1. INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 1.3 The Budget & budget preparation process

2. Planning and budgeting 2.4 Budget Execution 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.1 Payroll, Procurement & IT 1.4 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 5.3 Assessing & Recapitulation 3.2 Internal Control & Audit 5.1 External Scrutiny & Oversight 2.2 MTEF and performance budgeting 1.3 The Budget and budget preparation 1.2 Budget Cycle Module map map

3. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.The budget process principles 2.Strategic & detailed budget preparation 3.Budget calendar 3

4. 1. Legal framework 4 Financial Regulations Legislation Organic Budget Law/Public Finance Management Act/Budget Code Fiscal Responsibility Act Other legislations: Audit Act, Local Government Finance Act, …

5. 1. Legal framework The key ingredients of budget legislation: Provide a framework for parliamentary authorization Establish responsibility for effective management Empowers the Minister of Finance Set out the principles of responsible fiscal management Set out the reporting obligations Authorizes to spend and collect

6. 6 1. The legal framework The minimum coverage Concepts & definitions Scope of the budget Roles and responsibilities Accounting & classification Appropriations Budget calendar Budget execution Sanctions Debt and contingent liabilities; deficit Central – local government relations State Audit Accounting regulations Fiscal responsibility act Local government act Audit Act The Organic Budget Law

7. The annual budget law  Authorises revenue and spending  Payment appropriations give the limit to spend Annual cash limit Some special cases: standing/permanent appropriation (e.g. law for social allowances)  The EC budget, few Francophone countries in Africa have “dissociated appropriations”: Commitment appropriations authorise multi-year legal commitments (contracts), but they do not authorize payments Payment appropriations authorize the payments 1. The legal framework 7

8. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.The budget process principles 2.Strategic & detailed budget preparation 3.Budget calendar 8

9. 2. Budget Principles “ Traditional budgeting” Input based budgeting Strengths The basic processes are ensured Develop a discipline culture Weaknesses : Generally poor policy and performance concerns Frequently, cumbersome bureaucratic procedures 9

10. “ Performance orientated budgeting” Focus: activity, output, or outcome. Strengths: Reflects the true objective of budgeting Weaknesses: Need strong institutional arrangements Effectiveness strongly depend on the country context 10 2. Budget Principles

11. 11 Traditional budgetingPerformance oriented budgeting Input-orientedResults-oriented AnnualMulti-annual Central controlDevolution 2. Budget Principles

12. 12 ‘ Traditional’ versus ‘Performance oriented’: implications for role of Ministry of Finance

13. 13 Sequencing Control inputs before controlling outputs Implement an annual budget good before moving to multi-annual budgeting Establish external controls before introducing internal controls Establish internal control before introducing managerial accountability

14. 14 Sequencing Budget for work done before budgeting for results to be achieved Adopt and implement predictable budgets before insisting efficient use of resources by managers Enforce normal contracts in the market sector before introducing performance contracts in the public sector

15. 15 2. Budget Principles

16. Comprehensiveness Single budget document with all receipts and expenditures of the state encompass all government revenue and expenditure AnnualAnnual budget Universalityrevenue and expenditure shall be entered in full without any adjustment against each other; revenues are not earmarked for specific expenditures TransparencyTransparent presentation of revenues and expenditures Balanced (policy)of revenues and expenditures, compatible with macroeconomic constraints, or international commitment

17. 17 - Tax Expenditures Local Government budgets deficit Contingent Liabilities (implicit-explicit) Extra-budgetary funds Quasi fiscal activities Budget overruns State owned enterprises deficit State Budget 2. Budget Principles Budget Comprehensiveness

18. 18 But the pie is nibbled … Earmarked revenues Funds Agencies Special accounts 2. Budget principles Budget Comprehensiveness

19. 2. Budget Principles … and by-passed:  Donors’ off-budget projects  Tax earmarked to specific purposes 19 Budget Comprehensiveness

20. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.The budget process principles 2.Strategic & detailed budget preparation 3.Budget calendar 20

21. 3. The Budget document PEFA “A” benchmarks (PI-6): 1.Macro-economic assumptions 2.Fiscal deficit, defined according to GFS or other internationally recognized standard. 3.Deficit financing, describing anticipated composition. 4.Debt stock; 5.Financial assets 6.Prior year’s budget outturn, presented in the same format as the budget proposal. 7.Current year’s budget presented in the same format as the budget proposal. 8.Summarized budget data, including the current and previous year 9.Explanation of budget implications of new policy initiatives Is something missing ? 21

22. 3. The Budget document The budget should: Give information on the “hidden part of the iceberg”, including fiscal risks, financial relationships with sub-national government and public enterprises PEFA “A” (PI-7): If extra-budgetary expenditure is below 1% of total expenditure 22

23. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.Context 2.The budget process principles 3.Strategic & detailed budget preparation 4.Budget calendar 23

24. 1. Context

25. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.Context 2.The budget process principles 3.Strategic & detailed budget preparation 4.Budget calendar 25

26. 2. The budget process principles A.Work in 2 phases B.Linking the budget to policies C.Have a structured process D.Budget process in multi-annual perspective E.Distinguishing continuing and new policies F.Avoid fragmentation

27. A. Work in 2 phases 27 Ministries Ministry of Finance, Prime Minister, Council of Ministers Macro-economic analysis Decisions Totals Expenditure ceilings by ministry Prioritisation within the ceilings Sector strategies updated Reconciliation Monitoring reports Estimates of the baseline Identification of new activities and savings Framing Detailing

28.  Many developing countries have national and sector strategies and plans (Poverty Reduction Strategy Papers, five year development plans, etc.)  At each key stage of the budget process, the documents prepared (budget requests, budget bill, MTEF –if any, etc.) should: show the link between the proposed activities and the strategy identify implementation difficulties to implement the strategies and propose corrective measures 28 B. Linking the budget to policy

29.  Introduce procedures and instruments; Public expenditure reviews Evaluation studies Sector committees Medium Term Expenditure Framework (MTEF)  Pay attention to “asymmetries of ownership”; planning (PRSP) and budgeting are not always controlled by the same ministry. B. Linking the budget to policy 29

30. 30 C. Have a structured process

31. Advantages:  Fiscal discipline; by assessing the sustainability of the budget policies, reviewing the forward fiscal of the current policies  Resource allocation; in accord to the policy objectives by planning policy changes that require several years to be implemented  Operational efficiency; by providing managers with some degree of predictability in funding D. Budget process in multi annual perspective

32. Multi annual ‘resource’ perspective Instruments: A medium-term macro-economic framework A medium-term fiscal framework (MTFF) A Debt sustainability analysis (DSA) D. Budget process in multi annual perspective

33. Multi annual ‘cost’ perspective Instruments: Assessment of the forward costs of investment projects over a multi-year period; Assessment of the forward expenditure related to legally binding entitlements Assessment of other initiatives of significant fiscal impact D. Budget process in multi annual perspective

34. Year 0 Year 1 Year 2 Year 3 Baseline Expenditure ceiling Savings on existing programs Expenditure projections New programs and policy changes E. Distinguishing continuing and new policies

35. Form of fragmentationCause of potential misallocation Remedial action Project loan and grantImposition of donors’ priorities; draining of matching resources Ensure transparency; General budget support Dual budgeting (current capital) May lead to new non- productive assets, unfunded recurrent costs Unify budgeting process Extra-budgetary funds, autonomous agencies Own priorities dominate those of government Mechanisms to review all expenditures together Tax expendituresBenefits mistargeted, poorly monitored Consideration with all expenditures, reports Quasi-fiscal activitiesSubsidies being captured by private interests Transparency and finance public service obligations from the budget F. Avoiding fragmentation Adapted from J.Brumby in Robinson “Performance budgeting”. IMF. 2007

36. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.Context 2.The budget process principles 3.Strategic & detailed budget preparation 4.Budget calendar 36

37. 37 Macro-economic forecasting Development of sector strategies Setting priorities within fiscal constraint Costing / fiscal impact assessments Set macro-fiscal policy Determining expenditure ceilings National Development Plan fiscal side policy side Phase 1: Strategic budget preparation 3. Strategic & Detailed preparation

38. Ministry of Finance- Line Ministries Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Strategic

39. 3. Strategic & Detailed preparation Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Ministry of Finance Line Ministries Strategic

40. 3. Strategic & Detailed preparation Line Ministries Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Step3 Approval of ceilings by Cabinet Ministry of Finance Strategic

41. 3. Strategic & Detailed preparation Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Step4 Preparation of3year estimates within cabinet approved ceilings Step3 Approval of ceilings by Cabinet Ministry of Finance Line Ministries Strategic

42. 3. Strategic & Detailed preparation Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Step4 Preparation of3year estimates within cabinet approved ceilings Step 5 Determine Fiscal space for new Activities Step3 Approval of ceilings by Cabinet 5 Ministry of Finance Line Ministries

43. 3. Strategic & Detailed preparation Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Step4 Preparation of3year estimates within cabinet approved ceilings Step 5 Determine Fiscal space for new Activities Step3 Approval of ceilings by Cabinet 5 Ministry of Finance Line Ministries Strategic

44. 3. Strategic & Detailed preparation Step 1 Sector review of ministry objectives/ outputs and activities Step1 Agreement on programs and subprograms Step2 Detailed expenditure and sector/ ministry ceilings for3 years Step2 Macro- economic framework/ Availability of resources Step4 Preparation of3year estimates within cabinet approved ceilings Step6 New Budget Policy Paper Step 5 Determine Fiscal space for new Activities Step3 Approval of ceilings by Cabinet 5 Ministry of Finance Line Ministries Strategic

45. 3. Strategic & Detailed preparation 1. Prepare draft budget within expenditure ceiling 2. MDAs set up budget procedure for subordinate agencies 3. MoF and MDAs review the budget 4. MDAs send draft budget to MoF for review 5. Adjustments are made 6. MoF consolidates budget and submits to Council of Ministers (and then to Parliament) Detailed

46. Module outline  The budget 1.Legal framework 2.Budget principles 3.Budget documents  The budget preparation process 1.Context 2.The budget process principles 3.Strategic & detailed budget preparation 4.Budget calendar 46

47. Budget needs to be on time! In theory: The budget should be approved by legislature before end-year. In practice: This principle is systematically breached in many developing countries 4. Budget Calendar 47

48. The budget process needs time!  Budget managers need time to prepare budget (minimum of 6 weeks between budget circular and submission to MoF).  Legislators need time to review draft budget  Legislators need time to amend the budget 4. Budget Calendar 48

49. 4. Budget Calendar Budget process plans time!

50. Key messages A PFM legal framework should establish clear responsibilities for PFM and set out the principles for effective financial management The budget documentation, should cover all financial operations of government, either direct or indirect and should include an assessment of the fiscal risks 50

51.  The budget is a process!  All public expenditure should be based on govt. policies. Political involvement is therefore necessary  Need to differentiate between continuation of existing services, changes in levels of services, and introduction of new services Key Messages

52.  Budget preparation divided into 2 phases: Strategic and detailed.  The budget calendar should leave enough time to: (i) MDA for prioritisation and internal trade- offs; (ii) legislature for scrutinizing the budget, which should be enacted before the beginning of the budget year.