Public Expenditure and Financial Management Overview of Issues and Approaches

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Public Expenditure and Financial
ManagementOverview of Issues and Approaches

• Bill Dorotinsky,
• PREM public sector
• governance group

PEAM Course May 2, 2006
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Outline

• Framework for Review
• Approaches to PEM review
• Budget Cycle
• Formulation
• Execution
• PFM System
• PFM Functions
• Outcomes/Impact
• Common Problems
• Common Solutions
• Measuring PFM Systems

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Three Objectives of Public Expenditure Management
Systems
Framework

• Macrofiscal discipline and stability
• Support economic growth and stability (and reduce
  poverty)
• Avoid public finance crises
• Strategic allocation of resources
• Match government policy with programs, objectives
• And assure social safety nets, and promote growth
• Technical efficiency
• Getting the most from each zloty spent
• And just delivering core services

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Basic principles of PEM
Framework

• Comprehensiveness
• include all revenue and expenditure, all agencies
• Accuracy
• record actual transactions and flows
•  Annuality
• cover a defined period of time (e.g. one year
  budget, multi-year forecasts)
• Authoritativeness
• only spend as authorized by law
• Transparency
• information on spending is public, timely,
  understandable

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What institutions to review?

• Formal and Informal Rules
• Laws and regulations
• Constitutions , fiscal, budget, procurement,
  civil service, special funds, sector laws, public
  enterprises, mandatory spending
• Process
• Policy
• Planning
• Financial/resource management
• Organizations and their roles
• Information

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Approaches to PEM Review

• Cycle, Process
• System
• broad scope
• organizations
• Functions/tasks
• Outcomes/Impact

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Expenditure Management Cycle
Source Adapted from Integrated Financial
Management. Michael Parry, International
Management Consultants Limited. Training Workshop
on Government Budgeting in Developing Countries.
THE UNITED NATIONS. December 1997.
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Budget Formulation

• Issues are typically about
• Process
• Quality of Engagement

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Process Issues

• Due process
• Fair hearing for proposals, requests within
  government
• Coherence
• Budget process is planning process
• Planning within resource constraints
• Indicative ceilings for budget offered early in
  the process
• hard budget constraint
• Changing incentives
• Comprehensiveness
• Capital, all revenues and expenses
• Civil society participation
• decentralized impact analysis
• Legislative stage
• In executive via white papers

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Process (continued)

• Proper decision sequence for coherent process
• Macrofiscal, revenues, expenditures
• Sectoral
• Administrative/program/project
• Accountability Link resources with management
  responsibility
• Schedule
• Budget calendar issued
• Sufficient time for sound proposals
• Ministries
• Budget office analysis
• Legislative review
• Two stage process

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Quality Issues (improving process outcome)

• Multi-year perspective
• Setting multi-year policy objectives
• Conservative economic, revenue forecast
• Likely versus hoped for
• Benchmarked against non-governmental forecasts
• Realistic expenditure forecast
• Provision for recurring unanticipated events
• Contingency reserves with clear rules for use
• Indicative ceilings linked to second-year of
  prior budget forecast (policy)
• Requests reconciled to prior year actuals,
  current year estimates
• Two aggregate forecasts (advanced)
• Proposed policy
• Current services/policy
• Capital and recurrent

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Quality (continued)

• Budget ownership
• Early, frequent engagement of policy officials on
  structured decisions
• Fiscal policy paper to kick-off process
• Distinguish policy from recurrent revenue
• Proposed revenue sources versus historical trends
• No spending allowed against proposed unless they
  materialize (grants, tax revenue)
• Communication
• Clear signals of direction, markets and agencies
• Prepare public for change sustainable
  adjustment

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Quality (continued)

• Budget Information
• Prior year actual, current year estimate, budget
  year 2, Staffing, Outputs
• Classification economic, administrative,
  functional, program
• Requests distinguish between on-going, new
  spending mandatory, discretionary
• Decision papers
• Basis for Minister of Finance, Govt decision
• Pulls together academic, audit, performance,
  evaluation of prior years financial performance,
  other information

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Why is budget execution important?
Credibility of the Honduran Budget In-year
Deviations by Agency (percent of the executed
over the approved budget)
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What is budget execution?

• Processes and institutions to implement the
  budget
• Incentives principle-agent problem
• Reflects that budget is NOT only an accounting
  document
• also a political document
• Planning/steering device

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Objectives of budget execution

• Manage Spending and Revenues to budget
• support choices of elected officials
• allow budget to be planning and steering tool
• promote macrofiscal discipline
• Reduce opportunities for corruption
• Enable program implementation
• Assure resources flow to programs
• allow budget to be aid to operational efficiency
  through spending unit advance planning, efficient
  administration
• enable program managers to achieve objective

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General Phases of Execution

• Phase 1 Allocation
• Phase 2 Ministry Spending Plans
• link actions with finances cash flow needs
• Phase 3 Commitments
• Phase 4 Verification
• Phase 5 Liquidation of Financial Obligation

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Phases of Execution
Source Integrated Financial Management. Michael
Parry, International Management Consultants
Limited. Training Workshop on Government
Budgeting in Developing Countries. THE UNITED
NATIONS. December 1997.
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Budget and Policy Execution System in Hungary
(1999)
System
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Public Finance Functions
Core Functions
Budget Execution
Macroeconomic Forecasting
Budget Formulation
Fiscal Policy
Revenue Administration
Treasury
Debt Management
Procurement Policy
Internal Audit
Non-core Functions
Lottery Gambling
Financial Asset Management
Financial Market Regulation
Financial Investigations
Procurement Administration
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Core Tasks and Organizations

• - Macroforecasting
• Fiscal Policy
• Revenue administration
• Debt Management

Financial Management is Everyones Responsibility
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Common PEM problems

• Weak links between planning, policy, resource
  limits, and budgets
• failure to achieve strategic objectives
• abstract planning, unrelated to ways and means
• Annual focus leads to suboptimal choices
• Digging a hole inability to climb out
• Complacency today, unaware of crisis tomorrow
• Separation between capital and recurrent budgets
• Lower than expected returns to capital
• Non-comprehensive budget
• Using other means to support favored programs
• Revenues not captured in budget
• Taking piecemeal decisions without reference to
  over-all effect
• Funds dont reach intended beneficiaries
• Budget executed differently than approved
• Goods and services not delivered as planned

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Common Reforms

• MTEF
• Treasury
• IFMIS
• Performance Budgeting
• Fragmentation
• Procurement, Debt
• New Public Management
• Deconcentration, decentralization
• Administrative Civil Service

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Measuring PFM Systems

• Field of PFM has evolved recently, moving towards
  more assessment standardization
• New set of PFM indicators to monitor quality of
  PFM system at high-level
• See www.pefa.org
• Recommended with approach to working with
  countries
• Country-led reform agenda
• Donor coordination around agenda
• Shared information pool common PEFA framework

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PFM PEFA Indicators

• Transparency of taxpayer obligations and
  liabilities
• Effectiveness of taxpayer registration and
  assessment
• Effectiveness of tax collection
• Predictability of funds for commitment
• Recording/management of cash, debt and guarantees
• Effectiveness of payroll controls
• Competition, value for money and controls in
  procurement
• Effectiveness of internal controls
• Effectiveness of internal audit

• Orderliness in annual budget process
• Multi-year perspective

• Accounts reconciliation
• Resources received by service delivery units
• Quality and timeliness of in-year budget reports
• Quality and timeliness of annual financial
  statements

• External audit
• Legislative scrutiny of budget
• Legislative scrutiny of external audit reports

Cross-cutting Indicators

• Aggregate expenditure out-turn
• Composition of expenditure out-turn
• Aggregate revenue out-turn
• payment arrears
• Classification of the budget

• Comprehensiveness of information
• unreported government operations
• Transparency of inter-governmental fiscal
  relations
• Oversight of aggregate fiscal risk
• Public access to key fiscal information

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General References

• SIGMA Policy Brief No. 1 Anatomy of the
  Expenditure Budget (1997) OECD
• Managing Government Expenditure. Schiavo-Compo
  and Tommasi. Asian Development Bank. 1999
• Government Budgeting and Expenditure Controls,
  Theory and Practice. Premchand. IMF. 1993
• Public Expenditure Management. IMF. 1993.
• Treasury Reference Model (Bank PE website)
• A Contemporary Approach to Public Expenditure
  Management. Schick, Allen. World Bank Institute.
  1999.
• Public Expenditure Handbook. World Bank, 1998.
• Managing Public Expenditure A Reference Book for
  Transition Countries. Richard Allen and Daniel
  Tommasi, Eds. OECD. Paris, 2001.
• Public Financial Management Performance
  Measurement Framework. PEFA. Washington, D.C.
  June 2005.
• See www.pefa.org for PEFA Performance Measurement
  Framework

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Application Rules and Incentives

• Budget Impasse
• Executive-legislative relations
• What rules might govern a budget impasse?
• How might they effect incentives between the
  legislature and executive?
• What might be important considerations for
  designing a rule?

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Rules and Outcomes
Application
Source World Bank OECD budget procedures
database at http//ocde/dyndns.org/
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Informal Rules
Application
Dominican Republic Budget Deviation, 1996-2000
Identifying sources of weakness for further
investigation Identifying incentives at work
Source Dominican Republic PER 2003, background
data
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Dominican Republic
Application
Budget Deviation (ratio of executed to approved
budget)
Identifying trends for transparency
Source Dominican Republic PER 2003, background
data
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Exploringproblems
Above-the-waterline observation
100 clinics, but only 70 operating
WHY?
Budget not comprehensive
Budget fragmented
Cash triage
10 built with donor funds, donor funds
off-budget
10 built with domestic funds, capital budget
separate
10 funded in budget, but no cash allocated to
operate
WHY?
Weak budget law
Too rigid budget execution
Low public pay
WHY?
Donor ring-fencing for accountability
Line ministry gets flexible resource pool
Local staff seek higher PIU pay
And what can be done about it?