fiscal policy. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. 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. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). As a result, progress stalled and the reform was not pursued further. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. Total revenue including grants . The central idea here is that not all expenditure transactions need to pass through an identical control process. 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. These expenditure limits may not be strict limits for all types of expenditure. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. 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. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. In some countries, it may conduct its own pre-payment audits prior to executing payments. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). 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. 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. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. 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. 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. 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. 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). 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. 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. 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. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). The amount of interest depends on the total federal debt and interest rates. Authorized purpose of the expenditure. It can be spent on a range of different . Expenditure committed but respective reservation/ encumbrance not annulled. 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. In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). Line ministries and agencies can commit and use their allocated resources whenever they want within the year. Any part of that cost unpaid at the end of the period is a liability. To provide accountability, the budget proposals should be sub-divided by entity/purpose. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. However, this may not be true when only a commitment has been incurred but the government does yet have a liability because, for example, the goods and services have not yet been supplied. Ukrainian President Volodymyr Zelenskyy said he met with the secretary-general of the Organization for Economic Cooperation and Development on Tuesday and discussed a "fair tax system for Ukrainians." Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). 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. 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. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. 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. To be able to exercise upfront control over the future resource requirements related to pensions, countries implementing accrual budgeting (e.g., the UK, Australia and New Zealand) include the accruing cost and any unfunded liabilities of pension schemes17 within budgetary limits for each government department.18. 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. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. In some countries, the ministry of finance uses sequestering to prevent such risks. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. Box 2 describes the other specific controls that can supplement these general controls. The authority for expenditure is International Monetary Fund Copyright 2010-2021. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. Whereas, in Francophone systems, the financial control officer is employed by the Budget Office, in Lusophone systems the payment-authorizing officer is employed by the Accounting Office. Excessive number of redundant controls leads to payment delays,37 arrears, and proliferation of exceptional procedures that bypass the normal expenditure control framework. Identifying gaps and weaknesses in expenditure control in a particular country requires a systematic review of the integrity of the expenditure cycle, looking at: Definition/specification of key stages of the expenditure cycle, including the control criteria. 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. 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 Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Sweden has a separate debt management agency which also administers the TSA system. In this context, the function of financial and expenditure control has been merged with the treasury and verification of the regularity of certain current expenditures (such as salaries, leases and certain procurement contracts) has been delegated to line agencies at the commitment level. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. government budget, forecast by a government of its expenditures and revenues for a specific period of time. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. Same as Francophone, but the official approving commitments and payments is usually the same (unlike separation of responsibility in Francophone countries). This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. Therefore, unlike the old French system, the key principles here are integration and delegation. There is regular reporting and monitoring of overdue liabilities. Warrants/allotments are not used as a cash rationing tool. fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. 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. 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. While expenditure control frameworks differ greatly from country to country, it is nonetheless possible to define, in a generic sense: the key stages of the budget execution cycle; the specific control objectives at each of these stages; and. 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. 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. Delivery date is captured and time lag between delivery and verification monitored. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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. 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. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). This is what constitutes the hierarchical and risk-based control (control modul de la dpense) that Morocco has started to implement since 2008 (based on Decree n 207-1235 of November 4, 2008). Commitment. At this stage, there is no commitment, but it is known that the expense will be incurred during the budget year and, therefore, the reserved funds should not be used for other activities. 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, (, ). Apportionment of authorization for specific periods and spending units. The contralora hence maintains overall control of budget execution. This control is a key element of the overall cash management system. It forms aggregate demand in addition to household consumption, business investment, and net exports. 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. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. These are (i) appropriation control; (ii) commitment control; (iii) aggregate cash control; (iv) control of regularity; (v) accounting control; and (vi) other specific controls. 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. 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. Apportionment, reservation, commitment and payment order stages and virements during budget execution. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. For example, the Social Security Act requires the government to provide payments to beneficiaries based on the amount of money they've earned and other factors. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). 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. 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. What are the main areas of expenditure for local government? Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. _paq.push(['setSiteId', '17']); 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 the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. Lack of adequate control over government expenditure remains a problem in many countries. Overall authority and responsibility for budget execution are assigned to the respective line minister who delegates this up to the stage of payment order. It may also have a role in appropriation and commitment controls through its representatives posted in spending agencies (as in Francophone systems). For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). There are two ways of securing such 'economy' in government expenditure: (1) The annual budget of toe central government must lay down the amount to be spent for particular purposes and the government servants or departments should not be permitted to spend in excess of the budgetary allocations. This may lead to potential arrears. 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