INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 2.4 – Budget Execution

Module map

• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control• Payment Controls• Budget Reporting• Reform sequencing

Module outline

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Budget execution process

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Budget Execution Process

• Budget implementation is not simply a matter of executing the approved budget – all countries expenditure differs from the budget

• Variance depends on fiscal conditions, stability and certainty in the country’s finances, the role of the finance ministry and budget system

• A highly itemized budget usuall experience more variance than where managers have more spending discretion

• The trend is to give spending units more flexibility in implementing their budgets

• Might not be appropriate in countries with inadequate managerial controls.

Issues in budget implementation

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• Approved budget is unrealistic,

• Extreme uncertainty concerning available resources, with quarterly or monthly allotments

• Extra-budgetary funds outside the budget process, hoarded by spending units

• Significant payment arrears that are not included in financial statements

• Funds diverted to unauthorized purposes or private accounts

Common budgetary problems

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• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control• Budget Variations• Payment Controls• Budget reporting• Reform sequencing

Module outline

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• Functions aimed at ensuring the credibility of the budget and aggregate fiscal discipline can be included in the set of basic PFM functions:

• (i) functions required to ensure financial compliance;

• (ii) other functions that contribute to the credibility of the budget, together with financial compliance functions.

•  • EC report by Jack Diamond April 2012

Getting the basics right

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• The PFM objectives• • (i) financial compliance/due processes; • (ii) second, aggregate fiscal discipline; • (iii) then, strategic allocation of resources and

efficient public service delivery•  

• EC report by Jack Diamond April 2012

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Getting the basics right

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• financial compliance• adequate control system, • clear and transparent financial regulations  

• Control of expenditures and revenues• controls performed by the ministry of finance, or

other central agencies • and controls performed within the spending units

EC report by Jack Diamond April 2012

Getting the basics right

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• A credible annual budget is implemented with few significant deviations

• High transparency

• Public funds spent for authorized purposes only

• Spending units have reasonable certainty on the funds to be made available

• Compliance with formal rules

Getting the basics right

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• Legislative /parliament

• Executive – cabinet (ministers) - bureaucracy /civil service

• Ministry of Finance – Secretary to the Treasury- Accountant General (Treasury)- Budget Department /Ministry

• Line ministries (education, health etc)

- permanent secretary/accounting officer

Institutions & officials

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• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control • Payment Controls• Budget Reporting• Reform sequencing

Module outline

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• Each area of the budget has one, and only one, budget holder. All budget managers are clear on the income and costs they are responsible for and the size of their budget

• Budget managers are able to control the level of expenditure or income from their budgets. Financial responsibility matches the reality of management control

• All revenue deposited in bank account – not used locally

• Budgets are shown gross (not net of receipts).

Principles of budgetary control

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Budgetary Control

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BUDGET

Allotment

Commitment

Certification

Payment order

Payment

MoF Budget department

Public Accounts department

Warrant

Supplier

Limit

In-year budgetary adjustments:

• Transfer of resources – across sub-codes

o by line manager/ ministry

• Virements – between departments

o by Treasury

• Supplementary budgets

o by Parliament

Budget modifications

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• Budget revisions should be submitted to Parliament for approval

• should be limited to one revision per year

• Good practice: the mid-term budget review which may include in year (t):

• budget execution report for the first months of year (t)

• supplementary estimates for year (t) budget

• budget policy paper for year (t+1), and indicative spending for the following two years

Supplementary budgets

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• Ensures budget units only spend what appropriated by Parliament & released by Treasury

• Reduces payment voucher arrears

• Improves effectiveness

• Increases the confidence in vendors that they will get paid

• Reduces the opportunity for rent seeking by payment offices

Reasons for commitment control

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The vote book

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123 6545 stationary annual appropriation-€1000

date payee description order paid balance

15 May 2010 ABC ltd paper €240 €760

1 June 2010 ABC ltd paper €240 €760

5 June 2010 XYZ ltd printer paper €260 €500

12 July 2010 XYZ ltd printer paper €260 €500

• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control• Budget Variations• Payment Controls• Budget reporting• Reform sequencing

Module outline

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• Imbalances between cash inflows and outflows: appropriation freezes, commitment limits, cash budgeting, informal borrowing from vendors (arrears)

• They are disruptive for sound budget execution management (non-predictability)

• During budget preparation indicate new & on-going projects (delay or cancel?), scalable versus non scalable projects (no half bicycles)

• Often resulted from IMF quarterly ceilings on bank borrowing

Cash Rationing

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• Main treasury system

• Running costs paid locally

• Some income may be retained locally

• Larger sums controlled centrally

Alternative forms of payment or cash release

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• The standard payment system is through the ‘Treasury’:

• The Ministry of Finance is responsible for making the actual cash, cheque and direct bank transfers.

• There may be local treasuries in MDAs and/or regional locations across the country.

Main Treasury system

• Some income may be retained locally to increase spending (internally generated resources or funds)

Internally generate resources

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• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control• Budget Variations• Payment Controls• Budget reporting• Reform sequencing

Module outline

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• Reflect the structure of the budget

• Show funds received, committed funds, expenditures and transfers, opening and closing balance of bank accounts

• For example, submitted by the line ministry to the Accountant General’s Office (MoF) for reporting & the Budget Office for the budget release process

• Non submitted Monthly Expenditure returns may result in suspension of further budget releases

Monthly Expenditure Returns

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• Details of receipts and payments by each ministry

• Compared with the performance of the previous year and relevant budget

• Reported to politicians (cabinet and/or parliamentary finance committee) and public

• May lead to supplementary budget

Quarterly budget reports

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• International Budget Project:www.internationalbudget.org

• Open Budget Index 2010 (94 countries)80 % of governments don’t adequately account to public for their spending

• Our Money, Our Responsibility: A Citizens' Guide to Monitoring Government Expenditures

• Links to national budget groups, Centre for Budget Advocacy – Ghana, Uganda Debt Network

• Global Integrity – www.globalintegrity.com

Involvement of civil society

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Reporting for local delivery units

29Put on notice boards and give to elected representatives, trade unions, parent-teacher associations. Press reports

• Expenditure cycle from allotment to payment• Getting the Basics Right • Budgetary Control• Budget Variations• Payment Controls• Reform sequencing

Module outline

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• 1. A schematic view of the reform decision process• 2. Stage One: Analysis and Diagnosis--PFM Technical factors• 3. Stage Two: Analysis and Diagnosis--Factors External to

PFM• 4. Stage Three: Settling on a sub-set of reform options• 5. Stage Four: Dialogue with stakeholders to agree reform

actions• 6. Stage Five: Decide sequencing of reform actions• 7. Stage Six: Put in place an adequate delivery mechanism• 8. Stage Seven: Formal monitoring and review of reform

efforts• EC report by Jack Diamond April 2012

Sequencing of reform

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• Assessing Reform Risks at the Top Political Economy Level•  • 1. Change management is essential to address the external factors• 2. Deciding on what is possible within the "basics" in PFM reform• 3. Change management as risk management• 4. Reform implications in deciding the feasibility of reforms•  • Assessing Reform Risks at the Institutional Organizational Levels•  • 1. An approach to assessing risks from external factors at the lower level• 2. The institutional structure of PFM systems• 3. The internal organization of PFM systems•  • EC report by Jack Diamond April 2012

Assess reform risk (1)

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• A Risk-based Approach to Sequencing within the Basics

•  • 1. Reform risk as a criterion for sequencing decisions• 2. Operationalizing the risk-based approach• 3. Employing the risk analysis to determine reform strategy• 4. Choosing the sequence of reform actions

• EC report by Jack Diamond April 2012

Assess reform risk (2)

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• Budget execution system should ensure compliance with legislature’s authorisations

• Virement rules should provide managers with a certain degree of flexibility, but within the government’s policy framework

• Uses of appropriations should be regularly monitored

• The budgetary horizon (when payments and receipts are predictable) will vary over time and between countries

• Reform sequencing will vary from country to country

Key messages

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