When sequestering appropriations, ongoing commitments should be taken into account. Expenditure Control: Key Features, Stages, and Actors. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. 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. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. 31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . Accurate costing of policies and programs, and a comprehensive expenditure authorization framework that captures all expenditure measures. These stages are: 1. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. _paq.push(['setSiteId', '17']); Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. Payment. Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. The scope for establishing such advanced systems, however, remains challenging in many developing countries. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). 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. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. 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. This includes, but not limited to: failure to check the availability of funding before authorizing expenditure; failure to record and maintain data on commitments; delays in processing of payments; circumvention of controls at key stages, including through collusion; and poor record keeping, including of verification documents. 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). To function effectively, this approach requires a high level of capacity in the line agencies with devolved authority, timely and transparent financial reporting, and a strong internal and external audit function. Large delay between verification (recognition of liability) and payment order (arrears, etc). Types of Spending 1. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. The main heads of Central Government's revenue expenditure are: (i) Defence Services, (ii) Development Services, ADVERTISEMENTS: (iii) Administrative Services, (iv) Debt Services, and (v) Assistance to States. 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. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. If a future valuation shows that the costs of a scheme have risen or have fallen, action needs to be taken (via adjustments to member benefits or member contributions) to return costs to the level of the cap. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. 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. No apportionment (or in-year release of spending authority) mechanism. When it increases, aggregate demand increases, and we expect the economy to grow higher. This objective is achieved by appropriations. The lack of systematic tracking and control of commitments leads to over commitment and arrears in several countries of commonwealth tradition, particularly in Africa. 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). 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). 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. 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. 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. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). Any perceived risks and/or uncertainties should also be adequately addressed. 5. Funds/cash not available in government bank accounts to implement the payment order. 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. 4, Paris. 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. The main goals of fiscal policy are to achieve and maintain full employment, reach a high rate of economic growth, and to keep prices and wages stable. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. However, even in such cases and in line with the principles of budget comprehensiveness, transparency, and accountability, such expenditures should be included in the budget documentation, and subjected to the same regularity controls discussed in Section III (see Table 1). Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. PEFA PI-22; and average time lag between delivery and verification. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). Next. 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. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. While particular expenditure control weaknesses may manifest themselves at a particular stage of the expenditure cycle, addressing them may require reforms at various points in the process. Show answer Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. fiscal policy. However, the design and implementation of such a differentiated control arrangement would depend on several factors, including the effectiveness of the internal control and assurance system to identify and alert management to control risks.45, Devolution of Expenditure Control in France, Morocco, and Thailand. The various controls applied during the expenditure cycle can be grouped into six main categories. Lienert, I., 2003, A Comparison Between Two Public Expenditure Management Systems in Africa, Working Paper WP/03/2, (Washington: International Monetary Fund). This is known as retenciones de crdito in Spain (and a similar arrangement in Portugal) and engagement budgtaire in France which precedes the engagement juridique or legal commitment stage. These expenditure limits may not be strict limits for all types of expenditure. In particular, it is important to ensure effective coordination between issuance of warrants/allotments by the budget department and cash planning and management by the treasury so that adequate cash is available for payment when the line ministries/agencies expenditure commitments materialize.23 Similarly, transaction level bank reconciliation by the accounting department and/or line agencies should be coordinated with the treasury departments monitoring of cash balances in various bank accounts. Legality of the operation is controlled by verifying that the officials approving a transaction have the authority to do so, and that the required supporting documents have been prepared in line with the law/regulations (for audit). Current spending They are for the short term and include expenditure on wages and raw materials. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. 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. 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. The central idea here is that not all expenditure transactions need to pass through an identical control process. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Government expenditure has ballooned over the years. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. Some countries PFM systems may not formally track all the seven stages (see discussion in page 9). Banks were privatized and deregulated, central bank laws introduced firm limits on the amount of credit available to the government, centralized treasury departments were established to raise financing from the private sector on commercial terms, control and process government payments, and report on budget execution through the main treasury account. Payment order is issued within the payment due date to discharge the recognized liability. 4. 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. 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. Commitment. 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 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. 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. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. 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