GOVERNMENT BUDGETING

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Intergovernmental Fiscal Relations and Local Financial Management February 24-March 5, 1999 Novotel Hotel, Chiang Mai, Thailand Organized by the National Economic and Social Development Board of the Royal Thai Government and the World Bank GOVERNMENT BUDGETING By Dana Weist World Bank, 1999

2 I. Overview 1. Purposes a. Framework for policy formulation Achieving stabiliz.ation, employment and growth objectives of economic policy Allocating resources (iii) Relating costs to performance b. Means of policy implementation Concerns of economy and efficiency Financial and administrative control (iii) Emphasizes payment, accounting and reporting c. Means of legal control Constitutional provisions, continuing laws and procedural regulations govern budget formulatidn and execution Emphasizes prevention of abuse of power or improper use of public funds d. Source of public information Reflects past activities, current decisions and future prospects Form of political accountability 2. Framework for policy formulation a. Emphasizes decisionmaking and resource allocation based on outputs rather than on controlling inputs b. Ongoing nature of public spending Future costs of existing commitments Future revenues likely to be collected from the existing tax system (iii) Outputs (or programs) provided by government (iv) Linkages to overall macro-economic programs and indicators Evaluation of program performance Government Budgeting 1

3 c. Policy tools Develop systematic capability to analyze alternatives and evaluate outcomes Improve program and project evaluation (iii) Identify ways to perform more effectively and to use resources more economically (iv) Modernize data processing and management information systems to provide information in a timely and readily accessible way Monitor financial flows 3. Macroeconomic programming a. Impact of macroeconomic policies on public expenditures and revenues Stabiliz.ation, growth and employment policies Balance of payments (iii) Level of domestic and external credit b. Impact of government policies on economy (e.g., gross domestic product, total employment) Aggregate spending on current programs and capital projects for all governmental entities Comp<;>nents of spending (e.g., wages and salaries, investment) 4. Multi-year ("rolling") f"mancial planning a. Essential to integrate development planning and budgeting effectively b. Benefits of multi-year horizon Programming scarce financial resources Selecting alternative solutions to financing fiscal deficits (iii) Integrating long-term improvements in tax and financial administration (iv) Determining borrowing and other public debt policies Preparing necessary legislation c. Requirements Government Budgeting 2

4 Clear-cut and hierarchical organiz.ational structure. Suitable financial data (iii) Modem data processing and management infonnation systems (iv) Accurate revenue and expenditure forecasts Detailed analysis of policy options d. Integrate needs of policy makers, economists, financial accountants and data processing specialists e. Process Directed by central agency, typically MOF, working closely with other Ministries (e.g., Planning), government enterprises, and public institutions Financial "current services baseline" projects future (often 3-5 years) revenues and expenditures based on current government policies and commitments (iii) Baseline projection serves as foundation against which to develop a financial strategy and financial projections to incorporate policy decisions (iv) Difference between baseline and policy estimates measures financial effects of government decisions Develop and distribute common economic, demographic and other assumptions (vi) Develop government-wide procedures to implement financial planning concepts, and integrate them into existing budgetary planning and data collection processes f. Transitioning to multi-year budgeting Typically streamline budgeting process for current fiscal year before moving to a multi-year context First year oftriennium Government Budgeting 3

5 a) Annual budget law b) Estimate expenditures, revenues and plans for financing fiscal deficit for following two years c) Project fiscal deficit for the following two years d) As a given fiscal year is completed, second year of multi-year budget becomes the.base, and recently completed fiscal year used to update projection for new base year (iii) Each subsequent year in multi-year budget "rolls" forward for continual monitoring and evaluation 5. Comprehensiveness a. Requires aggregated measure of all government spending (i.e., all agencies and all financial transactions), often requiring consolidation of budgets of public enterprises and other public entities b. Often violated Certain transactions omitted Certain agencies excluded (iii) Separate current and capital budgets 6. Budget Document a. Identifies services to be provided and how services are financed b. Good budget documents include tables and text that reflect multiple purposes c. Need for concise summary and guide to key issues/aspects Formats vary in size, scope, and level of detail May include transmittal letter, budget message, executive summary, and/or budget-in-brief (iii) Summaries of the major changes in priorities or service levels from current year and factors leading to changes (iv) Priorities and key issues for the new budget period Summaries of the major financial factors and trends affecting the budget Government Budgeting 4

6 (vi) Summary financial data on revenues, other resources, and expenditures for prior year actual, current year budget and/or estimated current year actual, and proposed budget 7. Budget Classification a Data collected at a relatively disaggregated level, then aggregated in various ways b. To assure consistency between budgetary formulation and control, budget account classifications should be integrated with the general ledger account classifications c. Typical classifications Object class (e.g., payroll, supplies, equipment, etc.) Government ministry (may also include program, sub-program, project and activity) (iii) Functional categories (e.g., health, education, income support, etc.) (iv) Economic classification (e.g., purchases, transfers to individuals, net interest, etc.). 8. Formulation/Preparation a. Timing set in budget calendar b. Typical phases Il. STAGES OF THE BUDGET PROCESS Policy framework (often based on economic plan), including projections of revenues and expenditures and major policy alternatives Cabinet/president make provision decisions on total expenditures, major new spending initiatives/cutbacks, and major tax changes (iii) Budget office issues guidelines ("budget call" or "budget circular") (iv) Budget office and representatives of spending departments negotiate pre1iminary estimates Budget office aggregates departmental requests and presents recommendations to Minister of Finance, who then presents them to President/Cabinet (vi) President/Cabinet decide on changes in expenditures or revenues (vii) Spending departments can appeal decisions Government Budgeting 5

7 (viii) Final decisions made by Cabinet/President (ix) Budget proposals submitted to Legislature (x) Legislature considers and approves budget by adopting one or more acts c. Decisions generally made incrementally d. Revenues often underestimated, expenditures often overestimated e. "Repetitive" budgeting common 9. Execution a. Legal purpose: ensuring th~t expenditures are consistent with limits established laws and regulations b. Managerial purpose: promote efficiency and macroeconomic stability c. Commitments (i.e., contracts/other obligations for hiring personnel and other purchases of goods and services) Preaudit: explicit approval prior to entering into commitment Commitments without prior approval (iii) Annual authorization often aportioned (allotted) over months/quarters d. Disbursements to liquidate commitments Often made by central disbursement officers through accounts at central bank Operating departments may disburse payments in currency or at remote locations e. Recording and reporting Timely information on commitments and disbursement essential to control execution Ministry of Finance needs information on receipts, cash balances, and debt transactions (iii) Departmental managers need information on nonfinancial aspects of work programs f. Accounting and auditing Often fail in providing necessary information on a timely basis Government Budgeting 6

8 Post-audit: review of transactions after completion (iii) Traditional audit focus on financial transactions now being replaced by focus on performance g. Mid-year changes in budget Reflect reasessment of needs/resources Transfer of spending authority (virement) III. EVALUATION OF PERFORMANCE AND FINANCIAL OUTCOMES 10. Costs and benefits of current and alternative programs/projects 11. Weaknesses a. Collection and reporting of voluminous quantities of data of limited value often without corresponding analysis or evaluation b. Misallocated resources to ineffective or uneconomical programs/projects 12. Obstacles a. Lack of performance indicators b. Antiquated or unavailable data c. Lack of understanding of analytical techniques 13. Program and project evaluation a Identify project(s) to be analyzed b. Determine all impacts -- favourable and unfavourable, present and future -- on society No fool-proof technique for forecasting unforeseen consequences Foreseen consequences predictable probabilistically c. Assign monetary values to impacts Complete information: market prices exist and accurately reflect social values Inadequate information: cost effectiveness analysis (iii) Market prices don't exist: rely on estimates of willingness to pay Government Budgeting 7

9 (iv) Market prices don't accurately reflect social values: adjust for distortions and reflect opportunity costs Markets don't exist: use indirect methods of valuation - estimate by surveys, observe behavior or changes in property values (vi) Valuing impacts over different time periods: use discounting d. Calculate net benefits e. Choose among projects Fundamental rule: select alternative that produces greatest net benefit f. Benefit/cost ratio greater than Performance measurement a. Assesses adequacy of government programs b. Measures of government efficiency/productivity complicated by the "public" and "service" nature c. Dimensions Financial Service (iii) Program performance d. Uses Identify financial and program results Evaluate past resource decisions (iii) Facilitate future improvements (iv) Communicate service and program results to the community e. Objectives Based on program goals and objectives that reflect program mission/purpose Measure program results/accomplishments (iii) Establish a basis for intertemporal comparisons Government Budgeting 8

10 (iv) Measure efficiency and effectiveness Reliable, verifiable, and understandable (vi) Report internally and externally (vii) Monitor and use in decision-making processes (viii) Limited in number and complexity f. Minimal requirements Report on the outputs of each program Be related to the objectives of each department g. Steps to establish "basic" performance measures Identify meaningful and relevant goals and objectives for government and its service delivery units Identify and track output measures that are useful and relevant to the goals and objectives of key services (iii) Identify and track performance measures for a manageable number of meaningful ~cial objectives that are used in evaluation (iv) Develop and refine additional performance indicators to make them more_ meaningful and identify mechanisms to improve their interpretation and use in decision making and accountability h. More comprehensive mea5ures report on: Achievements Impacts (iii) Outcomes of key programs (iv) Relative to program objectives, organiz.ational missions and priorities 1. Steps to establish "more comprehensive" perform?ilce measures Develop multi-year series of input, output, efficiency (output/input), and effectiveness (or quality) measures in major governmental areas Develop a database of statistics of common measures Government Budgeting 9

11 (iii) Analyze implications of using particular measures for decision making and accountability (iv) Implement customer or resident satisfaction measures Develop common definitions of key performance measures to allow intergovernmental comparisons 15. Overview (vi) Incorporate financial and service performance measures in making and evaluating decisions (vii) Develop community condition measures to assess resident needs that may not be addressed by current programs IV. CAPITAL BUDGETING a. Potential mechanism for allocating scarce resources to capital facilities b. Requires integration of physical and financial planning c. Justification Governments are often responsible for community development Level of public services must be adequate to attract and support economic development, at a reasonable cost (iii) Governments have limited resources to support capital facilities d. Reasons for distinct capital budgets Focuses decisions Facilitates financial planning (iii) Regularizes provision of projects 16. Process a. Long-run physical improvements plan/master plan b. Capital improvements plan (CIP) Listing of capital expenditure projects over medium term Needs assessment and inventory Government Budgeting 10

12 (iii) Selection/evaluation of capital expenditure projects c. Financial analysis of government revenues and expenditures, present and anticipated d. Fiscal framework Magnitude and timing of outlays on planned capital improvements measured against forecasted financial resources Assumes no new operating functions and existing tax rates and bases (iii) Forecast of normally recurring revenues, based on analysis of past data (iv) Forecast of normally recurring expenditures, based on analysis of past data Comparison of2 forecasts yields estimate of needed fiscal resources e. Revenue forecasting "Cleaned" data series Consistency in classification of revenues (iii) Difficult to forecast new taxes due to incomplete information/administrative changes f. Expenditure forecasting Consistency New government functions tend to have accelerated growth rates which level off g. For both forecasts Modify past trends by recently observed changes Concern with deviations from past trends h. Coordination of financial analysis with CIP Facilities imply long-term commitments so coordination is important Schedule of capital improvements (iii) Financial impact of CIP 1. Operation and maintenance costs must be reflected in annual budget J. Sum of projects in first year of CIP becomes capital budget for annual budget Government Budgeting 11

13 V. MODERNIZATION AND REFORM 17. Common themes a. Functions and responsibilities should be integrated across departments and ministries Budgeting and accounting systems should operate in an integrated manner Budgeting reforms should be integrated from the outset with reforms in accounting, debt and treasury systems b. Formal linkages between planning and budgeting should be established c. Responsibility should be decentraliz.ed Budget formulation example: line agencies should assume greater responsibility for developing their proposed budgets and entering their budget requests into computerized budget system d. Decentraliz.ed responsibility must be accompanied by a well-trained staff since budgeting technicians key agents in implementing proposed budget reforms (i} Types of training: Program budgeting and the use of performance measures (iii) Budget formulation, approval, execution and evaluation (iv) Linkages between budgeting and the national economy Multi-year budgeting (vi) Debt programming (vii) Processing information through computerized budgeting processes (viii) Analytical skills e. Training function should be institutionaliz.ed so that the technicians have a regular outlet for upgrading their skills and assuring their professional development f. Reforms in procedures must be accompanied by reforms in reports, manuals and forms Viability of budgeting system depends on regular feedback to assure accountability and control; management reports are key Government Budgeting 12

14 Management reports should be designed to analyze preliminary budget proposals and review government's budget position on periodic basis g. Budgeting should not be an exercise in and of itself, but rather a tool for enhancing decision making h. Reformed budgeting process should Analyze the long-term implications of spending Identify the consequences of adopting alternative courses of action (iii) Incorporate a macroeconomic framework into budget deliberations (iv) Integrate other key policy issues 18. Financial Information Systems a Weaknesses Reports often incomplete in coverage, poorly integrated and inflexible Information systems, where they exist, often developed in response to specific organiz.ational requirements or needs and not along functional lines (iii) Systems often duplicated (iv) Inconsistent data Limited opportunities for the systematic sharing of data or cross classification for further analysis (vi) Cumbersome, costly and time consuming, manual systems of checks and controls often imposed on financial data b. Benefits of moderniz.ation Enforces consistency of budget preparation Promotes harmonization of the chart of accounts (iii) Enforces discipline and adherence to set budget calendar and budget preparation (budget format and execution rules determined by central authority) (iv) Maximizes autonomy of decentralized spending agencies in preparation and control of their budget process Government Budgeting 13

15 Processes commitments uniformly within integrated and timely financial management system (vi) Automates and monitors issuance of vouchers and payable orders, in relation to inflow of revenues, warrants and annual appropriations (vii) Improves timeliness of reports (viii) Enhances autonomy and responsibility of spending agencies in budgeting and expenditure control process by providing agency-level information systems which are integrated in an overall structured framework 19. Results-Oriented Budgeting a. Benefits Provides better means to make political choices, set goals, and establish priorities among competing demands and desirable ends for customer services Encourages long-term thinking, defines goals, translates them into desired results, and uses performance measures more effectively (iii) Translates choices about goals and priorities into actions/performance objectives and standards, and communicates objectives and standards more effectively to government employees (iv) Removes needless constraints on managers' uses of resources, encourages innovation and provides positive incentives to manage effectively and cut wasteful spending Converts accountability for spending money to accountability for achieving results b. Initiatives of U.S. Government's National Performance Review Strengthens accountability for results, with political leadership defining political priorities first, then reaching agreements with managers on what they are expected to accomplish and how their accomplishments will be measured Once decisions have been reached, empowers managers to achieve expected results by providing necessary resources, unburdened by excessively detailed restrictions (iii) Streamlines and improves budget development process to give managers more time to manage their programs, provides them wit:p. more timely information on policy priorities and funding levels to use resources more effectively, and provides links among budgetary resources, missions, goals, and results. Government Budgeting 14

16 ADDITIONAL REFERENCES Richard Goode, Government Finance in Developing Countries (Washington, DC: The Brookings Institution, 1984), Chapter 2, Budgeting. James McMaster, Urban Financial Management: A Training Manual (Washington, DC: The World Bank/EDI, 1991) A. Premchand and L. Garamfalvi, "Government Budgeting and Accounting Systems," in Fiscal Policies in Economies in Transition, ed. by Vito Tanzi (Washington, DC: IMF, 1992), pp Government Budgeting 15