INTRODUCTION TO PUBLIC FINANCE MANAGEMENT (PFM) Module 1.1 Definitions, objectives of PFM and its context

2.2 & 2.3 Planning and budgeting 3.1 The Budget Execution Cycle 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.2 Payroll, Procurement & IT 1.3 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Manageme nt 1.2 The Budget 5.3 Assessing & Recapitulati on 3.3 Internal Control & Audit 5.1 External Scrutiny & Oversight Module map

Why is PFM important? New EU Budget Support Guidelines 2012 Continued importance of budget support instrument Stronger link with fundamental values of the EU Greater differentiation of budget support operations, Strengthened eligibility criteria More rigorous assessment

Some definitions Implementing public policies The specific objectives of PFM The limits of technical approaches to PFM Module outline 4

What is PFM? Public Financial Management deals with management of public resources: the allocation and use of resources collected from the economy 3 basic elements of public finance: Public expenditure Revenues Government debt

OECD DAC 2009 Definition: “ It includes all components of a country’s budget process… including strategic planning, medium-term expenditure framework, annual budgeting and also revenue management, procurement, control, accounting, reporting, monitoring and evaluation, audit and oversight.“ The scope of this course 6

General government comprises all government units Central government State government, in federal countries Local government Social security funds are sometimes combined into a separate subsector Public sector also includes, corporations and quasi-corporations controlled by the government units What is the Government? 7

8 Source: Government Finance Statistics (GFS). IMF

Some definitions Implementing public policies The specific objectives of PFM The limits of technical approaches to PFM Module outline 9

Three objectives of PFM 10 Aggregate fiscal discipline Operational efficiency Allocative efficiency Outcomes/ Effectiveness Outputs/ Efficiency

PFM is only one of the instruments to implement public policies, but it is probably the more important As instrument, PFM has specific objectives to implement properly policies, which should not be confused with policy objectives “ Good Plans” “ Good hands” “ Money” “ Good tools” 11 Specific objectives of PFM

Aggregrate fiscal discipline Fiscal discipline refers to: maintaining a sustainable balance between revenues, expenditures and the level of public debts respecting the expenditures ceilings at all levels and by all actors of the Government administration

New York times

Allocative Efficiency Definition Allocate and spend public resources in such a way that that attainment of the government objectives is maximised Preconditions for optimising allocative efficiency: Clearly defined national objectives and priorities Existence of effective sector programmes Capacity and willingness to re-allocate if needed Information on programme outcomes

Definition Ability to make efficient and effective use of resources in the implementation of strategic priorities Key elements Use of liquidity (loans, cash management) Support to service delivery units Reduce leakage Key players Treasury, Line ministries, service delivery units Operational Efficiency 16

1/Aggregate fiscal discipline Ensuring macro-economic stability Control of totals 2/Allocation of resource in conformity with policy objectives Importance of political aspects Requires appropriate mechanisms for revealing policy choices and for policy dialogue 3/Efficient public service delivery and resource management Importance of management systems (e.g. HR management systems) 18 As defined in the recent budget literature -Cf. for example PEFA

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A societal dimension of PFM must be taken into account “Traditional” PFM values: regularity, compliance, etc. remain very important Role of Parliament in democratic society Accountability (Be Answerable and held responsible) Transparency Completing the 3 PFM objectives 20

Accountability The budget as key accountability instrument Plans expenditures and revenues Operationalizes the policies Voted by Parliament Scrutiny by parliament

The budget cycle 22

Accountability ‘versus’ PFM objectives? The challenges Constraints may be required for fiscal discipline but some degree of flexibility is required for performance The role of Parliament is crucial in democratic society.

Assessing the 3 PFM objectives? PEFA 24

Some definitions The specific objectives of PFM Implementing public policies The limits of technical approaches to PFM Module outline 25

PFM is an instrument to implement public policies; Public finance policies Tax policy Public expenditure policy Debt policy National and sector policies Poverty Reduction Strategy Sector plans, etc Public policies and PFM 26

Some definitions Implementing public policies The specific objectives of PFM The limits of technical approaches to PFM Module outline 27

PFM compliance was high in the 50s/60s. Performance dropped in late 70s/80s, when salaries plummeted. Gap between the fiction of formal systems and the reality of informal processes. The limits of technical approaches 28

Rakner,

Can PFM reform fight Corruption? NO but it helps in identifying where there are failings Strengthening PFM systems in an adequate manner will help in curbing administrative corruption However, fighting grand corruption, which involves powerful politicians is largely a political and societal matter The limits of technical approaches 30

Lessons learned? Modest; realistic expectations PFM in its political context PFM processes should be aimed at making informal rules visible Transparency is crucial Attention should be paid to external (to the executive) control The limits of technical approaches 31

PFM is an important instrument to implement government policies The main tasks of PFM are to ensure aggregate fiscal discipline, resource allocation in conformity with policy objectives and efficient public service delivery Budget management is a core component of PFM Political aspects of PFM must be taken into account and informalities must be made visible. Key messages 32

Completing the figure 33