Public Expenditure and Financial Management Overview of Issues

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Public Expenditure and
Financial Management
Overview of Issues and Approaches
Bill Dorotinsky,
PREM public sector
governance group
PEAM Course
May 2, 2006
Outline
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Framework for Review
Approaches to PEM review
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Budget Cycle
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Formulation
Execution
PFM System
PFM Functions
Outcomes/Impact
Common Problems
Common Solutions
Measuring PFM Systems
2
Framework
Three Objectives of Public Expenditure
Management Systems
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Macrofiscal discipline and stability
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Support economic growth and stability (and
reduce poverty)
Avoid public finance crises
Strategic allocation of resources
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Match government policy with programs,
objectives
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And assure social safety nets, and promote growth
Technical efficiency
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Getting the most from each zloty spent
3
Framework
Basic principles of PEM
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Comprehensiveness
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Accuracy
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cover a defined period of time (e.g. one year budget, multi-year
forecasts)
Authoritativeness
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record actual transactions and flows
Annuality
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include all revenue and expenditure, all agencies
only spend as authorized by law
Transparency
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information on spending is public, timely, understandable
4
What institutions to review?
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Formal and Informal Rules
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Laws and regulations
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Process
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Constitutions , fiscal, budget, procurement, civil
service, special funds, sector laws, public enterprises,
mandatory spending
Policy
Planning
Financial/resource management
Organizations and their roles
Information
5
Approaches to PEM Review
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Cycle, Process
System
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broad scope
organizations
Functions/tasks
Outcomes/Impact
6
Expenditure Management Cycle
Financial management system boundaries
Planning
system
Project
appraisal
Medium term
plans, e.g. three
year rolling plans
Resource
allocation
Annual budgets
Development,
recurrent and
revenue
Expenditure
review
Public expenditure
review
Institutions
Fund release
procedure, e.g...
warranting
Accountability
Audit system
Reports and
financial statements
Accounting for
revenue and
expenditure
Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited.
Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
7
Budget Formulation
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Issues are typically about
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Process
Quality of Engagement
8
Process Issues
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“Due process”
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Fair hearing for proposals, requests within
government
Coherence
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Budget process is planning process
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Planning within resource constraints
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Indicative ceilings for budget offered early in the
process
‘hard budget constraint’
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Comprehensiveness
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Changing incentives
Capital, all revenues and expenses
Civil society participation
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‘decentralized’ impact analysis
Legislative stage
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Process (continued)
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Proper decision sequence for
coherent process
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Macrofiscal, revenues, expenditures
Sectoral
Administrative/program/project
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Accountability: Link resources with
management responsibility
Schedule
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Budget calendar issued
Sufficient time for sound proposals
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Ministries
Budget office analysis
Legislative review
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Two stage process
10
Quality Issues
(improving process outcome)
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Multi-year perspective
Setting multi-year policy objectives
 Conservative economic, revenue forecast
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Likely versus ‘hoped for’
Benchmarked against non-governmental
forecasts
Realistic expenditure forecast
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Provision for recurring ‘unanticipated’ events
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Contingency reserves – with clear rules for use
Indicative ceilings linked to second-year of
prior budget forecast (policy)
Requests reconciled to prior year actuals,
current year estimates
Two aggregate forecasts (advanced)
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Proposed policy
Current services/policy
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Quality (continued)
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Budget ownership
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Early, frequent engagement of policy
officials on structured decisions
Fiscal policy paper to kick-off process
Distinguish policy from recurrent
revenue
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Proposed revenue sources versus historical
trends
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No spending allowed against proposed unless they
materialize (grants, tax revenue)
Communication
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Clear signals of direction, markets and
agencies
Prepare public for change – sustainable
12
Quality (continued)
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Budget Information
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Prior year actual, current year estimate, budget
year +2, Staffing, Outputs
Classification: economic, administrative,
functional, program
Requests distinguish between on-going, new
spending; mandatory, discretionary
Decision papers
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Basis for Minister of Finance, Gov’t decision
Pulls together academic, audit, performance,
evaluation of prior years financial performance,
other information
13
Why is budget execution important?
Credibility of the Honduran Budget – In-year Deviations by Agency
(percent of the executed over the approved budget)
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What is budget execution?
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Processes and institutions to implement
the budget
Incentives – principle-agent problem
Reflects that budget is NOT only an
accounting document
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also a political document
Planning/steering device
15
Objectives of budget execution
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Manage Spending and Revenues to
budget
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support choices of elected officials
allow budget to be planning and steering tool
promote macrofiscal discipline
Reduce opportunities for corruption
Enable program implementation
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Assure resources flow to programs
allow budget to be aid to operational
efficiency through spending unit advance
planning, efficient administration
enable program managers to achieve
objective
16
General Phases of Execution
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Phase 1: Allocation
Phase 2: Ministry Spending Plans
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link actions with finances; cash flow needs
Phase 3: Commitments
Phase 4: Verification
Phase 5: Liquidation of Financial
Obligation
17
Phases of Execution
Time
Medium
term
financial
plan
Annual
budget
Supplementary budgets
Financial planning and budget system
Budget
transfers
(virements)
Expenditure
warranted
Fund control
system
Purchase
order
issued
Invoice
from
supplier
Commitment
accounting
Accrual
accounting
Source: Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training
Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
Payment
Cash accounting
18
System
Budget and Policy Execution System in Hungary (1999)
19
Public Finance Functions
Core Functions
Macroeconomic
Forecasting
Debt
Management
Fiscal Policy
Revenue
Administration
Non-core Functions
Budget
Formulation
Treasury
Internal
Audit
Financial Asset
Management
Financial
Investigations
Procurement
Administration
Budget
Execution
Procurement
Policy
Lottery &
Gambling
Financial
Market
Regulation
20
Core Tasks and Organizations
- Budget Allocations
- Supplemental Budgets
- Virements
- In-year monitoring and correction
- Warrants (cash allocations)
- Cash Flow Management
(forecasting, planning,
sequestration)
- debt management
- financial asset management
- accounting (policy, system
management, chart of accounts)
- make payments
- collect revenues
- account management and
reconciliation
- Central Bank relations
Ministry of Finance
- Macroforecasting
- Fiscal Policy
- Revenue administration
- Debt Management
Treasury
Spending
Ministry
Spending Unit
- internal control
- program management
- spending (commitments)
- recording & reporting
- payment orders
- verification of receipt of
goods/services
- program/cash plans
Financial Management is Everyone’s Responsibility
21
Common PEM problems
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Weak links between planning, policy, resource limits, and
budgets
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Annual focus leads to suboptimal choices
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Using other means to support favored programs
Revenues not captured in budget
Taking piecemeal decisions without reference to over-all effect
Funds don’t reach intended beneficiaries
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Lower than expected returns to capital
Non-comprehensive budget
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Digging a hole; inability to climb out
Complacency today, unaware of crisis tomorrow
Separation between capital and recurrent budgets
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failure to achieve strategic objectives
abstract planning, unrelated to ways and means
Budget executed differently than approved
Goods and services not delivered as planned
22
Common Reforms
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MTEF
Treasury
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Performance Budgeting
‘Fragmentation’
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IFMIS
Procurement, Debt
New Public Management
Deconcentration, decentralization
Administrative & Civil Service
23
Measuring PFM Systems
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Field of PFM has evolved recently, moving
towards more assessment standardization
New set of PFM indicators to monitor
quality of PFM system at high-level
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See www.pefa.org
Recommended with approach to working
with countries
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Country-led reform agenda
Donor coordination around agenda
Shared information pool – common PEFA
framework
24
PFM PEFA Indicators
11. Orderliness in annual
budget process
12. Multi-year perspective
Budget
Execution
Budget
Formulation
26. External audit
27. Legislative scrutiny
of budget
28. Legislative scrutiny
of external audit
reports
Accounting and
Reporting
External Audit
and Oversight
13. Transparency of taxpayer obligations
and liabilities
14. Effectiveness of taxpayer registration
and assessment
15. Effectiveness of tax collection
16. Predictability of funds for commitment
17. Recording/management of cash, debt
and guarantees
18. Effectiveness of payroll controls
19. Competition, value for money and
controls in procurement
20. Effectiveness of internal controls
21. Effectiveness of internal audit
22. Accounts reconciliation
23. Resources received by
service delivery units
24. Quality and timeliness of
in-year budget reports
25. Quality and timeliness of
annual financial
statements
Cross-cutting Indicators
1.
2.
3.
4.
5.
Aggregate expenditure out-turn
Composition of expenditure out-turn
Aggregate revenue out-turn
payment arrears
Classification of the budget
6.
7.
8.
9.
10.
Comprehensiveness of information
unreported government operations
Transparency of inter-governmental fiscal relations
Oversight of aggregate fiscal risk
Public access to key fiscal information
25
General References
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SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) OECD
Managing Government Expenditure. Schiavo-Compo and Tommasi. Asian
Development Bank. 1999
Government Budgeting and Expenditure Controls, Theory and Practice.
Premchand. IMF. 1993
Public Expenditure Management. IMF. 1993.
Treasury Reference Model (Bank PE website)
A Contemporary Approach to Public Expenditure Management. Schick, Allen.
World Bank Institute. 1999.
Public Expenditure Handbook. World Bank, 1998.
Managing Public Expenditure: A Reference Book for Transition Countries. Richard
Allen and Daniel Tommasi, Eds. OECD. Paris, 2001.
Public Financial Management Performance Measurement Framework. PEFA.
Washington, D.C. June 2005.
See www.pefa.org for PEFA Performance Measurement Framework
26
Application: Rules and
Incentives
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Budget Impasse
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Executive-legislative relations
What rules might govern a budget
impasse?
How might they effect incentives between
the legislature and executive?
What might be important considerations
for designing a rule?
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Application
Rules and Outcomes
Table 2: Provisions for spending in the event no budget is enacted prior to the fiscal year, by system
of government
Non-OECD
OECD
Presidential
Parliamentary
Presidential
Parliamentary
(8)
(5)
(3)
(23)
Executive’s budget takes
38 %
20 %
17 %
effect
Previous year’s budget takes
50 %
80 %
26 %
effect
Legislature must vote other
33 %
39 %
measures
Executive falls, new
4%
elections held
Other (including no
12 %
66 %
13 %
provisions)
Source: World Bank – OECD budget procedures database at http://ocde/dyndns.org/
28
Application
Informal Rules
Dominican Republic Budget Deviation, 1996-2000
Identifying sources of weakness for further investigation
Identifying incentives at work
Source: Dominican Republic PER 2003, background data
29
Application
Dominican Republic
Budget Deviation (ratio of executed to approved budget)
Partido del Presidente
Presidencia de la República
Interior y Policía
Fuerzas Armadas
Finanzas
Secretaría de Estado de Educación y Cultura
Salud Pública
Agricultura
Obras Públicas
Otros
1979-86
PRD
2.09
1.06
1.06
1.94
0.96
0.87
0.82
0.98
1.19
1987-96 1997-2000
PRSC
PLD
7.35
2.53
1.00
1.06
0.86
0.97
0.54
1.06
0.86
0.95
0.68
0.78
0.35
0.76
0.44
0.88
1.13
1.08
Identifying trends for transparency
Source: Dominican Republic PER 2003, background data
30
Above-thewaterline
observation
100 clinics,
but only 70 operating
Exploring
problems
WHY?
Budget not comprehensive
10 built with
donor funds,
donor funds
off-budget
Budget fragmented
10 built with
domestic funds,
capital budget
separate
Cash triage
10 funded in
budget, but no
cash allocated
to operate
WHY?
Weak budget law
Too rigid budget execution
Low public pay
WHY?
Donor ring-fencing
for “accountability”
Line ministry gets
flexible resource pool
And what can be done about it?
Local staff seek
higher PIU pay
31
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