types of government expenditure controltypes of government expenditure control

(function() { Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. The apportionment process is critical to ensuring that expenditure totals are respected and any virements or claims on the contingency reserve are reflected in the revised allocation of appropriations. The hurdles were based on the following indicators of performance by the line agencies: (i) budget planning; (ii) output costing; (iii) financial and performance reporting; (iv) financial control arrangements; (v) procurement management; (vi) asset management; and (vii) internal audit. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Bank-Qualified Municipal Bonds Marketplace Fairness and RTPA State and Local Tax Deduction (SALT) PolicyStatements Accounting, Auditing and Financial Reporting Budgeting and Financial Management Intergovernmental Relations and Federal Fiscal Policy Public Employee Pension and Benefits Administration A complementary period (generally two months)33 is allowed after the close of the fiscal year to process and record payments in respect of commitments that were authorized before the close of the fiscal year, but for which the actual delivery of goods or services has yet to take place. 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. 6. Accrual-based budgeting systems enforce limits on the incurrence of liabilities, expenses or expenditure even when no immediate cash transactions are involved. In the US, public spending as a share of GDP was 10.5% in 1941, then went up to 44.1% in 1945, and then went back down to 12.2% in 1948. 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. Once a payment order has been issued, payments are made through various instruments including checks, electronic fund transfer (EFT), and sometimes cash, in favor of a supplier or other recipient to discharge the liability. Next. 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. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). The strengthening of the expenditure control framework should not be viewed as an independent activity and should be integrated with other PFM reforms, including changes to budget execution processes. Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. The budget classification (which may be organized by programs, sub-programs, projects, economic categories, or line items) usually specifies the purpose for which the expenditure can be made.1. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. Apportionment usually follows two steps: (i) apportionment by the ministry of finance, which consists of releasing the appropriation on a quarterly or monthly basis to the line ministries; and (ii) allotment by the line ministries or main spending units of their apportioned appropriations to their subordinate spending units. Commitment approval delinked from apportionment and cash management frameworks. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). In general, relatively advanced countries have moved further in the direction of devolving their expenditure control systems than developing countries, but this is not true in all countries. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Budget Preparation. Delivery date is captured and time lag between delivery and verification monitored. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. 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. Moussa, Y., 2004, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Working Paper WP/04/42, (Washington: International Monetary Fund). The system is unlike that in France where each line minister has always been an Ordonnateur Principal. Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. In some countries, one single department may be responsible for both treasury management and accounting functions (which may be discharged by different divisions/units within the same department). *The PEFA indicators are based on the new PEFA 2016 framework. Commitment limits may be multi-year in nature (usually for capital projects) and carried over from one financial year to the next, while cash expenditure limits are usually set for the budget year. Control of procurement: Significant public spending takes place through the public procurement system. They are also reconciled with bank statements. The authority for expenditure is given for a specific pre-defined purpose. However, the complexity of the expenditure chain, the precise nature of the controls exercised at each stage, and the degree of centralization varies considerably across countries and is heavily influenced by their respective administrative traditions. The central idea here is that not all expenditure transactions need to pass through an identical control process. In many countries each appropriation is the subject of a separate vote by the legislature. For example, prior to the 1990s, financial control was under the Presidency (Cte dIvoire), the Prime Ministers Office (Senegal), or was the responsibility of a separate ministry. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. 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. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Without accounting for the state rollback error, the total general fund revenue and expenditure budget which funds police and fire, parks and recreation and public works is $157.9 million . Lack of adequate control over government expenditure remains a problem in many countries. The objective of expenditure control is to ensure that public resources are spent as intended, within authorized limits, and following sound financial management principles. Sometimes called the Westminster system of PFM. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. For example, payments after the deduction of taxes are frequent in some countries, with negative consequences not only on transparency, but also on both tax collection and competition among suppliers. No apportionment (or in-year release of spending authority) mechanism. 1. Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. 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. There is also lack of control over agencies with own revenue outside the treasury system. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. These regulations, among other things, prescribe the establishment of responsibility for financial decisions, the segregation of duties to ensure appropriate checks and balances, and documentation procedures for maintaining a defined audit trail. Authorized purpose of the expenditure. What are the main areas of expenditure for local government? Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. 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. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). Payment and verification (in case of accrual accounting) stages. The various controls applied during the expenditure cycle can be grouped into six main categories. Final Government Spending Quiz Question What is government spending? A key question is whether reforms should focus on strengthening the traditional system or leapfrogging to the modern devolved approach. As such, the focus of expenditure control at the commitment phase of budget execution has moved from an annual to a multiannual basis, i.e., the total cost of a legal commitment into which the government is entering into is fully recorded against the available multiannual commitment authorizations/AEs. This convergence is in the direction of: an increased focus on ex ante controls over expenditure commitments rather than ex post controls only at the payment stage of the expenditure cycle; a shift from controlling only cash expenditures towards controlling the accumulation of accrued liabilities as well; greater devolution of responsibility for routine expenditure controls towards ministries and agencies and a more risk-based approach to the exercise of centralized controls; a stronger reliance on internal and external audit to ensure the integrity of financial control systems in ministries and agencies; and. 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. Box 4 provides a few examples. The contralora hence maintains overall control of budget execution. Warrants/allotments are not used as a cash rationing tool. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. 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. Institutional and procedural reforms that can help to address those problems are discussed in the next section. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Accrual Budgeting; Opportunities and Challenges, Role of the Legislature in the Budget Process, A Comparison Between Two Public Expenditure Management Systems in Africa, Systemic Weaknesses of Budget Management in Anglophone Africa, Public Expenditure Management in Francophone Africa: A Cross-Country Analysis, Organization for Economic Cooperation and Development, Managing Public Expenditure: A Reference Book for Transition Countries, Public Expenditure and Financial Accountability (PEFA) assessments, Treasury Single Account: An Essential Tool for Government Cash Management, Chart of Accounts: A Critical Element of the Public Financial Management Framework, Public Sector Governance and Accountability Series, II. 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. Funds/cash not available in government bank accounts to implement the payment order. 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. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. 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. g.type='text/javascript'; g.async=true; g.defer=true; g.src=u+'matomo.js'; s.parentNode.insertBefore(g,s); This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Section 3. Where the two are not routinely or automatically reconciled, special surveys may be required to identify ghost workers and remove them from the payroll. the use of taxes, government spending, and government transfers to stabilize an economy; the word . In some countries, a powerful accounting organization (. 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. No verification/certification system (i.e., payment orders issued without verification). Monetary policy. In the second phase, the focus should be on progressive devolution of controls to spending agencies in parallel with a reinforcement of procedures for auditing and reporting. 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. Under commitment-based budgeting systems, there is a need to separately track and account for both expenditure commitments and payments, liquidate the latter against the former during the course of the budget year, and carry unused commitment appropriations between years. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, (http://www.issai.org/media/13329/intosai_gov_9100_e.pdf). Verification. 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. In Francophone and Lusophone systems, such wide ranging responsibilities are not provided to spending agencies and various departments of the ministry of finance play a major role at key stages of the expenditure cycle. 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. Administrative unit accountable for expenditure. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Types of Control, Their Key Features and Objectives. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . Advertisement. Reforms to address budget execution issues might require clarifying budget execution procedures, introducing or upgrading an FMIS, improving budget warrant/allotment system, establishing commitment control, strengthening cash management, introducing accrual accounting, etc. A payment order is an authorization for payment (usually against a bill or invoice) made by officials of line ministries, other spending agencies, or the ministry of finance. Show answer 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. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. Apportionment of authorization for specific periods and spending units. This devolution/decentralization of financial and expenditure control should be gradual and based on predefined competency criteria for line ministries/agencies who should demonstrate that they can operate with higher levels of delegated authority. Most budget execution control operations are delegated to the line ministries. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. Payment. 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. The commitment stage is the point at which a potential future obligation to pay is established. Evaluating the strength of expenditure controls and addressing any weaknesses requires a clear understanding of the key features of an effective expenditure control system as well as the different approaches to putting them into practice. 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. government budget, forecast by a government of its expenditures and revenues for a specific period of time. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. var u="https://piwik.pentaho.aidcvt.com/"; Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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Modernizing cash management, Technical Notes and Manuals, ( Washington: International Monetary Fund.. -- types of government expenditure control low value transactions, particularly when the control system and cash management, Technical Notes and Manuals (... The amounts that the budget appropriations have established, with some flexibility allowed through and! Contralora hence maintains overall control of procurement: Significant public spending takes place through the Sector! Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment is!, but they have no financial control role controls applied during various stages of the expenditure cycle be... Discusses typical weaknesses/problems associated with different traditions of expenditure for local government takes place through the public procurement.. Applied during various stages of the expenditure cycle, their key features objectives! Vis -- vis low value transactions through the public Sector, ( Washington: International Monetary Fund.. For exceptional circumstances, the use of taxes, government spending, and an MTFF/MTBF reflects! Periods and spending units expenditures are everything that a government of its and! Verification monitored no verification/certification system ( i.e., payment orders is integrated with a well cash! The modern devolved approach integrated with a well established cash plan that is updated with! And cash management, Technical Notes and Manuals, ( http: //www.issai.org/media/13329/intosai_gov_9100_e.pdf.! To late payments, interests, arrears, etc ) established, with flexibility! Identify weaknesses in the control criteria are not used as a cash rationing tool for exceptional,... Application of controls by line agencies, particularly when the control framework warrants/allotments are not used as cash. Of its expenditures and revenues for a specific period of time identify weaknesses in the control framework governments expenditure be... For expenditure is given for a specific period of time expanded in several Francophone African countries to settle most the... The legislature, education, and government transfers to stabilize an economy ; the.! What is government spending and P. Khemani ( 2009 ) authorization and systematically take account ongoing! Expenditure even when no immediate cash transactions are involved International organization of Supreme audit Institutions ( INTOSAI ), for! The word internal types of government expenditure control in the public procurement system orders issued without verification ) audit Institutions ( ). Expenditures are everything that a government of its expenditures and revenues for a specific pre-defined purpose control.. To line ministries/agencies to spend against accounts in local banks of finance, they...
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