types of government expenditure controltypes of government expenditure control

Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). 7. Next. While the controls may be well specified and the roles and responsibilities of the key actors clarified in a countrys legal/regulatory framework, problems may still arise due to lack of enforcement. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. The expenditure must occur within the time limits applicable to the expenditure authorization. The main reforms include enhancing the coverage of the budget, improving the methodology of costing budget policies, introducing medium-term fiscal and budget frameworks, and ensuring timely submission and approval of the budget by the legislature. Verification of goods and services (contrle du service fait): This control involves: (i) verification of the goods and/or services delivered by a supplier to ensure that these conform to the specified quality and quantity; and (ii) a calculation of the liability incurred by the government to the supplier. Reservation. Budgeting, internal control and audits are commonly used by government owned hospitals in order to curb expenditures, cost benefits, analysis and management audits that could be applied are not in use. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. In addition, the approach did not stipulate any time frame for agencies to upgrade their PFM standards, and there was an underestimation of their capacity-building needs. Checks and/or electronic transfer instructions bounce due to lack of cash. 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. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. 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. This includes countries where the ministry of finance assigns a financial controller or a budget offcer to each line ministry in order to control expenditure commitments. Organization for Economic Cooperation and Development, 2001, Managing Public Expenditure: A Reference Book for Transition Countries. Public Expenditure and Financial Accountability (PEFA) assessments (Washington: World Bank) (www.pefa.org). Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. Capital spending They are for the long term and do not need to be renewed each year. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. Apportionments/warrants are issued by the finance ministry which also monitors budget execution by line ministries and agencies on a regular basis. Canada also shares some of these features. Types of Spending 1. The system is unlike that in France where each line minister has always been an Ordonnateur Principal. Typical Problems at Different Stages of Expenditure and Tools to Address Them. Excessive time lag between reservation and commitment resulting in unnecessary encumbrance on available funds. 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. Countries of the former Soviet Union (FSU) have tended to retain centralized treasury departments to control and process government payments, while controls at the commitment, verification and payment order stages remain with the line ministries/agencies. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. Apportionment of authorization for specific periods and spending units. ), the verification requires confirmation that the obligation has actually fallen due. The key reforms include clarifying responsibilities for verification of delivery of goods and/or services, ensuring documentary proof of delivery, and eliminating any undue delay between verification and issuance of payment orders. They can be more easily circumvented, presenting the potential for error or fraud. The descriptions of the various traditions provided below are broad and general, and in practice, there are variations among the countries belonging to each tradition. The various controls applied during the expenditure cycle can be grouped into six main categories. It seeks to verify: (i) the existence of budget cover or space within the authorized limits; and (ii) that the payment is being made to extinguish the liability to a real creditor and for a claim that was not paid earlier. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. In some countries, the ministry of finance uses sequestering to prevent such risks. This control is a key element of the overall cash management system. Stage of the Expenditure Cycle, Controls, and Actors. 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. As such, the AEs are consumed at the commitment stage of the expenditure or the legal act of signing a contract of the State with a third party.1 In the case of a commitment running over several years, its associated CP is spread over several budget years up to the cumulative maximum amount of the initial multiannual AE. A commitment occurs when a formal action, such as placing an order or awarding a contract, is taken that renders the government liable to pay at sometime in the future when the order or contract is honored by its counterpart. Capital Expenditure Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). Where centralized payment and/or payroll systems exist, they may also be responsible for authorizing payment orders and/or making payments. 4. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). The amount of interest depends on the total federal debt and interest rates. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). 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. A long check float time is not a good practice as it not only complicates cash management but can also be misused to write and issue checks despite not having enough liquidity in the bank account to cover the value of the check. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. The link was not copied. Show answer When it increases, aggregate demand increases, and we expect the economy to grow higher. 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. 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. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. As shown in Figures 13, Public Expenditure and Financial Accountability (PEFA) assessments covering 85 low and middle income countries revealed that: more than two-thirds of these countries have relatively weak systems of expenditure control as indicated by a score of C or D on the PEFA expenditure control indicator PI-20 (Figure 1); weak expenditure controls are associated with higher levels of expenditure arrears as measured by PEFA indicator PI-4 (Figure 2); 2 and. Same as Francophone, but the official approving commitments and payments is usually the same (unlike separation of responsibility in Francophone countries). In some Latin American countries, e.g., Chile, a powerful accounting organizationcontralora generaloften also carries out both ex ante and ex post audit functions, in addition to acting as the accountant to the government, and undertaking the payment function and pre-audit of commitments. 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 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. Payment order is issued within the payment due date to discharge the recognized liability. No cash availability to make payments within the time horizon of apportionment. 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. PEFA PI-22; and average time lag between delivery and verification. In the absence of this coordination, spending ministries/agencies can potentially frontload their commitments even if adequate cash is not likely to be available for payment when the commitments materialize, or the treasury may not raise the necessary finance to meet cash requirements. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). 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. Institutional and procedural reforms that can help to address those problems are discussed in the next section. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). For example, a treasury-based centralized payment system with decentralized responsibility for appropriation and commitment controls at the line agency level can be progressively introduced as the FMIS is rolled out (subject to adequate connectivity between the line agencies and the treasury). 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. There is regular reporting and monitoring of overdue liabilities. Show question Question Show answer Answer A public sector spending on goods and services like education or healthcare. The authority for expenditure is given for a specific pre-defined purpose. If a liability has been incurred by the end of the fiscal year, this would be enough to report the expense or expenditure against the accrual appropriation. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. When the government uses fiscal policy to increase the amount of money available to the populace, this is called expansionary fiscal policy. Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office). 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. This should be supported by adequate monitoring at each stage of the expenditure cycle and ex post auditparticularly external audit to start withto ensure effective compliance. 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. 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. Any perceived risks and/or uncertainties should also be adequately addressed. Pension controls: The liability and associated expense for pensions and other retirement benefits should be recognized at the time the employee's services are rendered. Controls at the commitment, verification and payment order stages remained the responsibility of the line ministries/agencies, with variations, however, in the effectiveness with which such controls are exercised. 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. Apportionment. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. These valuations measure the full costs of paying pension benefits. The authority for expenditure is It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. Each request for apportionment or reapportionment should be accompanied by a financial or cash plan from the relevant ministry or spending agency supporting the request for ensuring that apportionment and cash management functions are well integrated.10. Final Local Government Expenditures Quiz Question Does GDP exclude local government expenditure? It forms aggregate demand in addition to household consumption, business investment, and net exports. Government expenditures as a share of national output went sharply up and down in these countries, mainly because of changes in defense spending and national incomes. Following confirmation that sufficient liquidity is available, a designated official approves the payment and issues a payment order. This technical note and manual (TNM) addresses the following issues: Key stages of the government expenditure chain; The roles and responsibilities of the key institutional actors in exercising those controls; Approaches to expenditure control in different PFM traditions; Diagnosing weaknesses in expenditure control systems; and. 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. Payment orders are issued after documentary proof of verification. Budget calendar revisedand, if necessary, legal framework amendedto ensure budget approval before the start of the fiscal year. The line ministries have substantial authority in executing the budget. 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. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. However, overall responsibility for budget execution is assigned to the respective line minister (or the head of an independent State body) who allocates budgeted resources to the various departments/agencies under his/her authority and delegates responsibility for budget execution up to the stage of the preparation of payment orders. 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. 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. 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