It is possible to execute badly a realistic budget, but impossible to execute well an unrealistic budget. Hence, the precondition for good budget execution is a sound budget preparation process, which starts from robust revenue estimates and hard expenditure ceilings for sector departments. Beyond this precondition, good budget execution requires other measures.
Budget execution is where resources put policies into practice. Objectives are translated into orders for supplies and contracts are awarded. It is also where poor planning becomes obvious, numerous obstacles can arise and problems such as overspending can occur. What can governments do to ensure that spending agencies comply with the budget authorised by the legislature?
In Chapter 6 of their book ‘Managing Government Expenditure’, S Schiavo- Campo and D Tommasi outline the budget execution system, highlighting areas where implementation problems can happen. Traditionally, detailed controls are used to ensure that there will be no overspending and that the composition of the budget remains unaltered. However, even these rigid and time-consuming controls are insufficient to assure fiscal discipline.
Underspending of a budget and particularly of the development component is common in a number of developing countries and could be viewed as the result of good fiscal discipline. However, it is more often the case that optimistic financial planning has failed to take into account the availability of domestic resources or allowed enough time for mobilising external funds.
Other key conclusions from the book include:
- In some countries continuous interference by central departments in the management of projects impedes implementation while in other countries powerful agencies implement programmes without reporting to ministries.
- In countries with fiscal problems or an over-estimated budget, funds are often released on emergency and political grounds, discarding the priorities defined in the budget. As seen in Ukraine and China, agencies are able to accumulate arrears while compying with budget procedures.
- Better internal controls are possible where the same person does not make payments and perform other activities such as placing orders.
- In several Asian countries, such as India and Malaysia, where the Ministry of Finance assigns a Financial Advisor in each line ministry to control budget execution and identify problems, delays can occur due to cumbersome ex-ante control on line ministries’ activities
- Transition countries, in particular, make use of centralised payment systems using accounts with commercial banks. This avoids delays in payment processing. However, it impedes fiscal discipline, as payments cannot be monitored by the Ministry of Finance.
- In aid-dependent countries where development projects are a pocket of prosperity within a destitute ministry, resources are often diverted to cover the running costs of the ministry’s departments.
The authors have found that the most efficient and effective budget execution systems are those that allocate flexibility to line ministries and agencies to manage their resources while keeping within the policy framework of the budget.
Other policy suggestions are:
- Current centralised payment systems should become more flexible and include greater involvement of spending agencies.
- Decentralised systems should improve areas of monitoring, accounting and cash management and be subjected to regular and comprehensive audits.
- Arrangements should be put in place to allow funds from development projects that are delayed to be reallocated to those that are proceeding well.
- Responsibilities within line ministries need to be clarified to ensure that central departments are fully responsible for co- ordinating sector policy and that agencies carry out their activities under supervision without disruptive interference in day-to-day administration.
