1. Budget Execution: Overview Bill Dorotinsky, PRMPS May 2001

2. Outline Why is budget execution important? What is budget execution? What are the objectives? Expenditure Management Cycle Core Functions Expenditure System Spending Controls Key features, tests of weakness

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

4. 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

5. 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

6. Planning system Medium term plans, e.g. three year rolling plans Annual budgets Development, recurrent and revenue Fund release procedure, e.g... warranting Accounting for revenue and expenditure Public expenditure review Information technology A core tool of integration Reports and financial statements Audit system Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event review Accountability Expenditure review Financial management system boundaries Source: Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997. Expenditure Management Cycle

7. 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

8. Core Functions - internal control - program management - spending (commitments) - recording & reporting - payment orders - verification of receipt of goods/services - program/cash plans Financial Management is Everyone’s Responsibility

9. Expenditure System External Audit Procurement, Personnel, Physical Asset, Contract, Performance Management Self-correcting system No scandals does not mean clean system

10. Budget and Policy Execution System in Hungary (1999)

11. Control Approaches

12. Controls Budget Control –Changes to budget (supplemental/virements) –In-year monitoring of budget implementation for policy/management Financial Control (commitment phase) –authorized person made commitment –activity authorized/legal –money appropriated for purpose (budget) –funds available (budget and cash) –proper accounting/coding Verification

13. Controls (2) Accounting Control –checks accuracy of financial controls –authorized person other than financial controller (above) verified –documentation correct, amounts correct –recipient identified Internal Audit Audit (ex poste)

14. Key Features of Good Systems Commitments are recorded, monitored, and controlled to budget Expenditures are verified One approved/official budget: standard Budget classification and accounting classification match Classification is in sufficient detail to identify sources of overspending (program, organization, economic classification) Regular, timely in-year reporting for management/policy purposes –Information used by management to manage

15. Key features (2) Budget estimates are conservative, and no spending allowed against unrealized revenues Accounting records regularly reconciled with bank accounts Annual accounts closed in timely fashion Contracts closed when complete. Formal system for supplemental budgets, virements –Closing accounts bill not used for ex poste supplemental budget Final audited accounts completed, public

16. Tests Approved over actual –Total, functional, administrative, program Arrears Internal audit –Error rate in accounting samples –Number of material weaknesses identified Correction rates within 1-year –Number of cases of fraud or abuse identified Number of cases where sanction imposed

17. Tests (2) External Audit –Same as internal Large unreconciled balances between accounting and accounts

18. Application: Brazil Table 2: PPA Execution, Year 2000 Average rates of budget execution (source: Planejamento and Senado Data) Non- strategic PPA programs PPA Strategic Programs Percent Empenhado/Atual (annual obligation rate) 82 %68 % Liquidado/Atual (actual annual obligations) 68 %49 % Liquidado/Empenhado (ratio of actual obligations to initial obligations) 79 %69 %

19. HIPC Application

20. Relative Need for Upgrading Classi- fication Projec- tion Internal Control Recon- ciliation ReportingFinal Audited Accounts Formulation Execution Reporting Comprehensiveness

21. Internal Control  About two-thirds of HIPCs do not currently have serious payment arrears problems.  Expenditure tracking surveys have been recently introduced in about 15 percent of HIPCs.  About one-third of HIPCs are reported to have active internal audit systems  but a closer look suggests that for most, internal audit capacity was partial at best, and often ineffective. Reconciliation  About 40 percent of the countries now undertake regular reconciliation between fiscal and monetary accounts. HIPC Execution Findings

22. Final Audited Accounts  More than 20 percent of HIPCs forward their annual accounts to external audit within six months of the end of the year  But only about 15 percent have audited accounts forwarded to the legislature within twelve months of the end of the fiscal year.  In some cases, the accounts are never closed and audited.  About one-third of the HIPCs close their books shortly after the end of the fiscal year. Reporting  Less than 20 percent of HIPCs provide in-year tracking reports within two weeks of the end-of-period, and two-thirds within two to four weeks.  About two-thirds of HIPCs surveyed provide a functional classification for the budget  but 40 percent do not currently provide in-year tracking on a functional basis. HIPC Findings (2)

23. Readings Required SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) OECD Recommended Managing Government Expenditure. Schiavo-Compo and Tommasi. Asian Development Bank. 1999 Ch. 6. Assuring Compliance in Budget Execution Ch. 7. Managing and Monitoring Budget Implementation Ch. 8. Cash Management and the Treasury Function Ch. 9. Management Controls, Audit, and Evaluation Ch. 10 Accounting Ch. 11. Reporting “Budget Execution and Cash Management.” Ch. 12 of Government Budgeting and Expenditure Controls, Theory and Practice. Premchand. IMF. 1993 Public Expenditure Management. IMF. 1993. Ch. 4 Compliance. Treasury Reference Model (Bank PE website) Setting-up a Treasury in Economies in Transition, IMF Working paper WP/95/16, Feb. 1995 Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997. (http://www.respondanet.com/english/publications)