Payment orders are issued after documentary proof of verification. 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. 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. 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. To ensure bank reconciliation and reliability of expenditure data used for financial reporting, it is important to compare and reconcile the transactions recorded in the cash book (which records the details of checks issued) with those in the bank statements. The amount of interest depends on the total federal debt and interest rates. In some countries, the ministry of finance uses sequestering to prevent such risks. 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. These stages are: 1. Expenditures. 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. Key strengths: line agencies directly accountable for the use/control of their appropriations; and no complementary period. 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. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. 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. 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 . Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. 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. 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. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. 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. This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). 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. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. A long check float time is not a good practice as it not only complicates cash management but can also be misused to write and issue checks despite not having enough liquidity in the bank account to cover the value of the check. Article 78 of the WAEMU Directive No. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. The descriptions of the various traditions provided below are broad and general, and in practice, there are variations among the countries belonging to each tradition. 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. 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. This objective is achieved by appropriations. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. 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. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). As a result, progress stalled and the reform was not pursued further. The authority for expenditure is given for a specific pre-defined purpose. 2. 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. However, these hurdles were set at such a high level that hardly any agency cleared them. At the same time, they have the disadvantage of: (i) potential disparate application of controls by various agencies particularly when the control criteria are not well defined; (ii) increasing the risks of non-compliance and/or collusion (as both the authority to spend and the responsibility to ensure the regularity of transactions is assigned to the same agency) in the absence of strong internal and external audit functions; and (iii) prolonging the preparation of financial reports (as expenditure data has to be collected and complied from multiple sources) required by central agencies for budget execution monitoring. Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation dengagement for multi-year investment projects in Francesee Box 3). In particular, the new law: (i) divests the financial controllers of the responsibility for regularity control (contrle de rgularit) of budget managers (administrateurs de credit), which was transferred/decentralized to the line ministries; (ii) requires the financial controllers to assess the fiscal sustainability of decisions taken by budget managers to reinforce macro-fiscal discipline; and (iii) also requires the controllers of central agencies, such as the General Inspectorate of Finances (Inspection gnrale des finances), to apply a risk-based approach to control. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. In the absence of this coordination, spending ministries/agencies can potentially frontload their commitments even if adequate cash is not likely to be available for payment when the commitments materialize, or the treasury may not raise the necessary finance to meet cash requirements. Bank-Qualified Municipal Bonds Marketplace Fairness and RTPA State and Local Tax Deduction (SALT) PolicyStatements Accounting, Auditing and Financial Reporting Budgeting and Financial Management Intergovernmental Relations and Federal Fiscal Policy Public Employee Pension and Benefits Administration The expenditure cycle and associated controls in Lusophone African countries34 are quite similar to the control framework in Francophone systems, but there are a few key differences. 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. Apportionment, reservation, commitment and payment order stages and virements during budget execution. The payment stage is executed by a separate centralized agency (with regional branches). Once a payment order has been issued, payments are made through various instruments including checks, electronic fund transfer (EFT), and sometimes cash, in favor of a supplier or other recipient to discharge the liability. 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. 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. Expenditure committed but respective reservation/ encumbrance not annulled. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Reservation/pre-commitment. Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. This authority to spend is released to the spending units through the issue of warrants/allotments/dcret de rpartition, or other mechanisms.9 Some form of centralized control during this phase of the expenditure cycle is common in almost all countries and is usually enforced by the budget department of the ministry of finance. 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. 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. 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. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). If a liability has been incurred by the end of the fiscal year, this would be enough to report the expense or expenditure against the accrual appropriation. 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. Often the same type of verification/control is applied at multiple stages of the expenditure cycle, thereby rendering the control redundant and tedious. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). The link was not copied. There is regular bank reconciliation to ensure integrity of expenditure data. When sequestering appropriations, ongoing commitments should be taken into account. Payment order is issued within the payment due date to discharge the recognized liability. 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. 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). They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. ), the verification requires confirmation that the obligation has actually fallen due. 7/2009 sets a maximum one month complementary period. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. To provide accountability, the budget proposals should be sub-divided by entity/purpose. A complementary period (generally two months)33 is allowed after the close of the fiscal year to process and record payments in respect of commitments that were authorized before the close of the fiscal year, but for which the actual delivery of goods or services has yet to take place. 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). discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). 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. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. Warrants/allotments are not used as a cash rationing tool. 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. Administrative unit accountable for expenditure. When several departments in the ministry of finance and other agencies are involved in the supervision of the expenditure cycle, clear business process rules delineating the respective functions of each are required. It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. 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. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). 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. 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. 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. A unit of government, typically a line ministry, department or agency, is assigned the responsibility to ensure that the appropriated resources are spent as intended within the authorized limits. Payment order. This technical note and manual (TNM) addresses the following issues: Key stages of the government expenditure chain; The roles and responsibilities of the key institutional actors in exercising those controls; Approaches to expenditure control in different PFM traditions; Diagnosing weaknesses in expenditure control systems; and. 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. 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. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. Economy Minister Mohd Rafizi Ramli said, if the government is . The contralora hence maintains overall control of budget execution. 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. 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? Final Government Spending Quiz Question What is government spending? Authorization of expenditure. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). The purpose of apportionment is to prevent spending agencies from incurring obligations at a rate which would require the authorization of additional funds for the fiscal year in progress.8 Once expenditure authorization is in place, it is apportioned for specific periods and/or specific spending units. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. 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. 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). Time horizon of apportionment too short for expenditure planning and execution by line agencies. Types of Control, Their Key Features and Objectives. The issuance of payment orders and checks may be decentralizedwith spending ministries carrying out these tasks and reporting back to the centeror centralized in a treasury department, typically called the accountant general's department within the ministry of finance, which acts both as paymaster and prepares the final accounts of the government. 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. These expenditure limits may not be strict limits for all types of expenditure. 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. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. Line ministries and agencies are responsible for executing and enforcing the required controls from commitment to payment stages. 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). Accounting and monitoring of budget execution were carried out by the banking system. 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. 7. These include appropriation control, commitment control, and accounting control. Commitment approval delinked from apportionment and cash management frameworks. 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. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . Role of Central and Line Agencies in Various Traditions and Lessons Learned. 1. 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. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). 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. In some countries, a powerful accounting organization (. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. As such, the AEs are consumed at the commitment stage of the expenditure or the legal act of signing a contract of the State with a third party.1 In the case of a commitment running over several years, its associated CP is spread over several budget years up to the cumulative maximum amount of the initial multiannual AE. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). Some of the controls during the expenditure cycle can be automated and applied through an FMIS. 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. For example, prior to the 1990s, financial control was under the Presidency (Cte dIvoire), the Prime Ministers Office (Senegal), or was the responsibility of a separate ministry. 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