ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Day 2: April 6, 2010 Process and Development Technique of Program Budget Program Budgeting, April 5 - 8, 2010

ADB Grant No.0133-CAM/Component 1: PFMRD Content 1.Cash budget system presentation 2.Inputs of budget preparation 3.Steps of budget preparation 4.RGC budgeting process 2 Session 2 Process and Development Technique of Program Budget

1. Cash Budget System Presentation  Basis of the Budget System  Presentation of the cash budget 3ADB Grant 0133-CAM: Component 112/18/2015

 Basis of the Budget System Budget systems can be classified as: i-Cash budget, ii-Obligation based budget, iii-Accrual based budget and iv-Output budgeting. 4ADB Grant 0133-CAM: Component 112/18/2015

Cash budget When is cash budgeting appropriate?  Cash budget system is used for budgeting where most of the appropriations are on a cash basis  In a cash-based budget, appropriations define limits for payment and annual commitment, that is, financial obligations met within the fiscal year and the annual tranche of multiyear commitments (e.g. MTEF, Program Budgeting). 5ADB Grant 0133-CAM: Component 112/18/2015

Cash budget (continued) When is cash budgeting appropriate? :  A cash budget fits well the need for compliance and expenditure control. Commitments and payments are controlled on the basis of the authorizations of the Parliament.  Macroeconomic objectives, such as the cash deficit, are directly linked to the appropriations 6ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget Cash budget presentation needs to have: i.Major requirement of the budget ii. Budget annexes and other documents 7ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget i.Major requirement of the budget  The budget submitted to the legislature should include all elements needed to assess budgetary and fiscal policy and present the appropriations according to the needs for legislative control by the Parliament. Revenues, expenditures, and the fiscal outturn should be presented together.  Concerning the expenditure side, one may distinguish: (i) a “main” presentation, on the basis of which appropriations are voted; and (ii) annexes that give additional information. 8ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget  includes estimates that show appropriations; may or may not include sub-items for information only. Some countries present thousands of line items in the budget while others have very few.  Some countries limit the number of appropriations to 20 or even less. However, most of these countries also have a detailed annual expenditure plan by organization, program, and economic category, which is either internal to the executive (as in China and Vietnam) or presented through various annexes to the budget. 9ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget (continue)  Two distinct situations may be found:  the presentation of the budget to Parliament is a pure formality. Where the executive has all the power, many of the issues discussed are not relevant, notably, the nature of appropriations, the comparison of cash controls with accrual-based controls, accountability rules, financial reporting, etc.  elements of the annual expenditure plan are discussed in Parliament committees. Line ministries go to the committees to negotiate items in expenditure plan prepared by the Ministry of Finance (e.g. some FSU countries, before the current reforms). 10ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget (continued)  The budget should clearly identify responsibilities in budget management.  The appropriations should be presented by line ministry and independent agency, and by their major subdivisions. In several FSU countries, the budget is or was presented by program instead by line ministry or agency. Reforms are currently under way to remedy this problem (e.g., Ukraine for instance, reformed its budget classification system in 1997).  In several developing countries, the recurrent budget is presented by line ministry but the development budget is presented by broad function, program, and project. 11ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget (continued)  Projects financed by donors are often of composite nature, and may include both current and capital expenditures, particularly in the social sectors.  Nevertheless they have a single project manager and are often submitted to special reporting requirements from donors. Thus, although the distinction between “recurrent” and “development” expenditures is artificial and questionable, for accountability and management purposes aid-dependent countries are obliged to follow it in the presentation of the budget.  “Development” projects must be separated from other expenditures. However, presented together. 12ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget (continued)  Present development expenditures together with recurrent expenditures under the same administrative headings (but under separate appropriations) is required in order to assess the overall budget of a line ministry or an independent agency.  In countries with dual budgeting, such unified presentation will not eliminate all the negative effects of dual budgeting processes, but will facilitate scrutiny of sector budgets. Within the “main” presentation of the budget, development projects should be seen as an administrative category, and classified according to line ministries or agencies. 13ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget “Main” presentation of the budget (continued)  In aid-dependent countries or in countries that have a dual budgeting system, the presentation could differ from the one mentioned earlier, as follows: Ministry (or agency) Directorate (or other major administrative subdivision) Program (if any) Current expenditures Capital expenditures (items not included in the “development” expenditures) “Development” expenditures (domestic/external resources) Capital Current Memo: Total current expenditure Total capital expenditure 14ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget Budget annexes and other documents  Annexes to the budget presented to Parliament are needed to give other presentations of appropriations needed to analyze the budget. e.g. the following could be attached to the budget: (I) an annex by function; (ii) an annex by program, especially if there are multi sectoral programs; (iii) if the main presentation, shows the breakdown between current and capital expenditures, an annex by development project/program (development budget); (iv) if the main presentation already includes the “development” budget, an annex to show the true investment component; etc. 15ADB Grant 0133-CAM: Component 112/18/2015

 Presentation of the cash budget Budget annexes and other document  Appropriations should be compared with the appropriations of the previous year. An annex by function should show the growth of expenditures over several years (on the basis of actual budget execution).  Other documents can include: (i) narrative statements on each sector budget policy, presented by programs; (ii) performance indicators; (iii) the presentation of the forward costs of multiyear projects; and (iv) if appropriate, multi-year estimates or a Public Investment Program (PIP). 16ADB Grant 0133-CAM: Component 112/18/2015

2. Inputs of budget preparation  Strategic development plan  Priority program/policy Program with indicators Sub-program with indicators Activities and target areas  Achievement of priority program/policy Satisfactory/unsatisfactory on activity, sub-program and program  Component of budgets 17ADB Grant 0133-CAM: Component 112/18/2015

2. Inputs of budget preparation  Other strategic development plan/policy  Economic classification items  Revenue  Revenue policy (proprietary & government)  Historical revenue by economic classification item; Ch. 70, 71, 72, 73, 74, 75, 76, ADB Grant 0133-CAM: Component 112/18/2015

2. Inputs of budget preparation  Other strategic development plan/policy  Economic classification items  Historical expenditure  Capital expenditure: Ch. 13, 21  Recurrent expenditure: Ch. 60, 61, 62, 63, 64, 65, ADB Grant 0133-CAM: Component 112/18/2015

3. Steps of budget preparation Basic steps in a standard budget preparation system comprise the following: First step: macroeconomic framework for the budget year (and ideally at least the next two years). This allows the budget department within the ministry of finance to determine the global level of expenditure that can be afforded without adverse macroeconomic implications, given expected revenues and the level of deficit that can be safely financed. Second step: the allocation of this global total among line ministries, leaving room for reserves (a separate planning and a contingency reserve) to be managed by the ministry of finance. Source: IMF, guide for public expenditure management 20ADB Grant 0133-CAM: Component 112/18/2015

3. Steps of budget preparation Basic steps in a standard budget preparation system comprise the following: (continue) Third step: the budget department to prepare a budget circular to give instructions to line ministries, with the indicative aggregate spending ceiling for each ministry, on how to prepare their estimates in a way that will be consistent with macro objectives. This circular will include information on the economic assumptions to be adopted on wage levels, the exchange rate and price levels (and preferably differentiated price levels for different economic categories of goods and services). Source: IMF, guide for public expenditure management 21ADB Grant 0133-CAM: Component 112/18/2015

3. Steps of budget preparation Basic steps in a standard budget preparation system comprise the following: (continued) Fourth step: the submission of bids by line ministries to the budget department. Once received there needs to be an effective "challenge" capacity within the budget department to test the costing of existing and any new policy proposals. Fifth step: comprises the negotiations, usually at official and then bilateral or collective ministerial level, leading finally to agreement. Finally, step six is Cabinet endorsement of the proposals for inclusion in the budget that will go to parliament. Source: IMF, guide for public expenditure management 22ADB Grant 0133-CAM: Component 112/18/2015

4. RGC budgeting process General The fiscal year for all government ministries and public institutions starts with the first day of January and ends of December of each calendar year. The budgeting process will be starting in March in order to provide more time for the budget preparation and deliberation. 23ADB Grant 0133-CAM: Component 112/18/2015

4. RGC budgeting process General The general budgeting process is described in the following stages. 1.Macroeconomic framework development and preparation of Budget Strategic Plan (Mar- May) 2.Budget Preparation (Jun-Sep) 3.Approval the National Budget (Oct-Dec) Source: Law on Public Finance System, Chapter 3 and 4, Krom No. 0508/016, Royal Palace and Royal Signature and Seal May 13, ADB Grant 0133-CAM: Component 112/18/2015

Macroeconomic Framework Development (Mar-May) StepDateProcessResponsibility 11 st week of March Develop National Macroeconomic & Public Financial Policy for submission to the Council of Ministers for review and approval. MEF 2Review and approve National Macroeconomic & Public Financial Policy Council of Ministers 31 st week of April Issue Circular to the ministries, public institutions and the sub-national administration on the preparation of budget strategic plan. MEF 4Before 15 th of May Submit budget strategic plan to the MEFLine ministries, public institutions & sub- national administration Source: RGC, Law on Public Finance System, Chapter 3, section 1, article 39

Development of Macroeconomic Framework Diagram Source: RGC, Law on Public Finance System, Chapter 3, section 1, article 39

Budget Preparation (Jun-Sep) StepDateProcessResponsibility 11 st week of June Draft Circular on the budget preparation technique with the formats and procedures and other related documents for submission to the Council of Ministers for review and approval. MEF 2Review and approve the Circular on the budget preparation technique Council of Ministers 3Send the Circular to the ministries and public institutions for preparation revenue, expenditure budget plan. MEF 4Before 15 th of July Submit budget plan and priority policy to the MEFLine ministries, public institutions & sub- national administration 5AugustOnce the ministries have submitted their budgets, discussion with the Budget Department of MEF begins around the month of August. MEF Line ministries, public institutions & sub- national administration 6September Add up the government revenue-expenditure budget for rebalancing the government budget. Draft Financial Law and prepare the memo of them. MEF

Budget Preparation Diagram

Approval the National Budget (Oct-Dec) StepDateProcessResponsibility 11 st week of October Submit the draft of Financial Law to the Council of Ministers for review and approval. MEF 2 1 st week of November Review and endorse the draft of Financial Law Submit the endorsed the draft of Financial Law to the National Assembly Council of Ministers 3 1 st week of December Deliberate on and approve the Financial Law Submit the Financial Law to the Senate for approval National Assembly 4Before 25 th of December Deliberate on and approve the Financial LawSenate

Budget Approval Diagram