types of government expenditure control

the responsibilities of the relevant actors in enforcing these controls. Similarly, the procedure of using an imprest (dpenses par rgies davance), which does not follow all the control stages and should be used only for urgent minor expenditures, is sometimes used to speed up the expenditure process. 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 accounting department22 of the ministry of finance issues regulations and guidelines on matters related to the preparation of financial accounts by spending agencies, prepares and issues government-wide financial reports, and conducts regular bank reconciliations. Payment order. Non-contractual commitments (subsidies, transfers, etc.) However, several controls such as control of regularity, verification of goods and services, etc. Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. Any perceived risks and/or uncertainties should also be adequately addressed. Show question Question Francophone and Lusophone. The payment stage, however, is executed by a separate centralized agency (with regional branches)called cash offices in Germany and the Federal Accounting Agency in Austriawhich processes and keeps records of all payments and is in charge of accounting and preparation of financial reports. 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. It can be spent on a range of different . Box 2 describes the other specific controls that can supplement these general controls. 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. 3. Table 4 lists the typical problems that may arise at different stages of the expenditure cycle. The process of issuing checks should be managed to monitor and minimize check float14 and ensure that sufficient cash is available when they are presented for encashment. Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. Table 3 provides a summary of the roles played by central and line agencies at different stages of the expenditure cycle as well as the key strengths and challenges in different traditions. 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. Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. government budget, forecast by a government of its expenditures and revenues for a specific period of time. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. Therefore, entering into a commitment or incurring a liability in excess of the limit would not, in the absence of other controls, constitute a breach of law. _paq.push(['trackPageView']); Reservation/pre-commitment. 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. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. 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. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). Authorized purpose of the expenditure. 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. 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). HM Treasury, 2013, Review of Financial Management in Government, (www.gov.uk). Manual processing controls: Key manual processing controls for purchasing, payment, and confirmation of receipt of goods and services are performed outside the typical information systems (e.g., FMIS) environment and should be subject to periodic internal control checks and audit. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. Managing the change process would involve communicating effectively to all relevant stakeholders a broad understanding of why the changes are necessary and what objectives are sought to be achieved. The link was not copied. As described in detail in the next section, the application of controls at various stages of the expenditure cycle may be centralized within the ministry of finance or decentralized to line ministries and agencies. Expenditure committed but respective reservation/ encumbrance not annulled. No verification/certification system (i.e., payment orders issued without verification). Lack of adequate control over government expenditure remains a problem in many countries. Payment. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. 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. When it increases, aggregate demand increases, and we expect the economy to grow higher. Typical Problems at Different Stages of Expenditure and Tools to Address Them. Following the approval of the budget/appropriation bill, spending agencies are usually asked to submit a proposed plan for apportionment/allotment. There has been a proliferation of special procedures in a number of countries (particularly in Africa) that are designed for the benefit of powerful vested interests (who want a faster spending process for specific transactions, closer tracking of certain resources, and/or the accommodation of special institutional interests/arrangements). This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. 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. 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. The lack of a comprehensive and credible budget particularly affects the authorization (as the expenditure authority is not realistic), commitment (as ongoing/outstanding commitments are not adequately allocated for) and verification (as the accumulated liabilities are not fully reflected in the budget) stages. Both the central agency/finance ministry and line agencies are involved in various tasks during the expenditure cycle. 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. Reservation. Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. Sometimes called the Westminster system of PFM. Your current browser may not support copying via this button. This includes countries where the ministry of finance assigns a financial controller or a budget offcer to each line ministry in order to control expenditure commitments. Delivery date is captured and time lag between delivery and verification monitored. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. The main reform at this stage is the introduction of a comprehensive commitment control system, including for multi-year commitments and standing commitments (e.g., salaries, utilities, subsidies, transfers, etc.). The key questions to be asked are: (i) whether all the key stages of the expenditure cycle and associated business rules and processes have been clearly defined; and (ii) whether the required controls at each stage have been clearly specified and consistently applied. This will be dependent on sustained improvements in financial management standards and management information, and assurance of a control-conscious culture in each agency. Overly rigid and controlled spending procedures in several Francophone African countries have resulted in the proliferation and misuse of exceptional spending procedures, e.g., the issuance by the minister of finance to the treasury (bypassing the normal chain of expenditure) of an immediate payment order subject to regularization later. When sequestering appropriations, ongoing commitments should be taken into account. In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. The key questions to be asked are: (i) whether there are clear laws and financial regulations regarding the controls and the authority and responsibility of relevant actors who should apply them; and (ii) whether the relevant actors understand and apply them in practice. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. 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). For example, a treasury-based centralized payment system with decentralized responsibility for appropriation and commitment controls at the line agency level can be progressively introduced as the FMIS is rolled out (subject to adequate connectivity between the line agencies and the treasury). The authority for expenditure is given for a specific pre-defined purpose. 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. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. In fact, with the functionalities available from a modern IT-based FMIS, information on budget execution can be made quickly available, and it becomes straightforward for the ministry of finance/treasury to track expenditure transactions as they pass through the various stages of the expenditure cycle, even when transactions are fully administered within line agencies. 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. 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). . Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. In case of relatively simple requirements, a spreadsheet-based application may suffice. 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. There is regular reporting and monitoring of overdue liabilities. 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). Payment and verification (in case of accrual accounting) stages. Therefore, there would be no under-execution of the budget under these circumstances. PEFA PI-22; and average time lag between delivery and verification. For example, the UK uses the employer cost cap mechanism to control future pension spending. 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. Expenditure not appropriated/authorized by the start of fiscal year. A distinguishing feature of a governments budget, unlike the budget of a typical business entity, is that it is funded primarily via compulsory taxation of citizens and authorized via an act of Parliament. var _paq = window._paq || []; In the British Commonwealth system, there is no complementary period, and at the beginning of a new fiscal year, in principle, no cash transactions pertaining to the previous years budget should take place. Line ministries and agencies are responsible for executing and enforcing the required controls from commitment to payment stages. Options for strengthening the expenditure control framework. 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. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). The introduction of an FMIS can thus strengthen expenditure controls as the system can replace several key controls that were previously applied manually and systematically track them. 2. _paq.push(['setTrackerUrl', u+'matomo.php']); For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). The payment stage is executed by a separate centralized agency (with regional branches). : 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. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. Types of Control, Their Key Features and Objectives. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. 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 . Certain sums may be spent under permanent rather than annual legislation. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. Special procedures are also sometimes a symptom of the inefficiency of the normal procedures to respond adequately to priority needs. This objective is achieved by appropriations. 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? 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). This is especially true for expenditure on multi-annual investment projects (see Section III for multi-year expenditure limits on commitments). In the German-Austrian tradition,35 as in Francophone and Lusophone systems, there is a clear division between the roles of ordering or anordnend (which covers the apportionment of the budget, together with the reservation, commitment, verification and payment order stages) and executing or ausfuehrend (which covers the execution of payments). 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. There is also lack of control over agencies with own revenue outside the treasury system. Apportionment. For similar examples, see also R. Allen et al, The Evolving Functions and Organization of Finance Ministries, IMF Working Paper WP/15/232 (2015). 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. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. 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. Types of control, and regularly report to the ministry of finance and central... Copying via this button delay between actual delivery and verification monitored actors in these. 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