Budget Execution:Overview

Bill Dorotinsky, PRMPS

May 2001

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

Why is budget execution important?

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50.0

100.0

150.0

200.0

250.0

300.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Credibility of the Honduran Budget – In-year Deviations by Agency (percent of the executed over the approved budget)

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

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

Planningsystem

Medium termplans, e.g. three

year rolling plans

Annual budgetsDevelopment,recurrent and

revenue

Fund releaseprocedure, e.g...

warranting

Accounting forrevenue andexpenditure

Public expenditurereview

Information technologyA core tool of integration

Reports andfinancial statements

Audit system

Project monitoring

Projectappraisal

Resourceallocation

Liquidity

managem

ent

Expen

ditur

e

contr

ol

Monitoring

& controlling

Post eventreview

Accountability

Expenditurereview

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

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

Core Functions

Ministry of Finance

Treasury

SpendingMinistry

Spending Unit

- Budget Allocations- Supplemental Budgets- Virements- In-year monitoring and correction

- Warrants (cash allocations)- Cash Flow Management (forecasting, planning, sequestration)- debt management- financial asset management- accounting (policy, system management, chart of accounts)- make payments- collect revenues- account management and reconciliation- Central Bank relations

- 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

Expenditure System

Ministry of Finance

Treasury

SpendingMinistry

Spending Unit

Internal Audit

External Audit

Procurement, Personnel, Physical Asset, Contract, Performance Management

Self-correcting system

No scandalsdoes not mean clean system

Budget and Policy Execution System in Hungary (1999)

Control Approaches Ex Ante

(to commitment) Ex Poste

External (to spending unit)

Centralized commitment control (transaction approval)

Allocations (commitment limits) Warrants (cash limits) Procurement rules Personnel/pay rules

Central internal audit, external audit

Regular reporting Quarterly close-outs

Internal Ministry or spending unit transaction approval

Procedures to minimize risk (internal controls)

Ministry internal audit Performance

Management

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

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)

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

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

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

Tests (2)

• External Audit– Same as internal

• Large unreconciled balances between accounting and accounts

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 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 %

 

Benchmark Description

Comprehensiveness

1. Composition of the budget entity "Close-fit or better" to GFS definition of general government

2. Limitations to use of off-budget transactions Extra (or off) budget expenditure is not substantial

3. Reliability of budget as guide to outturn Level and composition of outturn is "quite close" to budget

4. Data on donor financing Both capital and current donor funded expenditures included

Classification

5. Classification of budget transactions Functional and/or program information provided6. Identification of poverty-reducing expenditure Identified through use of classification system

(e.g., a virtual poverty fund)

Projection

7. Quality of multi-year expenditure projections Projections are integrated into budget formulation

Internal Control

8. Level of payment arrears Low-level of arrears accumulated

9. Quality of internal audit Internal audit function (whether effective or not)

10. Use of tracking surveys Tracking used on regular basis

Reconciliation11. Quality of fiscal/banking data reconciliation Reconciliation of fiscal and monetary data carried out

on routine basis

Reporting12. Timeliness of internal budget reports Monthly expenditure reports provided within four weeks of

end of month

13. Classification used for budget tracking Timely functional reporting derived from classification system

Final Audited Accounts

14. Timeliness of accounts closure Accounts closed within two months of year end

15. Timeliness of final audited accounts Audited accounts presented to legislature within one year

Fo

rmu

lati

on

Exec

uti

on

Rep

ort

ing

Budget Management

HIPC Application

Relative Need for Upgrading

0102030405060708090

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Percentage of Countries Requiring Substantial Upgrading

Classi-fication

Projec-tion

Internal Control Recon-

ciliation

Reporting Final Audited Accounts

Formulation Execution Reporting

Comprehensiveness

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

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)

ReadingsRequired

• 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)