The aim of this paper is to provide information for economists lacking experience in the practical issues of public expenditure management. These guidelines aim to provide a general overview of the principles and practices observed in three key aspects of public expenditure management: Budget preparation; budget execution; and cash planning. For each, the guidelines identify separately the differing practices in the francophone, Commonwealth, Latin American and transition economies. These guidelines are concerned only with the macroeconomic impact of budget processes rather than the microeconomic perspectives of expenditure policies.
A full understanding of budget planning and preparation is essential. Thus, fiscal economists and budget advisors need to know the framework in which the budget is made, who is responsible for planning and preparation, what are the basic steps, what weaknesses exist within the system, and how changes can be implemented.
- Budget planning and preparation are at the heart of good public expenditure management and require control of aggregate expenditure; resource allocation reflecting policy; delivery of services; and minimization of costs of management
- To prepare a budget one should determine the macroeconomic framework for the next three budget years, allocating resources to ministries and reserves, instruct ministries on preparing estimates, accept ministry bids, negotiate and then finalise
- The key issues on budget execution are: Whether deficit targets are likely to be met, and whether any budget adjustments agreed at the preparation stage are being implemented
- The key issues on expenditure are: Whether actual revenues and expenses are likely to be within budget; whether changes are implemented as planned; and whether any problems are encountered in execution
The expenditure budget should aim to be comprehensive, transparent, realistic, policy-oriented and allow for clear accountability. It is by meeting these five criteria that the soundness of budget systems can be judged.
- Comprehensiveness and transparency are achieved by designing the system so that the budget is annual, it covers revenue and expenditure together, and ensures ALL resources are directed to a common pool and then allocated according to policy
- Realistic revenue projections and the financeable fiscal deficit must be decided before the budget is prepared to ensure that the ministries do not set the level of taxation
- To ensure that the budget reflects the government’s priorities, it must be determined at cabinet level, while spending ministries should meet with the finance ministry to discuss the ministry’s estimates
- Economists are advised to use accrual accounting (which identifies expenditure incurred when goods and services are delivered, and payment is due) methods rather than cash accounting (which only identifies payments once they are made)
- Governments should either have only one central bank account, or all accounts should be reconciled on a daily basis to ensure that one department does not have cash deposited and dormant while another is borrowing at an un-preferential rate.
