This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). A distinguishing feature of a governments budget, unlike the budget of a typical business entity, is that it is funded primarily via compulsory taxation of citizens and authorized via an act of Parliament. Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office). Canada also shares some of these features. Some of the controls during the expenditure cycle can be automated and applied through an FMIS. 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. Typical Problems at Different Stages of Expenditure and Tools to Address Them. 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. The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. Advertisement. Apportionment of authorization for specific periods and spending units. 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. 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. 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. 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 PEFA indicators are based on the new PEFA 2016 framework. It is, therefore, necessary to distinguish between such final payments by spending units and the apportionment of spending authorization to them, including the associated transfer of funds. 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). On the sectoral side, growth in public administration, defence and other services decelerated to a two-year low of 2.0 percent YoY in Q3 versus 5.6 . })(); Copy this link, or click below to email it to a friend. Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. The actual expenditures may be greater than or less than the budget. The apportionment process is critical to ensuring that expenditure totals are respected and any virements or claims on the contingency reserve are reflected in the revised allocation of appropriations. When sequestering appropriations, ongoing commitments should be taken into account. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. In any case, understanding the seven key stages of the expenditure cycle and associated control systems is also important to effectively design and implement an FMIS. : 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. 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. _paq.push(["setDoNotTrack", true]); Verification. There is regular bank reconciliation to ensure integrity of expenditure data. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Insufficient allocation for expenditure authorized through standing/permanent legislations. Sometimes called the Westminster system of PFM. 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. 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. Authorization of expenditure. This control is a key element of the overall cash management system. 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. 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. Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. At the same time, centralization has the disadvantage of: (i) undermining spending responsibilities of managers in line agencies in the day-to-day management of line ministries/agencies budgets; (iii) inefficient decision-making (including superimposed prioritization) and rigid controls by the ministry of finance when it lacks the detailed information on the spending requirements of agencies;26 and (iv) presenting opportunities for rent seeking by officials implementing multiple and cumbersome controls. The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. These expenditure limits may not be strict limits for all types of expenditure. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. 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). Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). While expenditure control frameworks differ greatly from country to country, it is nonetheless possible to define, in a generic sense: the key stages of the budget execution cycle; the specific control objectives at each of these stages; and. var u="https://piwik.pentaho.aidcvt.com/"; 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. Payment and verification (in case of accrual accounting) stages. Defence Services: They account for nearly 20% of the total revenue expenditure of the Central Government in India. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. In some countries, it may conduct its own pre-payment audits prior to executing payments. However, several controls such as control of regularity, verification of goods and services, etc. Capital spending They are for the long term and do not need to be renewed each year. 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. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; The author is also grateful to K. Douglass for her assistance with data analysis. 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. In some countries, the ministry of finance uses sequestering to prevent such risks. Expenditure Control: Key Features, Stages, and Actors. Check float has two dimensions: (i) check float time; and (ii) check float amount. 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. Apportionment usually follows two steps: (i) apportionment by the ministry of finance, which consists of releasing the appropriation on a quarterly or monthly basis to the line ministries; and (ii) allotment by the line ministries or main spending units of their apportioned appropriations to their subordinate spending units. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Checks and/or electronic transfer instructions bounce due to lack of cash. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). 4, Paris. _paq.push(['enableLinkTracking']); Authorized purpose of the expenditure. 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. By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . 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. Certain sums may be spent under permanent rather than annual legislation. Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. Show question Question The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. The hurdles were based on the following indicators of performance by the line agencies: (i) budget planning; (ii) output costing; (iii) financial and performance reporting; (iv) financial control arrangements; (v) procurement management; (vi) asset management; and (vii) internal audit. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. 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 Commitment approval is linked to (and cancels) the respective reserved amount. 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. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. 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. 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. bank accounts (as reflected in bank statements). For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Verification (or certification). Lack of adequate control over government expenditure remains a problem in many countries. 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. 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. Payment orders are issued after documentary proof of verification. The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. Payment. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. 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. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). 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. Time horizon of apportionment too short for expenditure planning and execution by line agencies. All Rights Reserved. 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. A Diagnostic Framework to Assess the Capacity of a Government's Financial Management Information System as a Budget Management Tool, Rwanda Nutrition Expenditure and Institutional Review 2020. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. The line ministries have substantial authority in executing the budget. How Do Treasury Systems Operate in sub-Saharan Francophone Africa? Seven Key Stages of the Expenditure Chain. 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. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. In many countries each appropriation is the subject of a separate vote by the legislature. 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