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. Expenditure not appropriated/authorized by the start of fiscal year. Thus, the changes will affect the economy. 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. the use of policy (such as fiscal policy or monetary policy) to reduce the severity of recessions and excessively strong expansions; the goal of stabilization policy is not to eliminate the business cycle, just to smooth it out. 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. The classification of public expenditure can be done in 4 ways: Revenue Expenditure The revenue expenditure is funded through the current revenue of the government that includes taxes and non-tax revenues such as welfare schemes or profits, or incidental incomes. bank accounts (as reflected in bank statements). Box 2 describes the other specific controls that can supplement these general controls. To provide accountability, the budget proposals should be sub-divided by entity/purpose. Apportionment framework and cash plans/ forecasts take account of commitment profiles and associated expected payment schedules. 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. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. 2, No. 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. Khan, A., and M. Pessoa, 2010, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Technical Notes and Manuals (Washington: International Monetary Fund). 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. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Minimizes the cost of financing government programs by smoothing the gap between cash inflows and outflows. 7. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). Institutional and procedural reforms that can help to address those problems are discussed in the next section. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Payment. 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). Decentralized frameworks have the advantage of: (i) aligning expenditure decision making with the spending priorities of line agencies; (ii) minimizing/eliminating redundant controls which in turn improves the efficiency and speed of expenditure execution; and (iii) making each line agency directly accountable for its spending programs. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. 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 objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. Ministry of Budget and Public Accounts, 2009, Rfrentiel de comptabilit budgtaire, (France). _paq.push(['trackPageView']); Box 4 provides a few examples. 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. fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. 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. 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). Lack of adequate control over government expenditure remains a problem in many countries. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . 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. Show answer Answer A public sector spending on goods and services like education or healthcare. These are (i) appropriation control; (ii) commitment control; (iii) aggregate cash control; (iv) control of regularity; (v) accounting control; and (vi) other specific controls. In many countries each appropriation is the subject of a separate vote by the legislature. 5. 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. 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. The authority for expenditure is given for a specific pre-defined purpose. In the German-Austrian tradition,35 as in Francophone and Lusophone systems, there is a clear division between the roles of ordering or anordnend (which covers the apportionment of the budget, together with the reservation, commitment, verification and payment order stages) and executing or ausfuehrend (which covers the execution of payments). Administrative unit accountable for 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. Other specific controls relate to specific types of transactions and are designed to either reinforce macro-fiscal discipline and sustainability (e.g., controls on payroll, pensions, and incurrence or liquidation of liabilities or guarantees) or safeguard the integrity and efficiency of public procurement and payroll systems. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. As a result, progress stalled and the reform was not pursued further. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. 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. Expenditures. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Types of Fiscal Policy The government has control over both taxes and government spending. Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). 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. Final Government Spending Quiz Question What is government spending? Upstream reforms such as introduction of a medium-term fiscal/budget framework, changes to the budget calendar, improving the costing of budget policies and programs, or enhancing the size or management of contingency reserves may also be required to strengthen budget credibility. A full understanding of the budget planning and preparation system is essential, not just to derive expenditure projections but to be able to advise policymakers on the feasibility and desirability of specific budget proposals, from a macroeconomic or microeconomic perspective. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. Economy Minister Mohd Rafizi Ramli said, if the government is . Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. Sometimes, a consolidated check is issued to cover multiple payments by the bank to the respective beneficiaries accounts (e.g., payroll payments) as per the treasurys instructions. PEFA PI-22; and average time lag between delivery and verification. The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. 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. This plan indicates the funds required for operations, typically on a quarterly or monthly basis. 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). Show answer Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. Advertisement. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). Check float time is the time between when a check is written and issued as a payment, and when the check is presented by the beneficiary to the bank for encashment. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Items of government expenditureItems of government expenditure Functional classification Government expenditures can be classified by the type of service that they provide: Ed tiEducation Health Social Security, Social Insurance and Assistance Defense Foreign Affairs Others: Energy & Natural Resour ces; Transportation . The nature of the expenditure limit enforced at each stage depends on the accounting basis used in the budget appropriation framework.19 Specifically: Cash-based budgeting systems primarily enforce a limit on the accumulation and liquidation of cash obligations incurred during the budget year. 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. 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. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. 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 allocation of responsibility to various actors in the exercise of expenditure controls is heavily influenced by their respective administrative traditions of PFM and level of development. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. International Monetary Fund Copyright 2010-2021. The three main types of government expenditure include public services, transfer payments, and debt interest. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. Pension controls: The liability and associated expense for pensions and other retirement benefits should be recognized at the time the employee's services are rendered. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. 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. 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. Cash Management: How Do Countries Perform Sound Practices? It forms aggregate demand in addition to household consumption, business investment, and net exports. Accounting and monitoring of budget execution were carried out by the banking system. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. 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, (, ). Government Spending: Giveth Some, Taketh Some. 4. 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. Authorized purpose of the expenditure. The main reforms include enhancing the coverage of the budget, improving the methodology of costing budget policies, introducing medium-term fiscal and budget frameworks, and ensuring timely submission and approval of the budget by the legislature. The budget should be implemented as formulated and authorized with as little deviation as possible, but there should be room to adjust to changing circumstances (e.g., genuinely unexpected events) by modifying the budget as necessary during the year. While the answer to this question will depend on specific country context and weaknesses, in general caution should be exercised in the devolution of controls in countries that are at the initial stage of development of PFM systems (e.g., fragile states), or with weak capacity at line agencies to implement the required controls, and/or without strong institutions of ex post oversight (internal and external audit). In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. While the controls may be well specified and the roles and responsibilities of the key actors clarified in a countrys legal/regulatory framework, problems may still arise due to lack of enforcement. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. 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. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. 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. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. Controls at the commitment, verification and payment order stages remained the responsibility of the line ministries/agencies, with variations, however, in the effectiveness with which such controls are exercised. Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. 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. 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. 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). Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. Verification (or certification). For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. 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. Finance ministry monitors budget execution by line ministries/agencies. Pattanayak, S., and J. Cooper, 2011, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Technical Notes and Manuals (Washington: International Monetary Fund). Where countries have cash appropriations and accrual based financial statements, this usually gives rise to differences between budget execution reports and financial statements that require reconciliation. Payment order is issued within the payment due date to discharge the recognized liability. Verification. In some cases, these variations are noted in the text. The budget classification (which may be organized by programs, sub-programs, projects, economic categories, or line items) usually specifies the purpose for which the expenditure can be made.1. Similarly, the procedure of using an imprest (dpenses par rgies davance), which does not follow all the control stages and should be used only for urgent minor expenditures, is sometimes used to speed up the expenditure process. Budget Preparation. Warrants/allotments are not used as a cash rationing tool. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. 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