INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 2.3: Budget Execution

Module outline Expenditure cycle: from allotment to payment Getting the Basics Right Budgetary Control Budget Reporting

Expenditure cycle Budget Execution Process Authority released by Treasury to line ministries etc Line ministries commit funds through payroll, order or contract Payments are made for the goods & services provided Transactions recorded in the accounting system Budget reports and financial statements prepared Budget Execution Process

Expenditure cycle Issues in budget implementation: Budget implementation is not simply a matter of executing the approved budget – outturns will always show some variance the original budget due to various factors … in all countries. The trend is to give spending units more flexibility (discretion) in implementing their budgets. Budgetary flexibility might not be appropriate in countries with inadequate managerial controls.

Expenditure cycle Common budgetary problems: Approved budget is unrealistic. Extreme uncertainty concerning available resources, with quarterly or monthly allotments. Extra-budgetary funds outside the budget process hoarded by spending units. Significant payment arrears not included in financial statements and approved budgets. Funds diverted to unauthorized purposes.

Module outline Expenditure cycle: from allotment to payment Getting the Basics Right Budgetary Control Budget Reporting

Getting the basics right Functions aimed at ensuring the credibility of the budget and aggregate fiscal discipline can be included in the set of basic PFM functions: functions required to ensure financial compliance; other functions that contribute to the credibility of the budget, together with financial compliance functions. Jack Diamond 2013

Getting the basics right Financial compliance adequate control system; clear and transparent financial regulations. Control of expenditures and revenues controls performed by the ministry of finance, and other central agencies; controls performed within the spending units. Jack Diamond 2013

Getting the basics right A credible annual budget is implemented with few significant deviations. High transparency. Public funds spent for authorized purposes only. Spending units have reasonable certainty on the funds to be made available.

Module outline Expenditure cycle: from allotment to payment Getting the Basics Right Budgetary Control Budget Reporting

Budgetary control Principles of budgetary control: Each area of the budget has one, and only one, budget holder. All budget managers are clear on the income and costs they are responsible for and the size of their budget. Budget managers are able to control the level of expenditure or income from their budgets. Financial responsibility matches the reality of management control. Budgets are shown gross (not net of receipts).

Budgetary control

Budgetary control Budget modifications In-year budgetary adjustments: Transfer of resources – across sub-codes by line manager / ministry Virements – between departments by Ministry of Finance / Treasury Supplementary budgets by Parliament

Budgetary control Supplementary budgets Budget revisions should be submitted to Parliament for approval. Good practice: the mid-term budget review may include in year (t): budget execution report for the first months of year (t); supplementary estimates for year (t) budget; budget policy paper for year (t+1), and indicative spending for the following two years.

Budgetary control Commitment control Ensures budget units only spend what appropriated by Parliament & released by Treasury. Reduces payment voucher arrears. Improves effectiveness. Increases the confidence in vendors that they will get paid. Reduces the opportunity for rent seeking by payment offices.

Budgetary control The vote book 123 6545 stationary annual appropriation-€1000 date payee description order paid balance 15 May 2010 ABC ltd paper €240 €760 1 June 2010 5 June 2010 XYZ ltd printer paper €260 €500 12 July 2010

Module outline Expenditure cycle: from allotment to payment Getting the Basics Right Budgetary Control Budget Reporting

Budgetary reporting Monthly Expenditure Returns Reflect the structure of the budget. Show funds received, committed funds, expenditures and transfers, opening and closing balance of bank accounts; For example, submitted by the line ministry to the Ministry of Finance: Treasury for reporting & the Budget Department for the budget release process. Non submitted Monthly Expenditure returns may result in suspension of further budget releases.

Budgetary reporting Quarterly budget reports Details of receipts and payments by each ministry. Compared with the performance of the previous year and relevant budget. Reported to politicians (cabinet and/or parliamentary finance committee) and public. Review the need for supplementary budget.

Key messages Budget execution systems should ensure compliance with legislature’s authorisations. Virement rules should provide managers with a certain degree of flexibility, but within the government’s policy framework. Uses of appropriations should be regularly monitored. The budgetary horizon (when payments and receipts are predictable) will vary over time and between countries.