Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. 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. 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). 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 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. bank accounts (as reflected in bank statements). Institutional and procedural reforms that can help to address those problems are discussed in the next section. Note: BD-Budget Department; TD-Treasury Department; AD-Accounting Department; SA-Spending Agencies. 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. These include appropriation control, commitment control, and accounting control. Expenditures at the verification stage are sometimes called accrued expenditures (e.g., in the US), accounts payable, or actual expenses. Approximately two-thirds of spending consists of mandatory expenditures on programs such as Social Security and Medicare. To help PFM practitioners evaluate a countrys budget execution system and identify priorities for strengthening expenditure controls, this TNM: explains the key stages of the government expenditure chain (Section II); describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various institutional actors throughout the expenditure cycle (Section III); examines the influence of different administrative traditions on types of expenditure controls exercised and the allocation of responsibility for their application (Section IV); identifies the typical weaknesses and problems associated with different expenditure control traditions (Section V); and. 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. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Reservation. In some countries, ministries of finance regard expenditure as having taken place when funds are transferred from the ministry of finance or treasury bank accounts to the line ministries (or first-tier spending units). Payment orders are issued after documentary proof of verification. Some types of budget appropriationsdebt service, for examplemay not be subject to a strict spending limit and may be revised according to developments in interest rates and exchange rates. 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. 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. An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. var _paq = window._paq || []; the responsibilities of the relevant actors in enforcing these controls. Types of Control, Their Key Features and Objectives. In any case, understanding the seven key stages of the expenditure cycle and associated control systems is also important to effectively design and implement an FMIS. Approaches to prioritising expenditure where there are competing demands for funding. In some countries, a powerful accounting organization (. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. Final Government Spending Quiz Question What is government spending? fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). An overview. The expenditure cycle and associated controls in Lusophone African countries34 are quite similar to the control framework in Francophone systems, but there are a few key differences. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. Sometimes called the Westminster system of PFM. 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. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. 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. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. Inordinate delay in issuance of spending authority to line agencies. They can be more easily circumvented, presenting the potential for error or fraud. The link was not copied. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. 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. 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. Capital Expenditure Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Key strengths: centralized payment and treasury accounting system. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments. This setting aside of an allotment for a future expenditure should not be confused with a legal commitment as no specific contract is signed at this stage. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. As these countries transitioned to market-based economies, they established centralized treasury departments under the finance ministry to process payments and exercise control at the payment stage. 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. There is also lack of control over agencies with own revenue outside the treasury system. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? Total revenue including grants . Lack of adequate control over government expenditure remains a problem in many countries. Reforms could usefully be implemented in phases as follows: In the first phase, the focus should be on establishing basic control functions such as centralized control of apportionments and simplified/streamlined but effective controls42 at other stages of the expenditure cycle, particularly commitment control backed by cash planning43 linked to timely release of funds to spending agencies. Delivery date is captured and time lag between delivery and verification monitored. How Do Treasury Systems Operate in sub-Saharan Francophone Africa? 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. The distribution of responsibilities between them is typically organized along the following lines: The budget department of the ministry of finance issues regulations on matters related to the execution of the budget, apportions appropriated funds to spending agencies, monitors their expenditures and performance, authorizes in-year budget revisions, and monitors and reports on budget execution. Apportionment, reservation, commitment and payment order stages and virements during budget execution. 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. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. 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. 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. 4, Paris. World Bank, 2007, Budgeting and Budgetary Institutions, Public Sector Governance and Accountability Series. Economy Minister Mohd Rafizi Ramli said, if the government is . Flynn, S., and M. Pessoa, 2014, Prevention and Management of Government Expenditure Arrears, Technical Notes and Manuals, (Washington: International Monetary Fund). Stage of the Expenditure Cycle, Controls, and Actors. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). 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. Some of the controls during the expenditure cycle can be automated and applied through an FMIS. It will also usefully guide technical assistance work related to modernization of government budget execution and expenditure control systems, including the design and implementation of IT-based financial management information systems. The lack of effective communication between treasury, which uses a cash-based budget execution system, and line agencies, which maintain their own accounting records (normally on accrual basis), leads to problems in reconciling expenditure data. 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. Lack of adequate control over government expenditure remains a problem in many countries. 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. However, these hurdles were set at such a high level that hardly any agency cleared them. Government expenditure has ballooned over the years. 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. When sequestering appropriations, ongoing commitments should be taken into account. 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. Government expenditure is vital in influencing the economy. Thailand introduced a hurdle approach in the late 1990s to devolve budget execution control, moving this function from the finance ministrys Bureau of the Budget to line agencies. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). Government Spending: Giveth Some, Taketh Some. 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. The TSA systems in some of these countries give financial incentives for smoothing expenditure profiles. Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. Payment. 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). Funds/cash not available in government bank accounts to implement the payment order. *The PEFA indicators are based on the new PEFA 2016 framework. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. In case of relatively simple requirements, a spreadsheet-based application may suffice. Countries does not carry out any form of detailed commitment or payment control the payment these were! 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