Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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). Current spending They are for the short term and include expenditure on wages and raw materials. 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. Francophone and Lusophone. 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. Government Spending: Giveth Some, Taketh Some. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). Transactions undertaken using exceptional procedures often end up being registered in suspense accounts that are rarely cleared due to lack of budget cover and are neither properly tracked nor reported. How Do Treasury Systems Operate in sub-Saharan Francophone Africa? 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. 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. At this stage, there is no commitment, but it is known that the expense will be incurred during the budget year and, therefore, the reserved funds should not be used for other activities. })(); Copy this link, or click below to email it to a friend. 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. Apportionment framework and cash plans/ forecasts take account of commitment profiles and associated expected payment schedules. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. 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. 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 three main types of government expenditure include public services, transfer payments, and debt interest. At this stage, after goods have been delivered and/or services have been rendered by a supplier, an authorized officer within the spending unit concerned verifies their conformity with the contract or order, and that a liability and due date of payment are recognized. Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. Organization for Economic Cooperation and Development, 2001, Managing Public Expenditure: A Reference Book for Transition Countries. Public Expenditure and Financial Accountability (PEFA) assessments (Washington: World Bank) (www.pefa.org). 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. Government expenditure has ballooned over the years. These expenditure limits may not be strict limits for all types of expenditure. Administrative unit accountable for expenditure. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. The strengthening of the expenditure control framework should not be viewed as an independent activity and should be integrated with other PFM reforms, including changes to budget execution processes. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. Reservation/pre-commitment. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. 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. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. Types of Fiscal Policy The government has control over both taxes and government spending. These include appropriation control, commitment control, and accounting control. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. 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. 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. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. 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. In the second phase, the focus should be on progressive devolution of controls to spending agencies in parallel with a reinforcement of procedures for auditing and reporting. This may lead to potential arrears. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. 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. 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. 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. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). Commitment. 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. 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). This plan indicates the funds required for operations, typically on a quarterly or monthly basis. 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. 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. Limit on amount of expenditure. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). 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). The authorization for expenditure is usually given through the budget law which defines the time horizon for, limits on,5 purpose of, and administrative unit accountable for government expenditure (Box 1).6 To deal with unanticipated spending pressures, some flexibility in the allocation of expenditure between sectors may be allowed subject to clear rules/criteria (e.g., through virements and/or allocation from a contingency reserve). 4, Paris. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. Overdue liabilities/payables as a percentage of the value of total payment orders issued; PEFA PI-21.2; and PI-25.3. Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. Lack of adequate control over government expenditure remains a problem in many countries. The new 2009 WAEMU/CEMAC directives, however, call for a shift from centralized to decentralized ordonnancement in these countries. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Under commitment-based budgeting systems, there is a need to separately track and account for both expenditure commitments and payments, liquidate the latter against the former during the course of the budget year, and carry unused commitment appropriations between years. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. 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. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. Mainly commitment, verification, payment order and payment stages, but also at other stages. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) 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. *The PEFA indicators are based on the new PEFA 2016 framework. Other Controls Specific to Particular Types of Transactions. 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. Key strengths: line agencies directly accountable for the use/control of their appropriations; and no complementary period. In case of relatively simple requirements, a spreadsheet-based application may suffice. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. Reforms to address budget execution issues might require clarifying budget execution procedures, introducing or upgrading an FMIS, improving budget warrant/allotment system, establishing commitment control, strengthening cash management, introducing accrual accounting, etc. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. To provide accountability, the budget proposals should be sub-divided by entity/purpose. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. In Francophone and Lusophone systems, such wide ranging responsibilities are not provided to spending agencies and various departments of the ministry of finance play a major role at key stages of the expenditure cycle. Apportionment. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. 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. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. The scope for establishing such advanced systems, however, remains challenging in many developing countries. 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. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Some types of budget appropriationsdebt service, for examplemay not be subject to a strict spending limit and may be revised according to developments in interest rates and exchange rates. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. Capital Expenditure 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. The key reforms include clarifying responsibilities for verification of delivery of goods and/or services, ensuring documentary proof of delivery, and eliminating any undue delay between verification and issuance of payment orders. PEFA PI-22; and average time lag between delivery and verification. 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. Countries of the former Soviet Union (FSU) have tended to retain centralized treasury departments to control and process government payments, while controls at the commitment, verification and payment order stages remain with the line ministries/agencies. 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. The key reforms include development of expenditure plans by line agencies and submission of these plans to the ministry of finance for decision on apportionment, and preparation of reliable cash flow forecasts to serve as the basis for apportionment. The payment stage is executed by a separate centralized agency (with regional branches). In most cases, funds can be moved quite freely between sub-programs and items within the year. Finance ministry does not carry out any form of detailed commitment or payment control. 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. would still require manual intervention. This convergence is in the direction of: an increased focus on ex ante controls over expenditure commitments rather than ex post controls only at the payment stage of the expenditure cycle; a shift from controlling only cash expenditures towards controlling the accumulation of accrued liabilities as well; greater devolution of responsibility for routine expenditure controls towards ministries and agencies and a more risk-based approach to the exercise of centralized controls; a stronger reliance on internal and external audit to ensure the integrity of financial control systems in ministries and agencies; and. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. The commitment stage is the point at which a potential future obligation to pay is established. The word budget is derived from the Old French bougette ("little bag"). When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. 5. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Identifying gaps and weaknesses in expenditure control in a particular country requires a systematic review of the integrity of the expenditure cycle, looking at: Definition/specification of key stages of the expenditure cycle, including the control criteria. 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). 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