1. PATHWAYS TO IMPROVING BUDGET IMPLEMENTATION BUDGET MANAGEMENT AND FINANCIAL ACCOUNTABILITY COURSE THE WORLD BANK MARCH 1, 2004 ALLEN SCHICK

2. 1 BASIC FUNCTIONS OF BUDGETING FISCAL DISCIPLINE  Assure that budget aggregates are sustainable over the medium-term and promote economic stability EFFECTIVE ALLOCATION  Assure that public money is spent in accord with national priorities and on programs that are effective in achieving public objectives EFFICIENT PUBLIC SERVICE  Assure that public services are delivered in an efficient, fair and courteous manner, and are accessible to citizens

3. 2 THE EVOLUTION OF BUDGTING: STAGE 1 Line Item Budgeting Detailed itemization of inputs Uniform classification of expenditures External control Pre-audit Detailed procedural rules and restrictions Performance measured in terms of compliance Advantages Controls public spending Safeguards public assets

4. 3 THE EVOLUTION OF BUDGETING: STAGE 2 Block Budgeting Expenditures consolidated into broad categories Shift from external control to internal control Shift from pre-audit to post-audit Audit of systems rather than transactions Some use of workload, output, activity measures What is not changed Budget is still input-based Budget power concentrated in central agencies Results measured in terms of compliance

5. 4 THE EVOLUTION OF BUDGETING: STAGE 3 Managerial Accountability Single budget for all operating costs Agencies have broad discretion in using funds May be permitted to carry over unused funds to next year Budgets are based on outputs/results Use of performance measures throughout the budget process Actual performance compared to targets Shift to accrual accounting and budgeting Agencies produce audited financial statements

6. 5 STAGES OF EXPENDITURE CONTROL TYPE OF CONTROLEXERCISED BY WHAT IS CONTROLLED MODE OF ACCOUNTABILITY EXTERNAL CONTROL Finance Ministry and other central agencies Specific inputs (individual items of expenditure, such as each position or purchase) Compliance with line budget, civil service rules and other rules INTERNAL CONTROL Spending Departments Major expenditures items (total salaries, all equipment, or supplies, etc.) Audit of systems to assure that internal controls meet government standards MANAGERIAL ACCOUNTABILITY Spending or responsibility unit Global operating budget running costs and outputs Reports and audits on outputs, costs, quality and other results

7. 6 ISSUES IN BUDGET IMPLEMENTAITON Budget implementation is not simply a matter of executing the approved budget. In every country, the implemented budget varies from the adopted one The variance between the adopted and implemented budget depends on the country’s fiscal conditions, stability and certainty in the country’s finances, the role of the finance ministry, and the type of budget system. A highly itemized budget may experience more variance than one which gives managers spending discretion. The trend in contemporary public management is to give spending units more flexibility in implementing their budgets. Might not be appropriate in countries with inadequate managerial controls.

8. 7 VARIANCE OF EXPENDITURES FROM BUDGET VIREMENT The shift of funds within or between votes, as authorized by law. IMPOUNDMENT The withholding of funds by the finance ministry of the spending department. REPROGRAMMING The shift of money from one activity to another, usually within the same vote, account, or fund. REBUDGETING Formal or informal revision to the budget by the government during the fiscal year, usually in response to a change in budget conditions or because the adopted budget was unrealistic. OVEROBLIGATION Obligation of funds in excess of the amount authorized or available. In poor countries, over- obligation may be unreported until payment is made. MISCALCULATION Systemic coding of expenditure to wrong account or activity.

9. 8 COMMON PROBLEMS IN IMPLEMENTING THE BUDGET IN POOR COUNTRIES The approved budget is unrealistic, so actual spending must be less than authorized Extreme uncertainty concerning available resources, with quarterly or monthly allotments Extra-budgetary funds outside the budget process, hoarded by spending units Significant arrears that are not included in financial statements Significant discrepancy between actual and reported expenditure for certain activities Funds diverted to unauthorized purposes or private accounts Delayed publication of financial statements

10. 9 CASH EXPENDITURE VERSUS ACCRUED COST IN BUDGETING Advantages of Cash-Based Budgeting  Easy to compute and understand, based on actual flows  Necessary for efficient cash and debt management  Facilitates legislative (and political) control of the budget Advantages of Cost-Based Budgeting  Recognizes liabilities incurred that will be paid in the future  Provides a more accurate statement of the government’s financial condition  Facilitates making managers responsible for resources used  Facilitates measurement of the full cost of services

11. 10 GET THE BASICS RIGHT A realistic budget that is implemented with few significant derivations from plan Low level of corruption in public expenditure High transparency in public finance Public funds spent for authorized public purposes Reported expenditure corresponds to actual expenditure Reliable external and/or internal controls Spending units have reasonable certainty as to the funds that will be available A managerial culture that promotes compliance with formal rules

12. 11 GET THE STRATEGY RIGHT Basic reforms are likely to yield the greatest payoff in budgetary improvement Basic reforms are practices standardized in developed countries Best practices should be long-term objectives, not short- term priorities Getting the sequence right is essential for successful reform Good ideas often fail because of bad strategy Reform should build on existing institutions; they should not seek to imitate other countries Political support is a precondition for effective reform Reform must be a continuous process, not a one-time fix

13. 12 GET THE SEQUENCE RIGHT Budget for inputs before aiming to budget for outputs Account for cash before accounting for accruals Operate a reliable accounting system before installing an integrated financial management system Establish external controls before introducing internal controls Have reliable internal controls before devolving managerial responsibility Maintain a high performance civil service before entrusting civil servants with broad discretion Make sure you know how public money is spent before letting managers spend money the way they want Budget for work to be done before budgeting for results to be achieved Have effective financial auditing before adopting performance auditing