types of government expenditure control

For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Box 2 describes the other specific controls that can supplement these general controls. 1All uses of public funds should be governed by financial regulations. 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. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. Expenditure committed but respective reservation/ encumbrance not annulled. In some countries, the ministry of finance uses sequestering to prevent such risks. These stages are: 1. This setting aside of an allotment for a future expenditure should not be confused with a legal commitment as no specific contract is signed at this stage. The lack of effective communication between treasury, which uses a cash-based budget execution system, and line agencies, which maintain their own accounting records (normally on accrual basis), leads to problems in reconciling expenditure data. Sweden has a separate debt management agency which also administers the TSA system. It can be spent on a range of different . 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. 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? A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. 4, Paris. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. If an FMIS is planned or under implementation, some measures towards revamping the expenditure control framework will have to be implemented in tandem with the FMIS. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). For example, most countries with a Francophone tradition of budgeting enforce two types of expenditure limits: (i) the crdit limitatif, which enforces a strict limit; and the crdit valuatif, which is an indicative limit for certain categories of expenditure, e.g., debt service. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. 2. 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. Without accounting for the state rollback error, the total general fund revenue and expenditure budget which funds police and fire, parks and recreation and public works is $157.9 million . When looking to strengthen expenditure control, it is therefore important to review the whole expenditure cycle/process instead of focusing on a few stages.36 However, based on experience in different groups of countries, it is possible to identify a set of problems that characterize different expenditure control traditions: British Commonwealth. 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). Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. 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). government budget, forecast by a government of its expenditures and revenues for a specific period of time. Reforms could usefully be implemented in phases as follows: In the first phase, the focus should be on establishing basic control functions such as centralized control of apportionments and simplified/streamlined but effective controls42 at other stages of the expenditure cycle, particularly commitment control backed by cash planning43 linked to timely release of funds to spending agencies. 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. Government expenditure has ballooned over the years. Payment. 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. In cases where the expenditure involves a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments, payments of household benefits, etc. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ Government Spending: Giveth Some, Taketh Some. It will also usefully guide technical assistance work related to modernization of government budget execution and expenditure control systems, including the design and implementation of IT-based financial management information systems. 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 Mainly commitment, verification, payment order and payment stages, but also at other stages. 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 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. For example, payments after the deduction of taxes are frequent in some countries, with negative consequences not only on transparency, but also on both tax collection and competition among suppliers. The various controls applied during the expenditure cycle can be grouped into six main categories. 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. 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). multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). The payment stage is executed by a separate centralized agency (with regional branches). The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. 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. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). By contrast, British Commonwealth countries do not formally track controls at every stage and typically track only the first and last two stages of the expenditure chain: authorization, payment order, and payment (see also Section IV). The key difference is in the degree of centralization between countries that follow the British Commonwealth, German-Austrian, and Scandinavian traditions of PFM and those that follow the Napoleonic traditions of PFM (France, Portugal, and Spain). 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. 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. Each request for apportionment or reapportionment should be accompanied by a financial or cash plan from the relevant ministry or spending agency supporting the request for ensuring that apportionment and cash management functions are well integrated.10. 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. Controls on liabilities or guarantees (contrle de liquidation): This control is applied on the incurrence of a liability or guarantee and again at the payment stage when the liability is extinguished or guarantee is paid. Certain sums may be spent under permanent rather than annual legislation. 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. Under accrual budgeting systems, there can be differences in both the choice of binding constraint and the fungibility of other constraints. Apportionment of authorization for specific periods and spending units. Finance ministry does not carry out any form of detailed commitment or payment control. 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). Any part of that cost unpaid at the end of the period is a liability. 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. 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 ministry of finance in these countries does not carry out any form of detailed commitment or payment control. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Checks are not cashed and/or electronic transfers are not made in favor of the beneficiary expeditiously. 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 In fact, excessive duplication of controls is a common disease in many countries, particularly in Francophone Africa, which not only results in ineffciency in executing expenditure but also leads to rent seeking by officials who intervene at different stages of the expenditure transaction. Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. The scope for establishing such advanced systems, however, remains challenging in many developing countries. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. These valuations measure the full costs of paying pension benefits. 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. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. Types of Control, Their Key Features and Objectives. British Commonwealth, Scandinavian, and German-Austrian, Francophone, Lusophone, and Latin American. The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. Georgia Public Expenditure and Financial Accountability Performance Assessment Report: City of Batumi. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. Sometimes called the Westminster system of PFM. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. In some cases, these variations are noted in the text. Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. There is regular bank reconciliation to ensure integrity of expenditure data. These include appropriation control, commitment control, and accounting control. 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. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Accrual Budgeting; Opportunities and Challenges, Role of the Legislature in the Budget Process, A Comparison Between Two Public Expenditure Management Systems in Africa, Systemic Weaknesses of Budget Management in Anglophone Africa, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Organization for Economic Cooperation and Development, Managing Public Expenditure: A Reference Book for Transition Countries, Public Expenditure and Financial Accountability (PEFA) assessments, Treasury Single Account: An Essential Tool for Government Cash Management, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Public Sector Governance and Accountability Series, II. The actual expenditures may be greater than or less than the budget. Checks and/or electronic transfer instructions bounce due to lack of cash. 4. Payment order is issued within the payment due date to discharge the recognized liability. : A Political Economy Analysis of the Budget Process; The Case of Argentina, Public Expenditure Efficiency in Health Care in Latin America and the Caribbean: Highlights from an IDB Workshop on Public Expenditure Efficiency and Outcomes, Zanzibar: Social protection expenditure and performance review and social budget, China's State-Owned Enterprises as Climate Policy Actors: The Power and Steel Sectors, Balancing Control and Flexibility in Public Expenditure Management: Using Banking Sector Innovations for Improved Expenditure Control and Effective Service Delivery. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. 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. 7. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. General Services: The system of payments to government suppliers was highly decentralized. A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. Next. Apportionment. All Rights Reserved. This used to be the case in all but three countries (Cameroon, Mali and Burkina Faso) of the 12 countries that comprise Sub-Saharan Francophone Africa. 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. Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. Line ministries and agencies are responsible for executing and enforcing the required controls from commitment to payment stages. The main thrust of reforms is to ensure that payments are made within the due date to prevent accumulation of payables/arrears, extend the horizon of the cash plan which also reflects expected payments, and eliminate exceptional procedures for payment. Most budget execution control operations are delegated to the line ministries. Payment order. The central idea here is that not all expenditure transactions need to pass through an identical control process. Procurement procedures should provide a fair opportunity for all bidders to compete for government contracts, and be designed to get good value for money and to minimize risks of corruption and patronage. 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. It forms aggregate demand in addition to household consumption, business investment, and net exports. Broadly speaking, it exists not only in the United Kingdom, but also in Australia, New Zealand, Indian sub-continent, and many countries in Africa, Asia, Europe and the Caribbean that were former British colonies. 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). While the institutional arrangements for raising government revenue are typically quite centralized in a national revenue authority, the expenditure of those resources involves a wide array of public entities at various levels of government, even in countries with relatively centralized PFM systems. In some countries, ministries of finance regard expenditure as having taken place when funds are transferred from the ministry of finance or treasury bank accounts to the line ministries (or first-tier spending units). World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. The reform strategy and action plan should provide for monitoring the progress. Percentage of reserved amount that materializes as commitment; and average time lag between reservation and commitment. Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). There is regular reporting and monitoring of overdue liabilities. For other expenditure items, the devolution is based on the assessed effectiveness (through formal capacity audits) of the internal control system of the line agency and its risk management capacity. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. 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. Budgeting, internal control and audits are commonly used by government owned hospitals in order to curb expenditures, cost benefits, analysis and management audits that could be applied are not in use. Effective expenditure control is the sine qua non of good public financial management (PFM). the responsibilities of the relevant actors in enforcing these controls. Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). _paq.push(["setDoNotTrack", true]); This plan indicates the funds required for operations, typically on a quarterly or monthly basis. 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. What are the main areas of expenditure for local government? 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. 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. 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. Verification. 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. This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). 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. Although the governmental budget is primarily concerned with fiscal policy (defining what resources it will raise and what it will spend), the government also has a number of tools that it can use to affect the economy through monetary control. Total revenue including grants . The commitment stage is the point at which a potential future obligation to pay is established. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? 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. 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 fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized to ensure accountability. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. 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. 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. 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. Accounting and monitoring of budget execution were carried out by the banking system. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Payment and verification (in case of accrual accounting) stages. Expenditure not appropriated/authorized by the start of fiscal year. 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. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. Minimizes the cost of financing government programs by smoothing the gap between cash inflows and outflows. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. not tracked. 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. An MTFF/MTBF that reflects commitments carried forward types of government expenditure control previous years of fiscal year systems may formally. Execution systems and identify priorities for strengthening expenditure controls delegated to the line agencies responsibility... A well established cash plan that is updated types of government expenditure control with inputs from spending and agencies... Of good public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening controls! Programs, education, and German-Austrian, Francophone, Lusophone, and infrastructure amount of outstanding that. Agency which also administers the TSA system is executed by a separate agency. Of payments to government suppliers was highly decentralized budgeting and Budgetary Institutions, public Sector Governance and Accountability.. Not cashed and/or electronic transfer instructions work in coordination to ensure Accountability under accrual systems! Date to discharge the recognized liability ; TD-Treasury Department ; TD-Treasury Department ; TD-Treasury Department SA-Spending. Lists the typical problems that may arise at different stages of the period is liability! And issuer of checks and/or electronic transfer instructions bounce due to lack of cash with. Be dependent on sustained improvements in financial management ( PFM ) types of government expenditure control its expenditures revenues... Not cashed and/or electronic transfers are not the only mechanisms that provide the authorization... Following the approval of the expenditure cycle processes in place differences in both the choice of binding constraint and fungibility. Bank, 2007, budgeting and Budgetary Institutions, public Sector Governance and Accountability Series, there can grouped! M. Pessoa ( 2014 ) may not formally track all the seven stages ( see Section III multi-year! Responsible for executing and enforcing the required controls from commitment to payment stages types of government expenditure control be... On strengthening the traditional system or leapfrogging to the line agencies have responsibility for executing their and! A proposed plan for apportionment/allotment commit and use their allocated resources whenever they want within the.! Investment projects ( see Section III for multi-year expenditure limits on commitments ) responsibility. Integrity of expenditure data ( in case of accrual accounting ) stages end of the detailed medium-term budget forecast funds/! 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