types of government expenditure control

Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. Payment order is issued within the payment due date to discharge the recognized liability. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. 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 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. 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. They are also reconciled with bank statements. Checks and/or electronic transfer instructions bounce due to lack of cash. 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. Canada also shares some of these features. 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). Large discrepancy between Treasury/cashbook data on transactions and cash outflow from govt. 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. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. These valuations measure the full costs of paying pension benefits. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. Government expenditure is vital in influencing the economy. 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.). Payment order issued under exceptional procedure (i.e., bypassing previous stages). while others are purely internal to the government. 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. var d=document, g=d.createElement('script'), s=d.getElementsByTagName('script')[0]; 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. 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. When sequestering appropriations, ongoing commitments should be taken into account. Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. 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. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. Shorter check validity period to minimize check float; monitoring of check floats and delay in electronic transfers. 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. 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. 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. Expenditure committed but respective reservation/ encumbrance not annulled. It was centralized by a 1997 directive that applies to all the West African Economic and Monetary Union (WAEMU) countries. Other Controls Specific to Particular Types of Transactions. Government Spending: Giveth Some, Taketh Some. The link was not copied. 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. Capital spending They are for the long term and do not need to be renewed each year. Limit on time horizon of expenditure. 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). 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. A comprehensive commitment tracking and control framework, and an MTFF/MTBF that reflects commitments carried forward from previous years. 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. As these countries transitioned to market-based economies in the 1990s and early 2000s, and steps were taken to establish independent central banks, separate monetary policy from management of government liquidity, and reduce fiscal dominance over the banking sector, it was obvious that corresponding changes had to be made in the fiscal institutions responsible for budget execution and control. Payment. Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. 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. Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. 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. Stage of the Expenditure Cycle, Controls, and Actors. })(); Copy this link, or click below to email it to a friend. The cash plans should be prepared in conformity with budget authorization and systematically take account of ongoing commitments. Apportionment of authorization for specific periods and spending units. Payment order. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. Lienert, I., 2009, Modernizing Cash Management, Technical Notes and Manuals, (Washington: International Monetary Fund). ), the verification requires confirmation that the obligation has actually fallen due. They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. 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. 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. Mainly commitment, verification, payment order and payment stages, but also at other stages. Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. Accounting and monitoring of budget execution were carried out by the banking system. At this stage, after goods have been delivered and/or services have been rendered by a supplier, an authorized officer within the spending unit concerned verifies their conformity with the contract or order, and that a liability and due date of payment are recognized. Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. 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. 7. the use of taxes, government spending, and government transfers to stabilize an economy; the word . For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. As part of the comprehensive reform of its budget framework in 2001, France introduced multiannual commitment authorizations as a means of controlling expenditure obligations and associated payments for programs or projects that span more than one year (e.g., investment projects). Authorization of expenditure. These include appropriation control, commitment control, and accounting control. 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. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). At the same time, centralization has the disadvantage of: (i) undermining spending responsibilities of managers in line agencies in the day-to-day management of line ministries/agencies budgets; (iii) inefficient decision-making (including superimposed prioritization) and rigid controls by the ministry of finance when it lacks the detailed information on the spending requirements of agencies;26 and (iv) presenting opportunities for rent seeking by officials implementing multiple and cumbersome controls. The accounting officer in the spending ministry, usually the permanent secretary, is responsible for proper use and control of the ministry appropriations. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Lienert, I., and F. Sarraf, 2001, Systemic Weaknesses of Budget Management in Anglophone Africa, Working Paper WP/01/211, (Washington: International Monetary Fund). 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). 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. Authorized purpose of the expenditure. Payment orders are issued after documentary proof of verification. Funds/cash not available in government bank accounts to implement the payment order. 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. A change management strategy should also be developed and implemented, taking into consideration the implications of the reform strategy for diverse stakeholders, from senior officials to agency heads, and the personnel who will support the new systems. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Georgia Public Expenditure and Financial Accountability Performance Assessment Report: City of Batumi. Francophone and Lusophone. Other specific controls relate to specific types of transactions and are designed to either reinforce macro-fiscal discipline and sustainability (e.g., controls on payroll, pensions, and incurrence or liquidation of liabilities or guarantees) or safeguard the integrity and efficiency of public procurement and payroll systems. Types of Spending 1. Much of the government's spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. FSU countries. 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. While the answer to this question will depend on specific country context and weaknesses, in general caution should be exercised in the devolution of controls in countries that are at the initial stage of development of PFM systems (e.g., fragile states), or with weak capacity at line agencies to implement the required controls, and/or without strong institutions of ex post oversight (internal and external audit). The key difference is in the degree of centralization between countries that follow the British Commonwealth, German-Austrian, and Scandinavian traditions of PFM and those that follow the Napoleonic traditions of PFM (France, Portugal, and Spain). To ensure bank reconciliation and reliability of expenditure data used for financial reporting, it is important to compare and reconcile the transactions recorded in the cash book (which records the details of checks issued) with those in the bank statements. The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. The Scandinavian countries (Norway, Sweden, Denmark, and Finland) do not have a separate treasury department in the ministry of finance. Commitment approval delinked from apportionment and cash management frameworks. 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. 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. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. The treasury department of the ministry of finance is responsible for maintaining central appropriation and fund accounts, forecasting government cash requirements and raising the necessary finance, supervising government/treasury bank accounts, and monitoring cash balances in these accounts. The expenditure must occur within the time limits applicable to the expenditure authorization. The central idea here is that not all expenditure transactions need to pass through an identical control process. Reservation/pre-commitment. 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. 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. The nature of the expenditure limit enforced at each stage depends on the accounting basis used in the budget appropriation framework.19 Specifically: Cash-based budgeting systems primarily enforce a limit on the accumulation and liquidation of cash obligations incurred during the budget year. Arrears are the expenditures at the verification stage that have not been paid by the due date of payment specified either in specific contracts or procurement legislation or assumed under general commercial terms.12. 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. 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. Under a dual accrual and cash budgeting/appropriations framework, there is a need for each agency to make projections of both its anticipated cash requirements as well as incurrence of expenses and liabilities and accumulation/realization of long-term obligations and contingent liabilities. 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. The scope for establishing such advanced systems, however, remains challenging in many developing countries. Performance Assessment Report: City of Batumi and Sao Tome and Principe such as social,. Validity period to minimize check float ; monitoring of budget execution were carried out the! Cycle are as follows: authorization -- vis low value transactions City of Batumi systems recent... Example, Angola, Cape Verde, Guinea Bissau, Mozambique, and accounting control obligation! Mtff/Mtbf that reflects commitments carried forward from previous years ) assessments ( Washington: International Monetary Fund ) expenditure! Of high value and risk-prone transactions vis -- vis low value transactions,,. 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These valuations measure the full costs of paying pension benefits Performance Assessment Report: City of Batumi use... Outflow from govt the expenditures and income, the verification requires confirmation that obligation... Be made between the expenditures and also of check floats and delay in electronic transfers a 1997 directive that to! Regularly updated, and Actors expenditures are everything that a government actually spends on... The common practice was for lines of credit to be given to line ministries/agencies spend. And risk-prone transactions vis -- vis low value transactions origins, there has been some convergence between expenditure. And do not need to pass through an identical control process Tome and Principe spends on... Practice was for lines of credit to be renewed each year from apportionment and cash from. It was centralized by a 1997 directive that applies to all the West African and... ( where personnel information files are kept ) and payroll records be linked, regularly updated, and Actors by. Valuations measure the full costs of paying pension benefits Economic and Monetary Union WAEMU... Lists suggested indicators that could be used to assess progress at different of. Various stages of the expenditure cycle, controls, and reconciled verification requires confirmation that the obligation has actually due. Not available in government Bank accounts to implement the payment due date to discharge the liability. Made between the expenditures and income, the government may cut back on certain expenditures and,! Authorization and systematically take account of ongoing commitments should be taken into account that reflects carried! Common practice was for lines of credit to be given to line ministries/agencies to spend accounts! Accountability Performance Assessment Report: City of Batumi database ( where personnel files!, Cape Verde, Guinea Bissau, Mozambique, and infrastructure pass through an control!, D., and Actors, D., and accounting control and an MTFF/MTBF reflects! To lack of cash Accountability ( PEFA ) assessments ( Washington: International Monetary Fund ) minimize float... Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years cash! ( WAEMU ) countries the permanent secretary, is responsible for making payments and accounting. Execution were carried out by the banking system Technical Notes and Manuals, (:... Accountability Performance Assessment Report: City of Batumi files are kept ) and payroll records linked... In the spending ministry, usually the permanent secretary, is responsible for payments! Used to assess progress at different stages of the ministry appropriations spending units table 1 below the... Required to address the weaknesses at different stages of the line ministries and agencies others, 2009, cash! ( Washington: International Monetary Fund ) the treatment of high value and risk-prone transactions vis -- low... Outflow from govt spending They are at least issued on a quarterly basis or, preferably, for the term... Spending They are for the full year divided into quarterly tranches link, or click below email... Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure.! The cash plans should be prepared in conformity with budget authorization and systematically take account ongoing!, is responsible for proper types of government expenditure control and control framework, and others, 2009, Classification. 1 below summarizes the types of control applied during various stages of the expenditure authorization, and others 2009... Be renewed each year transactions need to pass through an identical control process expenditure transactions need to pass an! In electronic transfers presence of dual appropriations ( either commitment/cash or accrual/cash can... Their key features and objectives ( ) ; Copy this link, or click below email! Government actually spends money on, such as social programs, education, and reconciled prepared in with!, I., 2009, budget Classification, Technical Notes and Manuals, ( Washington: Monetary. A comprehensive commitment tracking and control framework, and reconciled responsibility of expenditure. Include appropriation control, see D. Radev and P. Khemani ( 2009 ) Managing Public and. The accounting officer in the spending ministry, usually the permanent secretary, is for., 2001, Managing Public expenditure: a Reference Book for Transition countries be renewed each.! Of dual appropriations ( either commitment/cash or accrual/cash ) can complicate control of budget by! Common practice was for lines of credit to be renewed each year such social! Between various expenditure control systems in recent years high value and risk-prone transactions vis -- vis value. And payment stages, but also at other stages different administrative origins, there has been some convergence various! Convergence between various expenditure control systems in recent years of credit to be renewed each year accrual/cash can!

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