PATHWAYS TO IMPROVING BUDGET IMPLEMENTATION

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PATHWAYS TO IMPROVING BUDGET IMPLEMENTATION

• ALLEN SCHICK

• BUDGET MANAGEMENT AND FINANCIAL ACCOUNTABILITY
  COURSE
• THE WORLD BANK
• MARCH 1, 2004

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BASIC FUNCTIONS OF BUDGETING

• FISCAL DISCIPLINE
• Assure that budget aggregates are sustainable
  over the medium-term and promote economic
  stability
• EFFECTIVE ALLOCATION
• Assure that public money is spent in accord with
  national priorities and on programs that are
  effective in achieving public objectives
• EFFICIENT PUBLIC SERVICE
• Assure that public services are delivered in an
  efficient, fair and courteous manner, and are
  accessible to citizens

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THE EVOLUTION OF BUDGTING STAGE 1

• Line Item Budgeting
• Detailed itemization of inputs
• Uniform classification of expenditures
• External control
• Pre-audit
• Detailed procedural rules and restrictions
• Performance measured in terms of compliance
• Advantages
• Controls public spending
• Safeguards public assets

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THE EVOLUTION OF BUDGETING STAGE 2

• Block Budgeting
• Expenditures consolidated into broad categories
• Shift from external control to internal control
• Shift from pre-audit to post-audit
• Audit of systems rather than transactions
• Some use of workload, output, activity measures
• What is not changed
• Budget is still input-based
• Budget power concentrated in central agencies
• Results measured in terms of compliance

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THE EVOLUTION OF BUDGETING STAGE 3

• Managerial Accountability
• Single budget for all operating costs
• Agencies have broad discretion in using funds
• May be permitted to carry over unused funds to
  next year
• Budgets are based on outputs/results
• Use of performance measures throughout the budget
  process
• Actual performance compared to targets
• Shift to accrual accounting and budgeting
• Agencies produce audited financial statements

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STAGES OF EXPENDITURE CONTROL
TYPE OF CONTROL EXERCISED BY WHAT IS CONTROLLED MODE OF ACCOUNTABILITY
EXTERNAL CONTROL Finance Ministry and other central agencies Specific inputs (individual items of expenditure, such as each position or purchase) Compliance with line budget, civil service rules and other rules
INTERNAL CONTROL Spending Departments Major expenditures items (total salaries, all equipment, or supplies, etc.) Audit of systems to assure that internal controls meet government standards
MANAGERIAL ACCOUNTABILITY Spending or responsibility unit Global operating budget running costs and outputs Reports and audits on outputs, costs, quality and other results
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ISSUES IN BUDGET IMPLEMENTAITON

• Budget implementation is not simply a matter of
  executing the approved budget. In every country,
  the implemented budget varies from the adopted
  one
• The variance between the adopted and implemented
  budget depends on the countrys fiscal
  conditions, stability and certainty in the
  countrys finances, the role of the finance
  ministry, and the type of budget system.
• A highly itemized budget may experience more
  variance than one which gives managers spending
  discretion.
• The trend in contemporary public management is to
  give spending units more flexibility in
  implementing their budgets.
• Might not be appropriate in countries with
  inadequate managerial controls.

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VARIANCE OF EXPENDITURES FROM BUDGET
VIREMENT The shift of funds within or between votes, as authorized by law.
IMPOUNDMENT The withholding of funds by the finance ministry of the spending department.
REPROGRAMMING The shift of money from one activity to another, usually within the same vote, account, or fund.
REBUDGETING Formal or informal revision to the budget by the government during the fiscal year, usually in response to a change in budget conditions or because the adopted budget was unrealistic.
OVEROBLIGATION Obligation of funds in excess of the amount authorized or available. In poor countries, over-obligation may be unreported until payment is made.
MISCALCULATION Systemic coding of expenditure to wrong account or activity.
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COMMON PROBLEMS IN IMPLEMENTING THE BUDGET IN
POOR COUNTRIES

• The approved budget is unrealistic, so actual
  spending must be less than authorized
• Extreme uncertainty concerning available
  resources, with quarterly or monthly allotments
• Extra-budgetary funds outside the budget process,
  hoarded by spending units
• Significant arrears that are not included in
  financial statements
• Significant discrepancy between actual and
  reported expenditure for certain activities
• Funds diverted to unauthorized purposes or
  private accounts
• Delayed publication of financial statements

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CASH EXPENDITURE VERSUS ACCRUED COST IN BUDGETING

• Advantages of Cash-Based Budgeting
• Easy to compute and understand, based on actual
  flows
• Necessary for efficient cash and debt management
• Facilitates legislative (and political) control
  of the budget
• Advantages of Cost-Based Budgeting
• Recognizes liabilities incurred that will be paid
  in the future
• Provides a more accurate statement of the
  governments financial condition
• Facilitates making managers responsible for
  resources used
• Facilitates measurement of the full cost of
  services

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GET THE BASICS RIGHT

• A realistic budget that is implemented with few
  significant derivations from plan
• Low level of corruption in public expenditure
• High transparency in public finance
• Public funds spent for authorized public purposes
• Reported expenditure corresponds to actual
  expenditure
• Reliable external and/or internal controls
• Spending units have reasonable certainty as to
  the funds that will be available
• A managerial culture that promotes compliance
  with formal rules

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GET THE STRATEGY RIGHT

• Basic reforms are likely to yield the greatest
  payoff in budgetary improvement
• Basic reforms are practices standardized in
  developed countries
• Best practices should be long-term objectives,
  not short-term priorities
• Getting the sequence right is essential for
  successful reform
• Good ideas often fail because of bad strategy
• Reform should build on existing institutions
  they should not seek to imitate other countries
• Political support is a precondition for effective
  reform
• Reform must be a continuous process, not a
  one-time fix

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GET THE SEQUENCE RIGHT

• Budget for inputs before aiming to budget for
  outputs
• Account for cash before accounting for accruals
• Operate a reliable accounting system before
  installing an integrated financial management
  system
• Establish external controls before introducing
  internal controls
• Have reliable internal controls before devolving
  managerial responsibility
• Maintain a high performance civil service before
  entrusting civil servants with broad discretion
• Make sure you know how public money is spent
  before letting managers spend money the way they
  want
• Budget for work to be done before budgeting for
  results to be achieved
• Have effective financial auditing before adopting
  performance auditing