provide accountability, the budget proposals should be sub-divided by entity/purpose. 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. 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. Payment. Economy Minister Mohd Rafizi Ramli said, if the government is . 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. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. 6. Institutional and procedural reforms that can help to address those problems are discussed in the next section. Therefore, there would be no under-execution of the budget under these circumstances. 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. In addition to reviewing and streamlining the formal procedures defined by the financial regulations, informal and any special procedures and practices that bypass the normal expenditure cycle should be thoroughly reviewed and (to the extent possible) eliminated.44 Business rules and processes should be established to enable faster spending execution to address priority needs rather than relying on informal/special procedures that undermine the effectiveness of the expenditure control framework. The first and each subsequent actuarial valuation report includes valuation results for the purposes of measuring changes in the cost of the pension scheme against the employer cost cap, expressed as a percentage of pensionable pay. No verification/certification system (i.e., payment orders issued without verification). 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. There is regular bank reconciliation to ensure integrity of expenditure data. A comprehensive commitment control system is in place that captures not only one-off (purchase order type) but also multi-year (e.g., projects contacts) commitments. 4, Paris. 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. Inordinate delay in issuance of spending authority to line agencies. 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. The system of payments to government suppliers was highly decentralized. Advertisement. As part of the comprehensive reform of its budget framework in 2001, France introduced multiannual commitment authorizations as a means of controlling expenditure obligations and associated payments for programs or projects that span more than one year (e.g., investment projects). Payment and verification (in case of accrual accounting) stages. A strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. The distribution of responsibilities between them is typically organized along the following lines: The budget department of the ministry of finance issues regulations on matters related to the execution of the budget, apportions appropriated funds to spending agencies, monitors their expenditures and performance, authorizes in-year budget revisions, and monitors and reports on budget execution. 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. The actual expenditures may be greater than or less than the budget. Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. 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. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. Budgeting, internal control and audits are commonly used by government owned hospitals in order to curb expenditures, cost benefits, analysis and management audits that could be applied are not in use. 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). 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. Expenditure not appropriated/authorized by the start of fiscal year. 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 The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. 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. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). 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. Typical Problems at Different Stages of Expenditure and Tools to Address Them. Spending agencies submit month-wise expenditure plans (along with their budget submission) to serve as the basis for issuance of spending authority (warrant/allotment) after budget approval. 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. 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. Apportionment. 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. government budget, forecast by a government of its expenditures and revenues for a specific period of time. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). The authority for expenditure is given for a specific pre-defined purpose. })(); Copy this link, or click below to email it to a friend. Transactions are recognized, classified, and recorded in the books/ general ledger according to a countrys accounting policies/standards and chart of accounts. 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. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. 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. Pay is established, the UK uses the employer cost cap mechanism to control future spending. Francophone African countries to settle most of the finance ministry and the preparation of financial.... Applicable to the stage of payment order is issued the inefficiency of the finance and! Expenditure arrears, see D. Radev and P. Khemani ( 2009 ),... 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To be encashed of a cash appropriation would mean that the appropriation is utilized when government. Cost cap mechanism to control future pension spending and agencies have substantial authority in executing budget.
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