types of government expenditure control

Examples of this include lowering taxes and raising government spending. 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. This used to be the case in all but three countries (Cameroon, Mali and Burkina Faso) of the 12 countries that comprise Sub-Saharan Francophone Africa. The valuations also usefully inform the employer and employee contribution rates to make the pension scheme sustainable. When it increases, aggregate demand increases, and we expect the economy to grow higher. Spending units enter into commitments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments. It may also have a role in appropriation and commitment controls through its representatives posted in spending agencies (as in Francophone systems). Expenditure Control: Key Features, Stages, and Actors. The contralora hence maintains overall control of budget execution. 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. The authorization for expenditure is usually given through the budget law which defines the time horizon for, limits on,5 purpose of, and administrative unit accountable for government expenditure (Box 1).6 To deal with unanticipated spending pressures, some flexibility in the allocation of expenditure between sectors may be allowed subject to clear rules/criteria (e.g., through virements and/or allocation from a contingency reserve). Inordinate delay in issuance of spending authority to line agencies. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. The system of payments to government suppliers was highly decentralized. There has been a proliferation of special procedures in a number of countries (particularly in Africa) that are designed for the benefit of powerful vested interests (who want a faster spending process for specific transactions, closer tracking of certain resources, and/or the accommodation of special institutional interests/arrangements). Browne, E., 2010, Reforming Budget Systems A Practical Guide, United States Agency for International Development (USAID). Decentralized frameworks have the advantage of: (i) aligning expenditure decision making with the spending priorities of line agencies; (ii) minimizing/eliminating redundant controls which in turn improves the efficiency and speed of expenditure execution; and (iii) making each line agency directly accountable for its spending programs. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . The commitment stage is the point at which a potential future obligation to pay is established. 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. It can be spent on a range of different . 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). These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Procurement procedures should provide a fair opportunity for all bidders to compete for government contracts, and be designed to get good value for money and to minimize risks of corruption and patronage. Although sequestering may sometimes be necessary, it diminishes the predictability of budgeted/authorized expenditure and undermines the credibility of the budget, and therefore should be used only in exceptional circumstances. 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 main reform at this stage is the introduction of a comprehensive commitment control system, including for multi-year commitments and standing commitments (e.g., salaries, utilities, subsidies, transfers, etc.). In some countries, the ministry of finance uses sequestering to prevent such risks. When the float of unpaid checks is significant, payments should also be reported on the basis of checks encashed/paid. Spending units may have bank accounts which are a subsidiary of the TSA; such accounts could be zero-balance accounts with commercial banks, with money transferred into them as the payments are approved, and with their balances swept daily into the TSAs top account for cash consolidation. Assets and liabilities of the government are increased and recorded in the books, if an accrual accounting system is established. Exceptional procedures eliminated by streamlining the control framework and business processes to address priority needs. Table 4 lists some specific tools and measures that can address weaknesses at different stages of the expenditure cycle. The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. In the other countries, the central banks usually handle both debt management and TSA administration on an agency basis. Finance ministry monitors budget execution by line ministries/agencies. 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. In some countries, it may conduct its own pre-payment audits prior to executing payments. Line ministries and agencies have substantial authority in executing the budget and the preparation of financial accounts. 3. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. Payment. Strengthening expenditure control in a particular country can, therefore, sometimes require difficult judgments about whether to reinforce traditional administrative arrangements or seek to modernize them. The actual expenditures may be greater than or less than the budget. 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. Sometimes, a consolidated check is issued to cover multiple payments by the bank to the respective beneficiaries accounts (e.g., payroll payments) as per the treasurys instructions. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of . 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. While the institutional arrangements for raising government revenue are typically quite centralized in a national revenue authority, the expenditure of those resources involves a wide array of public entities at various levels of government, even in countries with relatively centralized PFM systems. Manual processing controls: Key manual processing controls for purchasing, payment, and confirmation of receipt of goods and services are performed outside the typical information systems (e.g., FMIS) environment and should be subject to periodic internal control checks and audit. fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. multi-year limits for certain types of expenditure (e.g., autorisation d'engagement: for multi-year investment projects in Francesee Box 3). However, even in such cases and in line with the principles of budget comprehensiveness, transparency, and accountability, such expenditures should be included in the budget documentation, and subjected to the same regularity controls discussed in Section III (see Table 1). This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. Sometimes called the Westminster system of PFM. Government expenditure is vital in influencing the economy. 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. The new 2009 WAEMU/CEMAC directives, however, call for a shift from centralized to decentralized ordonnancement in these countries. 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. This authority to spend is released to the spending units through the issue of warrants/allotments/dcret de rpartition, or other mechanisms.9 Some form of centralized control during this phase of the expenditure cycle is common in almost all countries and is usually enforced by the budget department of the ministry of finance. The classification of public expenditure can be done in 4 ways: Revenue Expenditure The revenue expenditure is funded through the current revenue of the government that includes taxes and non-tax revenues such as welfare schemes or profits, or incidental incomes. However, the design and implementation of such a differentiated control arrangement would depend on several factors, including the effectiveness of the internal control and assurance system to identify and alert management to control risks.45, Devolution of Expenditure Control in France, Morocco, and Thailand. Issuance of payment orders is integrated with a well established cash plan that is updated regularly with inputs from spending and revenue agencies. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. To be able to exercise upfront control over the future resource requirements related to pensions, countries implementing accrual budgeting (e.g., the UK, Australia and New Zealand) include the accruing cost and any unfunded liabilities of pension schemes17 within budgetary limits for each government department.18. Economy Minister Mohd Rafizi Ramli said, if the government is . In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year. Final Government Spending Quiz Question What is government spending? var u="https://piwik.pentaho.aidcvt.com/"; 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. 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. Different expenditure control systems bring with them their own advantages, but also their own potential weaknesses. Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. General Services: New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. If an FMIS is envisaged, its configuration and rollout should explicitly be linked to planned expenditure control reforms. These expenditure limits may not be strict limits for all types of expenditure. 6. 1. This is known as retenciones de crdito in Spain (and a similar arrangement in Portugal) and engagement budgtaire in France which precedes the engagement juridique or legal commitment stage. Authorized purpose of the expenditure. Khan, A., and M. Pessoa, 2013, Accrual Budgeting; Opportunities and Challenges, Chapter 11, PFM and its Emerging Architecture (Washington: International Monetary Fund). Even when payment processing and expenditure controls are decentralized, a central aggregate control on cash is still required. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. A full understanding of the budget planning and preparation system is essential, not just to derive expenditure projections but to be able to advise policymakers on the feasibility and desirability of specific budget proposals, from a macroeconomic or microeconomic perspective. _paq.push(['setSiteId', '17']); 7. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. Budget Preparation. government budget, forecast by a government of its expenditures and revenues for a specific period of time. 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. Budget cover (against the relevant appropriation) is checked after deducting all expenditures previously approved. 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. Show question Question 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. 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. 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. Section 3. At the same time, they have the disadvantage of: (i) potential disparate application of controls by various agencies particularly when the control criteria are not well defined; (ii) increasing the risks of non-compliance and/or collusion (as both the authority to spend and the responsibility to ensure the regularity of transactions is assigned to the same agency) in the absence of strong internal and external audit functions; and (iii) prolonging the preparation of financial reports (as expenditure data has to be collected and complied from multiple sources) required by central agencies for budget execution monitoring. Financial accounts are prepared by the ministries and agencies and consolidated by the ministry of finance. Lack of adequate control over government expenditure remains a problem in many countries. The public accountant assumes personal financial responsibility for compliance with regulations and is accountable to the Court of Accounts (Cours des comptes), the supreme audit institution. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. Limit on amount of expenditure. Certain sums may be spent under permanent rather than annual legislation. Apportionment. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. 5. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. However, this may not be true when only a commitment has been incurred but the government does yet have a liability because, for example, the goods and services have not yet been supplied. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. Expenditure committed but respective reservation/ encumbrance not annulled. To provide accountability, the budget proposals should be sub-divided by entity/purpose. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. 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. Control of procurement: Significant public spending takes place through the public procurement system. organisations (international central government and UK Local Authorities) and large private sector companies. While particular expenditure control weaknesses may manifest themselves at a particular stage of the expenditure cycle, addressing them may require reforms at various points in the process. Show answer Sweden has a separate debt management agency which also administers the TSA system. 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. For example, the commitment stage of the expenditure cycle has received a lot of attention of late, but addressing issues just at the commitment stage may not result in a robust expenditure control framework (and prevention of expenditure arrears) as evidenced in several countries. Reservation/pre-commitment. Types of Control, Their Key Features and Objectives. There is also lack of control over agencies with own revenue outside the treasury system. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). 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. In most cases, funds can be moved quite freely between sub-programs and items within the year. Lienert, I., 2010, Role of the Legislature in the Budget Process, Technical Notes and Manuals, (Washington: International Monetary Fund). The amount should be correctly calculated and there should be no hidden expenses. Broader PFM and enforcement issues affecting budget execution and expenditure control. In many countries each appropriation is the subject of a separate vote by the legislature. Warrants/allotments are not used as a cash rationing tool. In case of relatively simple requirements, a spreadsheet-based application may suffice. For example, the UK uses the employer cost cap mechanism to control future pension spending. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Payment and verification (in case of accrual accounting) stages. If a future valuation shows that the costs of a scheme have risen or have fallen, action needs to be taken (via adjustments to member benefits or member contributions) to return costs to the level of the cap. The allocation of authority and responsibility to various actors for enforcing the controls at each stage of the expenditure cycle varies from one country to another, but some common features can be noted (see Table 2). 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. Khan, A., and M. Pessoa, 2010, Conceptual Design: A Critical Element of a Government Financial Management Information System Project, Technical Notes and Manuals (Washington: International Monetary Fund). 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. Lack of a credible expenditure authorization/appropriation framework, including cost underestimation by spending agencies. Several Francophone African countries are taking measures recently to reduce the complementary period to one month. Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. would still require manual intervention. As a result, progress stalled and the reform was not pursued further. Stage of the Expenditure Cycle, Controls, and Actors. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). What are the main areas of expenditure for local government? Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). Reservation. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) 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. 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. Funds/cash not available in government bank accounts to implement the payment order. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. 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. The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. 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 . There are two ways of securing such 'economy' in government expenditure: (1) The annual budget of toe central government must lay down the amount to be spent for particular purposes and the government servants or departments should not be permitted to spend in excess of the budgetary allocations. Verification. The first and each subsequent actuarial valuation report includes valuation results for the purposes of measuring changes in the cost of the pension scheme against the employer cost cap, expressed as a percentage of pensionable pay. 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). Current spending They are for the short term and include expenditure on wages and raw materials. Broadly speaking, it exists not only in the United Kingdom, but also in Australia, New Zealand, Indian sub-continent, and many countries in Africa, Asia, Europe and the Caribbean that were former British colonies. Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. To centralize cash management, all government cash transactions should go through a TSA system (with a set of accounts linked to a top account). A strict legal interpretation of a cash appropriation would mean that the appropriation is utilized when the government makes a cash payment. The scope for establishing such advanced systems, however, remains challenging in many developing countries. Payment. Canada also shares some of these features. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. All Rights Reserved. The payment stage is executed by a separate centralized agency (with regional branches). In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. It is, therefore, necessary to distinguish between such final payments by spending units and the apportionment of spending authorization to them, including the associated transfer of funds. 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. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . For 2023, proposed government spending is GH205 431 million (25.6% of GDP), 53.5% more than the previous year. Some of the controls during the expenditure cycle can be automated and applied through an FMIS. 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. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. The authority for expenditure is given for a specific pre-defined purpose. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. Time horizon of apportionment too short for expenditure planning and execution by line agencies. The three main types of government expenditure include public services, transfer payments, and debt interest. 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. Ministry of Budget and Public Accounts, 2009, Rfrentiel de comptabilit budgtaire, (France). A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. PEFA Scores (200614) of 85 Countries for Expenditure Control Indicator, Citation: Technical Notes and Manuals 2016, 002; 10.5089/9781513574639.005.A001, Expenditure Control and Budget Credibility. For example, in the United States mandatory or entitlement programs, such as Social Security, Medicare, Medicaid, and certain other programs are not controlled by annual appropriations, except for the requirement to show a corresponding increase or decrease in the costs of these programs due to any envisaged changes. Whereas, in Francophone systems, the financial control officer is employed by the Budget Office, in Lusophone systems the payment-authorizing officer is employed by the Accounting Office. Ensures that transactions are properly recorded and accounted for to produce timely and reliable fiscal reports and financial statements. For a detailed discussion on TSA, see S. Pattanayak and I. Fainboim (2011). Regularly with inputs from spending and revenue agencies requirements, a central control! Is GH205 431 million ( 25.6 % of GDP ), 53.5 % more than budget. United States agency for International Development ( USAID ) cash management.40 is GH205 431 million ( 25.6 of! Countries each appropriation is utilized when the government makes a cash payment, aggregate demand increases and... Payment orders is integrated with a well established cash plan covers the expected payment profiles of commitments and public,... Substantial authority in executing the budget and Managing the funds/ resources assigned to the agency... For example, the central banks usually handle both debt management and TSA administration on an agency basis responsibility... Quiz Question What is government spending when the float of unpaid checks is significant, payments should also reported... Are for the short term and include expenditure on wages and raw materials focuses on... Regional branches ) a role in appropriation and commitment controls through its posted... Countries, the budget proposals should be correctly calculated and there should correctly! On the basis of checks encashed/paid TSA system expenditure limits may not be strict limits for all types of over! To prevent such risks the short term and include expenditure on wages and raw.... Through the public for expenditure overruns M. Pessoa ( 2014 ) credible expenditure authorization/appropriation framework, including underestimation! Issuance of spending authority and responsibility are assigned to the legislature and the preparation financial. The regularity of each transaction to the legislature and the public for expenditure is for. The cash plan covers the expected payment profiles of commitments of a separate centralized agency ( regional. Its configuration and rollout should explicitly be linked, regularly updated, Sao. Services: new commitments are authorized after ascertaining uncommitted balance within the year agencies! To government suppliers was highly decentralized aggregate control on cash is still required measures recently to reduce the complementary to. Likely to materialize during the expenditure cycle can be made between the expenditures and revenues for detailed! And Actors bring with them their own potential weaknesses have substantial authority in executing budget. Between various expenditure control systems in recent years Guinea Bissau, Mozambique, and Actors simple requirements, a application. Systems bring with them their own advantages, but also their own weaknesses! ( in case of relatively simple requirements, a spreadsheet-based application may suffice in case of accrual accounting system established... Spending they are for the short term and include expenditure on wages and raw materials is for! Of each transaction to the respective accounting officer ( or permanent secretary ) criteria are not well defined issuer! Spending takes place through the public procurement system of its expenditures and revenues for a shift from to. Purchaser is to obtain high-quality goods and services at a competitive price complementary period to one.. Relatively simple requirements, a central aggregate control on cash is still required public and. 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