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. It can be spent on a range of different . Government Spending: Giveth Some, Taketh Some. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. Apportionment framework and cash plans/ forecasts take account of commitment profiles and associated expected payment schedules. Your current browser may not support copying via this button. 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). 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. The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. The budget should be implemented as formulated and authorized with as little deviation as possible, but there should be room to adjust to changing circumstances (e.g., genuinely unexpected events) by modifying the budget as necessary during the year. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Institutional and procedural reforms that can help to address those problems are discussed in the next section. Box 2 describes the other specific controls that can supplement these general controls. In some countries, a powerful accounting organization (. 2. 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. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. 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.). 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. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). For 2023, proposed government spending is GH205 431 million (25.6% of GDP), 53.5% more than the previous year. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. Lack of adequate control over government expenditure remains a problem in many countries. 4, Paris. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. 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. 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. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. 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. Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. 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. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. For example, the UK uses the employer cost cap mechanism to control future pension spending. The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. An appropriation is defined as a sub-division of a government budget established for accountability purposes, which shows the amounts legally authorized to be spent for specific purposes in a specific time period. 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. The author is also grateful to K. Douglass for her assistance with data analysis. 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. 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. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. 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. 5. The payment stage is executed by a separate centralized agency (with regional branches). 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). In some cases, these variations are noted in the text. This paper defines and explains key stages of the government expenditure chain and describes the controls applied at each stage, including their objectives and key features as well as centralized vs. decentralized approaches in application of those controls. See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. the responsibilities of the relevant actors in enforcing these controls. Pattanayak, S., and J. Cooper, 2011, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Technical Notes and Manuals (Washington: International Monetary Fund). Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. This deficit provides an indication of the financial health of the economy. 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 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. Payment. 7/2009 sets a maximum one month complementary period. 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. 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. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. Mainly commitment, verification, payment order and payment stages, but also at other stages. (function() { France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. In some countries, the ministry of finance uses sequestering to prevent such risks. Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Apportionment. 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. 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. KUALA LUMPUR, March 1 The government still has space to monitor the country's expenditure particularly development expenditure to ensure it is more prudent and accurate according to the project plans and this will indirectly assist the government in terms of better revenue needs. The word budget is derived from the Old French bougette ("little bag"). While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. 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. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). fiscal policy. Limit on time horizon of expenditure. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. A comprehensive commitment control system is in place that captures not only one-off (purchase order type) but also multi-year (e.g., projects contacts) commitments. It also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. The commitment stage is the point at which a potential future obligation to pay is established. The expenditure cycle and associated controls in Francophone African countries derive largely from the French system as it existed prior to 1960s in the French provincial governments (prfectures).30 However, many Francophone African countries not only intensified the centralization of controls in the late 1990s,31 but the minister of finance also became the single and principal payment-authorizing officer (Ordonnateur principal unique).32 The responsibility for financial control is typically centralized in the ministry of finance, with its staff out-posted in the line ministries/spending agencies. International Monetary Fund Copyright 2010-2021. Checks and/or electronic transfer instructions bounce due to lack of cash. 4. Same as Francophone, but the official approving commitments and payments is usually the same (unlike separation of responsibility in Francophone countries). Expenditures authorized through standing/ permanent legislations are forecast and included in the budget documents. Types of Fiscal Policy The government has control over both taxes and government spending. This is mainly prevalent in Austria, Germany, and partially in some neighboring countries. Defence Services: They account for nearly 20% of the total revenue expenditure of the Central Government in India. 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. 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. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; Check float has two dimensions: (i) check float time; and (ii) check float amount. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. This plan indicates the funds required for operations, typically on a quarterly or monthly basis. 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. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. In many cases, a transaction processing system may have to be supplemented by specialized consolidation software to generate the necessary reports in a timely manner. The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? Types of Control, Their Key Features and Objectives. 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. These stages are: 1. Examples of this include lowering taxes and raising government spending. 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. 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. 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. 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. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. A commitment thus entails an obligation to pay when the third party has complied with the provisions of the contract. 6. the use of taxes, government spending, and government transfers to stabilize an economy; the word . For multiannual programs/projects, the approved budget includes both the multiannual commitment limits (autorisations dengagement or AE) against which it also sets annual limits (crdits de paiement or CP) for cash payments during the year. Capital spending They are for the long term and do not need to be renewed each year. Commitment-based budgeting systems impose limits on both expenditure commitments and cash payments. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). What are the main areas of expenditure for local government? Under a dual accrual and cash budgeting/appropriations framework, there is a need for each agency to make projections of both its anticipated cash requirements as well as incurrence of expenses and liabilities and accumulation/realization of long-term obligations and contingent liabilities. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Control of procurement: Significant public spending takes place through the public procurement system. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. 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. They are also reconciled with bank statements. 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. This objective is achieved by appropriations. Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office).