chapter_2.ppt The labour market definitions and trends
Public Financial Management Good Practice Government Resource Planning Budget Planning
1. FreeBalance®
Public Financial Management
Good Practices
PFM Domain BUDGET FORMULATION
Good Practice PFM GOOD PRACTICES
Applicable ALL GOVERNMENTS
2. why is budget Profitability is the key concept in the private sector. Budget is the key concept
formulation in government. In business the budget is only an internal document. In
important in governments and not-for-profits, the budget is the key fiscal document.
government? Budgeting in the public sector is fundamentally different from budgeting in the
private sector. At the heart of the difference are the absence of a bottom line
and the presence of a shared and limited source of funding.
Governments operate using “commitment accounting” where budgets control
expenditures. The budget is the government’s key policy document: the legal
embodiment of government policy.
Budget formulation, or budget preparation, is the process by which
governments produce budgets. An effective budget pursues three (partially
competing) objectives: maintaining fiscal discipline, allocating resources in
accordance with policy priorities and efficiently delivering services, or ‘value for
money’. Budgets should be comprehensive, transparent and realistic.
Budget formulation needs to be aligned with budget execution which is the way
in which spending is managed and in-year budget changes are enabled.
Budgeting in the public sector is a complex exercise. It involves the combination
of information from multiple sources, bringing together different perspectives
and dealing with diverse interest groups, all influencing complex decisions.
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3. how is the quality of The Public Expenditure and Financial Accountability (PEFA) Performance
government budget Measurement Framework highlights the four objectives for budget formulation:
management Credibility of the budget – The budget is realistic and is implemented as
evaluated? intended
Comprehensiveness and transparency – The budget and the fiscal risk
oversight are comprehensive and fiscal and budget information is accessible to
the public.
Policy-based budgeting – The budget is prepared with due regard to
government policy.
Predictability and control in budget execution – The budget is implemented in
an orderly and predictable manner and there are arrangements for the exercise
of control and stewardship in the use of public funds.
what is the budget Budget formulation differs among countries and levels of government. The budget
formulation process? formulation process typically starts economic analysis and prediction for
government revenue. The process follows sets of budget rules during a budget
calendar that includes a broad set of financial information.
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4. how does budget Government budget planning begins during the fiscal year and leverages historical
planning fit into PFM and current revenue and expenditure information. Budget planning processes
processes? align, in the World Bank Treasury Reference Model, with economic forecasting,
debt management and treasury systems. Liquidity and cash management is critical
to understanding the expected revenue and expenditure variations in government.
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5. what budget Budget planning categories differ among countries. The processes used can be
categories are used different depending on the categories. Typical categories include:
by governments? Separation of capital expenditures from operating or recurrent expenditures.
Experience shows that in the absence of properly organized capital budgets,
governments resort to borrowing without due consideration of the
sustainability aspects, assets are inadequately maintained, and major projects
suffer from overall poor management and performance
Special budgets for procurement (procurement planning) and Public
investment planning (PIP), particularly national infrastructure projects
Separate planning for debt and aid that informs the budget planning process
Human resources and payroll planning can be a special categories because
salaries make up the greatest portion of the expenditure budget
how do budget Government budget formulation software can adapt to the planning workflow and
classifications enable categories used by governments through budget classifications. Government
budget formulation budget classifications, often called Charts of Accounts (COAs), represent the
across categories? underlying meta data for Public Financial Management (PFM).
The COA is made up of a number of hierarchical data segments and is considered
the lynchpin of a government’s accounting and reporting system and serves as a
key tool to meet its business requirements.
The COA, although appears to be just concerned with classifying and recording
financial transactions, is critical for effective budget management, including
tracking and reporting on budget execution. The structure of the budget—in
particular the budget classification—and the COA have a symbiotic relationship.
The COA structure can be used within the budget formulation software to map:
Users and roles to elements in the COA to ensure that planners are only able to
see the correct sub-section of data
Workflow processes and that the budget formulation process follows
government standards for different budget preparation categories
Revenue sources such as donors (aid), debt and government revenue can be
shown in “fund” source segment or included in the accounting codes
Capital, recurrent and salary categories are typically modeled in the accounting
(or object) codes
Program segment and can be combined with object codes can be used to
model public investment projects
Organization or location segment can be used to control decentralized budgets
across line ministries, government owned enterprises and sub-national
governments
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6. what are the major Analysis: government budgeting is transitioning from a ceremony where more
trends in government time was spent creating a budget than analyzing it to more rigorous thinking to
budget preparation? rethink action plans including techniques such as macro-fiscal frameworks,
zero-based budgeting and spending reviews
Benchmarking: many government agencies began emulating private-sector
best practices by integrating benchmarking activities into planning and
budgeting processes
Decentralization: enabling bottom-up budget proposals from those who are
closer to citizens
Multiple year: use of multiple-year planning to develop more credible budgets
Performance: Budget formulation and execution was traditionally focused
primarily on resource allocation and input control is maturing “towards a focus
on results” or government performance.
Participation: use of participatory budgeting outreach to citizens and civil
society, particularly at the local and regional levels of government
Policy: techniques that align government policy and objectives to budget
categories
Transparency: use of open data and budget reports throughout the budget
cycle to be more responsive to citizen needs by encouraging advocacy
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7. how does budgeting Budget performance: Government deficits caused by weak revenue
differ among mobilization, profligate government spending and anticipatory spending,
developing and including anticipation of donor inflows. Poor budgetary discipline will raise
developed country demand-pull inflation, crowding out the private sector from the financial
governments? market because of high interest rates and unsustainable debt profiles, all of
which slow private sector growth and reduce business confidence in the
economy.
Resource Shocks: Low-income countries are inevitably subject to the risk of
resource shocks.
Short term focus: In migrating from underdeveloped to highly developed
countries, fiscal sustainability has shifted in focus from the near term to the
distant future. In less developed countries, the immediate concern is whether
the government will be able to service its debt if capital flees, the currency
depreciates, and interest rates surge.
Under spending: In developing countries, and particularly in fragile states,
under spending is frequently as much of a problem as overspending. A failure
to spend funds in a timely manner and in accordance with the budget points to
a failure to deliver planned services. It is therefore useful to consider the
budget execution responsibilities of spending agencies
Unreasonable Expectations: Even in developed countries with access to
significant resources, such systems have taken many years to implement, and
not always successfully. Indeed, some developed countries themselves see the
challenge and complexity of say, implementing accrual budgeting as too great,
preferring instead to adopt a modified accrual methodology. So to expect small
developing and middle-income countries to implement such systems seems to
be overly ambitious and more often than not doomed to failure. Where
implementation fails, the effect can be to set back process reform many years.
what is fiscal Governments need to develop credible budgets to ensure that long-term spending
sustainability? is sustainable. Credible budget planning takes into account the four dimensions of
fiscal sustainability:
Solvency – the ability of government to pay its financial obligations.
Growth – fiscal policy that sustains economic growth.
Stability – the capacity of government to meet future obligations with existing
tax burdens.
Fairness – the capacity of government to pay current obligations without
shifting the cost to future generations.
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8. how are credible Policy: linking policy and resources including the presentation of budget
budgets achieved? priorities to align budgets with government objectives
Economic analysis: linking macroeconomic framework with revenue forecasts
to provide realistic projections of tax and other revenue sources and reducing
the need for additional debt
Risk: identification and determining risk and risk mitigation strategies to
identify potential deviations from the forecast of the key economic
assumptions underlying the budget
Trend analysis: analyzing past outturns to predict future budget needs to
ensure that programs are neither overfunded or underfunded
Multiple year perspective: planning for multiple years identifies medium term
costs for programs
Comprehensive financial budgets: articulating all details for capital and
recurrent expenditures, information on budget financing, debt and the
government’s financial position to ensure that supplemental budgets are not
necessary under regular conditions and all activities aligned to government
priorities in a unified budget
Controls: linking of the legal budget allotments and appropriations with budget
execution controls in the public finance management system
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9. what are Medium MTEFs represent rolling plans, normally over three to five years, which move
Term Expenditure forward each year with the first year representing the budget and the “outer”
Frameworks (MTEF)? years representing projections of spending. The purpose of MTEFs is to enable
more credible budgets, address fiscal sustainability and better link policy, planning
and budgeting for meaningful shifts in spending priorities. However, although there
is widespread recognition that this is a promising way forward, in practice
establishing MTEFs is difficult, and implementation takes longer than is often
anticipated.
MTEFs differ among countries depending on the fiscal context, capacity and
tradition. MTEF is an aggregate term that can include:
Medium Term Macroeconomic Frameworks (MTMF) to provide a multiple year
view on expected and relevant economic activity that can drive
Medium Term Fiscal Frameworks (MTFF) to predict the government revenue
and expenditure envelop to inform
Medium Term Budget Frameworks (MTBF) that provide the basic structure of
expenditures based on government priorities that can include
Medium Term Sectoral Strategies (MTSS) of specific programs designed to
improve economic sectors whose performance can be managed by
Medium Term Performance Frameworks (MTPF) that align budgets with
desired performance outputs and outcomes
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10. why are MTEFs Traditional approaches to budget reform – multiyear budgeting, output based and
challenging? accrual budgeting – have been particularly difficult to implement in developing
countries and the development landscape is littered with failed reform strategies.
Challenges to effective MTEF implementation include:
Accounting: poor accounting processes and bad execution data can lead to poor
plans
Economic stability: high uncertainty in terms of their terms of trade and hard-to-
predict commodity price earnings, as well as in the predictability of aid)
Off-budget: donor funding and government-owned enterprise budgets can be
“off-budget” where governments are unaware of the full revenue and
expenditure footprint for effective planning
Overloading: doing too much at once can overload human capacity prevent
progress on all reforms
Political will: unwillingness to change policy to reflect macroeconomic analysis
or performance measures
Fiscal sustainability: focus on the medium-terms makes the process not attuned
to long-term issues
Component model for budget formulation automation software.
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11. how does Effective government budget planning software can be configured to meet unique
government budget requirements. There are numerous budget management software applications
planning software available but, in practice the World Bank and aid agencies have funded the
meet unique introduction of private sector financial systems, which do not include core budgeting
requirements? functionalities.
Government budget formulation software must support:
Financial functions including the ability to develop budgets in any combined top-
down/bottom-up process. Effective budget preparation software can take
previous data and adjust by formula (such as reduce by 5% all revenue categories
or increase the cost of oil by 10%). The software enables linking budget
justification directly with the budget classifications. The budget passed by the
legislature, often called the “organic budget law” or “the vote” is automatically
integrated with the budget execution/accounting system to ensure proper
budget controls.
Content. Budget formulation software needs to use data from other sources
including importing spreadsheet data directly to the financial budget plan,
attaching narrative to budget requests and referencing documents.
Workflow: Flexible workflow functions are necessary to follow the government
budget calendar and address budget categories. Multiple budget versions are
required.
Performance: Governments with higher capacity can integrate output and
outcome data to the COA and develop scorecards.
what are the inputs Inputs in the budget formulation process include:
for government Financial transactions from previous years (and the active fiscal year) including
budget software? the tracking of multi-year commitments that roll-over to subsequent years
Budget variances from previous budgets including changes that occurred to the
budget during operation such as budget transfers and virements to provide trend
information
MTEF year 2 and 3 budget estimates to provide a baseline for the working
budget
Macroeconomic data that predicts government revenue, identifies risks, and
creates baseline budget assumptions such as currency exchange rates
Cost drivers or established estimates for products and services so that budgets
use credible assumptions and align with scenario planning such as analyzing the
impact of changing energy costs and currency fluctuations
Documents like budget justification, policy information and reports
Integration with underlying systems and spreadsheets
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12. what are the Outputs in the budget formulation process include:
outputs for Budget controls to be integrated with the treasury system components of the
government budget Government Resource Planning (GRP) software for commitment accounting
software? including support for warrants, supplemental budgets, continuing resolutions
Scenario plans that enables government to quickly adjust budgets should risk
factors come to fruition during the fiscal year
Documents generated from the system such as budget books
why are budget Budget controls are necessary because, in many governments, practices do not
controls a critical match rules. Institutional or governance factors may lead to gaps between formal
output of budget PFM regulations or procedures and actual practices (e.g., a technically sound internal
formulation control is not enforced). Therefore automated controls with the financial
software for management software provide internal controls to reduce overspending and ensure
government? compliance with government accounting regulations.
Controls are modeled in budget formulation software and automatically integrated
with budget execution and commitment accounting functions within the GRP. These
controls should be adapted to meet legal and fiscal discipline requirements.
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13. why are flexible Flexible controls in GRP software are critical for governments to match regulations
controls required? and enable modernization:
Budget laws address high-level budget items in the COA. Therefore, strict control
at details or “line item budgeting” is not material to the law
Capacity is critical when determining decentralization and needs to be flexible to
support more discretion in spending and budget transfers to improve results
Allotments, appropriations, warrants and cash controls differ among countries
based on legal frameworks, traditions and liquidity
Treasury departments provide more value to governments by managing liquidity
and adjusting allotments based on surplus and deficit forecasts than approving
commitments and transferring amounts among budget line items
what budget Multiple Controls: numerous controls can operate simultaneously such as cash
control functions warrants and annual appropriations
are necessary in Periods: different controls can be active for different time periods, typically from
GRP software? a month to a year
Aggregate: controls can operate from detailed line item to high level and where
the total of detailed line items could equal or not equal the total for the high
level controls
Tolerances: discretion enabled for some controls such as the ability to overspend
some monthly controls by a fixed amount or a percentage as long as aggregate
controls are not overspent
Commitment Controls: where tolerances can be applied to commitments and
obligations
Segregation of Duties: workflow controls to ensure proper separation of duties
for spending approvals, payment approvals and budget transfer approvals that
meet government fiscal regulations
Organization Configurations: support of different control schemes for different
government organizations reflecting legal status and organizational capacity
why not use Spreadsheet and simple web applications do not provide sufficient control, error
spreadsheets or management and integration for budget planning:
simple web Version management and approval: versions of budgets and approvals for
applications for budgets require more sophisticated software that uses workflow control
budget Controls: budget formulation software is required to create controls, manage
preparation? segregation of duties integrate with commitment accounting
Errors: validation on data input is not sophisticated in spreadsheet and simple
web applications resulting in mistakes
Historical information: integrated budget preparation and budget execution
software provides accurate analytical information for budget planners
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14. what are good Conclusions
practices for budget 1. Budgets are the legal embodiment of government policy and is critical in public
formulation? financial management
2. Budget formulation practices should match country conditions and human
capacity
3. The Chart of Accounts is critical for effective budget processes
4. Budget formulation software can help to create more credible budgets that
provide fiscal sustainability and internal controls
There are very few “best practices” but many “good practices” in Public Financial Management.
FreeBalance, a global provider of Government Resource Planning (GRP) software and services
shares good practices from experience with developed and developing country governments
around the world.
www.freebalance.com
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