guidelines for public expenditure management...guidelines for public expenditure management figure 3...

BARRY H. POTTERANDJACK DIAMOND

Guidelines forPublic Expenditure Management

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© 1999 International Monetary Fund

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Guidelines for public expenditure management / editors, Barry H.Potter and Jack Diamond.

p. cm.ISBN 1-55775-787-9

1. Expenditures, Public. 2. Budget. 3. Government spendingpolicy. 4. Finance, Public. I. Potter, Barry H. II. Diamond, Jack.HJ7461.G85 1999352.4'6—dc21 99-10980

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Contents

Preface v

Acknowledgments vii

1. Introduction 1

2. The Expenditure Aggregates and Data Sources 5What government activities should be covered? 5What are the data sources? 8How are short-run expenditure projections to be made? 9

3. Budget Preparation 12What is the framework in which budget decisions are made? 13

Recognizing the usefulness of budget principles 13Knowing the rules 14Identifying the responsibilities within the budget system 15

Who is responsible for preparation of the budget? / 7What are the basic steps in budget preparation? 17What are the typical weaknesses of budget preparation systems? 19What are the typical questions? 19

Is the central government's budget really unified? 19Is the macroeconomic constraint explicitly taken into account?

Are the assumptions underlying the budget accurateand consistent? 21

Are recent budget execution figures known and analyzed? 22Do procedures exist for resource prioritization? 23Is there any multiyear planning? 25Is there a legitimate need for extrabudgetary funds? 25How are quasi-fiscal activities and contingent liabilities to

be taken into account? 27How should appropriations-in-aid be handled? 28

How are changes in expenditure plans to be targeted? 29

4. Budget Execution 34What are the different stages of the budget execution process? 35Who is responsible for budget execution? 40

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CONTENTS

How can budget appropriations be revised during the year? 42How good is the information on outturn expenditure? 43What are the problems encountered in budget execution

procedures? 45What are the typical questions? 45

How should the multiplication of exceptional proceduresbe dealt with? 45

How can the reconciliation of budgetary and banking databe handled? 46

How can the accumulation of arrears be measured—and avoided? 48

Is there a complete consolidation of funds? 52How efficient is foreign aid management? 53

How can expenditure be adjusted in-year? 54How should good governance be pursued? 56

5. Cash Planning and Management 59

What are the essential features of cash planning? 59Who is responsible for preparing and monitoring the cash plan? 62What are the main constraints that disrupt smooth financing of

expenditure plans? 63What are the typical questions? 63

Is the budget realistic? 63Are the procedures for the release of appropriations adequate? 64Are there adequate experienced and skilled staff to

carry out this task? 64Are there clear borrowing rules? 65

Glossary 67

Text Tables

1. Potential Weaknesses in Budget Preparation 202. Stages in the Expenditure Process 40

Text Boxes

1. Assessing the Soundness of the Budget 142. The Framework that Regulates the Budget:

What Do You Need to Know? 163. Pros and Cons of Extrabudgetary Funds 264. Key Questions Concerning Extrabudgetary Funds 275. Cash Accounting vs. Accrual Accounting 39(i. Payment Delays and Arrears 49

Figures

1. The Budget Countdown: A Timeline for Budget Preparation 22. Budget Execution 33. Cash Planning 4

V


Preface

When mission teams from the International Monetary Fund visit coun-tries for either surveillance or program work, one person is usually designatedas the "fiscal economist." This economist's duties extend over both the rev-enue and expenditure sides of the fiscal accounts.

Traditionally, economics training in public finances has focused more ontax than expenditure issues, and within expenditure, more on policy consid-erations than the more mundane matters of public expenditure manage-ment. Thus, many economists participating in their first IMF mission mayhave relatively little experience of practical issues in public expenditure man-agement; typically, they face questions that are more about accounting andinstitutional structures than economic theory or policy.

For many years, the IMF's Public Expenditure Management Division hasanswered specific questions raised by fiscal economists on such missions.Based on this experience, these guidelines arose from the need to provide ageneral overview of the principles and practices observed in three key aspectsof public expenditure management: budget preparation, budget execution,and cash planning. For each aspect of public expenditure management, theguidelines identify separately the differing practices in four groups of coun-tries—the francophone systems, the Commonwealth systems, Latin America,and those in the transition economies.

Following the preparation of an internal document for training and guid-ance purposes in early 1998, it was suggested that this document might bemade more widely available to the public. This publication is thus intendedfor a general fiscal, or a general budget, advisor interested in the macroeco-nomic dimension of public expenditure management.

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Acknowledgments

The authors wish to acknowledge the contributions from other membersand former members of the Public Expenditure Management Division of theFiscal Affairs Department, particularly Taryn Parry, Jose-Luis Ruiz, VeroniqueBedague, and Ian Lienert. In addition, comments from G.A. Mackenzie,Sanjeev Gupta, and Adrienne Cheasty on earlier versions were especially help-ful in assisting the authors in the preparation of the final text. Special thanksare due to Theresa Garrison for her patience and diligent production of manydrafts of this manuscript and her editorial suggestions. Jeff Hayden of theExternal Relations Department edited the manuscript and coordinated itsproduction.

VII


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1Introduction

Economists working on fiscal policy and fiscal management need a goodunderstanding of how the expenditure side of the budget is planned, pre-pared, and executed.1 This publication is designed for those interested in themacroeconomic impact of such budget processes, rather than in the perhapsmore familiar microeconomic perspective of expenditure policies.

The analysis provided and the guidelines offered on good practices inbudget management are intended for economists reviewing the fiscal sectorof the economy and judging the feasibility of fiscal policy actions. The mate-rial should also provide a helpful background to other advisors or officialsworking on budgetary matters in developing countries and economies in tran-sition who do not have specialized macroeconomics training.

The guidelines cover what such individuals need to know to:

• ensure that consistent data on planned and past public expendituresare prepared in a consolidated format, compatible with a macroeco-nomic framework;

• assess the adequacy of budget preparation procedures, in particular thelevel and composition of public expenditure planned before the bud-get year starts;

• analyze whether the budget execution system can deliver planned spendingwithin the budget aggregates; whether any steps are necessary tostrengthen expenditure control; and how to intervene to enable anynecessary in-year adjustments to be made to planned spending; and

• assess whether there are adequate cash planning and management, arrange-ments for a government to meet its fiscal targets on borrowing and pre-vent sudden, unanticipated borrowing that could disrupt achievement ofmonetary policy targets or undermine monetary discipline.

The focus of the analysis is on how to accomplish the above tasks within acountry's existing budget system, which may be considered as given in theshort run. This short-term focus, however, should not deter fiscal economistsand general budget advisors from being interested in, and able to identify theneed for, longer-term improvements.

'Revenue and financing issues areclearly also of concern to fiscaleconomists, but they are not consid-ered in detail in this publication.

1


GUIDELINES FOR PUBLIC EXPENDITURE MANAGEMENT

Figure 1The Budget Countdown: A Timeline for Budget Preparation

Number ofmonthsbeforepassage (t) Steps in budget process

t-8 Forecast macroeconomic outlook.

t-7 -Jh- Determine affordable government expenditure total(and subtotals by sector program or line ministry);seek cabinet approval of strategy.

t-6 -&- Send out budget circular inviting bids from line ministries.

t-5

t-4 Line ministries/spending agencies submit budget requests.

t-3-

t-2

Review and negotiation (usually between the ministry of finance1

and individual line ministries) of budget requests leading toexpenditure estimates (by line ministry, program, sector).

- Executive budget is submitted to legislature.

t -4- Budget approved by legislature (appropriations).

1 The term ministry of finance is used throughout the report for simplification, even though ministriesof finance go under many different names in practice, including the treasury, ministry of economy, etc.The key functions covered are budget preparation (referred to here as the budget department), andbudget execution and government financial management (cash, debt, assets) (referred to as thetreasury). In rare instances, the treasury can be a separate ministry from the ministry of finance(e.g., Italy).

The structure of the guidelines is as follows:

• Section 2 gives a brief introduction to the coverage of the budget andsources of expenditure data required for expenditure projections;

• Section 3 focuses on the budget preparation process: how total plannedspending is determined; the allocation of resources among spendingprograms to reflect priorities; and the scope, feasibility, and targeting ofexpenditure changes;

2

t-1


Introduction

Figure 2

Budget Execution

Sequence Action

1 — — Budget appropriations approved under annual budget law.

Release of appropriation to spending ministries (as a lump sum,or as quarterly or monthly allotments).

Line ministries/spending agencies enter into contracts and orders(commitments), and pay wages, pensions, etc., weekly or monthly.

Goods and services are delivered and verified.

8

Bills or invoices are received and payment orders preparedand issued.

6 —j— Payment is made via cash, check, or electronic transfer.

Transaction is recorded in accounts.

Accounts are audited.

• Section 4 describes the key features of budget execution, identifiesproblems that often interfere with the efficient execution of the bud-get, and discusses the use of in-year expenditure adjustments to helpmeet fiscal targets; and

• Section 5 considers the interaction between expenditures, cash flows,cash planning, and borrowing, and how cash management can helpensure that no unanticipated borrowing disrupts the achievement ofmonetary policy objectives.

At the outset, a fundamental distinction needs to be drawn between expen-diture management and expenditure policies. Effective expenditure manage-ment is not feasible without clear and well-defined expenditure policies, whosecosts are properly identified in the relevant budget appropriations (see glos-sary). Expenditure budgets, in the form of line item appropriations, representthe cost of agreed expenditure policies. No improvements to budget prepara-tion or execution can compensate for inappropriate or misguided policies.

These guidelines do not cover expenditure policy issues. Extensive mate-rial has already been prepared by the Fiscal Affairs Department of the IMF on

3

2

3

4

5

7



Figure 3

Cash PlanningSequence Action

From budget appropriations, provisional expenditure forecastsmade month by month.

2 Similar provisional monthly revenue forecasts prepared.

Scope for changing the timing of transactions explored tominimize gaps and hence borrowing costs.

Revised quarterly and monthly expenditure and revenue forecastsprepared.

Forecasts revised monthly within the year in light of developments.

(Sometimes) cash limits set monthly on certain governmentexpenditures.

'-Ke-young Chu and RichardHemming, eds., PublicExpenditure Handbook: A Guide toPublic Policy Issues in DevelopingCountries (Washington:International Monetary Fund,1991).

3Fiscal Affairs Department(Expenditure Policy Division),Unproductive Public Expenditures:A Pragmatic Approach to PolicyAnalysis, IMF Pamphlet Series,No. 48 (Washington:International Monetary Fund,1995).

4Prepared by Karim Nashashibiand Claire Liuksila,(Washington: InternationalMonetary Fund, 1993).

5George T. Abed and others,Fiscal Reform in Low-IncomeCountries: Experience under IMF-supported Programs, IMFOccasional Paper No. 160(Washington: InternationalMonetary Fund, 1993).

expenditure policy issues, notably the Public Expenditure Handbook? two pam-phlets—Unproductive Public Expenditures^ and Guidelines for Fiscal EconomistsParticipating in Fund Missions*—and Occasional Paper No. 160, Fiscal Reform inLow-Income Countries: Experience under IMF-supported Programs.'*

The style of the guidelines is interrogative: to pose questions that a fiscaleconomist or general budget advisor might have about budget processes andprocedures and then to offer answers, often differentiating between the dif-ferent expenditure management systems in francophone, Commonwealth,Latin-American, and transition economy systems. First, however, by way of abasic introduction, Figure 1 illustrates a typical timetable for preparing anannual budget. Figure 2 identifies the very basic elements of a typical budgetexecution process, and Figure 3 describes the main steps in cash planning andcash management. A glossary is also included at the end of the book for thoseunfamiliar with some of the terms used.

4

1

3

4

5

6


2The Expenditure Aggregates

and Data Sources

Before considering how the expenditure side of the government's budgetis planned, prepared, and executed, it is necessary first to clarify the coverageand sources of data on public spending. This brief section discusses three crit-ical, if basic, questions: What is the appropriate definition of governmentexpenditure from a macroeconomic perspective? What are the data sourcesfor public expenditure aggregates? How can expenditure projections for ashort-term perspective best be prepared?

What government activities should be covered?

When considering the macroeconomic impact of government expendi-tures, fiscal transparency demands that the economist work with a very broaddefinition of the government sector.6 While several different aggregates maybe referred to in IMF programs, "General Government Fiscal Operations"(GGFO), or general government for short, is usually identified as best suitedto the macroeconomic perspective. This aggregate covers the activities of alllevels of government (central and state level), and the quasi-fiscal operations ofnongovernment entities.7 General government should thus reflect the overallmagnitude of government operations, the aggregate burden of taxation, theallocation of public resources, and the size of the government borrowingrequirement. This last item is, of course, crucial to IMF work since the financ-ing of the government deficit plays a critical role in financial programming.

Tables on past and projected general government expenditures can nor-mally be prepared by consolidating inputs from a series of spreadsheets, cov-ering at a minimum the central government, aggregate state and localgovernments, and social security expenditures within any separate fund. Insome cases, however, other important government transactions (besides socialsecurity) take place through special or "extrabudgetary" funds (e.g., roadfunds or health funds). In others there are quasi-fiscal operations undertakenthrough the banking system (e.g., subsidized loans to state-owned enter-

6See IMF, Code of Good Practices onFiscal Transparency available athttp://www.imf.org/external/np/fad/trans/code.htm.

'Definitions of GGKO and centralgovernments may be found in theIMF's Government Financial Statistics(C.FS) manual.

5


http://www.imf.org/external/np/fad/trans/code.htm

http://www.imf.org/external/np/fad/trans/code.htm


8ln this publication, separateministries or departments ofstate charged with the deliveryof public services are referred toas "line ministries" (to distin-guish them from the ministry offinance). Spending agencies aresmaller units that deliver publicservices, either reporting to aline ministry or directly to theministry of finance.

'•'The term "off-budget" is useddifferently from "extrabud-getary" throughout this publica-tion. An "off-budget" transactionis one conducted by a spendingagency or line ministry whosetransactions should be within thebudget. An extrabudgetary fund(typically set up by law and exe-cuted to rules) conducts transac-tions thai are, by definition,outside the budget.

prises). Those preparing general government tables should, ideally, try toidentify all such transactions, quantify their magnitude, and include themwithin the consolidated total.

Some countries—but by no means all—already provide a good consoli-dation of their data. But it is often desirable to check that the data conformto appropriate norms for coverage, as well as acceptable standards of accuracyand consistency. In practice, problems are often encountered in ensuring thedata are sufficiently accurate and comprehensive, including the following:

(1) Some extrabudgetary funds are set up by a special law and may followdifferent accounting rules, classification systems, or even different fis-cal years. A good understanding of these differences is necessarybefore consolidation can be attempted.

(2) It is also not unusual to encounter government transactions that arereported on a net rather than gross basis—for example, by spendingagencies;8 this practice creates a transparency problem by hiding thescale of government operations and their impact on the economy.These transactions should be unraveled and, wherever possible, thedata prepared on a gross basis.

(3) Some central government expenditures take the form of transfers tolocal governments. When consolidating general government spend-ing, it is necessary to avoid double-counting such transfers.

(4) Some developing countries still maintain "dual budgeting," that is,separate recurrent and development budgets. While this is now gen-erally viewed as undesirable because it risks both inadequate macroe-conomic control and poor resource allocation, it is often a given inthe short term. Those preparing a general government budget needto consolidate the two carefully, keeping a watch for inconsistencies(e.g., timing, economic assumptions, etc.).

(5) In some instances, debt servicing is handled separately—for example,by the central or a commercial bank. Data have to be obtained fromthe bank(s) and consolidated with the information on other centralgovernment expenditures.

(6) The misclassification and/or exclusion of expenditures is a frequentproblem. There is often a confusion between expenditure andfinancing transactions. A common example is the incorrect inclusionof loan amortization as expenditure. Net lending operations by gov-ernment are often difficult to track down and are sometimes "off-budget";9 but they should be consolidated in the governmentaccounts. Similarly, within a general government table, only transfersand net lending to the nonfmancial public enterprise sector fromgeneral government (not any "commercial" expenditvires such as thewage bill of the enterprise) should be included. But it can often bedifficult to unravel these transactions. There may also be quasi-fiscalexpenditures involved in lending to this sector directly from the cen-tral bank or from "commercial" banks, under government or centralbank direction.

6


Expenditure Aggregates and Data Sources

(7) Data on quasi-fiscal activities may be very difficult to obtain, if possi-ble at all. Quantification of such activities is, in itself, often very diffi-cult (see Section 3).10

In practice, it may be necessary to work with incomplete data on generalgovernment or to use only information on central government, even thoughthe objective is to attain a macroeconomic perspective on fiscal activity. Inmany IMF programs, the central government budget is used, because infor-mation on the other (typically smaller) components of general government isnot available. In other IMF programs it is possible to augment the data on cen-tral government budget to gain a better view either of a wider measure of thecentral government sector, or a rough proxy for general government. (Thecoverage of the central government, which is defined in the organic budgetlaw, will vary with the type of budget system encountered.) As a general guid-ance, the following broad categorization may be helpful.

• In francophone Africa, the main tables prepared by the authorities usu-ally cover the central government budget—which does not includesocial security operations (typically rather small). To this, social securityoperations and other extrabudgetary fund operations (like commoditystabilization funds) should be added whenever possible.

• In Latin America, much the same practice applies. However, social secu-rity operations can often be more readily included, since informationon the social security budget has to be provided annually to thelegislature.

• In the (British) Commonwealth system, local governments are usuallyhighly dependent on central transfers for support and the extent ofmajor extrabudgetary funds is minimal. Central government budgetsare typically the main operational tables.

• In transition economies, extrabudgetary funds are extensively used, espe-cially for social purposes; are usually important; and need to be con-solidated. Moreover, very centralized systems are giving way to greaterautonomy at the subnational government levels. The movement of bud-get authority to subnational levels, however, has often not (yet) beentranslated into significant local revenue assignments or importantshares in total taxes.

In a number of cases, it will be appropriate to work with a wider aggregatethan general government—the nonfmancial public sector—by including thenonfmancial public enterprises. The nonfmancial public sector should beused when public enterprises undertake quasi-fiscal activities, such as the pro-vision of schooling on a significant scale. This is particularly the case in a num-ber of Latin American countries, where the operations of these enterprisesand the linkages to the government's budget need to be fully explored.

The key point is that, in deciding which public expenditure aggregate willbest allow a macroeconomic perspective, a balance needs to be struckbetween the desirable (as wide a coverage of fiscal transactions as possible)and the realistically achievable. Ideally, all relevant nonbudgetary transactions

7

10 see als IMF , Code of Good practices on Fiscal Trans[oratory



should be included or at least some adjustments made to the aggregatesreported in the budget. But how far this will be practicable is inevitably con-strained by the availability of information.

To sum up, the key questions to ask about the coverage of the data are:

• Is it possible to work with general government or with central govern-ment only?

• Is the coverage of government operations complete as defined in gen-eral government? If not starting with central government budget data,which other transactions should be included and how feasible is it toestimate and monitor their size? Have intersectoral transfers (e.g., cen-tral government grants to local government) been counted only oncein the consolidation?

• Are estimates gross or does netting take place? If netting takes place,are these transactions sufficiently large or strategically importantenough to necessitate conversion to a gross basis?

• Are the scale and nature of activities undertaken by nonfinancial pub-lic enterprises sufficient to justify working with the nonfinancial publicsector rather than GGFO?

What are the data sources?

Those preparing expenditure aggregates need to be able to get timely,reliable, and accurate information on both outturn and planned expendi-tures (see glossary for definition of outturn). Data on outturn central gov-ernment expenditure as a whole are generally available from some unit in theministry of finance. More detailed information on month-to-month spendingcan sometimes be obtained from line ministries or spending agencies. Butthere are important differences, particularly when gathering information dur-ing the fiscal year ("in-year"), in terms of data availability on outturn expen-diture among the francophone, Commonwealth, Latin American, andtransition economy systems. Such in-year information is crucial for fiscal mon-itoring and fiscal adjustment.

• In francophone systems, accounting for government expenditures is morecentralized, so that data are available, usually quickly, on cash out-turn—and even on earlier stages in the spending process (see Section4)—from the ministry of finance.

• Commonwealth systems are, by contrast, often more decentralized.Typically, consolidated reports of payment orders and checks issued bygovernment are available; checks cashed may also be available, butoften only with a reporting lag from the banking system and throughthe central bank. Data on earlier stages of spending, however, requirespecial reports from the line ministries, except where a centralized gen-eral accounting office is in charge of issuing payment orders directly.

• In Latin American countries, the expenditure process is quite decentral-ized. Data on monthly limits for payment orders are available; how-

8


Expenditure Aggregates and Data Sources

ever, there are typically no data on the earlier stages of the spendingprocess.

• In transition economies, the position is in flux: now the information isnormally available from the ministry of finance, often the treasurydepartment, but there are still some reporting lags.

Data on central government will need to be complemented or aug-mented by data from other sources to develop a consolidated picture of gen-eral government operations. First, it is necessary to consider extrabudgetaryfunds and where data on these accounts can be acquired—for example, onpension funds from a ministry of pensions.11 Second, line ministries or theministry of finance should be able to provide information on state or localgovernment expenditures. Third, where there is a separate development bud-get, information on expenditure may be available only from a separate min-istry of planning or planning commission, or only from line ministries.Fourth, the measurement of foreign-financed development expenditures(mostly but not wholly capital) can be problematic, where systems for moni-toring aid inflows and development projections are inadequate. At worst, fullconsolidation of such expenditures may not be achievable (see Section 4).

All these outturn data are termed "above the line;" that is, accountingrecords of government expenditures undertaken. The monetary survey canbe an important source of "below-the-line" data on cash outturn expendi-tures; that is, data extracted from the financing of government expendituresfrom banking, nonbank, and external sources. While the banking system pro-vides data on government bank accounts, rather than on a detailed line itembudgetary basis, it can provide a useful check on the budgetary data from theministry of finance (this is explored further in Section 4).

It is thus necessary to determine what data on outturn governmentaccounts are available within the ministry of finance; and what ancillarysources—line ministries, planning commission, central bank—can be used toget the necessary information on the consolidated government sector.

Finally, data on planned expenditures for the setting of the next budgetcan usually be found from a combination of the ministry of finance, any plan-ning ministry, and in some instances the central bank (for debt payments)—see Section 3.

How are short-run expenditure projections to be made?

Most country authorities, whether working with IMF programs or WorldBank projects or not, prepare and publish at least annual projections of pub-lic spending.12 Many also make projections, at least in aggregate and often byline ministry, of annual expenditure in each of the two subsequent years.Budget advisors can readily subject these to economic analysis, particularly onvolume measures, cost factors, and underlying economic assumptions. In thecontext of macroeconomic forecasting, the techniques for projecting annualexpenditures are well known. However, the fiscal economist may be less awareof how to make short-term projections on expenditures, on a monthly, quar-

nUsually these data are not avail-able from the ministry offinance, or if they are, only witha considerable time lag.

12This may not be on a consistentdefinitional base with theannual budget.

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10 GUIDELINES FOR PUBLIC EXPENDITURE MANAGEMENT

13The simplest categories ofexpenditure are recurrentwages and salaries; recurrentgrants and transfers; recurrentdebt payments; recurrent othergoods and services; and capitalexpenditures.

terly, or semi-annual basis. Yet, such projections can be critically important inthe context of taking in-year fiscal remedial action.

Whatever data are provided by the authorities, a fiscal economist maywish to make a separate assessment of short-term expenditure trends—forexample, for the second half of the fiscal year. (For financial programmingwork in the IMF, for example, it is always important to estimate a time pathfor public expenditures in order to derive the quarterly—and sometimesmonthly—financing requirements of the government.)

The starting point will usually be the latest annual expenditure projec-tions, usually presented in the annual budget by the authorities and, ideally,with estimated figures for the last year and projections at least for the next twoyears. (Some such forward projections represent expected expenditures; butmore often, they are normative. For example, in many low-income countries,the annual figures for years two and three are likely to be residuals from a tar-geted fiscal deficit and projected revenues. The positive or normative natureof projections needs to be properly understood.)

A breakdown of the annual projections into quarterly and monthly fig-ures may be provided by the authorities, but this is not always the case. Short-run focus projections do not usually require sophisticated modelingapproaches. Rather, to prepare expenditure projections with any precisionrequires a close understanding of (1) the different stages of the spending pro-cess; (2) different categories of expenditure, identified by economic type, andoften individual projects; and (3) the patterns of spending in preceding years.

Ideally, all government expenditure transactions should be classified infour ways:

(1) by administrative responsibility—the ministry, department, or spend-ing agency that undertakes the expenditure;

(2) by economic category—defined by Government Financial Statisticsstandards;

(3) by function (e.g., health, education)—defined by the United Nations;and

(4) by program (e.g., by policy goals and objectives).

In principle, all transactions should have a coding (e.g., on the paymentorder) that incorporates all four dimensions. In practice, this is found mainlyin industrial countries. Only the first three will, to some degree, be present inmost other countries. Moreover, if the classification system is a mix of eco-nomic type and function, then considerable work may be necessary to convertit to a consistent economic basis.

But expenditure classification is important, particularly for short-termprojections. It is usually easiest to adopt a disaggregated approach that pro-jects government expenditure transactions, by month or by quarter, sepa-rately for broad economic categories. Apart from its relative simplicity, thisclassification facilitates broader economic analysis; for example, it allows eas-ier simulation of the effects of varying economic assumptions or projectionson the exchange rate, inflation, etc. Starting from the very simplest economiccategorization,13 wages and salaries are nearly always paid on a well-defined


Expenditure Aggregates and Data Sources 11

timetable (weekly, biweekly, monthly, or bimonthly).14 Some grants and trans-fers are paid monthly but others quarterly. Debt interest payments can usuallybe projected from a schedule of due payments. So, once the budget is set, thelikely pattern of such recurrent expenditure outlays can be determined in afairly straightforward way. By contrast, the profile of the purchase of othercurrent goods, services, or capital goods may be more variable from month tomonth and thus more difficult to assess.

Projections should thus be based on a combination of budget plans,known commitments (see Section 4), and past expenditure patterns. For ana-lytical purposes, once a base projection has been established, the economistmay also need to examine particular scenarios and thus to distinguishbetween those economic categories that are most sensitive to different eco-nomic assumptions, such as the exchange rate or inflation rates; or considerwhether some expenditures are particularly sensitive to changes in output.Especially when the inflation rate is high or volatile, even three- or six-monthprojections need to be built up from a very short-time profile, typicallymonthly. Also, particularly during periods of economic crisis or fundamentalmacroeconomic structural problems, such that revenue receipts (and oftenexternal financing) are very uncertain, monthly expenditure projections areespecially important and may need to be constrained by available financing.

Greater disaggregation than the broad economic categories identifiedabove may also then be desirable, to build up projected spending patterns.Moreover, it may also be necessary to identify large or volatile items of expen-diture from past years' outturns (e.g., on capital projects, or payments oftransfers) and make special efforts to estimate their magnitude and timing inthe period ahead. Any additional or exceptional expenditures that arise willhave to be factored into the projections separately.

In developing short-term expenditure projections, therefore, the follow-ing are key questions to bear in mind:

• What information by economic category can be identified?• What components are susceptible to changes in which economic

assumptions?• What guidance can be found from past expenditure patterns?• What special expenditures may occur in the projection period?• Does a high or volatile inflation rate require the development of a very

short-time profile (e.g., monthly) projections?• What constraints on expenditure projections may be implied by the

projections or revenue or financing?

In essence, therefore, any expenditure projections prepared should beexamined carefully and subjected to sensitivity analyses (again by economiccategory), taking into account consistency with past patterns; acknowledg-ment of factors that are new or different in the period ahead; and the latesteconomic indicators.

14But bonus payments can alsomake them more variable frommonth to month.


3Budget Preparation

A full understanding of the budget planning and preparation system isessential, not just to derive expenditure projections but to be able to advisepolicymakers on the feasibility and desirability of specific budget proposals,from a macroeconomic or microeconomic perspective. It is much easier tocontrol government expenditures at the "upstream" point of budget prepara-tion than later during the execution of the budget.

Thus, fiscal economists and general budget advisors need to know:

• what is the framework in which budget decisions are made;• who is responsible for planning and preparing the budget;• what are the basic steps;• what are the typical weaknesses in procedures and how can these be

overcome; and• how can changes in budget plans be programmed and targeted?

Answers to these questions are set out in the subsections below.Budget planning and preparation are (or should be) at the heart of good

public expenditure management. To be fully effective, public expendituremanagement systems require four forms of fiscal and financial discipline:

(1) control of aggregate expenditure to ensure affordability; that is, con-sistency with the macroeconomic constraints;

(2) effective means for achieving a resource allocation that reflectsexpenditure policy priorities;

(3) efficient delivery of public services (productive efficiency); and(4) minimization of the financial costs of budgetary management

(i.e., efficient budget execution and cash and debt managementpractices).

Budget preparation is the principal mechanism for achieving items (1)and (2); item (3) typically features as an element of budget preparation onlyin industrial countries, while item (4) is essentially an issue in budget execu-tion and cash management (see Sections 4 and 5). Moreover, no system ofbudget execution or cash planning (the subjects of Sections 4 and 5) can do

12


Budget Preparation 1 3

more than mitigate the problems caused by poor quality or unrealistic budgetpreparation.

What is the framework in which budget decisions are made?

Budget preparation is a process with designated organizations and indi-viduals having defined responsibilities that must be carried out within a giventimetable (see Figure 1 in Section 1 for a typical time line). This process isnormally established and controlled by a legal and regulatory framework.While generally sharing broadly common procedures, budget preparation(and execution) systems do exhibit differences depending on their historicorigin. Given the common heritage of many countries, it is possible to iden-tify four main patterns—francophone, Latin American, (British) Common-wealth, and transition economies.

To understand the budget preparation process in a given country, it isimportant to:

• assess the basic soundness by judging the budget preparation systemagainst certain internationally accepted standards or "budget principles";

• know where to find the rules governing the budget preparation pro-cess; and

• from those rules, identify who has the responsibility for what elementsof the budget preparation process.

Recognizing the usefulness of budget principles

Based on the objective macroeconomic assessment of available revenuesand financing, ideally, the expenditure budget should aim to be comprehen-sive, transparent, realistic, policy-oriented, and allow for clear accountabilityin budget execution. These concepts form a standard by which the soundnessof budget systems can be judged (see Box 1).

In most Organization for Economic Cooperation and Development(OECD) countries, comprehensiveness and transparency are achieved bydesigning a budget system with three key characteristics.

Annuality. A budget is prepared every year, covering only one year; votedevery year; and executed over one year. While maintaining the core conceptof annual authorization, this principle has been modified at the preparationstage, such that most OECD countries now develop the annual budget withina multiyear perspective, through the preparation of medium-term revenueand expenditure frameworks. A very few are moving toward determining bud-get appropriations for more than one year at a time.

Unity. Revenue and expenditure (as well as borrowing constraints) shouldbe considered together to determine annual budget targets. The budgetshould cover all government agencies and other institutions undertaking gov-ernment operations, so that the budget presents a consolidated picture ofthese operations and is voted on, as a whole, in the parliament.



Box 1. Assessing the Soundness of the Budget

The soundness of budget systems can be judged by the following:

Comprehensiveness• Is the coverage of government operations complete?• Are estimates gross or does netting take place?

Transparency• How useful is the budget classification? Are there separate economic and

functional classifications that meet international standards?• Is it easy to connect policies and expenditures through a program structure?

Realism• Is the budget based on a realistic macroeconomic framework?• Are estimates based on reasonable revenue projections? How are these made,

and by whom?• Are the financing provisions realistic?• Is there a realistic costing of policies and programs and hence expenditures

(e.g., assumptions about inflation, exchange rates, etc.)• How are future cost implications taken into account?• Is there a clear separation between present and new policies?• How far are spending priorities determined and agreed under the budget

process?

Universality. All resources should be directed to a common pool or fund,to be allocated and used for expenditures according to the current prioritiesof the government. In general, earmarking of resources for specific purposesis thus to be discouraged; but the case of extrabudgetary funds is consideredin more detail below.

These three characteristics are essential to ensure that, in budget prepa-ration, all policy proposals for undertaking government expenditure will beforced to compete for resources, and that priorities will be established acrossthe whole range of government operations.

They are usually considered a prerequisite to meeting the first two of thefour main goals of effective public expenditure management noted at thebeginning of this Section: exercising the macroeconomic constraint of afford-ability on the total, and ensuring efficiency in the allocation of resources.These characteristics are typically enshrined in a legal and administrativeframework regulating the budget process.

Knowing the rules

Although the precise legal framework for central government budgetingvaries from country to country, it is usually set out at several levels.

The constitution is the highest in the legal hierarchy. Although it deals onlywith broad principles, the constitution may clarify three important aspects:


Budget Preparation 15

(1) the relative powers of the executive and legislative branches with respectto public finances; (2) the definition of the financial relations betweennational and subnational levels of government; and (3) the requirement, forexample, in Commonwealth systems, that all public funds be paid into desig-nated accounts, and that these funds be spent only under the authority of alaw.

The organic law is usually the main vehicle for establishing principles ofpublic financial management. These laws may take the form of a single lawthat guides budget preparation, approval, execution, control, and auditing(loi organique relative au budget in the francophone system; ley de administrationfenanciera in the Latin American system), or there may be several general lawscovering specific areas of public finance management (e.g., underCommonwealth systems) that may also relate to subnational levels of govern-ment. They are called "organic" because they relate to organizational mattersand systems, and do not therefore require annual reenactment. Moreover,they can often be modified only under certain conditions, such as qualifiedparliamentary majority.

Financial regulations. The organic budget law also gives to the government,or the minister responsible for public finance, the authority to issue detailedregulations and instructions (for instance decret portant reglement de laComptabilite Publique in the francophone system, and decreto para la contabilidadpublica in the Latin American system). These are often quite detailed.

The constitution, the budget organic law, and financial regulations arepermanent and form the legal framework within which the annual budget law,which includes the revenue and expenditure estimates for a given year, is pre-pared, approved, executed, and audited. The annual budget law can take dif-ferent shapes depending on the system.

In the francophone and Latin American systems, the coverage of the annualbudget law (called budget or loi de finances in francophone countries and leyanual de presupuestos in Latin America) is rather wide, since it contains theamount and details of revenue and expenditure, the balance, and also anynew tax legislation measures and some changes to spending. Under theCommonwealth system, both revenue and expenditure estimates are presented.Often the latter are further divided into recurrent and development esti-mates, sometimes presented as separate volumes. Typically, the presentationis detailed by institution and line item. By contrast, the annual budget inmany transition economies has often been rather summary in format: prior toany recent reforms, budget estimates were presented by budgetary institu-tion—typically only the major supervisory institutions and not their subordi-nate units—and broken down only by broad "functions," more or less thesectors used in the previous central planning framework.

Identifying the responsibilities within the budget system

The powers assigned to the legislative and executive branches, and,within the executive branch, who does what, essentially define the responsi-bilities for preparing the budget (Box 2).



Box 2. The Framework that Regulates the Budget:What Do You Need to Know?

The following summarizes some of the key questions on the overall budgetpreparation framework.

What is the budget timetable?

How are budgeting powers distributed between the executive and legislativebranches?

• legislative power to propose spending• power of amendment• one vote—global vote on spending• executive powers to limit spending below appropriations

How are budgeting powers distributed within the executive?• number of agencies involved; who does what?• agenda for setting budget negotiations; how is this determined?• structure of negotiations—who has veto power?

How are activities funded?• revenue accounts• borrowed resources• extrabudgetary mechanisms• multiple funds• contingency funds• special funds

Any legislative limits on:• expenditure?• deficit?• borrowing?• carryover of spending authority to next year?

Any earmarking?• special or hypothecated funds• constitutional or legal commitments on specific public services (educa-

tion, health)

15At the budget execution stage,however, those preparing thebudget should also be aware ofthe degree of executive powerto limit spending below or toincrease spending above appro-priations (see Section 4). Thispower can be an importantdeterminant of the degree offlexibility for fiscal adjustment.

For instance, when considering expenditure changes at the budget prepa-ration stage, countries vary in the extent to which the parliament can changethe budget, once it is submitted for their consideration. Many countries, forexample, allow for the composition of the expenditure or revenue plans to bechanged but not the global total; in others, particularly in a number of tran-sition economies, new expenditure proposals—often poorly costed—can beput forward, approved by the parliament, and thus enter into the budget.Although those preparing the budget can help improve parliamentary under-standing through discussions, the budget must ultimately be negotiated by theexecutive with the legislature.15



Who is responsible for the planning andpreparation of the budget?

The responsibility for preparing the budget usually lies with the ministryof finance with input from the line ministries and some smaller spendingagencies. This exercise is normally controlled by a central budget departmentlocated in the ministry of finance, or sometimes in a separate budget ministry.

The character of central budget departments differs widely between coun-tries, however. Some are only responsible for preparing the current budget,excluding debt. In such cases, the capital budget may be prepared by a plan-ning or development ministry (or even at a higher level in the prime minister'sor president's office), while the debt service costs are assessed (and paid) byanother entity. Some budget departments are in charge of preparing the entirebudget, although not involved in implementation of the budget. Others havea say on expenditure commitments, and some are also in charge of monitor-ing budget execution. It is therefore important to know the precise responsi-bilities of the budget department. It is particularly useful to know if the budgetdepartment is responsible for supplying partial or complete data on budgetpreparation, expenditure commitments, and full budget execution data.

In many developing countries, only partial data on budget preparationmay be available in the budget department. It is important that all data on thecurrent budget, the capital budget, and the debt service (including data onsecondary and tertiary tiers of government) are consolidated to ensure that,in total, they are consistent with macro objectives. In some countries, researchdepartments of the central bank may carry out this task.

What are the basic steps in budget preparation systems?

In principle, the basic steps in a standard budget preparation system com-prise the following:

(1) The first step in budget preparation should be the determination of amacroeconomic framework for the budget year (and ideally at least thenext two years). The macroeconomic projections, prepared by amacroeconomic unit in the ministry of finance or elsewhere, should beagreed with the minister of finance. This allows the budget departmentwithin the ministry of finance to determine the global level of expen-diture that can be afforded without adverse macroeconomic implica-tions, given expected revenues and the level of deficit that can be safelyfinanced. In a few countries, there are fiscal rules in place that may limittotal spending or recurrent spending (e.g., the "golden rule").16

(2) The second step should be the allocation of this global total amongline ministries, leaving room for reserves (a separate planning and acontingency reserve as explained below) to be managed by the min-istry of finance.

(3) The next step should be for the budget department to prepare a bud-get circular to give instructions to line ministries, with the indicative

16Refers to the provision that thebudget deficit must not exceedinvestment or capital expendi-ture, that is, borrowing only forcapital spending.



aggregate spending ceiling for each ministry, on how to prepare theirestimates in a way that will be consistent with macro objectives. Thiscircular will include information on the economic assumptions to beadopted on wage levels, the exchange rate and price levels (andpreferably differentiated price levels for different economic cate-gories of goods and services).

(4) Step four is the submission of bids by line ministries to the budgetdepartment. Once received there needs to be an effective "chal-lenge" capacity within the budget department to test the costing ofexisting and any new policy proposals.

(5) The next step comprises the negotiations, usually at official and thenbilateral or collective ministerial level, leading finally to agreement.

(6) Finally, step six is Cabinet endorsement of the proposals for inclusionin the budget that will go to parliament.

While the principles should be broadly familiar in most ministries offinance (and would even be considered out of date in those industrial coun-tries with the most advanced budgeting systems), actual practices may fall along way short. For example, in too many countries the budget departmentdoes not prepare a macro framework, nor even a first outline of the budget,let alone indicative ceilings by line ministry, before sending out the budgetcircular. In such cases, the circular is an administrative mechanism that initi-ates the budget-making process, usually providing a timetable for budget sub-missions—that is, estimates of financial requirements by line item and by lineministry or spending agency—but not giving them much guidance in thepreparation of their estimates or overall spending limits. Thus, when prepar-ing their budget requests, the ministries often merely add percentages,guided by an inflation projection in the circular, to their previous year's bud-get. With this "bottom-up approach," line ministries are able to overstate theirneeds, exerting upward pressure on overall spending.

Early in the preparation stage, that is before the budget circular is issued,those advising on the preparation of the budget should ask:

• Is the budget based on an aggregate level of general or central govern-ment expenditure, in cash terms, that is consistent with the macroframework, and any fiscal rules in place?

• Does the budget circular to the line ministries provide adequate guid-ance on preparing budget estimates? Does it include a guideline orlimit for each line ministry on this total spending?

• Are there suitable reserves? Ideally, within the aggregate total thereshould be a planning reserve (not allocated in guidelines given to eachline ministry), so the ministry of finance can assign extra resourceslater during budget negotiations for the most urgent priorities, withoutbreaching the macroeconomic constraint. Moreover, after all final lineministry allocations have been made, there should still be a contingencyreserve within the aggregate that will be held and administered by theministry of finance to meet genuine contingency spending during thebudget year.



What are the typical weaknesses of budgetpreparation systems?

There are often weaknesses in budget preparation systems: their nature,scale, and significance need to be understood, both to assess the value of thedata produced and, where there are separate projections to be made by anIMF team or other external advisers, to accommodate such weaknesses. Eightcommon problem areas can be identified:

(1) The central government budget is not really unified. It is a dual-bud-get system with separate recurrent and capital or "development" bud-gets that may be based on inconsistent macroeconomic assumptions,budget classifications, or accounting rules. Each budget may be com-piled by a different ministry—for example, the ministry of financefor recurrent expenditures and a planning ministry for capital or"development" expenditures.17

(2) The macroeconomic constraint is not explicitly taken into account inthe budget process, or the economic assumptions underlying the esti-mated costs of expenditure programs are weak or erroneous.

(3) Projections for the outturn of the previous and current years' bud-gets are not prepared, or the experience to date is not analyzed, sothat budget preparation becomes a simple incremental exercisebased on the previous year's (often erroneous) budget estimates.

(4) Satisfactory procedures do not exist for review of expenditure poli-cies and program prioritization.

(5) There is no multiyear planning.(6) Extrabudgetary funds are used to divert spending to one or more

"off-budget" accounts.(7) Quasi-fiscal expenditures, contingent liabilities, etc., are not taken

into account.(8) Appropriations-in-aid are used inappropriately.

In many cases, remedying the problems encountered in the above areaswould require extensive reforms, so there may be limited scope to make animmediate impact. Even in the short term, however, those reviewing budgetpreparation can play an important role in sensitizing policymakers to certainweaknesses and so assist in reorienting the system.

Table 1 provides a summary of certain weaknesses and some of theirimplications. The next subsection deals with the individual issues in moredetail.

What are the typical questions?

Is the central government's budget really unified?

While the budget document presented to the legislature may appear to bea unified one, in reality the current budget and the capital budget are often

'"Development" budgets ofteninclude both capital and cur-rent spending on projects,mainly, but not exclusively,financed externally.


Ideal Situation Common Weakness Resulting Problems for Those Preparing Budgets

Unified budget with full coverage.

Universality: all revenues go into onefund for financing central governmentactivities.

Knowledge and analysis of previousyear's projected outturn expenditures;availability of volume indicators.

Use of macroeconomic framework.Separate price indices by category ofexpenditure.

Multiyear planning.

Procedures for resource prioritizationimplemented early in budgetpreparation.

Budget classification according toimplementing insti tution(administrative), purpose ofexpenditure (functional), and use ofexpenditure (economic).

Dual budget (separate development andrecurrent budgets); many extrabudgetaryfunds.

Earmarked funds, especially common forfinancing extrabudgetary funds.

Lack of data; data not communicated tobudget office, or data are not analyzed.

Inadequate knowledge (or incorporation)of macroeconomic constraints. Poorestimates of program costs.

F'ocus on current year only; no anticipationof future circumstances.

No direction in priority setting, or attemptto prioritize until too late in the budgetpreparation process.

Inconsistent nomenclature—for example,mixing functional and economic or budgetnomenclature is not consistent with thechart of accounts nomenclature.

Difficulty' in developing a consolidated budget. Blurring of capital andcurrent expenditure concepts. With two different budgets it is moredifficult to enforce expenditure limits or develop a fiscal adjustmentprogram.

Rigidity in spending priorities leading to inefficient allocation of publicresources. Again, this makes fiscal adjustment a more difficult task.

Data in the budget office may be misleading. For example, actualexpenditures are usually different from budgeted expenditures, andthe actual number of persons employed may be very different from theoriginal budget projection.

Leads to a bottom-up approach where the budget is determined moreby spending-agency requests. This and inadequate program provisiongenerally lead to overspending.

May have a negative impact on fiscal sustainability: shortsightedpolicies often cannot be maintained in the long term. Alternatively, alack of planning means imminent problems or recurrent consequencesof capital spending are not foreseen.

Procedures for prioritization are especially important for meetingdeficit targets or spending targets. If priorities are not communicatedin a top-down approach early in the budget preparation process,overspending relative to budget is a likely outcome

An economic classification is most useful when designing a fiscaladjustment program. Sometimes the only classification available isadministrative—by budget institution—so that reducing the budgetrequires cuts by institution, and the quality- of the fiscal adjustmentsuffers. Nor is it possible to understand how expenditures aredistributed among different items or for what purpose.

Table 1. Potential Weaknesses in Budget Preparation



prepared following different procedures. In such cases, difficulties can beencountered in meeting macro objectives where the two budgets are pre-pared without full coordination, or on different economic assumptions. Forexample, in many developing countries the development budget or PublicInvestment Plan/Program (PIP) may include a combination of capital andcurrent programs. Such a system can also lead to an inefficient use of fundsbecause, for example, the same item of expenditure may be included in thetwo budgets, or, more typically, investment projects may be included in thebudget, without providing for the necessary corresponding current expendi-ture. The supposed superior status of items included in the developmentbudget may also tend to squeeze out current expenditures within the afford-able total.

Information on planned capital expenditures may be partial, wheredonor-financed expenditure is significant and coordination with the donors isinadequate. It is important to check the extent to which the budget is unifiedin the above sense of ensuring the internal consistency of different compo-nents. Quite apart from checking whether the economic assumptions arecommon and consistent (see below) however, it is also essential to ascertainwhether there has been policy agreement (e.g., on start dates for new policies,on levels of staffing for new development projects when completed, orwhether the ministry of finance has ensured that the recurrent cost implica-tions of capital spending in future years have been taken into account). Ifthere is inconsistency, the coordination between the two budgets should bestrengthened by whatever means available. A meeting with key donors mayalso be necessary.

Is the macroeconomic constraint explicitly taken into account?Are the economic assumptions underlying the budget accurateand consistent?

In some countries the budget is prepared with surprisingly little referenceto the macroeconomic prognosis. Often, there is little macroeconomic ana-lytical capacity in the government, or the budget department has no contactwith those undertaking such analysis (e.g., a research department at the cen-tral bank). The absence of proper macroeconomic analysis is particularlycommon in countries that have a "dual-budget" system, that is, separate devel-opment and recurrent budgets as described above.

With inadequate macroeconomic analysis, there can be insufficient disci-pline to limit the size of the sustainable budget deficit at the beginning of thebudget process. As a consequence, the budget preparation procedure can beprincipally driven by the requests from the ministries for increased spending(i.e., the bottom-up approach). Without a firm top-down limit, the ministry offinance can only challenge proposals on technical or policy grounds, ratherthan in terms of affordability constraints and priorities within a fixed total.There will be a higher probability that the deficit obtained through this pro-cedure will not be sustainable. Fiscal adjustment will be easier if the macroe-conomic constraint and the acceptable deficit is defined first (i.e., a top-down



approach). From this, spending departments can be given some guidelines tolimit their requests.

However, even if a macro constraint on aggregate expenditure is set, thefiscal economist needs to probe their validity. Since many countries haveproven to be perennially optimistic in revenue forecasting, realistic revenueprojections and the financeable fiscal deficit must be decided before the bud-get preparation procedure begins, not at some late stage just before or, worstof all, after, its completion. (In the worst examples, the revenue forecast canbecome a residual derived from line ministries' aggregated spending plansless external financing and "acceptable" domestic borrowing.) Those prepar-ing the budget need to ensure that the budget preparation timetable is suffi-ciently long, and the process transparent and comprehensive, so that there isno need for arbitrary expenditure cuts late in the process, when revenue orborrowing constraints become clear.

Another source of weakness is that the economic assumptions to be usedin estimating the cost of present and new policies may not be accurate, con-sistent across line ministries, or sufficiently discriminatory between differenteconomic categories of expenditure. For example, a sharp fall in theexchange rate will have a much different impact on the cost of health pro-grams (because of the import of medicines) than on the costs of servicingdomestic debt. Poor unit cost estimates are one of the most common weak-nesses in budget preparation. Fiscal economists need to urge the budgetdepartment to specify by category different price factors before budget esti-mates are prepared. The higher and more volatile the inflation rate, thegreater the need to differentiate by category of expenditure.

Are recent budget execution figures known and analyzed?

The budget department—and others involved in budget preparation,such as the planning ministry—are often unaware of the provisional outturnfor the last completed financial year, or the projected outturn for the currentfinancial year, because the budget is executed by a separate treasury depart-ment, rather than by the budget department. Budget preparation for yeart + 1 begins early in the current fiscal year (t) before the provisional outturnfor the previous year (t - 1) is known, and usually before any projected out-turn for the current year has been made available, with the consequence thatthe budget department/planning ministry prepares the budget by referenceto the previous and current years' initial budgets, and not to the provisional orprojected budget outturn for the current and preceding years.

If there is economic instability—for example, in times of high inflation—the budget preparation exercise can become seriously unrealistic.Uncertainty about likely price levels can also "excuse" and thereby perpetuatea lax attitude to budget preparation: when the budget is subsequently exe-cuted, the results may include wasted administrative efforts spent switchingresources from one budget line to another (virement); excessive use of sup-plementary appropriations; loss of macroeconomic control over the total;poor allocation of resources among programs; and expenditure arrears.



At the preparation stage of the budget, when discussing the budget fig-ures, in addition to the budget department and any planning ministry, thetreasury (or budget execution department) should be fully involved. In par-ticular, the treasury department should provide estimates of spending in theprevious year and the spending to date in the current year (both in generaland on specific programs or economic categories), as well as its forecast of thelikely outturn for the current year. The best basis for forecasting expenditureon a given policy is usually the estimated cost of that policy for the most recentyear available.

Do procedures exist for resource prioritization?

An efficient budget preparation procedure should aim at making thegovernment's priorities clear and at selecting, from the many budgetrequests by spending ministries, those which are really important to the gov-ernment. In principle that requires two elements. First, a budget strategyneeds to be determined at a political (typically cabinet) level, which deter-mines (1) the affordable total, (2) new policies to be accommodated, and(3) any changes (often reductions) in existing policy provision. Second, eachspending ministry and the budget department/planning ministry shouldmeet to discuss each ministry's estimates. To accommodate new policies, thebudget department/planning ministry must require each spending ministryto prioritize its requests.

But this ideal is rarely matched by the practices in many countries. Quiteapart from weaknesses in the institutional arrangements, decisions on priori-ties at the budget preparation stage can be wholly artificial because (1) sub-sequent cash allocations or supplementaries will render them redundant;(2) amounts given by line item are deliberately loose or unclear, in anticipa-tion of a real allocation during budget execution; and/or (3) in practice, thepriorities are set outside the formal budget framework, for example, by thepresident's office.

Ultimately, the allocation of resources across spending programs is a polit-ical decision, although those preparing the budget will need to advise on whatis realistically achievable. For this, economic analysis should play an importantrole. For example, ministries need to have as much information as possible onexpenditure policies and programs, on costs, and, ideally, on their outputsand outcomes.18

Whenever possible, however, the cost of all new policies that a line ministrywishes to pursue should be estimated separately from the estimates of the costsof ongoing policies. As supporting information, the spending ministry shouldprovide data on expected results/performance from such new policies andincremental spending (ideally, outputs and outcomes) and preferably in a for-mat that enables the requests across ministries to be compared. The ministryof finance should have a role in reviewing, and commenting on, such cost esti-mates. The data should be presented with enough detail to allow the budgetdepartment to judge the reasonableness of the budget request, the activitiesthe request is intended to support, and the corresponding staffing levels.

18 Outputs are typically physicalmeasures of production: forexample, hospital patientstreated and miles of roads built.Outcomes refer to measures ofpolicy impact: for example,fewer road accidents afterreductions in speed limits.



19 Larger reserves can be justifiedin very specific circumstances.An example would be a plan toliquidate payment arrears,whose aggregate size is not yetclear.

Such systems are most advanced in a small number of industrial coun-tries: even there, the practices (and results) are not wholly in line with theabove principles. Real political agendas are sometimes nontransparent orinadequately articulated; the economic value of marginal expenditures acrossfunctions cannot be properly compared; and the measurement of policy out-comes, and their links to individual programs, has proved quite difficult inpractice. Yet, considerable progress has been made, particularly on measuringoutput and on requiring better assessments of the results of new policies orprograms proposed before they can be incorporated in the budget.Developments in this direction are to be encouraged, and there are some use-ful short cuts.

As noted earlier, to facilitate discussion on resource allocation, it is help-ful for the budget department to set, within the macroeconomic total, guide-lines/targets for each spending ministry on their total spending, when thebudget circular is issued. In addition to targets by line ministry, an allowanceshould be made within the affordable total for suitable planning and contin-gency reserves (see below). This allows budget negotiations to coalescearound a realistic target for each ministry, consistent with the affordablemacroeconomic total.

Such guidelines or targets can be normative (e.g., when they are derivedfrom a medium-term expenditure planning framework; see below) or purelyindicative (e.g., based on shares in the latest year's outturn figures).

Each line ministry/spending agency can be asked to put forward its esti-mates for its existing or baseline policies within that guideline. (This shouldautomatically be the basis of the data when the figures are derived from amedium-term framework.) Separately, each ministry should be asked to iden-tify what policies and programs would be enhanced/introduced or cut back,if their allocation were 5 or 10 percent above/below the guidelines. Whilesuch an approach can be abused (by line ministries offering only politicallyunacceptable items for reductions), with experience, and with a well-informed challenge capacity within the ministry of finance that identifieslower-priority items in advance, it can help to concentrate discussion on pri-orities at the margin, within an affordable total.

A planning reserve is a sum (usually one or two percent of total expendi-ture) not allocated in the guidelines, which the ministry of finance laterplans to allocate to new programs, if necessary above the guidelines duringbudget negotiations. A contingency reserve is a reserve for in-year expendi-tures above appropriations for handling genuine contingencies; it should bemodest in size (if too large, a bidding process from ministries may quickly setin) and thus it is unlikely it should exceed 2 or 3 percent of total expendi-tures.19 It should be under the control of the ministry of finance, and accessshould be granted by the ministry of finance only under stringentconditions.

Where priorities are not being clearly established during the budgetpreparation process, the budget department/planning ministry can establishbenchmarks using these mechanisms and thus set the basis for a discussion bypolicymakers of the priorities among the requests.



Is there any multiyear planning?

Focusing on the current or next fiscal year's expenditures alone can bemisleading. Expenditure planning should be extended beyond one year, notleast to gain a full appreciation of the future spending implications of presentpolicy decisions. Nowhere is this more important than on the recurrent costsof capital spending. For countries with multiyear PIPs, such plans need to bereintegrated with recurrent expenditures and into a multiyear expenditureplan that provides the basis for establishing a realistic global budget. Althoughthe introduction of a regular procedure of medium-term planning frame-works by function, by ministry, and (ideally) by program takes time todevelop, those analyzing and preparing the budget should begin this processby preparing medium-term fiscal scenarios.

There are several variants of such a planning framework. The simplest hasonly aggregate projections for public spending for the two or three succeed-ing years beyond the budget year. A second has "illustrative" figures by lineministries—sometimes on a mechanistic basis (e.g., shares of a global total areassumed to be held constant to the proportions in the budget year). A thirdis normative in that it projects costs of existing and any new policies agreedfor introduction over the medium term, but these medium-term figures playno role in subsequent-year budget negotiations. The best approach uses thesefigures for the past budget year as the starting guideline for the next year'sbudget negotiations.

Is there a legitimate need for extrabudgetary funds?

Extrabudgetary funds (as defined in the GFS manual) generally refer toaccounts of government transactions that are not included in budget totals ordocuments and typically do not operate through normal budgetary executionprocedures. Such transactions may, for example, be financed through foreignaid or earmarked revenues not included in the budget.

Unfortunately, extrabudgetary funds are often set up for inappropriatereasons, not consistent with principles of good governance. For instance, theymay be designed to allow the president or some parts of the executive branchto bypass the normal budget procedures (for example, the comptes speciaux inthe francophone system). In this case, the fiscal economist should aim to iden-tify all such funds and then ensure that they are consolidated on a gross basisin fiscal tables. This may be difficult where expenditures from these accountscover security or presidential spending, which can be considered highly sen-sitive issues. When consolidated, however, and when the political authoritiescan be persuaded to consider them as a legitimate component of the pub-lished budget, at some point those preparing the budget may be able to closethese accounts or at least to reduce their number. The affected expendituresshould then follow regular budgetary procedures and appear in the relevantheading in the consolidated budget.

Another reason to create this kind of account may be to earmark revenuefor a particular purpose. In this case, a specific kind of revenue is transferred



Box 3. Pros and Cons of Extrabudgetary Funds

Pros• Can increase efficiency by simulating private market conditions where levels

and standards of service are linked directly to fees or charges.• Can provide more consistent source of funds for expenditures that yield high

benefits yet do not get much recognition (road maintenance expendituresare a primary example).

Cons• Can result in a loss of aggregate expenditure control; such expenditure may

be outside the control of ministry of finance.• Can distort allocation of resources by circumventing the budget process and

review of priorities.• Earmarked revenues can become entrenched so funding is no longer based

on priority needs.• Less transparency may lead to inefficiency and/or misuse of funds.• Can facilitate rent-seeking and abuse of monopoly power.• Leads to less flexibility at the margin to reallocate when budget is under stress.• Is incompatible with good cash management practices.

to this account when collected, and whatever funds are available must be spenton a given item. While there are advantages and disadvantages in operatingsuch funds in many countries, in many cases the disadvantages far outweigh theadvantages (see Box 3 on the pros and cons of extrabudgetary funds). In theworst instances, new extrabudgetary funds may be established specifically todivert expenditures out of the budget, sometimes with the aim of publishing alower fiscal deficit. The practice of opening such accounts is often an indica-tion that the budget process is not functioning properly, and that resources forpriority tasks must be allocated through other mechanisms. Unfortunately, thispractice gives rise to rigidities in the short and long term. In the short term,financial management will be impaired because resources transferred to a spe-cial account are typically not available to the treasury for cash managementpurposes—for example, to relieve short-term cash shortages (see Section 5). Inthe medium term, a shift in government priorities may be impeded by the factthat a part of the available resources is set aside for a special task.

While having too many extrabudgetary funds should be discouraged,there can be a case for a selective use of such funds, quite apart from separatesocial security funds that are a feature of many countries—for example, forearmarking resources for infrastructure maintenance. If it is apparent that alack of maintenance is leading to higher capital expenditures in the longterm, for example, earmarking may prevent the diversion of resourcesneeded for road maintenance (often seen as not politically attractive) to otherpurposes. But the use of earmarked revenues should be accompanied by eitheradministrative mechanisms or market-like incentives that promote account-ability and efficiency (sometimes referred to as the "agency model")—some-



Box 4. Key Questions Concerning Extrabudgetary Funds

What is the purpose of the extrabudgetary fund? What is the rationale forkeeping such a fund off-budget?

Financing IssuesWhat is the source of funding? Does the source of funding make sense; does

it help to relate marginal benefits to marginal costs—for example, user fees?How are user fees determined; are there limits to prevent abuse of monopolypower (especially if demand is inelastic)? Are there general benefits (positive ornegative externalities, public goods arguments) in addition to user benefits thatjustify support from general budget revenues? If there is a split, how is the shareof financing determined? Is the source of financing an important governmentrevenue, and can the government afford to lose the associated degree of flexi-bility in prioritizing expenditures? Do earmarked revenues detract from the gov-ernment's capacity to collect traditional revenues?

Expenditure DecisionsHow are expenditure decisions made by the extrabudgetary fund? What use

is made of cost effectiveness or cost-benefit analysis? Does the management ofthe extrabudgetary fund promote efficiency, for example through quasi-marketmechanisms or through mission statements, objectives, performance measures?How are consumer interests represented and taken into account in expendituredecisions? If governed by a board, is membership of the board biased towardcertain needs—for example, regional needs?

Management Issues

Does the management of the extrabudgetary fund meet good governancerequirements? Is it free of political interference or unduly influenced by sup-pliers or trade unions? Is it possible for funds to be diverted to other uses? Canthese accounts be "raided" for other uses? Is the extrabudgetary fund indepen-dently audited?

How are the cash resources of the extrabudgetary fund handled? Does thegovernment have access to these funds for overnight borrowing to minimizegovernment borrowing needs? Does the treasury or ministry of finance have thelegal right to reduce funds available for expenditure in extrabudgetary funds ifthe budget is under severe pressure?

thing that is rarely achievable in developing countries.20 Without such extra-budgetary controls, funds can end up serving corrupt interests and weakengood governance. Box 4 provides a list of diagnostic questions for assessingthe legitimacy of using extrabudgetary funds.

How are quasi-fiscal activities and contingent liabilities to be takeninto account?

Some operations of a fiscal nature are not conducted through the budget.Examples of such quasi-fiscal expenditures include interest subsidies paid by

20See Barry H. Potter, "DedicatedRoad Funds: A PreliminaryView on a World BankInitiative," IMF Paper on PolicyAnalysis and Assessment 97/7(Washington: InternationalMonetary Fund, 1997), for arelated discussion on earmark-ing revenue for dedicated roadfunds.



the central bank on loans to public enterprises, and special support opera-tions for banks and public or private sector enterprises administered throughthe banking system. Quasi-fiscal expenditures also include spending by nonfi-nancial public enterprises that represents the provision (or subsidization) ofpublic goods (e.g., schools or hospitals). By definition, such expenditures donot pass through the budget and cannot be easily consolidated with the state-ment of general government operations.

In general, it is difficult to extract information on, let alone estimate thecost of, quasi-fiscal activities so as to consolidate such data in the general gov-ernment tables. But, to gain an overall assessment of the fiscal stance, it maybe necessary to assess the size of such operations and to notionally add the fig-ures to the information on general government operations. In addition, thosepreparing the budget should take every opportunity to persuade policymak-ers to transform such nontransparent activities into explicit subsidies, trans-fers, etc., to the extent they should continue at all, within the budget.

Governments also have, at any point in time, certain contingent liabilities.The most common is the existence of explicit government guarantees, usuallyon bank lending to industry or lower tiers of government, which can fall due.But there are other forms of implicit contingent liabilities: for example, theremay be a challenge in the courts to the government interpretation of a lawthat, if the judicial decision goes against the government, will have expendi-ture implications.

In general, countries should be urged to ensure that a careful record ofall such explicit contingent liabilities is maintained (while recognizing thatthere will always be some uncertainty on aspects like judicial decisions as wellas moral suasion pressures on "implicit" government guarantees) and to makeprudent allowance for such guarantees being "called" (i.e., payments beingdue) or for adverse judicial decisions, by ensuring that there are sufficientresources in the contingency reserve to meet such expenditures. Of coursethis will always be a difficult judgment; in some years the reserve may be morethan adequate—in which case the unused balance can be used to improve thefiscal position relative to the budget. In other years, some excess, even afterthe contingency reserve, may arise and should be met transparently throughsupplementary estimates—see Section 4. Those preparing the budget shouldensure that some estimate of expenditures from both explicit and implicitcontingent liabilities is allowed for in budget preparation.

How should appropriations-in-aid be handled?

Many countries have spending agencies that are able to finance a largepart of their activities from their own sources of revenue—normally fees andcharges. An example might be a dedicated passport office that charges for theissue of passports but receives budgetary resources for its capital expenditures.These budgetary resources are often termed appropriations-in-aid, or some-times net appropriations—that is, the amount sufficient to meet the gross ser-vice costs, after an assumed contribution from the fees and charges they raise.



There are three issues in this regard. First, irrespective of how far the costsof the service—for example, the issue of passports—are financed from ear-marked charges rather than from general budgetary resources, the activity isessentially within the government sector. Thus, in terms of measuring the sizeof government, the appropriations-in-aid data are insufficient. The grossexpenditures or gross costs of the service need to be identified, as well as howmuch is financed from own fees and charges, and how much from generalbudgetary resources. Second, though it is essentially a budget execution issue,there are often cases where the fees are paid into a separate bank accountheld by the relevant spending agency in a commercial bank. As explained inthe next Section, this is generally poor budgetary practice, which can lead toabuse with the monies being diverted into other areas of expendittire. Third,in budget preparation, it is often necessary to be aware of deliberate under-estimation of the likely revenues from fees and charges, so as to maximize thecontribution from general budgetary resources. In particular the ministry offinance needs to insist on the annual updating of fees and charges to allow forinflation—quite apart from any separate expenditure policy issues about howmuch of the service cost should be met by users and how much by the generaltaxpayer.

How are changes in expenditure plans to be targeted?

Whatever the weakness of the budget preparation system itself, the fiscaleconomist or general policy advisor may be called upon to advise on optionsfor changing expenditure plans (typically, but not always, for reductions inspending). In the past, fiscal adjustment through reductions in plannedexpenditures has often proved problematic. Changes in expenditure plans,relative to the authorities' original intent, have been implemented in waysthat were disruptive to budget execution or were unsustainable in the longrun. Where expenditure reductions have been undertaken, they have some-times produced short-run savings at long-run cost—for example, by cuttingneeded capital expenditure or by so severely contracting maintenance expen-diture that the capital stock was partially consumed. Where planned expendi-ture reductions have failed (in the sense that outturn expenditure was abovethe revised budget), they have typically led to payment arrears, and/or toexcess spending above appropriations. This has damaged both the private sec-tor economy (its bills are unpaid) and the credibility of the government infinancial markets.

A fundamental problem is that changes in the budget are often proposedat too late a stage in budget preparation. Yet, whatever the time constraints,proper evaluation of expenditure policy options is vital. Those preparing thebudget may be tempted to grasp quick solutions. However, budgets must rep-resent an objective estimate of the costs of stated and agreed (within govern-ment) expenditure policies. Correspondingly, the only sustained (andsustainable) changes in expenditure plans are those rooted in changedexpenditure policies.



Thus, expenditure reductions planned under a revised annual budget arenot likely to be successful where:

(1) they are made in appropriations without accompanying changes inthe underlying expenditure policies. Just changing the estimatesmakes the budget provision less than objective; the likely conse-quence is overspending against appropriation and/or the emergenceof payment arrears;

(2) estimates for open-ended, demand-led programs are revised down-ward; again this is typically the triumph of hope over past experience;

(3) inconsistent agreements are made between the ministry of financeand several line ministries to reduce the budget provision for certainline items, but with a "nod and wink" that access will be granted in-year to the contingency reserve; this reserve tends to become over-committed when real contingencies arise;

(4) "revised" economic assumptions on the exchange rate or inflationrate are invoked as justifying lower provision;

(5) overoptimistic assumptions are made on "efficiency savings" throughreductions in the number of civil servants and cuts in equipment pur-chases, utility charges, or fuel bills; and

(6) reductions are made in transfers to lower-tier governments—this justpasses on the problem.

Planned expenditure reductions are also not likely to be successful, if theyare essentially reliant on administrative actions in the budget execution pro-cess, where:

(1) they are imposed by the ministry of finance through cutbacks inplanned appropriations (often at a late stage in the budget prepara-tion process) without the concurrence, or over the heads of, lineministries;

(2) the appropriations are not themselves changed but rather the min-istry of finance undertakes to control total spending within theappropriated sum—for example, through controls in-year onmonthly cash allocations to line ministries; and

(3) they are to be accomplished by creative accounting measures—greater use of suspense accounts, the establishment of new or addi-tional extrabudgetary funds, etc. (such transactions should, in anycase, be consolidated within fiscal tables).

When presented with specific expenditure proposals (increases or reduc-tions) , it is necessary to examine both expenditure policies and expendituremanagement aspects.

In terms of expenditure policies, the important questions include:• Are the proposed expenditure policies soundly based? (Guidance here is

contained in the IMF's Expenditure Policy Handbook).• Do the proposals fit in with existing established policy priorities as laid

out in any published medium term strategies of the government? Willthey be rejected by parliament?



In terms of expenditure management:

• Are the cost estimates for the new proposals accurate? Will the propos-als achieve the projected adjustment? Is there an important quantita-tive difference between their immediate and longer-term costs (e.g., dothey just have a short-term benefit rather than representing some fun-damental fiscal adjustment)?

• How would they be enforced (through revised appropriations or cashallocations)?

Those preparing the budget need to prepare and analyze options. This isnot an easy task, especially in countries that have inherited budget systemsdesigned for compliance control (rather than macroeconomic or financialmanagement). Budget execution has traditionally been seen as ensuring thatspending is carried out according to the budget approved by the parliament.Some budgets are so strongly driven by the wishes of the executing institution(line ministry or spending agency) that the ministry of finance may not bewell-placed to suggest a likely scope or targeting for changes to the spendingplans. Also, the budget classification systems in many countries are weak andmay inhibit a satisfactory analysis of options for changes in governmentexpenditures.

While there are no hard rules about how planned public expenditure canbest be adjusted, experience suggests some guidelines. Three broadapproaches can be reviewed: (1) changes by program and policy; (2) changesby individual ministry; and (3) changes by economic category.

(1) Changes to budget plans by policy or program are the optimal(though not always achievable) approach. Governments shoulduse—or develop—mechanisms for identifying the most and least effi-cient and effective expenditure policies and programs, and targetexpenditure changes accordingly. (In this context, a number of moreadvanced countries are moving toward output-oriented budgeting.)In practice, country programs agreed with the IMF and the WorldBank may include commitments for increases in expenditure in, say,health and education, together with reductions in unproductiveexpenditures. Outside such agreed priority (or nonpriority) areas,the ministry of finance should, in principle, assess the costs and ben-efits of alternative policy packages. In many cases, however, it will notbe possible to review individual functions or policies, even in caseswhere good expenditure classification exists. Time pressures willoften force consideration of other approaches.

(2) Changes in expenditure plans by an individual ministry may be con-sidered, for example, where there is a lack of information by eco-nomic category (see next item). Such an approach can be helpful insupporting or expanding initiatives in areas like health and educa-tion (albeit on a ministry rather than sectoral basis). Reductions,where needed, can be targeted elsewhere; for example, where one ormore line ministries or spending agencies has a record of poor



expenditure control or in support of a policy decision that affectsonly a few ministries.

A common variant of this approach is "across-the-board" reduc-tions by ministries, in response to a call for lower than plannedexpenditures. By allowing each ministry to decide how to cut a fixedpercentage off its expenditure plans, it often seems attractive andbroadly equitable. But there are many drawbacks to such anapproach. Despite the apparent fairness, in reality across-the-boardreductions avoid consideration of priorities and leave individual min-istries to allocate among line items, with not only an uncertain eco-nomic and social impact, but also potential damage to the efficientdelivery of services. Such reductions also may all too often be seen astemporary, so line ministries apply them in areas that allow paymentarrears to build up (e.g., payments to utility companies). Across-the-board reductions should be avoided, therefore, with preferencegiven to adjustments by economic category (if changes by specificpolicy or program are not achievable).

(3) Changes in expenditure plans by economic category may have to bemade where budgetary pressures emerge at a late stage in budgetpreparation. Again, they have the appeal of representing rough jus-tice (e.g., if all ministries are asked to reduce their wage bill by a fixedpercentage)—even though they do not imply proportionally equalaggregate changes by ministry. Adjustments based on this economicclassification enable some economic analyses of expenditure patternsand prescription. Moreover, they can be targeted at wider expendi-ture policy objectives, such as reducing the wage bill or the numberof civil servants, reining in travel costs, or cutting back generalizedprice subsidies to consumers or subsidies to industry. But they alsohave a downside. Often, they do not encompass any judgment aboutpriorities between programs. Also, some of the measures appliedtend to be simplistic (because they are "last-minute"), such as wagestandstills or freezes, or percentage cuts in purchases of supplies.They are thus necessarily a blunt instrument, best seen as interim innature, pending a deeper review of policy options. They may haveshort-term benefits but long-term costs—for example, increasing thefinancial cost of completing a capital project and postponing thebenefits. Again, they may be seen as temporary, rather than repre-senting a structural fiscal adjustment.

Against that background, and with the renewed warning that there are nohard-and-fast rules, budget advisors are best advised to:

• make any revisions to emerging budget plans as soon as possible (last-minute changes tend to be ineffective);

• seek, as a starting point, expenditure changes that are in line withpreviously agreed decisions or views on expenditure policy priorities—this is especially important where there is room for additionalspending;



be sure that cost estimates for new expenditure proposals are realisticand accurate, not just for the year ahead but over the medium term,and that the proposals can be implemented at the political level;be wary of the individual ministry or agency approach, except wherethis is consistent with pre-agreed policy priorities or to address glaringpast failures to exercise proper control;avoid "across-the-board" cuts;where expenditure plans need to be scaled back, use reductions by eco-nomic category if fundamental policy changes cannot be achieved. Thefirst target should be any reductions consistent with the pursuit of out-standing policy goals, and ideally within the context of ongoing widerreforms—for example, measures to reduce civil service numbers orchanges in wage policies to improve the alignment of public and pri-vate sector wages; andbe cautious in reaching for the obvious but overly simplistic targets, likefreezes in new or ongoing public sector capital projects or in public sec-tor wages; or percentage reductions in the purchase of goods and ser-vices (unless and until the longer-term damage to the economy or tooverall government operations is assessed as bearable).


4Budget Execution

For fiscal economists, the key issues on budget execution are alwayswhether deficit targets are likely to be met, and whether any budget adjust-ments (both on the revenue and expenditure sides) agreed at the preparationstage (or in-year) are being implemented as planned. On the expenditureside of the budget, the key issues are whether the outturn is likely to be withinthe budget figure; whether any changes in expenditure priorities (as againstpast patterns) are being implemented in specific areas as planned; andwhether any problems are being encountered in budget execution, such asthe buildup of payment arrears.

Fiscal economists therefore need to fully understand any weaknessesin the country's budget execution process. Is it transparent? Are thereclear lines of accountability? Is information on execution of the budgetavailable on a timely, reliable, and accurate basis? Is it thus consistentwith the principles of good governance? Based on this understanding,where are problems likely to arise, and how might they be avoided orovercome? In some instances, action may be needed through budgetexecution procedures to bring expenditures back on track to the budgetprovision; hold expenditures below budget, in response to below-target rev-enue developments; or bring irregularities to the attention of the decisionmakers.

Thus, for fiscal economists and general budget advisors, the key questionsare:

• What are the different stages of the budget execution process?• Who is responsible for budget execution?• How can budget appropriations be revised during the year?• I low good is the information on outturn expenditure?• What are the problems encountered in budget execution procedures

and how can these be overcome?• How can expenditures be adjusted in-year?• How should "good governance" be pursued?

This section answers these questions in turn.

34


What are the different stages of the budgetexecution process?

After the legislative appropriation of expenditures, there are usually sixmain stages in the spending process.

Budget Execution 35

1. The authorization stage

Once a budget is approved by the parliament, ministries are authorizedto spend money, consistent with the legal appropriations for each line item.Where parliament has not yet approved the budget before the budget yearstarts, it is normal to allow governments to start spending on a "Vote onAccount" basis—a temporary authorization, often restricted to one-twelfthper month of the previous year's expenditure. In the francophone, LatinAmerican, transition, and many Commonwealth countries, once approved,parliamentary authorization is for one year. In some Commonwealth coun-tries, however, the authorization period may be set monthly or quarterly bywarrant.

In the majority of countries, unspent funds in one year cannot be carriedforward (carryover) to be spent in the next. In some OECD countries, how-ever, unspent operating funds can be carried forward, usually up to a speci-fied small percentage of the total funds (e.g., Australia, Canada, mostScandinavian countries, and the United Kingdom); and in some countriescash to pay for obligations incurred in one fiscal year but falling due in thenext can be carried over (e.g., Italy, Japan, New Zealand, and the UnitedStates). However, it is more common to allow the carry-forward of some ele-ment of capital appropriations (or in some cases program expenditures), toallow for changes in the phasing of projects compared with the original bud-get plans, while still maintaining the same total cost.21

In some OECD countries where the emphasis is on giving agencies morefreedom to manage their resources within an overall agency-specific budgetto improve efficiency, and where multiyear expenditure planning is well estab-lished, the trend has been toward a greater use of such carryovers. Howeverin these countries, aggregate expenditure control is much less of a problemand the prime objective is ensuring the most efficient and effective use of gov-ernment resources. These circumstances do not typically apply in non-OECDcountries, where the use of carryovers should generally be discouraged in theinterest of financial discipline.

2. The commitment stage

This is the stage where a future obligation (liability) to pay is incurred.The precise definition of commitment varies not only from one system toanother but even among those well-versed in public sector accounting.Broadly, a commitment arises when a purchase order is made or a contract issigned, which implies that goods will be delivered or services rendered, andthat a bill will have to be paid later on. But, as noted below, there are shades

21The primary objective lor [ l i eintroduction of carryover is toprevent the typica l end-ol-the-year rush to spend unusedfunds. In some Nordic < o tm-tncs and Austral ia , however, f i l ecarryover can be positive ornegative: overspending !>\ ;inagency in one f iscal \ear leadsto a deduction f rom its avail-able funds in the next .



of interpretation. Good budget systems maintain data on commitments thatcan be monitored, because these will (for the most part) ult imately bereflected in actual expenditure and because their profile, in terms of cash pay-ments to be made, may have important financial programming implications.But there are complications to be aware of.

• The existence of a commitment does not ensure that the goods willactually be delivered or the service rendered because the relevant min-istry or spending agency may change its mind or disagree with the sup-plier later. This is especially true in countries with poorly organizedpublic expenditure management systems, not least because suppliersare not guaranteed payment.

• The nature of commitments varies by economic category of expendi-ture. A critical dimension is the lag between entering into a commit-ment and the associated cash payments: this is especially important forthe purchase of capital goods and current nonwage goods or services.But a debt interest payment or the wage bill, both due monthly, are alsotypes of commitment.

• A commitment does not mean that a payment will be made within thesame fiscal year—the payment may be made the following year. This isespecially true for investment expenditure.

• In many countries, exceptional procedures allow an expenditure to bemade without a previous commitment.

• In some countries, what is interpreted as a "commitment" is at best areservation; that is, the request from a spending unit to the budgetauthority to put aside an allotment for a future expenditure. This can-not be considered a commitment in accounting terms, because no con-tract is signed at this stage. Some officials in transition economies tend,erroneously, to equate commitments with budget appropriations.

• In francophone and some other countries, there is a dual control overcommitments: administrative control via the line ministry or spendingagency and financial control by the ministry of finance. The ministryof finance's financial control represents a kind of "preaudit" confirma-tion that a commitment can be entered into, consistent with theappropriation.

• In many systems, commitments are either not recorded at all or theaccounting for commitments is not consolidated (e.g., the line min-istries and spending agencies record these only internally). When thereis no centralized accounting of commitments, there is a potential clan-ger of accumulation of payment arrears because no one ensures, whencommitments are incurred, that they are consistent with plannedfuture cash availability.

3. The verification stage

This signifies that goods have been delivered fully or partially accordingto the contract, or the service has been rendered and the bill has beenreceived. Physical delivery can precede verification by some period of time.


Budget Execution 37

The line ministry or spending agency making the purchase usually has thefinancial and the administrative responsibility to check the bill; that is, to ver-ify that the supply has been received in full compliance with any terms or con-ditions. The bill at this stage is recognized as a liability of the public sector, in anaccrual accounting sense, and is therefore an important stage of the expen-diture process. Even though it represents an accrued liability, it may not yetrepresent a cash liability, however—for example, when a grace period of 30 or60 days was included under the terms of the purchase order. Information onverifications within the central government sector, however, is not usuallyavailable on a centralized basis.

4. Payment authorization or payment order stage

This stage may have a different significance in different systems.22 In thefrancophone system a guiding principle is that the person who orders the supply(engagement) has to be different from the one who authorizes the payment(ordonnancement). The payment officer is normally a public accountant whobelongs to the Comptabilite Publique and has specific responsibilities in terms ofthe expenditure process for authorizing the payment of verified bills. Afterverification of the bill, the spending unit must then hand it on to this publicaccountant, and request that the bills be paid; payment orders are normallycentralized at the ministry of finance. For expenditure management pur-poses, this procedural distinction is not of major significance, although it doesimply a different institutional source of data on payment orders than undermany commonwealth systems (see below).

In contrast, in some Latin American countries the function of postaudit andpayment is undertaken by the same institution, a Contraloria General, whichalso exerts a preaudit function on commitments. In this case the source ofdata on different stages of spending is the same institution.

In Commonwealth systems the issue of payment orders is typically theresponsibility of the financial officer with delegated responsibility for thisfunction. Systems vary: the issue of payment orders and checks may bedecentralized—with spending ministries carrying out these tasks and report-ing back to the center—or centralized in a treasury department, typicallycalled the accountant general's department within the ministry of finance,which acts both as paymaster and prepares the final accounts of thegovernment.

In transition economies, the situation also varies, but most countries nowhave treasuries that are increasingly responsible for the issue of paymentorders. Some so-called "power" ministries, like defense and internal security,often have (so far) retained separate systems. Other inherited elements of theprevious system can also be very misleading: where there are different tiers ofspending units (first, second, third, etc.), some ministries of finance regardexpenditure as having taken place when money is transferred from ministryof finance bank accounts to the first-tier units. But, in unreformed systems,that money may take some time to be further transferred to subsidiary unitsand then constitute "final" expenditure on goods and services. It is therefore

22It should be understood that,from the government accountsperspective, the transaction iscompleted at stage (4) above—completion of payment order.



necessary to distinguish between such final payment orders and transfers thatreally represent payment authorization.

5. Payment stage

At this stage, the bill is paid—by cash, check, or electronic transfer. Insome systems, the payment is made through a single ministry of financeaccount in the central bank or in a designated bank. In others, the paymentis undertaken through the commercial banking system via bank accounts heldin the names of individual line ministries. (This latter approach can make itmore difficult for the ministry of finance to reconcile its accounts with thoseof the banking sector.)

6. Accounting stage

The cash transactions are recorded as complete in the books, whichallows a reconciliation from the cash based "above-trie-line" fiscal accountswith the financing of any deficit "below the line." Some countries are movingtoward accrual accounting, whose differences with cash accounting are dis-cussed in Box 5.

The accounts may be held centrally, as under the French and LatinAmerican systems and those Commonwealth countries with accountant gen-eral's offices. In unreformed transition countries, the accounts are held byline ministries at one or more commercial banks. These accounts will beaudited at a later stage. Table 2 shows the similarity of the stages in the fourgroups of countries, with the terminology that typically describes the stage.

For the fiscal economist seeking to monitor budget execution, choosingwhich stage (s) of the expenditure management procedure to monitor is oftenconstrained by information availability. In principle, the data given at the ver-ification stage may be particularly relevant because they measure the actualliability of the public entity and thus the accrued account liability. For exam-ple, if bills are verified promptly when they arrive, it allows a good measure ofthe potential arrears, where strict cash limits constrain the amounts availableto make payments.23 But such information is rarely available. The next beststage is commitment, and adequate data on commitments can often beobtained, particularly in francophone countries. In many countries, however,the only reliable and comprehensive information available is that derivedfrom the accounting for payment orders issued or payments encashed.Introducing better accounting through commitment recording and monitor-ing typically requires considerable time.

For fiscal monitoring purposes, countries with less well-developed systemsoften concentrate on the final encashment stage of payment, when checksfrom government accounts are cleared through the banking system—the cashaccounting stage. This is usually the most reliable, with timely informationavailable on a centralized basis, and it allows for direct reconciliation with themonetary accounts. Indeed, the payments accounting data from the bankingsector act as a check to ensure that the "above-the-line" information from gov-

'"'There may, of course, still bedisputes between the govern-ment and individual supplierson specific bills received.


Budget Execution 39

Box 5. Cash Accounting versus Accrual Accounting

In contrast to cash-based accounting, which only recognizes expenditurewhen it is paid and income when it is received, accrual-based accountingrequires that

• expenditure and liabilities are accounted for when goods and services aredelivered, even if payments have not been made; and

• revenue and receivables are recorded when goods are sold, even if proceedshave not been received.

There are many grounds for recording government expenditure transactionson an accrual basis and some industrialized countries have now begun to do so.

First, the accrual basis requires governments to pay more attention to areasthey have largely ignored—in particular accounting for their real and financialassets, setting a depreciation policy, etc., and so obtaining better information onthe costs of providing services

Second, as more government activities that cannot be, or are not being, pri-vatized are put on to a more commercial basis—through contracting out, feesfor services, etc., an accrual accounting regime more in line with private sectorpractices is appropriate, and so better able to measure performance.

Third, in national accounting terms, government expenditure is measured onan accruals basis: a liability, and thus an expenditure, is incurred when a com-mitment is fulfilled and verified—not when the cash payment takes place.

The GFS is in the process of moving to an accruals basis for governmentexpenditures, in the interest of creating a greater statistical harmony betweenfiscal and national accounts. However, accrual-based accounting is more com-plex, often difficult to administer, and hence typically not yet appropriate formany developing countries.1

'For a more in-depth treatment, see A. Premchand, Effective Accounting (Washington:International Monetary Fund, 1995).

ernment accounts is comprehensive and accurate. But, in many countries, it isalso necessary to estimate expenditure in accrual terms, or, as it is sometimestermed, on a commitment basis. In principle, this enables an assessment of theextent of payments that will fall due or the arrears being accrued. Such dataare most readily available under the French system. In Commonwealth andtransition countries, it may be difficult to obtain reliable information directly:in some instances, the information must be assembled as payments made, plusestimated arrears (see the subsection on problems in budget execution).

Thus, the fiscal economist should always be sure whether information con-veyed about spending to date refers to commitments, verifications, paymentorders issued, or payments encashed. All data received should be collected atthe same stage of spending or adjusted to reflect any inconsistencies. This maynot be an easy task when data are derived from more than one source.



Table 2. Stages in the Expenditure Process

Commonwealth Francophone Latin American Transition Economies

Commitment

Verification

Payment order

Cash payment

Accounts

Contract signed, orderplaced. Information notrecorded in centralaccounting system.

Bill is received. Work isverified as complete orsupply delivered in full.

Treasury processesorders and issues checks;or done directly by lineministries.

Checks are cashed.

Transaction recorded inaccounts.

Contract signed, order-placed (engagement).Authorized by theministry of finance orfinancial comptroller.

Bill is received. Work isverified as complete orsupply delivered in full.

The Comptahilite, Publique,a part of the Ministry ofFinance and Economy,processes orders andissues checks (liquidation,ordonnancement) or anentry is made in deferredpayments account.

Checks are cashed.


Contract signed or orderplaced (mmpromiso).Information is notreliable, not timely.

Bill is received. Work isverified as complete orsupply delivered in full(devengado). Informationis not reliable, not timely.Use of preaudits.

Payment orders (ardenesde pngo) are processedand checks issued.

Checks are cashed.


Order is placed, oftenno contracts. Typicallyno record is made at thisstage.

Bill is received. Work isverified as complete orsupply is delivered infull. Some use ofpreaudits by controldepartments.

Unless system has beenreformed, the centralbank processes paymentorders and transfers aremade between accountselectronically. No issuingof checks.

Not applicable.

Transaction recorded inaccounts: sometimesaccounts are held bybanks, not the ministryof finance.

-^These may or may not be sub-ordinated to the ministry offinance.

Who is responsible for budget execution?

Budget implementation, in the sense of delivering services by undertak-ing expenditures, is the responsibility of the line ministries and spendingagencies, within regulatory controls set by the ministry of finance. Whilefinancial information on budget exectition is usually available on a central-ized basis in the ministry of finance, the data are collected either through theline ministries or through ministry of Finance controls in the system. Theseinformation flows must be identified; and they may differ substantiallydepending on the systems.

In the francophone system, such information is, in principle, most easily acces-sible. Commitments may be authorized by the ministry of finance or by thefinancial comptrollers;24 in both cases the ministry of finance should have a con-solidated statement of commitments. A department in the ministry of financemay centralize all the payment orders or these may be authorized by the finan-cial comptroller (comptabilite publique), so again this information should be cen-trally available. The ministry of finance should be able to produce regularstatements—every day where the system is computerized—on cash payments.

In Commonwealth countries, by contrast, some fragmentation in the budgetimplementation process is typical. A treasury or finance department may bein charge of authorizing expenditures—perhaps by issuing annual, quarterly,

Stage


Budget Execution 41

or sometimes monthly warrants to line ministries, which in turn contract andundertake expenditures, maintaining their own books of accounts. The moni-tomv/fof the implementation of development and recurrent budgets, however,may be undertaken by different ministries (e.g., the ministry of planning andthe ministry of finance, respectively). In many countries, however, the account-ing far budget execution transactions is carried out by the chief accountant inthe spending ministry, who is nominally on the staff of the accountant gen-eral's department, a statutory appointee. The accountant general's depart-ment itself is in charge of keeping accounts of the government, makingreports to top ministry of finance management, and presenting the finalaccounts to the legislature.

Typically the accountant general's department also has paymaster func-tions, being responsible for the issue of checks and the distribution of cash tomeet other types of payment. But,

• sometimes debt service payments, at least the preparation of paymentorders, are handled separately by a department other than the ministryof finance; and foreign-financed projects often have different paymentsprocedures;

• sometimes the issue of checks is decentralized and carried out by stafffrom the accountant general's department in line ministries;

• sometimes it is centralized and carried out by the accountant general'sdepartment. But the centralization of check writing can lead to delaysin processing payments due.

In Latin American countries, responsibilities are typically also quite frag-mented. It is not unusual to have a ministry of finance responsible for rev-enues and financing, while another ministry—the ministry of economy—maybe in charge of the budget or at least the development budget. A powerfulaccounting organization—contraloria general—often carries out preaudit andpostaudit functions, in addition to acting as the accountant to the govern-ment. Payment orders are typically executed through the contraloria, whichhence maintains overall control of budget execution.

Transition economies have been moving away from a system where the bud-get was a part of the state plan, and replacing it with a centralized treasury sys-tem. Under the prereform system, spending targets, which were set sectorallyin conformity with the sectors of the state plan, formed the basis of the bud-get. The main features were as follows:

• Budget execution tended to be more decentralized. The ministry offinance distributed funds to the main ministries, which in turn dis-tributed these funds to the bank accounts of a large number of min-istries and from these to an even larger number of budgetinstitutions—many of them being enterprises.

• Payments were executed through the banking system usually electroni-cally, and through the previously monolithic state bank system, reportswere generated on payments made by each institution. While timely,the information derived was on a highly aggregated functional basis,with little economic content.



• Line ministries and spending agencies did report quarterly, in greatdetail, on their progress in executing their budgets, though with a con-siderable lag.

• Thus, despite the preconception of being highly centralized, budgetexecution was rather decentralized. Usually, a department within thecentral ministry of finance compiled the data on budget execution andprepared the accounts to reconcile them with the records of the statebank.

• This centralized department within the ministry of finance has typicallyformed the basis of new treasury departments that have subsequentlybeen developed in these countries and that usually have assumedresponsibility for the budget execution process.

How can budget appropriations be revised during the year?

During budget implementation, many countries find that they wish, orneed, to change the line item appropriations approved by parliament. Somesuch revisions are necessary and desirable, but excessive switching of bud-getary provision between items of expenditure (virement) and excessive useof supplementary estimates cause difficulties, and usually indicates a lack ofbudget discipline.

Once budget appropriations are set in the budget on a line-item basis,there is often a need to shift budgetary provision from one line item toanother; an example might be the delay in one capital project because of badweather, and the need or opportunity to accelerate work on another suchproject elsewhere. In general rules are set out (e.g., in the Organic BudgetLaw or in Financial Regulations in Commonwealth systems) on who canundertake such switches—often called virement. Typically, within a singleeconomic subcategory and program, the spending agency itself is permittedto make switches—for example, from the provision for one utility bill (say,water) which is below estimate to, say, the electricity bill, which is above. Butswitches between economic categories—for example, from subsidies andtransfers to purchase of goods and services or from one program to another(even if the responsibility lies with the same line ministry) typically shouldrequire the approval of the ministry of finance. Some switches, for example,from any other economic category to wages and salaries are usually abso-lutely forbidden. In some countries, the authorization needed to makeswitches between line ministries may require approval by the president orparliament.

Although virement is an acceptable practice it should not be abusedbecause:

(1) Excessive virement is an indication that budget preparation has beentoo casual; such virement exercises are not costless (they absorb admin-istrative resources) and they discourage effective expenditure planning.

(2) The use of virement ostensibly for one purpose, which then "leaks"into another; for example, higher wages and salaries, is often a reflec-tion of poor budget classification.


Budget Execution 43

(3) The switch may not be genuinely one for one—that is, the reductiontaken on one line item is not sufficient to pay for the increasedexpenditure on another.

Excessive virement is linked to the second general problem of too great ause of supplementary estimates. Essentially a supplementary estimate is neces-sary under the law in most systems, if the expenditure on a line item is toexceed the amount provided for in the budget appropriation approved by par-liament and the necessary additional amount cannot be accommodated by vire-menl. The basic principle, of course, is that supplementaries should not benecessary, as long as the budget is well prepared and any unexpected spendingis covered from a contingency reserve. But, even in industrial countries supple-mentaries do arise. (Even under a contingency reserve system, supplementaryestimates are still required to sanction the switch between the line items and thecontingency reserve to become legal expenditures in the final accounts.)

The principles to observe in the use of supplementaries are as follows.

(1) It is better to acknowledge expenditures in supplementaries thanresort to "off-budget" transactions, to using suspense accounts (seeglossary), etc.; the basic concept that the parliament should approveall expenditures must be regarded as sacrosanct.

(2) That said, it is the responsibility of ministries of finance to exhort lineministries and spending agencies to live within the budget resourcesallocated to them—the "hard" budget constraint; that means not givingsupplementaries too readily but encouraging the switching of resourcesfrom lower-priority expenditures to provide for expenditures abovebudget provision elsewhere, wherever possible during the fiscal year.25

(3) Financial regulations, backed by actual practices, must stick to thebasic concept that supplementaries cannot be assumed. Spendingabove provision without an agreed drawing on a contingency reserve,virement, or a specific supplementary for that item is an illegal actthat should be subject to disciplinary action.

(4) Supplementaries should be approved only at fixed times of the year.The best practice is once at the end of (or in some systems immedi-ately after) the financial year in question, where the expenditureshave been legally financed from a contingency reserve in the mean-time. In other systems, twice-a-year use of supplementaries isfollowed; the more frequent use (more than twice a year) of supple-mentaries is again an indication of a poorly prepared budget andinadequate budget execution.

How good is the information on outturn expenditure?

The targeted phasing of credit to government throughout the year is typ-ically a crucial component of fiscal (and monetary) policy. To meet suchcredit targets, the authorities must be able to monitor expenditure aggre-gates. The ministry of finance therefore needs to ensure that (1) aggregate

-•^Typically, supplementaries arenot needed for excess spendingon a line item, where theresources are found by transfer-ring monies from another lineitem in the same program.



expenditure data are being obtained in a timely way, (2) the data are accurateand reliable; (3) the ministry of finance has sufficient capacity to analyze andmonitor these data, and (4) some unit has been explicitly assigned the respon-sibility for this task. These conditions are not always satisfied. Thus, improvingthe quality of the government's information system on expenditures is oftenessential, so that the ministry of finance can develop the capacity to adjustspending in response to macroeconomic and fiscal developments, whilemaintaining expenditure control.

At the heart of any fiscal and financial information system is the account-ing system, which maintains the basic records of government transactionsand, thus, outturn expenditures. How well the accounting system is operatingcan be judged indirectly by asking the following questions:

• How quickly are final accounts prepared after the end of the fiscal year?• What are the lags in the reconciliation of above-the-line budget

accounts with the below-the-line accounts of the government in thebanking system? How often is reconciliation done and at what level ofaggregation?

• To what extent are data at different stages of the expenditure processmeasured and reconciled; that is, commitments and verifications; veri-fications and payment orders; payment orders prepared and paymentsissued; and payments issued and payments recorded by the bankingsystem?

• How pervasive are "suspense accounts" and "below-the-line accounts"(see glossary for definition of terms).

• Is there a genuinely independent audit (i.e., an audit body reporting tothe legislature rather than the executive); and how quickly does theaudit of the annual accounts appear?

Even a very broad assessment of the accounting system along these lines tendsto reveal any inadequacies in the information available to the ministry offinance for control purposes.

Ideally, the government accounting systems are integrated into a fully net-worked Government Financial Management Information System and can givethe necessary information on expenditure developments on-line. But thatcapability is largely confined to industrial economies and a number of LatinAmerican economies.26 Existing accounting systems in many developingcountries were set up to monitor and control the legal compliance of expen-ditures with authorized budget provisions. As such, they may be poorly suitedto provide the financial information required for macroeconomic, fiscal, andfinancial management. More usually, therefore, the ministry of finance mayneed to devise fiscal reporting solutions, outside the regular budgetary pro-cess, to provide some critical monitoring information, in the form of "flashreports."

Such "flash reports" on the expenditure side are usually prepared by col-lating and consolidating monthly reports of (and in some systems from) eachline ministry, setting out the monthly total payments made. Better developedsystems can also report commitments entered into, likely profiles for the asso-

-'"For a description of such sys-tems, see A. Hashim and W.Allan, Information Systems far(lovrrmnent I'iual Management,World Bank Sector StudiesSeries (Washington: WorldBank, 1999).


Budget Execution 45

elated cash payments, and payment arrears. The basic solution, however, is afundamental improvement in the budget system's regular reporting capabil-ity, typically by longer-run improvements to the accounting system, throughthe introduction of a double-entry general ledger system, and the develop-ment of a Government Financial Management Information System.

Whatever the shortcomings in the information system itself, the capacityof the ministry of finance to consolidate, analyze, and use this outturn expen-diture information is also important. Many developing countries have theinformation to monitor and control expenditure, but fail to make good useof it, because of a lack of administrative capacity in budget analysis.

Some key questions include:

• Is the ministry of finance short of suitably qualified people capable ofbudget analysis?

• Can the ministry of finance set up and operate a fiscal monitoring unitthat could create and manage a monthly reporting system?

• How well does the ministry of finance use the information, if analysesof budget developments are prepared? Is there any kind of feedbackmechanism for adjusting policy when an expenditure report showsunexpected, and particularly unwelcome, developments?

Technical assistance and staff training may be required to boost theadministrative capacity and skills so that staff may make effective use of theinformation.

What are the problems encountered inbudget execution procedures?

Some typical problems identified at the execution stage are the following:

• the multiplication of exceptional procedures that bypass expenditurecontrol arrangements;

• the difficulty in reconciling bank statements with budget accounts andthus in obtaining reliable and timely data on cash expenditures;

• the accumulation of payment arrears;• the lack of fund consolidation; and• difficulty in managing and accounting for aid flows.

Each of these topics is discussed on the following pages.


How should the multiplication of exceptional procedures be dealt with?

In some countries, the fear of corruption, or an unwillingness to shareinformation among the organizations involved in the expenditure manage-ment process, have prompted the authorities to add "special" stages of con-



trol. The expenditure process can then become so cumbersome that incen-tives are created to bypass it, through "exceptional procedures," which aresupposed to speed up the process for "urgent" expenditures. Many ministriesof finance have tolerated (or been forced to tolerate) special accelerated pro-cedures for politically sensitive expenditures.

The use of exceptional procedures is, however, all too often abused andshould generally be discouraged. Sometimes, such procedures arc used byofficials to order supplies, without making a formal commitment; only laterdo unexpected bills surface. Sometimes suppliers are prevailed upon to makeadditional supplies available on credit. It is therefore unclear whether theappropriation limit has been respected, or whether there will be cash avail-able to pay for the expenditures. This contributes to the emergence of pay-ment arrears. It can also be very difficult, after the fact, to identify the kind ofexpenditure on which public monies were spent because regularization—thatis, the formal recording of the expenditure in the accounts—occurs muchlater, if at all. The multiplication of exceptional procedures also has long-termimplications, creating incentives for spending agencies to go outside the bud-get system to avoid control altogether; that is, encourage extrabudgetaryactivity. Sometimes, indeed, all too often, such procedures are associated withcorruption.

Moreover, such procedures are often linked to the misuse of supple-mentary appropriations. When ministries wish to undertake expenditures ona specific line item beyond the appropriations approved by the parliament(and there is either no scope to switch resources into that line item fromanother, or they have been denied permission by the minis t ry of finance todo so), they need to seek parliamentary approval for supplementary appro-priations. As noted earlier, if these are issued regularly during that year orafter the year has ended—with the expenditures in the meantime financedfrom, and "frozen" in, a suspense account—budget overspending is beingroutinely financed.

Excessive use of exceptional procedures and supplementary appropria-tions should be discouraged, but, as noted, supplementary appropriations arenot always bad. First, they are preferable to the buildup of payment arrears,excessive use of suspense accounts, or other "creative accounting" measuresto temporarily hide expenditures. Second, they may be necessary to authori/enew in-year expenditures that are justified by the fiscal situation.

The fundamental point, however, is that transparency requires all gov-ernment transactions to go through the budget. Contingency reserves arethere for exceptional expenditures. There should never be recourse to"exceptional procedures" or off-budget accounts.

How can the reconciliation of budgetary and bankingdata be handled?

Exceptional procedures that bypass standard controls are one reason whyit may be difficult to reconcile bank statements on cash expenditures with thebudget accounts held on payment orders issued. But there are many other


Budget Execution 47

reasons for gaps between the data obtained from the banking system andthose reported by the ministry of finance:

• differences in coverage;• deficiencies in government accounting;• the problem of arrears; and• the "float."

These potential sources of discrepancy in fiscal tables should be identifiedand minimized to the fullest extent possible.

Differences in coverage

Often, central government financial statements do not cover specialfunds and other extrabudgetary operations, while the central bank may iden-tify accounts as belonging to the government in a residual (and, henceglobal) way—that is, all nonpublic enterprise accounts and nonprivate sectoraccounts. Those responsible for the budget should ensure that the bankaccounts, which the central bank considers to be part of government, coverthe same entities that the ministry of finance reports in government opera-tions. Unless the coverage matches, reconciliation is not possible.

Differences in government accounting

Apart from coverage, many countries have trouble maintaining theiraccounting systems and hiring qualified staff. Long delays and many errors inrecording transactions and reporting them are common. As the accountingsystem is put under stress, accountants take various short-cuts, such as theextensive use of below-the-line accounts and suspense accounts, to recordtransactions on a temporary basis, before "posting" them to the correct lineitem in the government accounts or obtaining supplementary appropriations.Unfortunately, many developing countries experience large backlogs in regu-larizing these accounts, and they become open channels for abuse and mal-practice. These practices undermine the reliability of the ministry of finance'saccounting data; it is necessary to ascertain how widespread such practices areand discourage their use.

Arrears

Perhaps one of the most common sources of discrepancy between bankaccounts and ministry of finance reports arises from misguided attempts toslow down the recording of expenditures at the final stages of the spendingprocess. Faced with a monthly or quarterly financing constraint, countries areoften tempted to slow down the payment process, either by delaying the issueof payment orders or the encashing of checks, in order to meet financing ceil-ings. In accrual accounting terms, once goods or services are verified as deliv-ered, the government has incurred a liability; only in cash accounting termsdo such practices have any purpose (albeit misguided). If the above practices



are relied on for a prolonged period, the ministries' liabilities (and henceexpenditure levels) are not correctly reflected in the bank accounts, owing tothe existence of unpaid overdue bills, which represent expenditure arrears.The ministry of finance should therefore carefully compare its reports on billsreceived and payment orders issued with those on payment orders encashed,as recorded by the central bank or government payment agency.

The "float"

Another source of discrepancy between the ministry of finance reportsand bank accounts is the "float" of uncashed checks. While the term "float"can be variously defined, the term is most frequently used to mean the checkfloat; that is, the gap between the amount of checks or payment orders issuedby the government and the amount encashed by recipients through the bank-ing system. It is usually a small and predictable percentage of total expendi-ture transactions, but the "float" needs to be taken into account in reconcilingthe data from above and below the line.

"Arrears thus do not includeunpaid bills received for goodsverified but still within theusual grace period.

How can the accumulation of arrears be measured—and avoided?

Payment arrears can arise on any expenditure item, including wages, trans-fers, and debt servicing. Thus, while they are most commonly found on pay-ments due to the private sector for the supply of goods and services, that is byno means the only item affected. For such goods and services, except in those caseslegally disputed, an arrear exists when a bill has been received for services verified as suc-cessfully delivered but not paid after what is considered the "acceptable grace period, " nor-mally 30-60 days.27 A typical problem encountered in measuring arrears is thataccounting systems are unable to determine which bills are already beyondtheir grace period—for example, when bills received are not carefully noted ineither a general ledger or separate bookkeeping record. Often, the amount ofarrears can only be defined through a proxy, which is the difference betweenthe amount of bills received (if known) and the amount of bills paid.

In practice, as Box 6 shows, the extent of arrears can be very difficult toestablish. The amount of arrears should never be defined as the differencebetween expenditures committed and payments made, or as was formerly thepractice in some transition economies, the gap between appropriations andpayments made. Either will lead to an overestimation of the figure. As previ-ously mentioned, not all the committed expenditures lead to an actual deliv-ery of services; and the interval between the commitment and the actualpayment often varies considerably from one kind of expenditure to another.An estimate of arrears as the difference between payment orders prepared forissue and payment orders cashed (and an allowance for the "float" of checksissued but not yet cashed) can be realistic—but only where the spending min-istries verify the bills and send the corresponding payment orders as soon asthey receive those bills. If such discipline is not followed, it is necessary to addalso any bills received and due for payment at line-ministry or spending-agency level, for which no payment order has been prepared.


Budget Execution 49

Box 6. Payment Delays and Arrears

After an order has been fulfilled and verified, a payment delay may arise fora number of reasons.

1. The supplier may not submit the bill within the normal period, giving anextra period of credit (this cannot be regarded as a genuine arrcar). Itmay, however, entail economic costs, that is, adding a premium to normalprices to allow for anticipated delay in payments.

2. The supplier may be put under pressure by the line ministry/spendingagency not to submit the bill, forcing him to become a creditor. This is agenuine arrear.

3. The relevant line ministry or spending agency official who sanctioned theexpenditure can put the bill in a drawer, perhaps knowing there is nomoney available under a monthly cash limit. No payment voucher is drawnup for the transaction (nor is any recording of the receipt of the goods orservices necessarily made).

4. As in 3, but a payment voucher completed for the bill is held back by theordering line ministry or spending agency.

5. As in 4, but the payment voucher is passed to the accounts section for even-tual processing when the cash is available.

In the first four instances, no official within the ministry of finance may knowwhat the true volume of arrears is. Only an audit of all the unpaid bills in cate-gories 3, 4, and 5—which means checking with all heads of line ministries andspending agencies with authority to incur expenditures—will give a compre-hensive view of the arrears. Even then, reason 2—which is unlikely to be large—will be excluded.

In francophone systems, expenditure is recorded in the treasury accounts bydebiting the relevant expenditure provision (account) line item. The counter-entry reflecting payment (under a double-entry bookkeeping system) can bemade in various accounts, depending on the way the payment is discharged.Apart from cash, one typical method of payment is through the cash voucher(bon de. caisse)', and another, if the treasury decides to defer payment, isthrough a credit entry in a suspense account (compte d'attente). Hence thefrancophone system, when functioning properly, offers this direct, althoughperhaps not wholly complete, indicator of the emergence of arrears. In prin-ciple, to gain a measure of arrears, one has only to take the balances of theseaccounts recording expenditures due for payment. These typically includethe suspense account and the account that records the outstanding amountof cash vouchers.

In Latin American countries, arrears (atrasos) in the expenditure processcan be estimated, when data are available, as the difference between theverification stage (devengado) and the payment stage (pago). In general, it isdifficult to measure arrears owing to either the total lack, or the weak relia-bility, of" this information. In this case, the second best alternative for calcu-lating arrears is to use the payment order (ordenes de pago) prepared as a



-KJack Diamond and ChristianSchiller, "Government Arrearsin fiscal Adjustment Programs,"in How to Measure the FiscalDeficit, edited by Mario I. Blejerand Adrienne Cheasty(Washington: InternationalMonetary Fund, 1993).

proxy variable for the verification stage, and compare this with the paymentstage (pago).

The Commonwealth system does not offer an easy indicator of arrears.Payment orders are usually prepared and issued by the receiving ministry,after certification that delivery has been made. Spending agencies are sup-posed to maintain commitment ledgers and to record their requests to thetreasury for payment or for payment orders to be issued, against authorizedappropriations (sometimes called "vote books"). But the vote books are notalways completed reliably, or even at all, as regards the column for enteringcommitments. A comparison of actual deliveries with payment orders issuedis likely to be carried out only in a piecemeal fashion by spending depart-ments. As noted earlier, checks or payment orders may be issued centrally orby the spending ministry to the suppliers. Only in a central system is it rela-tively straightforward to get a governmentwide comparison of payment ordersissued against checks issued, and then only after some delay. To estimate thesize of arrears under a decentralized system, reliance has sometimes beenplaced on data generated at a late stage in the spending process, on the gapbetween payments authorized and checks cashed. As Box 6 indicates, such ameasure can often be inaccurate.

When tackling arrears, the sources of problems need to be established.An accumulation of arrears may arise because:

• the budget provision is unrealistic and line ministries are allowed tocommit expenditure within that appropriation (i.e., budget provision),even though there is no cash available to liquidate the expenditure;

• the budget figures are realistic, but the cash plan (and monthly cashlimits) associated with the budget are not, or there is no in-year guid-ance on when expenditures can be committed;

• commitments are not recorded and therefore do not respect the bud-get ceilings or the timetable defined by the cash plan; or

• the spending ministries do not work efficiently and bills remainunprocessed.

To avoid a continued flow of arrears, the ministry of finance shouldaim to ensure that the budget and its associated cash plan are realisticallyprepared, that all committed expenditures follow formal procedures, andthat procedures are in place, so that the relevant data on progress at eachstage of spending are available in a timely manner, centralized, and analyzed.That often takes time—one reason why problems with arrears keepemerging.

The treatment of payment arrears in the fiscal accounts also poses a num-ber of difficulties. (See Diamond and Schiller for a full explanation.)-*

The standard presentation of the deficit in the GFS Manual\s, for the pre-sent, on a cash basis. This requires expenditure incurred in terms of paymentarrears to be shown as a memorandum item. Adding the size of the "float" ofuncashed checks and the memorandum item on arrears to the financing datafrom the monetary survey should facilitate reconciliation with the above-the-line deficit measured from the fiscal data.


Budget Execution 51

But the GF.S' Manual also rightly states that expenditure is incurred by thegovernment when goods and services are delivered and verified, and the pay-ment is due. A better presentation in fiscal accounts (sometimes termed amodified cash basis) is to show expenditures on a commitment basis, with thedifference between the above-the-line deficit total and cash financing identi-fied as "forced financing" (i.e., by unpaid suppliers). The kind of data avail-able on commitments from a French-style system can enable a fullpresentation. In other countries, such information may not be obtainable,except when a special survey of commitments/arrears has been undertaken.

Another form of presentation is to show the deficit measured on a com-mitment basis, the net change in arrears, and the corrected overall deficit ona cash basis. But, again, that requires data that are often not available or arevery diff icul t to integrate. In practice, data constraints will often drive fiscaleconomists to the standard approach or to some broad form of showingexpenditures on a commitment basis in preparing fiscal tables.

Besides taking measures to stop the accumulation (flow) of new arrears,those responsible for the budget should be familiar with the size of, and thestrategy for resolving, any existing stock of arrears. This stock can be very dif-ficult to estimate, as Box 6 implies. However, in many instances, the only reli-able source of information would be an audit of the existing bills, making surethat the goods or services have actually been delivered. (Some suppliers maytake advantage of accumulating arrears and the disorganization of the expen-diture process by sending bills for goods that were never provided or thathave, in fact, already been paid for.) Legitimately disputed arrears should notbe included in the stock of outstanding arrears for clearance.

Once the stock is known, it is advisable for some central agency in theministry of finance, say the treasury, to take over the responsibility for the pay-ment of the stock of past arrears, so that this can be programmed as an iden-tifiable component of the current fiscal year's expenditure. But liquidating astock of arrears raises a number of issues:

( 1 ) If provision is made by line ministries from within their appropria-tions (typically at a late stage in budget preparation), it leads toreductions in the financial provision for other policies and programs.When paying off the old stock of arrears, it is important to avoid theaccumulation of new arrears. Moreover, some line ministries orspending agencies may choose to incur new commitments with theirresources rather than meet past liabilities.

(2) If provision is made for repayment arrears by the ministry of finance,on the other hand—for example, from within its contingency reservewithout reducing the line ministry appropriations—this may ensurethe arrears are liquidated. But it generates a "moral hazard" problem.The line ministries may conclude that if they incur arrears in thefuture they will again be bailed out by the ministry of finance.

( M ) A third option is to finance the accrued liability by "securitization," aform of government borrowing. There is a range of options, includ-ing promissory notes that are discountable by the commercial banks (but



should not be rediscounted by the central bank, as that would lead tomonetization of the deficit); the issue of treasury bills; or the issue oflonger-term bonds. This approach has the advantage of not disrupt-ing the budget provision and may enable the private sector to berepaid more quickly, but it adds to government debt and to the gov-ernment's interest bill; and it again raises "moral ha/ard" issues.Moreover, whereas the issue of treasury bills and bonds is often asso-ciated with full payment of arrears, promissory notes can be used toprioritize (by varying the terms of the promissory notes) and canonly be cashed at a discount. Thus, the creditors face a loss relative tocash payment. Also, the issue of promissory notes can be nontrans-parent, being open to favoritism and corruption. In no cases shouldthe arrears be directly offset against tax liabilities. This would onlyundermine tax compliance and encourage the future accumulationof arrears.

(4) While option (2) and/or (3) may often be preferred, it should alwaysbe accompanied by a genuine strengthening of expenditure controlsto avoid future arrears, and thus reduce the moral hazard problem.Its acceptability will also depend on many other wider factors: thecase for prompt payment versus deferral; the interaction with anyarrears on tax payments;29 the mode of financing; and the pursuit ofmonetary policy objectives.

-"A number of former centrally-planned and francophoneAfrican countries haveindulged in the netting out oftax and expenditure arrears asa "one-off " (but all too oftenrepeated) exercise. As noted,such offsetting is to be avoidedin general, as it creates anincentive not to pay tax billsand prolongs unrealistic bud-geting. However, the accumula-tion of arrears can sometimesbe so large that such nettingout is a necessary first step toreduce the si/.e of the outstand-ing stock, whose residual mustbe handled by the options dis-cussed above.

Is there a complete consolidation of funds?

In most countries, the government's funds—for example, tax and cus-toms revenues, proceeds from internal and external borrowing, etc.—flowinto a single bank account (often called the treasury account) held in the cen-tral bank. This is thought not only to facilitate budget execution, particularlycash and debt management, but also to be the safest depository for govern-ment funds. But there is no theoretical reason why this must be so; in a few-industrial countries, the role of government banker has been contracted outto a single commercial bank. In the vast majority of countries, however, thecurrent practice (or the aim) is for government resources to flow speedily andefficiently into a single account held in the central bank.

Government funds are, however, often fragmented in developing coun-tries. In some countries, the main treasury account coexists with other publicaccounts, such as the account of the amortization funds in francophone coun-tries, or public entities are allowed to open accounts in private banks. In suchcases, government funds may be available as deposits in bank accounts, evenwhile the government is borrowing in the market and/or payment arrears areaccumulating in the private sector, because the main treasury account has nocash available. Thus some fiscal tables—which are consolidated reports—canshow a buildup of idle cash balances and the accumulation of arrears.

This fragmentation of funds undermines budgetary operations and gen-erally implies additional costs to the government. Often the government isborrowing at high interest rates, while unused funds accumulate in bank


Budget Execution 53

accounts and earn a low rate of interest, if any. Commercial banks use the gov-ernment ' s own money to lend back to them at a profit.

Such practices should be changed. First, information on these accounts—at least on the aggregate Hows and balances in all central and commercialbanks belonging to the government—should be available to the ministry offinance/"1 (This is necessary to enable the ministry of finance to reconcileaggregate bank accounts with the government's fiscal tables.) The second stepis to consolidate as many of these accounts as possible within a single treasuryaccount at the central government. Any accounts that are designed to bypassnormal budget procedures should be closed, and expenditure previouslyfinanced from these accounts would then become regular budgetary expen-diture and follow the normal budget procedures.

How efficient is foreign aid management?

For many developing countries, the degree of their reliance on externalforeign assistance has increased over the years. Unfortunately, the growth inaid flows has often not been matched by the administrative capacity to man-age them well. This can create several problems for fiscal economists.

Many of the problems concern the timing of aid flows. Commodity aid thatenters a country may be recorded at different times by the donor (on ship-men t ) , by the central bank (on clearing the port), and by the ministry offinance (when the commodity is sold and money flows into the governmentbank account). When the aid involves basic commodities that have to be pro-cessed, distributed, sold, and the profits remitted back to the government,the delays can be quite substantial. Often the receipts from such commodityaid do not enter the government's main account but go into special "coun-terpart funds," which are administered jointly by the government and thedonor. Sometimes these funds can be released only for donor-approved pur-poses. This source of f inancing should be regarded as tied aid rather than asgeneral budget support. In countries dependent on such aid, it is importantto understand the timing of these flows; distinguish financing from publicexpenditure transactions; and record such flows appropriately in govern-ment accounts.

For project aid, the reimbursement principle is increasingly employed,whereby the government first spends funds linked to a donor-supported pro-ject (expenditure), then claims reimbursement from the donor (financing).There are often large administrative delays in processing these claims, so thatspending initially has to be financed from domestic sources. The extent ofthese delays should be investigated, and, if they are substantial, the executingministries, in collaboration with the donors, should be encouraged to imple-ment measures to speed up the processing of claims.

Another common practice is for the donor to set up special project accounts,sometimes in the central bank but often in a commercial bank, to which allproject disbursements will be channeled, and from which all payments for theproject wil l be made. This makes it administratively easier for the donor tomonitor implementation, allows some control over the use of funds, and can

'"It is sometimes necessary toexclude amounts held in trustfunds where the government isthe trustee, not owner, of themonies.



be used as a means to regulate the speed of project implementation. However,since these accounts may be kept outside the regular government accounts,and so bypass normal accounting procedures, there are often delays in report-ing and problems in consolidating these accounts with the government'smain account.

Even more difficult for the accounting system is the practice of donors pay-ing foreign suppliers directly on behalf of the recipient country. In this, and thecase of special project accounts, the government is often dependent on infor-mation supplied by the donors to monitor the implementation and financingof projects. In many cases the flow of information breaks clown or is availableonly after considerable lags.

Further domestic problems arise because of uncertainty abotit the timingof receipts of'did flows. On the one hand, there can be the need to make pro-vision for counterpart funds within the budget—which are not used if the aidis not disbursed as planned. On the other, foreign aid can arrive unexpect-edly, requiring the authorities to direct money into counterpart expenditures.Often, there is a lag between when foreign resources arrive at the central bankand their crediting to the government's accounts.

For so long as donors require the separate accounting and banking oftheir grants and loans, there can be no generalized accounting (or financing)solutions. In countries highly dependent on foreign aid, the fiscal economistshould make a special effort to understand how commodity and project aid ishandled on a case-by-case basis, so that consolidation of all governmentexpenditures can be achieved, so far as possible. It may even be desirable tovisit local agencies of the principal donors and discuss with them their mainimplementation and reporting problems; and, as necessary, to discuss withthe authorities how procedures can be improved. The fiscal economist shouldencourage the government to maintain an up-to-date record both of its exter-nal liabilities and the timing of foreign inflows due.

How can expenditure be adjusted in-year?

Those executing the budget may be faced with requests to consider addi-tional expenditure in-year; or they may be asked to look at the scope for cut-ting back spending in-year—for example, when revenue inflows have proveddisappointing.

The most important point is that, as noted in the preceding section, onlychanges in expenditure policies can deliver sustained changes in expenditurelevels. Yet, some country authorities can be tempted to seek ways to avoidexpenditures being recorded as the first means of "cutting" spending.

First, fiscal economists and budget advisors need to keep in mind the dif-ference between an accrued and a cash liability for public expenditures. Asnoted above, once goods are delivered and the bill is received and verified, anaccrued liability has arisen. Moreover, in economic terms expenditure shouldbe recorded as having taken place. But all too often governments, aware ofthe paramount importance of the monetary variables in macroeconomic


Budget Execution 55

adjustment programs, seek to avoid recording a cash liability. Limiting theamount of cash liability allows the government to hold down (below target,for example) borrowing in cash terms.

Such schemes for "cutting" expenditures should be eschewed as they typ-ically involve:

• building up payment arrears;• recording expenditures in suspense accounts;• reductions in cash availability not matched by reduced appropriations

and appropriate policy changes to reduce commitments; or• delayed submission of bills (particularly at the end of the year).

They are creative accounting devices that misrepresent and understate theeconomic impact of the government sector and often cause financial damageto the private sector.

Second, the basic principle must be that, in seeking to introduce expen-diture reductions in-year, any attempt to reduce or slow down the rate ofspending must be directed toward the commitment stage—that is, before aliability is incurred. It follows that the scope and targeting for such measuresis restricted both by timing (for some expenditures such as debt servicing,the commitment and its timing are or should be immutable) and by the crit-ical need to alter expenditure policy on discretionary expenditures, so that acommitment can be avoided. For example, in-year, it is easier to hold up acapital project than to reduce employment quickly so as to reduce the wagebill. In general, the earlier action is taken, the greater the flexibility thatexists.

Thus, there are very real constraints on the adjustments to the plannedbudget that can be made through action on budget execution during theyear. Large components of spending—usually termed nondiscretionary—aregenerally fixed in the short term. These nondiscretionary expendituresinclude commitments made in prior years that cannot be changed, such asdebt service;^1 spending mandated by other legislation, such as indexationlaws, pension and wage legislation, or other social benefits or entitlements;wages and salaries for existing employees (in the short run); and many trans-fers, such as those to other tiers of government.

Although governments may often claim that all (or virtually all) expendi-tures are nondiscretionary, in practice, much of the spending on purchases ofgoods and services is, to some degree, discretionary—and even the size oi thewage bill can often be reduced in-year. The degree of budget lock-in—that is,how much expenditure is genuinely nondiscretionary—needs to be assessedto give a reasonable picture of the maximum degree of expenditure reductionthat can be imposed in any fiscal year.

Thus, any proposed actions need to be carefully crafted.

(1) Changing the level of new commitments must be the target. Thisrequires a conscious decision to change some expenditure policy,even if it is only advancing the start date of a capital project (to raisespending) or postponing a salary increase (to hold down spending).

a 'This does not prevent somecountries from building updebt arrears; for example, ondomestic debt held by a coun-try's own central bank.



(2) Even if action can be taken, for example, to delay the start of a capi-tal project, there may be economic costs (project delays), financialcosts (penalty clauses), and wider repercussions of loss of goodwillwhen donor-financed projects are scaled back.

(3) Within commitments, attention often focuses on capital items as themost obvious targets.

(4) One other category—current purchase of goods and services—maybe targeted for reductions, but it is often tricky. If a common per-centage reduction is proposed, line ministries may leave importantbills unpaid (e.g., utilities) or make unrealistic reductions in sensitiveitems, hoping to embarrass the ministry of finance later into releas-ing more resources.

(5) Also to be eschewed are reductions in intergovernmental transfers.Stich action represents passing the problem from one tier of govern-ment to another, with aggregate general government borrowingoften unaffected.

Rather more imaginative approaches to holding down expenditure cansometimes be found, such as delaying the introduction of a planned wageincrease or the start date of a new policy, or placing a freeze on hiring or pro-hibitions on external travel. The key point is that those executing the budgetshould be encouraged to look for opportunities to pursue preexisting expen-diture policy goals when reductions or increases are to be made. The scopefor "consolidating" an in-year emergency action as a new policy in the nextyear's budget should also be an important consideration.

32See for example, IMF, GoodGovernance: The IMF's Role(Washington, 1997).

aSee also George Kopits and JonCraig, Transparency in FiscalOfierations, Occasional PaperNo. 158 (Washington:International Monetary Fund,1998) and "Code of GoodPractices on FiscalTransparency: Declaration ofPrinciples," IMF Survey,April 27, 1998, pp. 122-24.

How should good governance be pursued?

A fundamental role for those advising on budgetary matters is to supportpublic sector reforms and policies that promote the efficient use of resourcesand sustainable economic growth. In recent years, a greater awareness of gov-ernance issues has focused attention on fostering public sector efficiency,transparency, and accountability.3- A well-functioning budgetary systemensures accountability, in the sense that:

• every action is transparent;'^• every participant is held accountable;• every action is properly documented and reported; and• every action can be subject to independent, professional, and unbiased

audit and review.

Since the budget system plays such a crucial role in achieving good gov-ernance, the fiscal economist or budget advisor should develop an awarenessof weaknesses within this system and consider how the system might beimproved by pursuing more transparent practices, promoting accountability,and delivering public goods more efficiently. In this context, the followingpoints are important, as a means to foster or maintain sound governingpractices.


Budget Execution 57

Define the government sector clearly and comprehensively. This means not onlythat central government, state/local governments, and government financialand nonfinancial operations should be separately identifiable, but also thatthe respective roles of the executive, legislative, and judiciary should beclearly defined and widely understood. Also, the true extent of governmentquasi-fiscal activities and the contingent liabilities of government should beidentified and monitored by governments.

View the budget as a complete process. Interference in any one element of thebudget process may have repercussions on the system as a whole. Too often,when formulating fiscal adjustment strategies, attention on the expenditureside is focused on the last stage—actual cash payments—where the impact ofgovernment spending is manifested in the monetary sector accounts. Asnoted above, expenditure control needs to take place at a much earlier stage,long before payment orders are prepared and processed.

Adjust spending at the earliest stage possible. Indeed, the aim should be tohave an input at the policymaking stage of budget preparation, when existingexpenditure policies are confirmed or new policies adopted.

Minimize disruptions to the expenditure process. The budget system fulfillsmore functions than that of helping ensure macroeconomic stability. Its orig-inal function was to ensure compliance with the budget appropriation law, thebasis of sound governance. The budget system should also promote otherobjectives, an efficient allocation of resources among programs, effectivenessof government operations, and efficient financial management of govern-ment resources. Care must be taken, therefore, that stabilization objectivesare not pursued at the expense of these other objectives. This is often not easyto accomplish. Cash controls, though attractive for securing aggregate controland compliance with the monetary dimension of an adjustment program,tend to bear more heavily on easily controlled elements like operations andmaintenance expenditures; they may distort, over time, the patterns of gov-ernment expenditures and be damaging to longer-run government efficiency.Widespread arrears, often associated with overreliance on cash controls, maylead to dislocations in the private sector (see Section 5).

Respect the budget system's internal and external controls. At each stage of theexpenditure process there are controls in place. In periods of fiscal stressthere is a tendency to bypass regular budgetary procedures and circumventcontrols. Often the result is an increase in corruption. The extent of oppor-tunistic corruption, whereby individuals take advantage of a poor control sys-tem, varies but is all too common. Systemic corruption, though perhaps morerare, involves using political power to subvert the control systems. This canhave a macroeconomic impact and may be indicative of the authorities' lim-ited commitment to adjustment and reform. But it is not susceptible to anydirect or quick solution; and only a strong political commitment will bringneeded improvements.

Limit exceptional procedures. In some countries, the expenditure process hasbecome so cumbersome that there are substantial incentives to bypass it,through "exceptional procedures." Procedures should be defined in laws andregulations; inspections and audits should be timely and comprehensive;



infractions should be dealt with, and seen to be dealt with through appropri-ate disciplinary action.

Poor governance can undermine fiscal adjustment. Governance issues affectthe ability to deliver fiscal objectives. Countries successful in fiscal reformeither started with a sound public expenditure management system or begantheir effort improving a deficient one.34 Weak governance should beaddressed early in the reform effort.

34G.A. Mackenzie, David W.H.Orsmond, and Philip R.Gerson, The Composition of FiscalAdjustment and Growth: Lessonsfrom Fiscal Reforms in EightEconomies, IMF OccasionalPaper No. 149 (Washington:International Monetary Fund,1997).


5Cash Planning and Management

As an integral element of public expenditure management, governmentsneed to develop cash planning and management to keep within budgetedexpenditure in cash terms; to prevent unanticipated borrowing that mightdisrupt monetary policies; and to help identify the need for in-year remedialfiscal action. Variations in in-year actual versus planned patterns of expendi-ture are not without cost. Even if the total limit on borrowing were notexceeded over a fiscal year, higher-than-planned expenditures within a shortperiod may lead to a surge in borrowing and can disrupt the achievement ofmonetary policy objectives.

The ability to adjust central government spending, both in the timing aswell as the amount, is of strategic importance in any budget system. Carefulfinancial planning and efficient in-year management of budget delivery areessential, but both planning and management will work well only if the bud-get information systems are comprehensive, timely, accurate, and reliable—and if all the departments involved, both inside and outside the ministry offinance, cooperate closely. These conditions are rarely fulfilled in developingcountries, thus making monitoring of the fiscal program difficult and cashmanagement more challenging. This section will outline the main cash plan-ning requirements for ensuring that expenditures are smoothly financedthroughout the year and that overall fiscal targets are met.

The main questions are:

• What are the essential features of cash planning?• Who is responsible for preparing and monitoring the cash plan?• What are the main constraints that disrupt smooth financing of expen-

diture plans and how can these be overcome?

What are the essential features of cash planning?

Cash planning has three main objectives: (1) to ensure that expendituresare smoothly financed during the year, so as to minimize borrowing costs;(2) to enable the initial budget policy targets, especially the surplus or deficit,

59



:lr'Kxcept where slate expendi-tures arc very large, themacroeconomic locus on finan-cial management is on the cen-tra! government level. State andlocal governments, however,have the same incentives tomanage their finances effi-ciently by following the samecash planning and manage-ment practices recommendedhere (see B. Potter in T. Ter-Minassian, Fiscal Federalism inThmry and Practice (Washington:International Monetary Fund,1997).

to be met; and (3) to contribute to the smooth implementation of both fiscaland monetary policy. An effective cash planning and management systemshould:

• recognize the time value and the opportunity cost of cash;• enable line ministries to plan expenditure effectively;• be forward-looking—anticipating macroeconomic developments while

accommodating significant economic changes and minimizing theadverse effects on budget execution;

• be responsive to the cash needs of line ministries;• be comprehensive, covering all inflows of cash resources; and• plan for the liquidation of both short- and long-term cash liabilities.

Even if a budget is realistic in the sense of having well-prepared and objec-tive aggregate revenue and expenditure estimates, this does not mean thatbudget execution will be smooth. Timing problems can be expected betweenpayments coming due and the availability of the cash necessary to dischargethem.

Ideally, a cash plan for central government expenditures should include,for the month ahead, a daily forecast of cash outflows (i.e., mainly expendi-tures) and cash inflows (receipts from tax and nontax revenues and also fromborrowing, including issues of government securities as well as other externaland domestic borrowing) .3S

But some such daily systems found in developing countries are essentiallymisdirected and represent "emergency" cash budget regimes that pay outtomorrow what flowed in today. Where such cash planning systems do exist,they are rudimentary, dirigiste, and unresponsive in practice, to unanticipatedshortfalls in revenues or borrowings. They have many drawbacks. While theycan be broadly effective in limiting cash payments to available cash inflows,they often do so at considerable cost to the effective allocation of resources(sudden cuts in cash provision relative to budget appropriation) and to thetimely delivery of services (because there is insufficient information on thelikely flow of cash available to enable managers in line ministries to plan theirdelivery of services). Moreover, such systems are often associated with abuildup of payment arrears. Governments need to pursue a more sophisti-cated approach to cash management.

Developing countries should aim to deliver their budget by adopting amonthly cash plan, based on projected aggregate cash inflows and limits oncash outflows. The principal components should be as follows:

• The starting point should be an annual cash plan, prepared in advanceof the fiscal year, setting out projected cash inflows and cash outflowsmonth by month.

• Past patterns can help establish likely month-to-month inflows of taxand nontax revenue receipts. The likely timing of external borrowingis also often partly known in advance, so that total inflows can be pro-jected. Past patterns of expenditures can usually be a guide to the cashoutflows each month.


Cosh Planning and Management 61

• However, factors such as irregular capital expenditure patterns, varia-tions in the timing of donor grant receipts (whether for specific capitalprojects or general budgetary support), and the precise timing of newborrowing (which may have to await a conjunction of beneficial marketconditions) are likely to mean variation from year to year in monthlypatterns of cash inflows and outflows.

• When it appears from the initial projections that there might not beenough cash available within a given month to cover expendituresfalling due, a government can delay the planned commitment of theexpenditure; speed up the collection of revenue; or borrow. The choiceamong the three options will depend on feasibility and costs.

Once the annual plan is established, it should become the basis for rollingthree-month projections, and within that projection an operational rash man-agement plan for the month ahead. These should operate as follows:

• The three-month projections and monthly plans need to be revised eachmonth on a rolling basis in the light of actual revenues and expenditures(and often experience in borrowing domestically and externally).

• When the three-month rolling projections indicate there may not beenough cash available within one or more of the three forward monthsto cover expenditures, action can be taken to delay expenditure com-mitments, accelerate revenue collection, or borrow, with the choicedepending on feasibility, costs, and borrowing constraints.

• The operational cash management plan for central government expen-diture for the month ahead should, ideally, include a daily (or at leastweekly) forecast of cash outflows and inflows. This cash managementplan should be prepared and updated at least every week.

The operational monthly cash management plan is often translated intoa monthly cash limit set on some, or all, expenditures of individual ministriesor spending agencies. In some instances—and not just in post-chaos situationsor as a temporary means of reimposing control—there can be cash limits oneconomic categories of spending or even individual line items. Some indus-trial countries have put limits on certain subaggregates like "running costs"—wages, utilities, and residence costs for individual spending agencies. Thesecash limits are often seen as being the way in which a "hard" budget constraintoperates. But, as noted, as a means of expenditure rather than cash control, cashplans on their own are ineffective when there is no separate control over com-mitments, and often lead to a buildup of (unpaid) liabilities.

The cash plan assists in determining the realism of fiscal criteria or bench-marks for each month/quarter. It can engender a sense of confidence amongthe authorities that they have cash control and give them greater confidencethat other important fiscal and monetary targets (e.g., credit ceilings) will berespected. Thus, to be viable, the targets included in an adjustment programshould always be supported by a cash plan that is updated to take into accountthe latest available information on revenues collected, other receipts (includ-ing borrowing), and expenditure committed and paid.



The continuous monthly updating of the cash plan should help in ensur-ing that the initial budget targets will be met. When it is clear from the latestforecast available that targets may not be met in the future or at the end ofthe year, measures will have to be taken to constrain expenditure or toincrease revenues. The cash plan can contribute to the decisions on the size,type, and targeting of the measures required. (See the previous section for adiscussion of such measures.)

Who is responsible for preparing and monitoringthe cash plan?

As noted, in principle, within the monthly cash management plan for thecentral government budget, the figures should be prepared and updated at leas!every week by the treasury or cash management department of the ministry offinance, as the government's financial manager. This often does not occur indeveloping countries—although sometimes the central bank may undertakeall or part of such an exercise. The budget advisor should encourage the cre-ation of some kind of cash management unit within the ministry of finance(typically as one of the components of the treasury department) to prepareand maintain cash plans and monitor outcomes.

To monitor delivery of the cash budget, the treasury department must getall the necessary information as quickly as possible from all the departmentsinvolved—not only from the ministry of finance departments, (e.g., the taxand customs administration and budget department) but also from the plan-ning ministry, the line ministries, the spending agencies, and the centralbank. This task is often not adequately carried out because, among other rea-sons, the reporting system is not fully networked. As a first step, before morelasting comprehensive reforms are put in place, a provisional monitoring sys-tem may have to be introduced.

For this purpose, one approach is to set up a small team, headed by some-one with enough authority to obtain information from the various depart-ments. For example, in some francophone African countries, the Direction tiela Prevision or Cabinet du Ministre des Finances are already operational in coor-dinating budget execution and cash planning. In Latin American countries,the unit in charge of monitoring is either in the central bank or within theministry of finance under the supervision of its minister. The functions of thisunit should be to:

• prepare a monthly cash plan;• keep an inventory of the existing in-year fiscal reports, on the rev-

enue side of the budget as well as on the expenditure side, and pro-pose the preparation of new reports if those existing do not fulfill theirrequirements;

• centralize the outturn revenue and expenditure information in "flashreports," summarizing main developments with minimum lags;

• analyze the reports, and update cash forecasts on the basis of these flashreports;


Cosh Planning and Management 63

make proposals for adjusting cash flows if the need arises; andkeep the central bank fully informed (because government operationscan have important consequences for bank liquidity).

What are the main constraints that disrupt smoothfinancing of expenditure plans?

In OECD countries, cash plans are typically prepared within the ministryof finance for year ( t + 1) on the basis of estimated revenue and expenditureprofiles for year (t- 1), and the information being collected, as the budgetyear (t) unfolds, from the tax and customs administrations and from the trea-sury department or line ministries (at least for large expenditure items). Inmany industrial countries with well-developed capital markets, the ministry offinance can readily borrow the amount necessary to meet both temporaryshortfalls, when timing problems occur, and to finance the deficits. Whenthere are temporary surpluses, these can be invested in the money markets,even overnight, to earn a return.

In contrast, many non-OECD countries do not have access to a well-func-tioning capital market. Either the ministry of finance cannot borrow easily,or it is not permitted to borrow from the central bank36 or the money marketto finance short-term shortages of cash. In these cases, cash plans have amore fundamental importance. Unanticipated expenditures cannot simplybe passed on to the ministry of finance for payment. The cash expenditureforecast for a given month then becomes a real limit that should not beovershot.

There are five prerequisites for good cash management: (1) a realisticbudget, (2) clear procedures for the release of appropriations, (3) strictobservance of the budget execution rules, (4) experienced and skilled staff toprepare and monitor the cash plans, and (5) clear borrowing rules.


Is the budget realistic?

A good cash plan cannot compensate for an unrealistic budget. Indeed,the cash plan—and any monthly cash limits typically derived from it—mustnot become substitutes for the budget itself. The budget preparation proce-dure is the prioritization process within specific financial constraints, and thisprioritization process should be fully in place before expenditure is brokendown into monthly cash limits.

Yet the reverse is often the experience—for example, in a number ofeconomies in transition and some African countries. Decisions about expen-diture priorities are not adequately discussed or settled at budget preparationtime by the line ministries and the ministry of finance, or the budget avoids 36For example under a currency

hard decisions to appease the parliament. Then, it is the ministry of finance board arrangement.



that has to exercise the real prioritization and expenditure cuts through cashallocations. This can strain budget execution beyond its breaking point.

Are the procedures for the release of appropriations adequate?

The way appropriations are released is also important because it defineshow much may be spent in a given month or quarter. Three systems are pos-sible, depending on the legal framework (usually the organic budget law),and/or the country's situation.

In most industrial countries, budgetary appropriations are available to thespending ministries as soon as the budget is approved. The spending min-istries are free to commit their expenditures and issue payment orders whenthey wish, and the treasury will borrow on the market if necessary. This is pos-sible because the profile of expenditure is relatively stable, and because thegovernment can borrow easily from a well-established capital market.

In some less developed countries, fixed amounts are released for a specificperiod of time (month or quarter)—for example, '/: of appropriations isreleased at the beginning of each month. If the situation does not change, V\iof the appropriations will be released every month. If, however, the situationworsens, the release of appropriations can be slowed down.

In many developing countries, particularly Commonwealth countries, for-mal warrants can be issued by the ministry of finance to spending agenciesthat control specific categories of spending, and budgetary allocations can bemade available only in part, again for various periods of time—monthly, quar-terly, or even by special request. This allows fine-tuning of the release ofappropriations.

In all cases, when the appropriations are released, the line ministry orspending agency has authorization to commit the expenditure. But additionalcontrols on cash releases (e.g., monthly cash limits) can be an effectivemethod of controlling the rate at which appropriations are used. In a very fewcountries with severe cash shortages, commitments and payments have to bealmost simultaneous, because suppliers will not accept an order nor deliverunless payment is assured.

Are there adequate experienced and skilled staff to carry out this task?

The preparation and the maintenance of cash plans require some finan-cial skill. Officials have to analyze the available information, make judgmentsas to its reliability, and, based on this information and their past experience,make realistic projections. In particular, they have to regulate the flow of com-mitments with all the instruments available to make sure the cash necessaryto cover the expenditure, when due, will be available and thus avoid paymentarrears. This is not easy—depending on the type of expenditure, there may bea lag of months, or only a few days, between the commitment stage of theexpenditure and the payment.

Another important task is to liaise with the central bank to ensure thatfinancing requirements can be met and will not cause adverse monetary


Cash Planning and Management 65

repercussions. The scope for borrowing from different sources, and the termsof such borrowing, will also be matters of concern, since the future debt ser-vice implications of present borrowing will also have to be factored intospending plans. Officials executing the budget should possess adequate skillsand technical capacity. Sometimes fiscal economists and general budget advi-sors need to identify where training is necessary.

Are there clear borrowing rules?

Government borrowing quickly leads into wider questions of monetarypolicy. In this publication, only two aspects are considered: are the institu-tional arrangements sufficiently robust to permit effective cash planning forgovernment and to facilitate short-term borrowing?

As noted earlier, it is all too common for the government's monies to beheld on deposit in a number of different bank accounts—some in the centralbank and some in commercial banks. Ideally, the government should have allits resources either in a single account—such as the Treasury Single Accountas established in a number of transition economies—or in accounts that canbe consolidated every night. If a consolidated balance rather than some sub-set of bank accounts can be drawn upon, that may prevent the governmentfrom borrowing when it does not need to do so. (There are many occasionswhen government deposits in a commercial bank are used by that bank topurchase treasury bill issues. The government is literally borrowing its ownmoney and paying interest for the privilege.)

Thus, all government deposits in the banking system should be consoli-dated overnight so as to ensure that government borrowing requirements areminimized. This can be more problematic than first appears—common diffi-culties include:

• hypothecated funds such as health, road, and even social security fundsmay be established by separate legislation. The money in these funds isoften not available to the government, even on a short-term borrowingbasis; privatization funds have often been established on this same basisin some East European and other transition economies;

• donors may regard money committed to a government and held ondeposit in the central or a commercial bank, but not yet disbursed, astheirs (the donors)—not the government's; and

• there may be a lack of transparency between monetary and fiscal instru-ments; thus large government deposits in the commercial banking sec-tor may be serving a secondary monetary role (e.g., providing liquidityneeds for the banking system).

In this area, the basic principles are that:

• government money belongs to the government;• money in different accounts is usually fungible and should be consolidated;• the government has a right and a duty to make effective use of its own

funds; and



• the government should earn a market rate of interest on its deposits,while paying overdraft rates on its borrowing and a negotiated servicefee to banks that conduct transactions for it.

Where the government is budgeting for a deficit, planning for the financ-ing of that deficit is a major task—outside the scope of this publication.Governments need to have an annual borrowing strategy implemented inclose coordination with the central bank and in line with monetary policy. Butfor efficient cash management, within that borrowing strategy, the govern-ment also needs a mechanism for dealing with unanticipated day-to-day orweek-to-week cash shortfalls in the least-cost way, and without unnecessary dis-ruption to the delivery of public services.

How then is a temporary shortfall to be met? First, great care should betaken in attributing an unanticipated borrowing need to temporary causes.Poor revenue performance or sudden increases in expenditure above planare very often not temporary factors; rather, any temporary causes should betracked down, and the authorities must be convinced that this cause willunwind within a short interval. Only then will any associated borrowing begenuinely temporary (and readily repaid).

Once it is clear that the country is facing a temporary cash shortfall, theremay be scope for postponing some payments. But this can damage the gov-ernment's financial credibility and is normally best avoided. As noted earlier,if the government does not hold all its deposits in a single account, the scopefor financing a temporary cash shortfall on the main treasury account by bor-rowing from other government funds should always be investigated. Somecountries maintain a separate "stabilization fund," into which windfalls, dona-tions, etc., are directed, that can be used in such circumstances. This is (orshould be) the least-cost option in terms of interest forgone, being less thanthe cost of an overdraft facility.

Finally, many countries have an automatic overdraft facility (sometimescalled a "ways and means advance" in Commonwealth countries) at the cen-tral bank. Clear rules must govern the use of such overdraft facilities:

• the size of the overdraft facility should be limited (preferably in statute);• the duration of any overdraft should be limited (again preferably in

statute);• to avoid monetization of the deficit, any short-term borrowing that is

not quickly repaid (through the arrival of delayed inflows into the trea-sury account) should be transformed into a treasury bill or bond issueand sold (ideally to the nonbank public) by the central bank; and

• the cost of the overdraft facility should be transparent and be paid bythe ministry of finance.


Glossary

AppropriationThe budget as approved by the legislature for a line item of spending.The budget law gives the executive branch the authority to incurobligations, which become due during the budget year up to a specifiedamount for specified purposes within a financial period (usually one fiscalyear).

Below-the-line itemsThese are below the line drawn to establish the deficit between revenuesand expenditures; correspondingly, above-the-line items comprise expen-ditures and revenues. Below-the-line items thus normally relate to thefinancing of the deficits.

Budget provisionThe amount of appropriation proposed or approved for a line item or for ahigher aggregate set of line items, such as a subprogram, program, sector, etc.

CommitmentThe placement of a purchase order or signing of a contract or other agree-ment for the provision of goods or services.

Contingency reserveA small portion of the total budget that is set aside for expenditures onunexpected needs or emergencies, not appropriated in other budget lines.

EntitlementAny spending program where expenditure is open-ended (usuallytransfer/grant payments) and where recipients must be paid or given trans-fers/grants, if they meet certain criteria. Some common examples are foundin social security programs, unemployment programs, and poverty programs.

Extrabudgetary fundsAccounts held by government bodies but not included in the governmen-tal budget; expenditures from such accounts are often financed by ear-marked revenues or user fees and charges.

Organic budget lawA law specifying the schedule and procedures by which the budget shouldbe prepared, approved, executed, accounted for, and final accounts sub-mitted for approval.

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OutturnActual revenues and outlays on expenditures.

Payment orderAuthorization for payment against a bill or invoice made by officials of lineministries, the ministry of finance, and others.

Planning reserveA small portion of total planned budget expenditure that is (notionally) setaside by the ministry of finance before the budget is formulated, and thenallocated to budget line items by the cabinet according to perceived policypriorities on individual sectors, programs, etc.

Provisional appropriationLegislation that permits an expenditure to get under way before the actualbudget appropriation, without any further authorization procedures. Thisis most commonly used at the start of the fiscal year (e.g., when the legisla-ture has not yet finalized the budget).

Quasi-fiscal operationsActivities of the central bank (or possibly other state-owned financial ornonfmancial enterprises) that are in nature similar to fiscal actions pursuedby the government. Although undertaken at the direction of the govern-ment, they are usually financed by the banks or state enterprises but notincluded in the government's budget. Examples include credit to com-modity boards (or other entities) at below-market interest rates, and centralbank expenditures on the bailout of failing banks.

ReconciliationUsually, the process of checking payment orders issued by a governmentagency against actual payments according to bank statements; (reconcilia-tion can also apply to other stages of the expenditure process, such as com-mitments made and payment orders issued).

Special accountsAccounts recording transactions of an "exceptional" character that aremade outside the normal procedures for expenditure approval and record-ing; many refer to temporary accounts (such as advances), or to transac-tions whose authority is questionable or to the accounts of formalextrabudgetary funds or "below-the-line" accounts.

Special fundsUsually similar to extrabudgetary funds, but sometimes refer to fundsfinanced by earmarked revenues/user charges that are within the govern-ment's budget.

Supplementary appropriationLegislation passed during the budget year to provide for expenditures addi-tional to the original budget.


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Suspense accountsA type of special temporary account used to record balances, or correct mis-takes in amounts, that have not yet been "posted" to the relevant line item.Such transactions often include payments of adjustable advances, until thefinal amount chargeable is known.

VerificationOnce a bill for goods or services has been received, the relevant line min-istry/spending agency must confirm that the bill is correct and that thegoods or services have in fact been received. At this point, the bill becomesa liability of the public sector; in accrual accounting terms, an expenditureis recognized even though the bill has not yet been paid.

VirementThe process of transferring expenditure provision from one line item toanother during the budget year. To prevent misuse of funds, spendingagencies must normally go through administrative procedures to obtainpermission to make such a transfer.

WarrantA release of all, or more commonly a part, of the total annual appropriationon a quarterly or monthly basis that allows a line ministry or spendingagency to review commitments.


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