1. Budget Execution; Key Issues
Workshop on PEM in Bhutan
19 August 2004
David Shand, Acting Director, Financial Management
OPCFM, World Bank

2. Does the budget matter ? Is it just a pro-forma exercise of limited interest, rather than a key mechanism for determining government priorities and ensuring service delivery?
Unrealistic budgets – an endemic problem. May be encouraged by unaffordable national plans
How to achieve budget ownership – ministers, heads of department and program managers – not just MOF and finance staff
Need for budget dialogue, orderly processes and enforced rules - rather then a non-transparent exercise controlled by MOF
World Bank and countries develop “pro-poor” budgets which may not be implemented – because of inadequate systems, unrealistic budget or both ,

3. The three (or four) levels of objectives of PFM systems
The three (or four) levels of objectives of PFM systems. Budget execution must assist in achieving these objectives
aggregate fiscal control
strategic resource allocation
operational efficiency
external transparency
In many countries a substantial divergence between the formal budget and the implemented budget
Although some changes to budget during year are normal – perhaps a mid-year review, contingency reserve (need to manage fiscal risk

4. Formal rules versus informal rules
Formal rules versus informal rules. What are the incentives for compliance or non-compliance. Avoiding just “technical” fixes – institutional issues
To what extent are donors and their requirements part of the problem ? e.g. uncertainty of timing and amount of aid, non integration with the budget and with government accounting system
To what extent can we improve budget execution (PFM generally) in isolation from overall public sector reform?
Managers should have a defined level of resources – and be accountable for delivering required level of service

5. Budget preparation and execution issues are closely linked
Budget preparation and execution issues are closely linked. It is difficult to implement a poorly constructed budget. Many issues or problems in budget execution arise from issues or problems in budget preparation e.g.
scope of the budget – extra-budgetary funds ?
realism of both revenues and expenditures – can the budget be implemented?
budget preparation dialogue – do ministries understand how much they have been allocated and for what purposes ?
basis of accounting – does it follow the budget ?
how devolved or centralized is expenditure control ?

6. Different basis of budget measurement or point of control
obligations (commitments)
cash payments
costs (full accrual)
A cash basis of budgeting does not of itself provide control over commitments - expenditure arrears may build up
Both commitment and cash controls and information are needed
Importance of a common basis of budgeting and accounting (both classification and measurement) to monitor and report budget execution – surprising how often they diverge (accountants isolated from the budget office). Role of IPSAS ?

7. Importance of internal (self) controls
Importance of internal (self) controls. This concept is not understood in some countries – rather (external) inspections and audits
Importance of good fiscal reporting – regular budget execution reports and annual financial statements - timely reliable information based on international standards – which ?
Getting value from external audit institutions - there needs to be something to audit (fixing systems before fixing audit), avoid a “gotcha” approach, add to the credibility of financial statements. But is there political or public interest in the past?
Getting value from legislative review. To what extent can legislature amend the budget ? Legislatures may be part of the problem ? Is there much interest in past events?

8. Need for good internal information
MOF needs reliable information on budget execution progress – both commitment and cash controls. Otherwise “stop-start” occurs
In a devolved system MOF needs reliable information from spending ministries - to monitor and intervene if necessary
Spending ministries need information on budget execution progress – and on likely future funding
Reasonable predictability of funding is key to planning service delivery – release of funds arrangements
If budget uncertainty is unavoidable, specify in advance where the cuts will fall

9. Need for Good External Information
good external reporting must build on good internal reporting
informing public of budget allocations and budget implementation progress
publication of local expenditure budgets may lead to demand for better budget execution
the role of Public Expenditure Tracking Surveys (PETS) – to what extent do funds reach point of service delivery (schools, health posts etc)