Public Financial Management: An Introduction

Public Financial Management (PFM) A system of institutions, rules, regulations, procedures and processes through which decisions are made and implemented. PFM concerns itself with the instruments in place to achieve policy objectives. Crucial question is how well has money been spent? Has it been used efficiently and whether it has achieved the purposes for which it was allocated? This has become even more relevant in the current climate of deficit reduction and spending cuts. Created new challenges for parliaments and parliamentarians.

Aggregate Fiscal Discipline Objectives of PFM None of the main objectives of public financial management can or should be pursued in isolation from the others. Aggregate Fiscal Discipline Allocative Efficiency Operational Efficiency

PFM Objective 1: Aggregate Fiscal Discipline Basic expenditure control. Budget totals should be the result of explicit, enforced decisions (danger of repetitive budgeting); they should not merely accommodate spending demands. These totals should be set before individual spending decisions are made, and should be sustainable over the medium term and beyond.

PFM Objective 2: Allocative Efficiency Expenditures should be based on government priorities and on effectiveness of public programs. The budget system should spur reallocation from lesser to higher priorities and from less to more effective programs. A medium-term framework will take account of future implications of current allocations. Problems of limited resources that can be allocated; legally binding commitments; off-budget expenditure; political will.

Budgeting Systems Budgeting Systems can be classified according to the purpose of the authorization by the legislature; to purchase inputs for government activity; to produce specific outputs; or to achieve certain results: Line-item budgeting (the purchase of vaccines for child immunizations) Output budgeting (the number of child immunizations performed) Program budgeting (reduction in incidence of a particular child disease)

PFM Objective 3: Operational Efficiency Value for Money Agencies should produce goods and services at a cost that achieves ongoing efficiency gains and (to the extent appropriate) is competitive with market prices. Importance of managerial discretion and an adequate control system and a culture of compliance