Applying Accrual Concepts for Budgeting 1 March 2008



Applying Accrual Concepts for Budgeting

March 2008

Pål Ulla Deputy Director General Budget Department

2 Norwegian Ministry of Finance


The government-appointed commission’s recommendation for accrual budgeting Are accruals used for some agencies today?

Long-term liabilities Budgeting and financial statements

3 Norwegian Ministry of Finance

What are we talking about?

Norway has well established National Accounts for macroeconomic analytical purposes. The public government statistics are given both in cash and accrual bases (GFSM2001).

All the revenue estimates used in the budget formulation are first calculated in accrual terms and then transformed to cash flows. This is mainly for tax estimates.

Norway has however chosen that the parliament’s approval of the budget shall be on cash base.

It is the budget approved by the parliament that I discuss in this presentation.

4 Norwegian Ministry of Finance

The government appointed commission’s recommendation for accrual budgeting

• • • The choice of cash and accrual depends on how the government wants to control the individual agency.

The impressions in the Ministry of Finance are: Cash is best when the control of the budget execution is based on input control (transactions) Approval of the largest investment programs are important for formulation of some of the policies approved by the parliament (infrastructure, weapons programs) Accrual is best on performance based budgeting where the responsibility for the most efficient executions are decentralised to the individual agencies (in a total individual spending limit including reinvestments)

5 Norwegian Ministry of Finance The discussion concluded that the main principle still should be cash based budgeting.

• • • • Why: The principle was chosen because most of the agencies are and will be regulated through control of inputs.

New programs and agencies depend on approval of investment appropriations from the parliament. (Including appropriations for the largest projects which are policy related; infrastructure, weapon systems.) It is the line-ministries that decide what to perform with little influence over output or outcome by the Ministry of Finance.

There was/is little trust in the possibility to create a accurate performance based budgeting because outputs and outcomes are difficult to measure.

6 Norwegian Ministry of Finance

Value for money

• To introduce accrual budgeting is costly. There is a need to measure all fixed capital in both central and local government.

• One conclusion was that introducing accrual accounting will not produce Value for money.

7 Norwegian Ministry of Finance

Are accruals used for some agencies today?

Formula based budgeting is used for universities and high schools. They use accrual budgeting internally. However they want more resources for research still they have large amount in the TSA.

Appropriations for hospitals are based on performance targets. However actual spending each year exceeds targeted appropriations.

Use of accruals is not the problem but neither has it been the solution.

A project where 10 institutions are allowed to have their internal budgets on accrual base but report to the fiscal budget on cash base

8 Norwegian Ministry of Finance

Long-term liabilities

In Norway we use long-term projections to check for fiscal sustainability In a pay-as-you-go pension system you must include the contributions from taxes to pay for the future pensions to see if the system is sustainable.

The future sustainability problem can not be solved only with earmarked pension savings today. There must also be pension reform.

Because of the uncertainties accrual budgeting based on the present pension regulations will not give the right answer.

9 Norwegian Ministry of Finance

Budgeting and financial statements

One argument for having financial statement in a different accounting base than the budget is that this will create more (better?) background information for the prioritizing in the budget process In the Ministry of Finance in Norway it is seen to be most important to control budget appropriations as set by the parliament.

In addition two different principles will be confusing when formulating fiscal rules