THE BUDGET EXECUTION CYCLE

Transcription

1 CHAPTER 7 THE BUDGET EXECUTION CYCLE A. Objectives of Budget Execution 1. Importance of budget execution Budget execution is the phase where resources are used to implement policies incorporated in the budget. As already noted, it is possible to implement poorly a well-formulated budget; it is not possible to implement well a badly formulated budget. Good budget preparation comes first, logically as well as chronologically. However, budget execution processes are not simply mechanisms for ensuring compliance with the initial programming. Even with good forecasting systems, unexpected macroeconomic developments may occur during the year, and need to be reflected in the budget. Of course, changes should be accommodated in a way that is consistent with the initial policy objectives so as to avoid disrupting the activities of agencies and project management. Successful budget execution depends on numerous other factors as well, such as the ability to deal with changes in the macroeconomic environment, and the implementation capacities of the agencies concerned. Budget execution involves a greater number of players than budget preparation, and calls both for assuring that the signals given in the budget are correctly transmitted, and for taking into account feedback from actual experience in implementing the budget. Hence, efficient budget execution calls for: (i) ensuring that the budget will be implemented in conformity with the authorisations granted in the law, both in relation to the financial and policy aspects; (ii) adapting the execution of the budget to significant changes in the macroeconomic environment; (iii) resolving problems arising during implementation; and, (iv) managing the purchase and use of resources efficiently and effectively. 2. Budget execution systems Systems for budget execution system should ensure rigorous aggregate expenditure control, but also effective and efficient uses of resources in accordance with budget priorities. Its procedures should be appropriately balanced in order to avoid or resolve conflicts between these objectives. Aggregate expenditure control requires defining fiscal targets, and is therefore largely concerned with budget preparation. Nevertheless, budget execution procedures must ensure that fiscal targets are effectively enforced and that managers comply with the budget authorised by the legislature. However, this should not consist of replicating the traditional budget execution systems, which focus on detailed input controls, often performed by the ministry of finance. Such an approach is aimed at assuring fiscal discipline, but generally poses two different sorts of problems. On the one hand, excessively detailed controls are time-consuming, make the budget rigid, and do not give managers the flexibility in the allocation of inputs needed to implement their budgets efficiently. On the other hand, traditional compliance controls are not sufficient to ensure fiscal discipline. They tend to focus on cash payments for supplies, while the most crucial

2 210 Managing Public Expenditure - A Reference Book for Transition Countries problems are often found elsewhere (overstaffing, entitlements, arrears, etc.). Keeping budget execution under control requires effective management control systems, not excessively detailed compliance controls. This chapter reviews the general features of the budget execution cycle, including the issues related to compliance controls, while subsequent chapters deal with the specific methods and systems that are required for effective budgetary control. These systems include: Payables and public procurement (Chapter 8). Cash management and the treasury function (Chapter 9). Internal (management) controls and internal audit (Chapter 10). Accounting and financial reporting systems (Chapters 11 and 12). External audit (Chapter 14). 3. Overspending and underspending Overruns are sometimes caused by non-compliance of budget managers with the spending limits defined in the budget, when committing expenditures. Since cash allocated to spending units for appropriated expenditures is generally controlled, these overruns generate spending arrears. Overruns are often the result of off-budget spending mechanisms (payments from special accounts, below-the-line accounts, etc.). In some countries, the expenditure procedures can be so cumbersome that exceptional arrangements have been created to bypass them. Payments made through these exceptional procedures are not controlled against the appropriations and are therefore an important cause of overruns. Lack of compliance can be addressed through strengthening the audit system, and the reporting system, and ensuring the effectiveness of the basic budget execution controls reviewed below. A comprehensive coverage of the budget is required. Exceptional procedures should be avoided, and in a number of countries this requires simplifying the system of control. Overruns can be caused by deficiencies in budget preparation. Elements such as continuing commitments for investment projects and entitlements, or the impact of inflation on wages, are in some countries poorly taken into account when preparing the budget. Also, particular interests and political pressures may affect budget preparation, budget enactment and budget execution. In some countries, the executive or the parliament adopts decrees and laws that have a financial impact on the budget even if they do not concern the budget directly. As discussed in Chapter 1, regulations are needed in this area. The ministry of finance should review any regulation or draft decision that can have a fiscal impact. Sound budget preparation processes and adequate institutional arrangements are a prerequisite for avoiding overruns. But in some countries with weak systems of governance, seeking technical solutions of this kind is insufficient without the necessary degree of political commitment and leadership. In a number of countries, the official budget is underspent, particularly its non-wages expenditure items. This does not necessarily mean that there is good fiscal discipline in these countries. In some countries with poor governance, underspending of the official budget may coexist with large amounts of off-budget spending. In most cases, underspending, as well as overruns, is related to insufficiencies in budget preparation and programme preparation. An overestimated budget and unrealistic projections of revenues may lead

3 The Budget Execution Cycle 211 to budget revisions during budget execution and to a practice known as repetitive budgeting. 1 After the budget is approved, the ministry of finance relies on its own views in preparing the budget implementation plan. A treasury committee reviews the revenue situation and may decide that only a part of what the official budget actually calls for will be released. Under this approach, funds are released from a core budget known only to the ministry of finance and the treasury. 2 Any analysis of budget execution and the instruments for controlling the use of budget funds need to cover issues related to budget preparation, and to take into account both the risks of disruptive repetitive budgeting and the requirements for cash control and compliance control. The importance of these aspects depends strictly on the circumstances in each country. B. The Expenditure Cycle 1. Stages of the expenditure cycle Once the budget is adopted by the legislature, the expenditure cycle consists of the following phases: Apportionment of appropriations and release of funds to spending units. Funds may be released through notification of cash limits, issue of warrants, funds transfers to imprest accounts, and other mechanisms. In some countries, the release of funds includes two steps: (i) apportionment by the central budget office, which consists of defining which part of the appropriation the line ministries and spending units can use; and (ii) allotment by the line ministries and main spending units, which consists of allocating apportioned appropriations to subordinate spending units. 3 Commitment. The commitment stage is the point where a future obligation to pay is incurred. A commitment consists of placing an order or awarding a contract for specified goods or services to be delivered. It entails an obligation to pay when the third party has complied with the provisions of the contract. However, as discussed below, the precise definition of a commitment, in the budgetary sense, varies from one budget system to another, and depends on the economic category of the expenditure. Acquisition and verification (or certification). At this stage, goods are delivered and/or services are rendered and their conformity with the contract or order is verified. Assets and liabilities of the government are increased and recorded in the books, if the country has an accrual accounting system. Expenditures at the verification stage are also called accrued expenditures (e.g. in the US) or actual expenditures (e.g. in some FSU countries). Expenditure at the verification stage entails a liability, and arrears are the difference between expenditures at the verification stage and payments. Payment. At this stage, payments are made through various instruments such as: cheques, cash disbursed, electronic transfers, debt instruments, barter agreements, deduction from taxes and cash vouchers. The practice of making payments through barter agreements, deduction from taxes and cash vouchers is questionable. Payments through deduction from taxes are frequent in some FSU countries, but have negative consequences on both tax collection and competition among suppliers. Barter agreements impede competition among suppliers. Cash vouchers should generally be seen as an administrative stage in the expenditure cycle, rather than as a payment mechanism, especially when they are not paid immediately. Payments through cheques are, in most countries, recorded when cheques are issued. Comparisons with bank statements should be systematic. When the float of unpaid cheques is significant, payments must also be reported on the basis of cheques paid.

4 212 Managing Public Expenditure - A Reference Book for Transition Countries 2. The commitment and verification stages In budgetary jargon, depending on the nature of the expenditure and the country concerned, a commitment (or an obligation to spend) corresponds either to the commitment stage as defined above, or to the verification/acquisition stage, or to an administrative reservation of funds in anticipation of their use, or to a procedure for delegating authority. Some countries, e.g. the US, make a distinction between the (administrative) commitment which is a reservation of funds, and the obligation, which corresponds to an order placed, contract awarded, service received, or similar transaction that will require payment (Schick, 1995). For multi-year contracts, a commitment, in the budgetary sense, often corresponds to the annual tranche of the contract, or to actual expenditures. In this book, the term commitment, when not specified, corresponds to the definition given above (it entails a future obligation to pay, which will be effective when the third party complies with the provisions of the contract). When it is necessary to distinguish a multi-year commitment from its annual tranche, the expressions forward commitment and annual commitment are used. The (legal) commitment corresponds to the contract or the order, not to the annual commitment. For budget administration, the commitment in the budgetary sense should correspond to the earliest stage within the expenditure cycle at which a claim against the appropriation can be recognised. For debt service, personnel expenditures, transfers, and also some categories of expenditure on goods and services (such as consumption of electricity and telecommunication services), the commitment in the budgetary sense corresponds to the expenditure at the verification stage (e.g. the monthly wage bill, interest due, electricity charges). For these categories of expenditure, the obligation to pay comes from an event upstream to the commitment in the budgetary sense (staff recruitment, disbursement of a loan, office heating, etc.). Consequently, for these categories of expenditure, the commitment stage and the verification stage are combined in the budget execution phase. The commitment (in the budgetary sense ) should be defined as: (i) the legal commitment, when it makes sense to define the commitment on this basis (for example, contracts and orders for supplies, investment, maintenance works, etc.); and (ii) expenditures at the verification stage, for other items (personnel, debt servicing, utilities bills and transfers). For orders concerning petty expenditures, the commitment and verification stages may be confused without major inconvenience in the reports used for budget implementation supervision. Nevertheless, for the purposes of agency and programme management, it is important to monitor all legal commitments, from an order for stationery to a multiyear contract for an investment project of a significant size. In the same way, an administrative procedure for reserving appropriations, or the annual tranche of multi-year contracts can match some organisational arrangements, but it is necessary also to define a stage in the expenditure cycle that corresponds to the legal commitments. It is important to be precise about the definition of the term commitment which can take different meanings in different contexts, as follows: For cash planning and funds release, it is important to know the obligations to pay that will occur over the period of the budget. It can be expected, for example, that an order for stationery will be completed over this period, but contracts for investment projects (and legal commitments) may cover several fiscal years. Therefore, for cash planning the important factor is the share of the commitment that will generate a liability over the planned period. Except in the case of multi-year investment projects, this will generally be the legal commitment for supplies.

5 The Budget Execution Cycle 213 For budget preparation, it is important to know the forward costs of multi-year investment projects and the expenditures that are compulsory or that will occur without adjustment measures. The government has legal and/or moral obligations to meet the salary costs of government employees and the cost of entitlement programmes. It is necessary to calculate the cost of all such policy commitments whatever their form. For fiscal analysis, the cost of outstanding invoices, that is the difference between expenditures at the verification stage and payments, must be assessed. The difference between commitments and payments gives only an approximate estimate of arrears, since it includes orders not yet delivered. For programme management, information on both commitments and expenditures at the verification stage is needed. Spending agencies need to follow up accurately the orders and the contracts they have awarded. Accounting for expenditures at the verification stage gives the main elements for assessing costs, shows how far programme and project implementation has progressed, and is required for managing payables and contracts. Figure 7.1. IMPLEMENTATION OF BUDGETARY EXPENDITURE Parliament's authorisations Annual Budget Forecasts Appropriations Commitment Appropriations Other Legislation Apportionment Commitments Annual Contracts Multi-year "Permanent" Routine Activities or Orders Contracts Commitments Rental contracts, Stationery, etc. Investment, etc. Personnel, entitlements, etc. electricity, etc. Suppliers Verification Payment Uses of Appropriations Delivery Other liabilities Guarantees, contingent liabilities, etc.

6 214 Managing Public Expenditure - A Reference Book for Transition Countries For expenditure control, defining the (legal) commitment is very important, particularly for debt servicing, personnel expenditure and multi-year investment projects, which cannot be controlled only on the basis of annual appropriations. The benefits of monitoring either commitments or expenditures both at the verification stage and the payment stage are sometimes debated. In practice, these stages of the expenditure cycle are equally important and electronic systems are available that allow the necessary data to be captured and stored easily. Figure 7.1 illustrates the different stages of the expenditure cycle and the variety of mechanisms through which expenditures are committed. Thus, keeping budget commitments under control requires, besides controlling the uses of annual appropriations: (i) sound budget formulation and policy decision to ensure the conformity of permanent commitments with budget forecasts; (ii) control of multi-year commitments; and (iii) good administration, since many liabilities arise in practice from routine activities or informal procedures (e.g. telephone calls) rather than formal contracts or orders. 3. Assuring Financial Compliance a. Release of funds Instruments used by the ministry of finance to provide spending agencies with authority to spend vary from one country to the other (e.g. the issuing of warrants and notifying a budget implementation plan). What is important for the purpose of effective budget implementation is that the ministry of finance gives this authority in a timely and clear manner, in order to avoid any confusion in the uses of appropriations. As discussed in Chapter 9, sound cash management requires preparing in-year budget implementation and cash plans, but these plans must be in conformity with budget authorisations (except under special circumstances or if the budget is badly prepared). In some transition countries, because of fiscal problems or an overestimated budget, funds are released to line ministries on a day-to-day basis. Where a centralised treasury system exists, this mechanism consists of an ad hoc selection of agencies to which cash will be transferred, or a selection of the invoices to be paid. In some countries, this selection is made by a committee composed of the treasury director, the minister of finance, and the prime minister. Funds are often released on emergency or political grounds, discarding the priorities defined in the budget. The effective cash budget formulated implicitly through this process is substituted for the authorised budget, and may be quite different from the budget approved by the parliament. Another weakness with systems of cash rationing is that spending agencies can continue to make commitments according to the budget, and thus accumulate arrears, whilst complying in formal terms with budget procedures. Sequestering is the blocking of appropriations by the ministry of finance in order to rebalance the budget without adjusting cash plans. When sequestering appropriations, ongoing commitments should be taken into account. Although sequestering may sometimes be necessary, it diminishes predictability and should be used only in special circumstances. 4 In some countries, warrants authorising spending agencies to make expenditure commitments require the prior approval (or visa ) of the supreme audit institution (SAI). 5 In most cases, these somewhat ceremonial or pompous (Premchand, 1993) procedures are purely formal and do not create unnecessary delays in budget execution. However, the relevance of this procedure is questionable, since the SAI should not be involved in the ex ante control procedure.

7 The Budget Execution Cycle 215 b. Compliance controls The basic compliance controls during budget execution are the following: At the commitment stage (financial control), it is necessary to verify that (i) the proposal to spend money has been approved by an authorised person; (ii) money has been appropriated for the purpose stated in the budget; (iii) sufficient funds remain available in the appropriate category of expenditure; and (iv) the expenditure is classified in the correct way. When goods and services are delivered (verification), the documentary evidence that the goods have been received or that the service was carried out as required must be verified. Before payment is made, it is necessary to confirm that (i) the expenditure has been properly committed; (ii) a competent person has signified that the goods have been received or that the service has been carried out as expected; (iii) the invoice and other documents requesting payment are complete, correct and suitable for payment; and (iv) the creditor is correctly identified. After final payment is made (audit), it is necessary to examine and scrutinise the expenditure concerned and report any irregularity. C. Distribution of Responsibilities 1. General principles Decisions relating to the implementation of a programme authorised in the budget must be taken by the relevant line ministry, as is the case in most countries. However, in some countries, controls exercised by the ministry of finance, treasury or other central agencies can interfere in the effective implementation of sector policies. In such circumstances, some rebalancing of the relationship between the centre and line ministries or of the way central controls are exercised in practice should be considered. There may also be problems concerning the allocation of responsibilities between the central departments of the line ministries and their subordinate agencies. In some countries, continuous interference by the central departments in the management of projects and programmes impedes the effective implementation of these programmes. In other countries, powerful agencies implement programmes without reporting to their parent ministries. There is a need to clarify the distribution of responsibilities within line ministries to ensure that the central departments are fully responsible for co-ordinating sector policy and that subordinate agencies carry out their activities under the supervision of these departments but without unnecessary interference in day-to-day administration. Budget execution covers both activities related to the implementation of policies and tasks related to the administration of the budget. Both central agencies and the spending agencies are involved in these tasks. The distribution of responsibilities in budget management should be organised according to the respective areas of responsibility and accountability of these agencies. 6 The responsibilities of the ministry of finance are the following: Concerning the control of budget execution, administering the system of release of funds, monitoring expenditure flow, preparing in-year budget revisions, managing the central payment system (if any)

8 216 Managing Public Expenditure - A Reference Book for Transition Countries or supervising government bank accounts, administering the central payroll system (if any), preparing accounts and financial reports. Concerning policy implementation, reviewing progress independently or jointly with spending agencies, identifying policy revisions where appropriate, and proposing to the council of ministers reallocations of appropriations within the framework authorised by parliament. The responsibilities of spending agencies are the following: Concerning budget administration, allocating funds among their subordinate units, making commitments, purchasing and procuring goods and services, verifying the goods and services acquired, preparing requests for payment (and making payments, if the payment system is not centralised), preparing progress reports, monitoring performance indicators, and keeping accounts and financial records. Concerning policy implementation, periodically reviewing the implementation of the relevant programmes (including the monitoring of performance indicators), identifying problems and implementing appropriate solutions, and reallocating resources among sector programmes (but within the overall policy framework of the budget). When several departments in the ministry of finance and other agencies are involved in the supervision of budget execution, close co-ordination of their activities is required and their respective functions should be clearly delineated. In particular, in a number of countries, co-ordination between the budget department of the ministry of finance, which is responsible for budget preparation, and the treasury 7, which is primarily responsible for budget execution, is often insufficient. The budget department should be responsible not only for preparing the budget but also for budget revisions and the reallocation of resources among sectors. The treasury should provide it with all the information that is needed on budget execution. 2. Centralised or decentralised controls? Generally within any organisation, there is a separation of duties for authorising expenditures, approving contracts and placing orders, certifying that goods have been received and that services have been provided as specified, and authorising payments. In addition, in many countries, an ex ante control by a third party is performed before an official in a spending agency can make a commitment or payment. Such arrangements are aimed at limiting cases of misconduct, and ensuring that public funds are used efficiently and effectively (see Chapter 10, for a description of internal (or management) control procedures). Depending on the country, commitment and accounting controls may be either internal to the relevant line ministries or performed by a central agency (the ministry of finance, financial comptroller s office, etc.). Thus, in many countries payments are made through the treasury, but the extent of the involvement of the treasury in the execution of accounting controls varies widely from one country to the other. In some countries, the ministry of finance assigns a financial advisor or a budget officer to each line ministry in order to control budget execution. Depending on the administrative culture of the country, centralised ex ante controls can lead to excessive interference of central agencies in the day-to-day management of line ministries budgets, and, in some countries, even in the preparation of the sector budget. 8 Centralised ex ante controls may also cause delays in budget implementation and hinder efficient management, especially when the budget

9 The Budget Execution Cycle 217 execution process is not fully computerised. The system of having a financial adviser or budget officer appointed by the ministry of finance and posted in line ministries can create problems where the officials concerned are authorised to prepare sector budgets on behalf of the ministry of finance or exercise cumbersome ex ante controls on the activities of line ministries. Moreover, in countries with poor systems of governance, multiplying controls can have perverse effects and increase corruption. Unofficial tolls or levies may be imposed in exchange for bypassing these checks. As discussed in Chapter 9, a centralisation of cash balances is desirable, but this does not mean that the treasury should be involved in the day-today control of invoices and payment documentation. Controlling commitments and payments on the basis of the annual appropriations is often insufficient to ensure compliance and fiscal discipline. Accounting controls can prevent blatant cases of misuse of appropriations. Regardless of how they are organised, however, accounting controls do not prevent the accumulation of arrears since obligations are made upstream. Nor do they prevent the commitment of expenditures that are not authorised in the budget. Thus, controlling personnel expenditures needs specific instruments, such as staff ceilings and/or ceilings on operating expenditures or running costs. The control of annual commitments and payments cannot prevent overruns on the investment programmes that are carried out under multi-year contracts. Even for goods and services expenditures, centralised ex ante controls are insufficient. For example, controls on the consumption of utilities such as electricity and telecommunications, which represent a significant part of the government s current expenditure, need to reinforce internal management systems, not necessarily the budgetary procedures. Beyond formal compliance, economy and efficiency in the uses of resources must be ensured. One of the aims of centralised controls is to allow the ministry of finance to supervise budget implementation. In fact, with modern technologies, information on budget execution can be quickly available at the centre, even when transactions are fully administered within spending agencies. Most transition countries need to reinforce their controls on expenditure, but addressing compliance, economy and efficiency issues requires a broader approach than focusing on centralised budget execution controls. Soundly based systems of internal control, internal audit and external audit are also required. In many transition countries, these essential bases for sound expenditure management are not yet built. D. Budget Appropriation Management Rules 1. Annual nature of appropriations Although there are exceptions, notably where some appropriations are obligation-based, a classic rule of the budget is the annual nature of appropriations. At the end of the year, unused appropriations are cancelled. The annual rule can create a rush for spending at the close of the fiscal year, variously described as the end-year surge, spree spending or squander mania. 9 This spending bulge at the end of the fiscal year does not necessarily mean bad management, since it can be the result of prident purchasing procedures. Nevertheless, the potentially adverse effects of a strict annual rule are many. For example, revolving funds or extra-budgetary funds may be set up or ad hoc private organisations may be created to manage the budget under more flexible rules. To ensure that appropriations are not cut back in the following year, the annual rule encourages line ministries to make unplanned and economically inefficient spending at the end of the year. To avoid such perverse effects, some OECD countries have recently altered the annual nature of the appropriation for operating expenditures and authorised the carry-over of a certain percentage of these unspent appropriations to the next fiscal year. However, systematically authorising carry-over for

10 218 Managing Public Expenditure - A Reference Book for Transition Countries operating expenditures in transition countries could pose problems as regards expenditure control. The annual rule calls for systematic in-year planning of cash payments, which is indeed one the basics of a sound budgeting system. If appropriate accounting procedures are not in place, altering the annual rule can lead to executing two budgets at the same time, and confusion. An eventual alteration of the annual rule for operating expenditures should be considered only in the countries where the budget preparation process is fully satisfactory. In any case, carry-over for operating expenditures should be limited initially to a small percentage of appropriations and be submitted to the approval of the ministry of finance. Capital investment expenditures are difficult to manage within an annual budget framework. In principle, procedures for carrying over unused expenditure at the end of the year are needed for capital expenditures, provided that the budget includes soundly based estimates of their cost. Carry-over of capital expenditures should concern only ongoing projects and be submitted to the approval of the ministry of finance. Appropriate procedures are also needed for paying bills and invoices that were regularly committed over the previous fiscal year, but have not yet been paid because of delays in deliveries, for example. There are also some special activities for which revolving funds are needed (e.g. activities of departmental enterprises) but, as stressed in Chapter 1, such funds must be submitted to strict accounting and reporting requirements. Some EU Member States authorise pre-spending for some categories of expenditures, although under very strict conditions. Authorising pre-spending should not be considered in transition countries which do not have appropriate control mechanisms for managing such expenditure. 2. Flexibility issues Rules for transfers between budget items (chapters, line-items, etc.) are generally stated in the financial regulations or in the organic budget law. Such rules should distinguish transfers that may be made freely by line ministries, transfers submitted for the approval of the ministry of finance and transfers that are strictly forbidden. Although it is not generally the case in transition countries, in some other countries, control of these transfers is one of the major activities of the budget office during budget execution. The procedures involved are time consuming and absorb large amounts of administrative resources. In some countries, there are many thousands of appropriations and their purpose is too narrowly defined. Appropriations should be defined in order to ensure that the budget is implemented according to the government s policy objectives. However, an excessive number of appropriations tends to impede efficient implementation of the government s expenditure programmes. Most EU Member States have reduced the number of appropriations included in the budget (for example, Italy has reduced the number from 6,000 to 800; in the UK the number is less than 100). Determining the exact composition of the inputs of a programme is difficult. To implement policies and programmes in the most efficient and cost-effective way, the line ministries and agencies should be given adequate flexibility to manage their resources within the policy framework of the budget. Thus, during the implementation of programme expenditures, certain problems (e.g. delays) can occur, particularly in the case of investment expenditures. In such circumstances, appropriate measures should be taken to reallocate budget resources from investment projects that are delayed to other projects in order to ensure that government policy objectives are achieved. This flexibility concerns the composition of the inputs needed to carry out a given activity and the allocation of resources among activities and projects that meet a given set of objectives (within the same programme). However, it should not alter the policies stated in the budget or hinder the achievement of stabilisation objectives.

11 The Budget Execution Cycle 219 Several OECD countries have recently implemented block appropriations for operating expenditures. Line ministries are free to determine the best composition of inputs to implement their programmes and achieve results. To achieve greater efficiency, line ministries should be given a certain degree of freedom to allocate resources within their sector. This will contribute both to increased efficiency in delivering services and to keeping expenditure under control. The possibility of using savings on certain expenditure items for other expenditures gives an incentive to agencies to make these savings. Undoubtedly, in countries with a strong internal and external audit system, a long tradition of fiscal discipline, and a flexible management system for the civil service, it is better to allow spending agencies to determine the composition of the inputs needed to meet the programme objectives. It would be difficult, however, to adopt such a system in transition economies. Depending on the internal capacities of line ministries to control their programmes and the nature of problems met in budget implementation, it will usually be necessary to restrict the ability of ministries to reallocate budgetary resources within their sectors. Typically, therefore, transfers between personnel expenditures and other economic categories of budgetary appropriations should be regulated in transition countries. However, the effects of such regulations need to be carefully reviewed to ensure that they are designed properly. In some countries, for example, switching appropriations from other economic categories to personnel expenditure is not permitted; in other countries, the reverse form of transfer is forbidden. In the first case, the regulations are aimed at capping personnel expenditures. In the latter case, they are aimed at protecting personnel expenditures. Capping has the advantage of giving a clear signal to spending agencies. However, protecting expenditures already committed has the advantage of limiting budget overruns and arrears generation. In some transition countries, it may be desirable to have rules either to protect some non-salary items for which arrears are frequently generated (such as electricity consumption) or to cap certain categories of expenditures. However, these rules should focus on what is strictly necessary and should not apply forever. What can be a problem of compliance in one year will not necessarily be a problem the following year. 3. Special issues related to multi-year commitments It was suggested in Chapter 1 that authorisation for forward commitments should be included in the budget. Such measures may need time to be implemented. Nevertheless, an instrument to monitor and control multi-year commitments requires early implementation. If the budget does not include authorisations for forward commitments, an internal document should be prepared giving ceilings for these commitments. Such ceilings can be estimated from the forward costs of ongoing projects, which should be systematically assessed when preparing the budget. Typically, these commitment limits are equal to the total costs of projects under implementation less the amount of the contracts related to these projects that have already been committed. The notion of a project in this sense should be understood as the non-divisible expenditure that is necessary to achieve effective operation of the undertaking. For example, the commitment limit should comprise the entire cost of a bridge, since less than whole bridge is not operational, but it could comprise only a 100km section of a project to build a highway of 1,000km. Preparing multi-year estimates can help in preparing the authorisations for forward commitments. However, caution is required. The multi-year expenditure programming documents should be prepared under hard constraints and the conservative assumptions that are used in budget management. Moreover, authorisations for multi-year commitments should deal only with the non-divisible part of projects and programmes, rather than including all projects of a large programme.

12 220 Managing Public Expenditure - A Reference Book for Transition Countries In a number of transition countries, an ex ante control of multi-year commitments by the ministry of finance may be desirable. Line ministries would have to submit a request to the ministry of finance, before committing to a contract of significant size. This control should be based on formal commitment authorisations or at least on the internal document discussed above. Ad hoc controls often have the disadvantage of not distinguishing between financial controls and policy or procurement controls. Multi-year commitments should be reported in the same way as the uses of annual appropriations. E. Other Issues of Budget Implementation 1. Monitoring the execution of the budget To keep budget execution under control, a comprehensive and timely system for monitoring budget transactions is required. It is necessary to systematically register and track the uses of appropriations. Budgetary (or appropriation) accounting should cover appropriations, apportionment, increases or decreases in appropriations, commitments/obligations (including special procedures to monitor forward commitments), expenditures at the verification/delivery stage, and payments. Such a system is only one element of the government s accounting system, but the most crucial one for both formulating policy and supervising budget implementation. Financial reports on budget execution at each stage of the expenditure cycle detailed by organisation, function, programme, and economic category should be produced every month, while aggregate inmonth flash reports are needed for efficient cash management. Issues related to accounting and reporting are discussed further in Chapters 11 and 12. A comprehensive mid-term review of the implementation of the budget is needed to ensure that programmes are implemented effectively and to identify any policy problems. This review of budget execution should cover financial, physical and other performance indicators. Cost increases due to inflation, unexpected difficulties, insufficient initial study of projects, and budget overruns must be identified so that appropriate counter-measures can be prepared. Capital investment programmes are often beset by implementation problems because of insufficient implementation capacities and other factors such as delays in mobilising external financing, overoptimistic implementation schedules, climatic hazards, or difficulties in importing supplies. Mechanisms for reviewing the most significant or problematic projects are needed. These could consist of a regular monthly or quarterly review of projects within line ministries and a mid-year review involving line ministries and central agencies. 2. In-year budget revisions It is often difficult to make accurate forecasts of the implementation of certain programmes or of key macroeconomic developments such as changes in the world economy, inflation, interest rates or exchange rates. Moreover, some spending needs that were not foreseen during budget preparation may appear during budget execution. To limit the effects of such problems, rules for transfers must be flexible, and a contingency reserve should be included in the budget, as noted earlier. Appropriations for debt service, for example, cannot be a spending limit and should be revised according to developments in interest rates and exchange rates.

13 The Budget Execution Cycle 221 In the case of in-year changes that alter the composition of the budget or when an overall increase in expenditures is unavoidable, the budget may have to be revised. Mechanisms for revising the budget vary from country to country, and should be clearly stated in the organic budget law. Some broad principles are as follows: Since the budget has been passed by the legislature, revisions should generally be made by law. In general, changes in appropriations above a certain percentage of the initial appropriation, or changes that affect the total amount of expenditures, must be submitted to the legislature for approval. To allow the government to address urgent problems rapidly, procedures authorising exceptional expenditures before the parliament approves them can be considered. However, such authority should be regulated and time limited, and the executive required to present a revised budget to the parliament shortly thereafter. The number of in-year revisions should be strictly limited (preferably only one) and requests from line ministries should be reviewed together. Some countries present supplementary estimates to parliament on a case-to-case basis, each time the council of ministers approves a request from a line ministry, and numerous supplementary appropriations are thus voted every year. Such procedures should be avoided. Budget execution is difficult to control when the budget is continually being revised. Moreover, supplementary appropriations granted to one sector may all too soon seem better allocated to a higher-priority sector.

14 222 Managing Public Expenditure - A Reference Book for Transition Countries NOTES 1. See Caiden and Widalvsky (1990). 2. See Caiden and Widalsky (1990) and the discussion of the core budget in Chapter 5 of this book. 3. This distinction between apportionment and allotment is based on US terminology. 4. A discussion of the drawbacks of sequestering in France may be found in Hel-Thelier, Meny and Quinet (1996). 5. For example, in Turkey, and several British Commonwealth countries. 6. See the chart on page 259 in Premchand (1983), which lists budgetary tasks and administrative tasks. The distribution of tasks suggested below is partly drawn from this chart. 7. In some countries the treasury is a department of the ministry of finance, in others it is an independent or quasi-independent agency, usually under the supervision of the minister of finance. For further discussion of these issues, see Chapter 9 below. 8. For example, in Turkey, budget offices from the Ministry of Finance control both budget preparation and budget execution. 9. Premchand (1993). This practice was standard in the ex-soviet system and was called shturmovschin.