1. Budget execution: overview 1.

1 Role of the government budget A government budget is an allocation of financial resources made in advance, which relates spending needs to available funds. It establishes a legal means of authorizing and controlling expenditures and revenues by directing specific sums to specific uses and it provides a system of accountability and a standard against which results can be measured and assessed. The budget can be assessed according to its impact in three major areas: • Macroeconomic (the level of government expenditures and taxation, the availability of loans at reasonable interest rates, the expected level of deficit/surplus and the impact on the economy of various levels of expenditure, taxation, deficit/surplus and borrowing. • Allocational (the choices regarding the raising and spending of money as regards competing programs and interests and the process of allocating resources to uses of the highest priority) • Pertaining to efficiency (the success with which budget resources are usefully applied in individual cases; whether money has been raised and spent wisely and to good effect) Implicit in this characterization is a key point: the budget is not merely an accounting document, but also a policy document, embedding the social and political choices at a given point in time. Assuring the budget is implemented as enacted is an important aspect of government accountability to society and to elected officials. In this vein, the budget is a critical management tool in well-functioning public expenditure systems: it allows elected officials to steer the ship of state, and policy officials and program managers to know and manage to their role in the over-all directions. 1.2 Legal framework A fundamental principle of public finance is that expenditure and revenue proposals must be legally authorized in order to be fully effective. Generally the government’s budget follows the same legal processes as other laws: they are proposed, debated, modified,


approved and enacted. Sometimes the rules for legislating on financial matters are more stringent than for other laws. It is unnecessary for everything to be approved annually to be in compliance with this principle. Certain sums may be spent under permanent rather than annual legislation. Examples are payments to international organizations such as the UN, the salaries of judges and the auditor-general, interest on the national debt. These items are sometimes described as “charges on the consolidated fund”. Except for such charges, all taxation and all expenditure must be voted annually. A related aspect is that the undertakings of individual programs or Ministries also be legally authorized. That is, in some systems, not only must the annual revenue and expenditure be authorized by law, but the individual programs that are funded must also have a legal basis, such that approved funds are not used for unauthorized purposes, or unauthorized undertakings not be pursued with public funds. The following division of function exists: • The executive asks for money from the legislature, spends it, accounts for it and reports to the legislature on how it has been used. • The legislature approves revenue and expenditure proposals and establishes the specific purposes of the latter. It requires reports from the executive showing that the money provided has been used for the specific purposes approved by the legislature. To provide accountability, the budget proposals (and the budget execution accounts) have to be sub-divided by entity/purpose. This is achieved by appropriations. An appropriation is defined as a sub-division of a government budget established for accountability purposes, which shows amounts legally authorized to be spent for specific purposes in a specific time period. In many countries each appropriation is the subject of a separate vote. Such principles provide a system of checks and balances. In principle, the executive is made dependent in matters of public finance, on the legislature. In practice countries have travelled different distances in achieving a separation of powers. In some, members of the legislature are unable to propose increases in expenditure without at the same time indicating the source of the necessary funds (an increase in taxes; a decrease in expenditure elsewhere). In others, legislators are free to propose increases without legal 2

restraint. So-called democratic countries have taken decades (even centuries) to arrive at their current public accountability arrangements, which are the result more of political, than of technical advances. Major principles of public finance are usually embodied in permanent legislation (e.g. the organic budget law, the public finance act). They include: • No use of funds without legislative authorization

• Budgets proposed by the executive and authorized by the legislature in a series of votes • Use of a consolidated fund

• Accountability via appropriations, accounting and reporting to the legislature • Independent government audits and audit reports available to the legislature and the public • All uses of funds governed by financial regulations

1.3 Phases of the budget cycle Government budgets are highly regulated processes, governed by law and usually documented in a budget manual. A law on public finance (or organic budget law) establishes basic institutional relationships and processes. The budget itself is incorporated in an annual (or periodic) budget law. The budget involves several government institutions: the Ministry of Finance; the taxation authorities; the planning commission (or planning ministry); the Central Bank; and line ministries. It has several phases: • Setting parameters (setting policies, reassigning priorities, ensuring macroeconomic affordability) • Formulation (submission of information, aggregation, examination, negotiation)


• Authorisation (final formulation, presentation to legislature, debate, enactment) • • Execution (release of funds, spending, mid-term review, revision) Accountability (accounting, reporting, auditing and follow-up)

BUDGET CYCLE Setting policies




1.4 The execution phase



This is the active phase of the budget cycle. During this phase public money is raised and spent for the welfare of the people and the economic and social development of the country. It is an appropriate focus for the following reasons: • The budget as enacted may not resemble the budget as implemented. Minor changes may be due to new circumstances emerging during the budget year (e.g. environmental or economic emergencies). All budgets need the flexibility to deal with such circumstances. Others may be due to irresistible pressures: executive over-rides, diversion of funds, corruption, administrative bottlenecks, and so on. These can lead to waste, loss of control, deficits and indebtedness. • Large differences between the enacted and implemented budget imply missed budget objectives and opportunities. Some of the possible results are


larger deficits, under-funded programs, unspent funds, overspent funds, uncontrolled and unaccountable spending, inefficient stops and starts in the release of funds etc. In particular, social programs are often at risk as funds are shifted to law and order, internal security and defence. • The literature on budgeting focuses to a large extent on budget formulation. Formulation is an area where technical solutions are clean-cut. The real world of budget execution is infinitely more complex. The best formulated budget becomes meaningless, if to a large extent it is disregarded during execution. Even less significant variations from the enacted budget may have serious economic and social impacts. The objectives of the budget execution phase are: • to implement the budget as formulated and authorized with as little distortion as possible, but to adjust to changing circumstances (e.g. genuinely unexpected events) by modifying the budget as necessary during the year • to ensure that budget modifications during the year are done with due regard to legal process, after careful consideration of the facts, transparently and in a way that promotes government’s chosen objectives • to provide an environment for spending agencies which is conducive to smooth budget execution, ensuring that there is an appropriate balance of controls between spending agencies and central agencies • to ensure that the budget is executed according to the principles of due care, economy and effectiveness • to provide a means of achieving the macroeconomic goals of fiscal policy (e.g. to achieve a target deficit and level of borrowing) • to contribute to the achievement of government economic and social objectives in the sectors of the economy benefiting from budget funding 1.5 Major systems involved in budget execution The success of budget execution depends upon related systems:


prior activities: planning, budget formulation, budget authorisation

• concurrent activities: release of funds, disbursement, recording of transactions, operation of budget controls, monitoring of implementation (including any necessary remedial action) and systems to pay wages, manage contracts, measure performance, supervise programs, etc. • subsequent activities: financial statements, review and evaluation, public accountability and audit. Conditions for success include adequate staff and physical capacity, capable management, predictable funding, good co-ordination, adequate accountability and an enabling environment. In particular five key systems are essential for good budget execution: effective system-wide controls, adequate management involvement, good score-keeping, adequate reporting and good follow-up.

Authorization of Budget



Funds release



Effective system-wide


System-wide controls derive from the system of governance, public finance act (or "organic budget law"), financial regulations, institutional environment and the human factor (numbers, skills, motivation, neutrality etc.). System-wide controls are supported by • discipline, respect for established controls and penalties for lapses of control • up-to-date controls which reflect current realities, are simply expressed and easily accessible to users • • • institutions that play by the rules of the game internal and external accountability and transparency relative absence of strong vested interests that can profit by lack of control

Amongst the tell-tale signs of weak system-wide controls are: • those guilty of excess spending, over-commitment, illegal expenditure, fraud and corruption not held accountable for their actions • • • accounting systems which are significantly untimely and inaccurate weak systems for managing documentary evidence gross differences between the enacted and the executed budgets

• lack of strong legislative involvement in matters of public finance (particularly as regards accountability) • existence of personal and political loyalties stronger than the formal systems designed to control them • out of date legislation, obscure regulations etc. and lack of up to date guidance on the operation of controls (e.g. lack of documentation and training)


build-up of arrears in payments

• significant differences between fiscal and banking accounts, suggesting off-budget transactions • non-comprehensive execution, where significant transactions are kept offbudget.


Adequate involvement of program managers Financial management is everyone’s responsibility, not solely the purview of the Ministry of Finance. Naturally, managers in spending agencies are subject to controls. But they also have to implement expenditure programs. For this there has to be balance between system-wide controls and their powers as managers. If they have no powers, or their powers are excessively circumscribed they cannot get on with the job, lack involvement , cannot be made responsible and therefore cannot be held accountable. System-wide controls exercised by MOF lead to intervention in the affairs of spending ministries, for example: • delays in releasing an agency's budget; partial release of funds

• pre-spending controls without which expenditure cannot be committed, either centralized or decentralized responsibility for managing commitments • pre-payment controls without which creditors cannot be paid

• controls over budget transfers which prevent funds from being transferred to where they are needed • • intervention in procurement to comply with government-wide policies permission to recruit staff

• ultimately, in the event of severe mismanagement, assuming direct control of agency financial management System-wide controls are inevitable and desirable but if they are excessive, managers in spending agencies will be devoid of real spending responsibilities. Moreover a proliferation of central controls is not always associated with real control improvements, because the centre can be devoid of sectoral skills (e.g in health, transport, communications) in less developed Ministries of Finance, and remote from where the real decisions have to be made. For these reasons, controls are often best delegated to program managers. The scope for this varies from country to country. Good score-keeping


There are two main types of score-keeping: financial and non-financial. Each is covered by a separate module of this course (see papers 5 and 12). Accounting is the means by which the financial results of budget execution are recorded. Knowing for each part of the budget, how much was authorised and how much was spent provides for control of expenditure based on over and under expenditure. The simplest form of accounting is the cash basis which measures expenditure and revenue in terms of what was actually spent and received during the budget year. Another useful control is over commitments (intentions to spend money). Many budgetary systems incorporate commitment accounting. Some advanced countries have now moved to accrual accounting (a form of accounting found typically in companies) which allows balance sheets to be produced showing the full range of an entity's assets and liabilities. The criteria for judging the adequacy of an accounting system revolve around its relevance to the needs of users of information: timeliness, accuracy, reliability, freedom from bias and adaptation to the needs of users. Government accounting systems are often designed with the needs of legislative accountability foremost (i.e. accounting systems that report on expenditure by appropriation). They are often less well-adapted to the managers' needs (e.g. what things cost). Clearly for an accounting system to work well it has to be operated by staff with adequate skills, the systems themselves have to be welldesigned and there have to be regular checks on accuracy (known as "reconciliations"). Adequate reporting Reporting may also be in financial and non-financial terms, (hopefully both together as knowing how much has been produced compared with the cost of producing it, is central to good decision-making). Financial reports are the final outputs of an accounting system. Annual financial reports fulfil an external accountability role. Cash-based reports tell us what was authorized, what was spent and the balance of cash at the start and end of the period. Accrual-based reports tell us more about operating costs and a lot more about government assets and liabilities. Equally important for management purposes is a reporting system which supports budget execution. This reports at shorter intervals (months, quarters) and is intended for internal users such as managers of ministries, departments, units and cost centres. They need to have tracking information on the implementation of the budget: amounts authorised, released, committed and spent. Reports of this nature are intended as input to the decision-making process helping to answer questions such as: • how much have we spent to date and how much have we committed? 10

• what is the profile of expenditure in the remaining months of the budget year? • what unused budget authority remains and will it be used in the foreseeable future? • which items of expenditure are likely to be under and over spent and what can be done about it? (At the current rate of spending, what areas pose risk of overspending and under spending?) • what are our costs for operation X which could conceivably be contracted out? • can we meet unplanned expenditures from existing budget authority and if not how can they be funded? • can we reduce the costs of operation Y by using a different process and mix of inputs? • what can we do to adjust our implementation plans if expenditure releases for Z are significantly less than expected, preserving as much of planned performance as possible? Proper follow-up Follow-up refers to events occurring after the execution phase. The quality of execution will be weak if there is no effective follow-up. This refers not only to the work of auditors which is covered in separate modules of the course (see papers 8 and 9). It also refers to the arrangements within ministries and in MOF to use their experience of budget execution to improve its quality. Often large and damaging gaps are found in follow-up systems: • audit reports that do not address major issues effectively

• legislatures not able or willing to exercise control over budgets and their execution • an executive branch of government which prevents public accountability 11

• absence of an effective public accounts committee (specialist committee of the legislature dealing with public finance issues) • spending agencies which neglect adverse audit findings and do nothing to correct defective systems • lack of MOF follow-up on audit reports and necessary system improvements 1.6 The dysfunctional budget Sometimes the conditions for good budget execution are fulfilled. In other cases they are not. The enacted budget may be largely theoretical. Such a budget may have large differences between authorised and actual figures as regards: • total spending of major spending units (e.g. Ministry of Health vs. Ministry of Internal Security) • functional distribution of expenditure (e.g. education vs. economic services) • distribution of spending between line items (e.g. wage vs. non-wage expenditures) • • distribution of spending between debt service and non-debt service total expenditure, total revenue and resultant surplus/deficit

Theoretical budgets are natural partners with inadequate accounting systems. An inadequate accounting system: • contains significant inaccuracies; accounting records of the various subunits cannot be successfully reconciled; budget and cash flows cannot be reconciled; nor can bank accounts with cash books. In very bad cases, sources of inaccuracy have been flourishing and multiplying over several years. • is not based on sound, accessible documentation and is therefore difficult to interrogate and verify 12

• cannot provide timely data; annual financial statements are significantly delayed; within-year financial reports are also delayed and their usefulness for budget execution significantly reduced. • fails to support decisions. Those who need to take decisions on the basis of accounting information do not receive the information required or it is unreliable/too late in coming/irrelevant to their decisions. The most destructive enemy of budget execution is an adverse environment. Frequently found scenarios include: • an over-powerful executive branch of government capable of imposing its own priorities on expenditure at variance with the enacted budget • a civil service elite with personal financial interests which its members exercise at the expense of budget priorities set by government • top decision makers representing entrenched vested interests who have the influence necessary to remake the budget during its execution • the existence of traditional recipients of budgetary funds who have the power to enforce their "entitlements" (power ministries) References Asian Development Bank (1999) Managing government expenditure, S. SchiavoCampo and D. Tommasi, (Chapters 1, 3 and 6). Organization for Economic Cooperation and Development (2001) Managing Public Expenditures: A Reference Book for Transition Countries. Richard Allen and D. Tommasi, editors. (Chapters 1, 2, and 7)


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