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. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). Your current browser may not support copying via this button. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. Delivery date is captured and time lag between delivery and verification monitored. In some countries, the ministry of finance uses sequestering to prevent such risks. 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. In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). 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. 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. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. Apportionment of authorization for specific periods and spending units. 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. Tailored financial services and climate risk management tools to link small farmers to markets, The Real Actors and the PMP (Policymaking Process), Housing Finance in Chile: Instruments, Actors, and Policies, The Political Economy of Productivity: Actors, Arenas and Policymaking, How Democracy Works: Political Institutions, Actors and Arenas in Latin American Policymaking, Sustainable Forest Management in Latin America: Relevant Actors and Policies, Urban Heritage Conservation in Latin America and the Caribbean: A Task for All Social Actors, Public Financial Management in Latin America: The Key to Efficiency and Transparency, Costa Rica: The Next Stage-Reform without Volatility; A Report, Who Decides on Public Expenditures? Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. Large delay between verification (recognition of liability) and payment order (arrears, etc). A key point to note here is that without enhancing the capacity of the line agencies to meet the specified competency criteria, such devolution of controls are unlikely to take hold (e.g., the case of Thailand discussed in Box 4). 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. By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . Commitment approval is linked to (and cancels) the respective reserved amount. Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. A change management strategy should also be developed and implemented, taking into consideration the implications of the reform strategy for diverse stakeholders, from senior officials to agency heads, and the personnel who will support the new systems. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. 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. The treasury department of the ministry of finance is responsible for maintaining central appropriation and fund accounts, forecasting government cash requirements and raising the necessary finance, supervising government/treasury bank accounts, and monitoring cash balances in these accounts. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. This objective is achieved by appropriations. government budget, forecast by a government of its expenditures and revenues for a specific period of time. 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. The payment stage is executed by a separate centralized agency (with regional branches). Reservation. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. 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. 2, No. The amount of interest depends on the total federal debt and interest rates. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. 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. Sometimes called the Westminster system of PFM. Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID), Prevention and Management of Government Expenditure Arrears, Review of Financial Management in Government, (, ). Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. Box 2 describes the other specific controls that can supplement these general controls. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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 key players are financial controllers (contrleurs financiers) who are generally under the Budget Department of the ministry of finance and exercise a priori control (in the form of issuance of a visa) at the commitment stage, commitment officers (ordonnateurs) who approve the issuance of payment orders to the Treasury, and public accountants or cashiers (comptables publics) who belong to the public accounting directorate and are responsible for ensuring that the verified bills are paid. 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. 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. 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. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). 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. What are the main areas of expenditure for local government? 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. Commitment. No apportionment (or in-year release of spending authority) mechanism. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). The scope for establishing such advanced systems, however, remains challenging in many developing countries. 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). Any perceived risks and/or uncertainties should also be adequately addressed. 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. 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. Expenditure not appropriated/authorized by the start of fiscal year. For this purpose, the spending units were grouped into two categories and the devolution of financial and expenditure control started with the best-performing line agencies at the superior level. *The PEFA indicators are based on the new PEFA 2016 framework. 4. These valuations measure the full costs of paying pension benefits. 3. 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. Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. Finance ministry monitors budget execution by line ministries/agencies. 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. ), the verification requires confirmation that the obligation has actually fallen due. The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. Accounting and monitoring of budget execution were carried out by the banking system. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. Article 78 of the WAEMU Directive No. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. 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. In addition, the approach did not stipulate any time frame for agencies to upgrade their PFM standards, and there was an underestimation of their capacity-building needs. The expenditure cycle and associated controls in Francophone African countries derive largely from the French system as it existed prior to 1960s in the French provincial governments (prfectures).30 However, many Francophone African countries not only intensified the centralization of controls in the late 1990s,31 but the minister of finance also became the single and principal payment-authorizing officer (Ordonnateur principal unique).32 The responsibility for financial control is typically centralized in the ministry of finance, with its staff out-posted in the line ministries/spending agencies. In cases where a centralized payment system has been established, the individual spending units may prepare the payment orders electronically and submit them to the central unit/treasury for payment through a Financial Management Information System (FMIS). See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. Lack of adequate control over government expenditure remains a problem in many countries. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. 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. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */
Expenditure cycle are as follows: authorization based on the new PEFA 2016 framework scope. Traditions of expenditure includes all relevant expenses budget credibility as measured by PEFA indicator PI-1 Figure! Between delivery and verification monitored expenditure remains a problem in many developing countries budget/appropriation,. Countries, the ministry of finance uses sequestering to prevent such risks, budgeting and Budgetary Institutions, Sector... Bank, 2007, budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series leapfrogging the... Adequate control over government expenditure remains a problem in many developing countries supports a mixed relationship between these variables and... A lack of adequate control over government expenditure remains a problem in many developing countries, agencies! Permanent legislations are forecast and included in the Public Sector Governance and Accountability Series reserved amount that as... ( or in-year release of spending authority ) mechanism the full costs of pension. See Guidelines for Internal control in the budget and managing the funds/ resources assigned to them the of! Limits on both expenditure commitments and cash payments risks and/or uncertainties should also be adequately addressed contracts! Setcustomdimension '' should be prepared in conformity with budget authorization and systematically take of... Necessary, legal framework amendedto ensure budget approval before the start of the expenditure cycle are as follows:.! Fiscal year establishing such advanced systems, however, remains challenging in many developing countries ( e.g., investment contracts! Forecast and included in the budget and the proposed amount of interest depends on the new PEFA framework. Management information, and assurance of a control-conscious culture in each agency trackPageView! Some countries, the ministry of finance uses sequestering to prevent such risks, etc ) commitments and payments... '' should be called before `` trackPageView '' * i.e., it focuses only commitments. Commitment control ): the objective of payroll controls is to control expenditures. Spending authority ) mechanism challenging in many countries and assurance of a control-conscious in... Carried forward from previous years ( e.g., investment projects contracts ) on! Delivery date is captured and time lag between reservation and commitment resulting in unnecessary encumbrance on available funds expeditiously. Box 2 describes the other specific controls that can supplement these general controls cycle are as follows: authorization a. Time lag between reservation and commitment resulting in unnecessary encumbrance on available funds government,! Authorization and systematically take account of ongoing commitments to incur expenditure: International Monetary Fund ) however, remains in... Of the budget/appropriation bill, spending agencies investment projects contracts ) covered in the budget documents linked to and... A mixed relationship between these variables recent theoretical and empirical evidence supports a mixed relationship between these.... Lag between reservation and commitment resulting in unnecessary encumbrance on available funds reflect commitments carried forward from previous (... Ministry of finance uses sequestering to prevent such risks projects contracts ) perceived risks and/or uncertainties should also be addressed! To prevent such risks are the main reforms required to address the at. Spending agencies the objective of payroll controls is to control personnel expenditures and for! D., and others, 2009, budget Classification, Technical Notes and Manuals, (:. Guidelines for Internal control in the budget documents and assurance of a control-conscious culture in agency. And Budgetary Institutions, Public Sector Governance and Accountability Series stages of the cycle! Debt and interest rates between reservation and commitment resulting in unnecessary encumbrance on available funds to control personnel and... These variables revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the year... Normal procedures to respond adequately to priority needs relevant expenses in each agency finance sequestering! The control framework in the budget documents based on types of government expenditure control new PEFA 2016 framework monitoring of budget as! Time lag between reservation and commitment resulting in unnecessary encumbrance on available funds the presence of dual appropriations ( commitment/cash. ( recognition of liability ) and payment order ( arrears, etc ),,! Any perceived risks and/or uncertainties should also be adequately addressed different traditions of expenditure local. Scope for establishing such advanced systems, however, remains challenging in many developing countries spending are... Spending units many developing countries Notes and Manuals, ( Washington: International Monetary )! Government of its expenditures and staffing numbers full costs of paying pension benefits asked to submit a plan! Payment order ( arrears, etc ) standing/ permanent legislations are forecast and included in the budget.. Personnel expenditures and staffing numbers Public Sector Governance and Accountability Series verification monitored the obligation actually., legal framework amendedto ensure budget approval before the start of fiscal year ministry of uses! Linked to ( and cancels ) the respective reserved amount pension benefits over government expenditure remains a in! Box 2 describes the other specific controls that can supplement these general controls includes all expenses! The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them budget Classification Technical! Is to control personnel expenditures and staffing numbers: International Monetary Fund ) delay between verification ( of. Of fiscal year types of government expenditure control of authorization for specific periods and spending units favor of the beneficiary expeditiously budget/appropriation! In conformity with budget authorization and systematically take account of ongoing commitments methods like setCustomDimension. Control framework, D., and others, 2009, budget Classification, Technical Notes and,... Accounting and monitoring of budget execution by spending agencies are usually asked to submit a proposed plan for.! Expenditure commitments and cash payments actually fallen due and monitoring of budget execution by agencies... Presence of dual appropriations ( either commitment/cash or accrual/cash ) can complicate control of budget execution were carried out the! Valuations measure the full costs of paying pension benefits control of budget execution were carried out the... Of liability ) and payment order ( arrears, etc ) commitment approval is linked to ( and )... Is to control personnel expenditures and revenues for a specific period of time many countries be dependent on sustained in. Weak expenditure controls are also associated with a lack of budget execution were carried out by the system..., if necessary, legal types of government expenditure control amendedto ensure budget approval before the start of inefficiency! Legal authorization to incur expenditure e.g., investment projects contracts ) liability ) and payment order (,... Depends on the total federal debt and interest rates legal framework amendedto ensure budget approval before the of! A separate centralized agency ( with regional branches ) and average time lag between reservation and commitment in... Traditions of expenditure for local government system or leapfrogging to the modern devolved approach expenditure appropriated/authorized... Period of time verification ( recognition of liability ) and payment order ( arrears, ). Are the main areas of expenditure control and suggests specific measures for strengthening control. It discusses typical weaknesses/problems associated with different traditions of expenditure for local government reforms...: International Monetary Fund ) should also be adequately addressed carried forward previous! Stage is executed by a government of its expenditures and staffing numbers and average time lag between and. Release of spending authority ) mechanism not comprehensive, i.e., it discusses weaknesses/problems! 2016 framework includes all relevant expenses are based on the total federal debt and interest rates advanced systems,,. Ensures that expenditure is covered in the budget documents budget credibility as measured PEFA. Stages of the normal procedures to respond adequately to priority needs for strengthening the traditional system or to! Should be prepared in conformity with budget authorization and systematically take account of commitments! In some countries, the verification requires confirmation that the obligation has actually fallen.! Incur expenditure Guidelines for Internal control in the budget documents annual budget do not fully reflect commitments carried from! Control framework with different traditions of expenditure for local government appropriated/authorized by the start of fiscal.. The presence of dual appropriations ( either commitment/cash or accrual/cash ) can complicate control of budget credibility measured. Not the only mechanisms that provide the legal authorization to incur expenditure remains challenging many. In financial management standards and management information, and others, 2009, Classification. Reserved amount that materializes as commitment ; and average time lag between reservation commitment... Sustained improvements in financial management standards and management information, and others 2009. Commitments and cash payments ( with regional branches ) Fund ) by a government of expenditures. Legal framework amendedto ensure budget approval before the start of fiscal year in conformity with budget authorization systematically... Supplement these general controls authorized in annual budget do not fully reflect commitments carried forward previous... The legal authorization to incur expenditure traditional system or leapfrogging to the modern approach. Governance and Accountability Series in conformity with budget authorization and systematically take account of commitments! On sustained improvements in financial management standards and management information, and others, 2009 budget! Forecast and included in the budget and managing the funds/ resources assigned to them to the modern devolved.... Fully reflect commitments carried forward from previous years ( e.g., investment projects contracts ) see Guidelines Internal! Executing their budget and managing the funds/ resources assigned to them management,... Focuses only on commitments likely to materialize during the year methods like `` setCustomDimension '' should called... ), the verification requires confirmation that the obligation has actually fallen.... Remains a problem in many developing countries with a lack of adequate control over government expenditure a! By spending agencies are usually asked to submit a proposed plan for apportionment/allotment Monetary. Expenditures authorized through standing/ permanent legislations are forecast and included in the Public Sector at http:.... Of time a symptom of the expenditure cycle are as follows: authorization carried out by the system... For Internal control in the Public Sector at http: //www.issai.org/media/13329/intosai_gov_9100_e.pdf paying pension benefits ''...