types of government expenditure control

In countries of the British Commonwealth tradition, officials in spending agencies are charged with initiating and authorizing expenditure transactions, from commitment to payment, based on apportionments/allotments/warrants issued by the ministry of finance. 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. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). Authorized purpose of the expenditure. 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. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). Government expenditures as a share of national output went sharply up and down in these countries, mainly because of changes in defense spending and national incomes. 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. _paq.push(['enableLinkTracking']); The author is also grateful to K. Douglass for her assistance with data analysis. 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. 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. 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. Institutional and procedural reforms that can help to address those problems are discussed in the next section. But these funds may take some time to be further transferred to subsidiary spending units under the line ministries and then be spent on the salaries or goods and services that constitute final expenditure. 2. When sequestering appropriations, ongoing commitments should be taken into account. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. PEFA PI-27; and value of check float (or float of electronic transfer instructions) as a percentage of total value of checks (or electronic transfer instructions) issued. Key strengths: centralized payment and treasury accounting system. The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. PEFA Scores (200614) of 85 Countries for Expenditure Control Indicator, Citation: Technical Notes and Manuals 2016, 002; 10.5089/9781513574639.005.A001, Expenditure Control and Budget Credibility. 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). 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. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. 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. 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. It can be spent on a range of different . The main reform at this stage is the introduction of a comprehensive commitment control system, including for multi-year commitments and standing commitments (e.g., salaries, utilities, subsidies, transfers, etc.). 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. 31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. 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. Show question Question It may also have a role in appropriation and commitment controls through its representatives posted in spending agencies (as in Francophone systems). A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. The payment stage, however, is executed by a separate centralized agency (with regional branches)called cash offices in Germany and the Federal Accounting Agency in Austriawhich processes and keeps records of all payments and is in charge of accounting and preparation of financial reports. 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. This objective is achieved by appropriations. 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. This approach comprised two main components: (i) a set of core financial and performance management competencies (called the hurdles) to be met by each line agency to qualify for delegation of financial management and control; and (ii) semi-contractual arrangements between the Bureau of the Budget and line agencies formally linking the reduction in central control to the achievement of the specified competencies. The allocation of authority and responsibility to various actors for enforcing the controls at each stage of the expenditure cycle varies from one country to another, but some common features can be noted (see Table 2). The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. 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. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. The accounting department22 of the ministry of finance issues regulations and guidelines on matters related to the preparation of financial accounts by spending agencies, prepares and issues government-wide financial reports, and conducts regular bank reconciliations. The lack of a comprehensive and credible budget particularly affects the authorization (as the expenditure authority is not realistic), commitment (as ongoing/outstanding commitments are not adequately allocated for) and verification (as the accumulated liabilities are not fully reflected in the budget) stages. Box 2 describes the other specific controls that can supplement these general controls. Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. 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. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Authorization of expenditure. _paq.push(['setSiteId', '17']); Options for strengthening the expenditure control framework. The scope for establishing such advanced systems, however, remains challenging in many developing countries. In some cases, these variations are noted in the text. This may lead to potential arrears. 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). Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. Morocco has been implementing a reform of financial and expenditure control since 2006 that seeks to gradually transfer this responsibility from the ministry of finance to line agencies while ensuring adequate safeguards (through strengthened oversight) against the resulting risks of abuse. These are (i) appropriation control; (ii) commitment control; (iii) aggregate cash control; (iv) control of regularity; (v) accounting control; and (vi) other specific controls. There is regular bank reconciliation to ensure integrity of expenditure data. 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). 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. Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). A strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. The three main types of government expenditure include public services, transfer payments, and debt interest. 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. Warrants/allotments are not used as a cash rationing tool. 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). Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Expenditure Control: Key Features, Stages, and Actors. General Services: Reservation. Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Somali Regional State Government), Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Southern Nations, Nationalities and Peoples Region), Timor-Leste Public Expenditure and Financial Accountability Assessment 2018: Public Financial Management Performance Report, https://doi.org/10.5089/9781513574639.005. Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. 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. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. 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. When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. 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. When the FSU countries were centrally-planned economies (i.e., before their transition to market-based economies), the ministry of finance played a minor role, mainly as the financial administrator of the central plan. Any part of that cost unpaid at the end of the period is a liability. var u="https://piwik.pentaho.aidcvt.com/"; To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . 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. Other Controls Specific to Particular Types of Transactions. 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. 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. Large delay between verification (recognition of liability) and payment order (arrears, etc). Insufficient allocation for expenditure authorized through standing/permanent legislations. 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. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. Minimizes the cost of financing government programs by smoothing the gap between cash inflows and outflows. 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. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. This includes countries where the ministry of finance assigns a financial controller or a budget offcer to each line ministry in order to control expenditure commitments. 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). 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. Some countries PFM systems explicitly recognize all or most of the above stages and track them through a budgetary accounting system, while others formally track only a few of them.16 For example, the Spanish and Portuguese-speaking countries track all seven stages and the Francophone countries track at least six stages (the reservation stage or engagement budgtaire is also sometimes tracked). 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. 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). The contralora hence maintains overall control of budget execution. 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