An efficient and transparent budget system plays an essential role in securing good governance. It will help to achieve accountability and minimize the potential for the abuse and mismanagement of funds. However, weak governance can also undermine the delivery of fiscal objectives.
This section in the International Monetary Fund’s Guidelines for Public Expenditure Management looks at the budget execution process. It highlights issues and weaknesses throughout the process that need to be addressed and rectified. Budget execution processes differ depending on the type of government (francophone, Latin American, Commonwealth or ‘transition’ systems), especially in their information flows. This means that there are sometimes different problems at different stages which need to be taken into account when looking for weakness. The different stages of the budget execution process also need to be kept in mind, especially for monitoring purposes, and information needs to be available at all stages. To ensure good governance, the government sector should also be clearly defined, with the separation of powers and financial and nonfinancial functions, and the budget should be viewed as a complete process: All stages should be focused on equally.
Key weaknesses in the budget execution process are:
- A time lag between commitments (a commitment arises when a purchase order is made or a contract is signed) and associated cash payments
- There may be gaps between data obtained from the banking system and that obtained from the Ministry of Finance, caused by difference in what is reported, backlogs in regularising accounts and arrears through attempts to slow down recording the payment process
- There are specific problems with monitoring: In developing countries, the administrative capacity to analyse information may not be present; in many systems, it is difficult to find out if bills are beyond their grace period and there are difficulties in measuring arrears
- In some countries, especially transitional ones, exceptional procedures (to speed up the process for urgent expenditures) are often abused or used too frequently. Exceptional procedures create payment arrears and incentives to go outside the budget system
- In transitional countries there are further problems: Commitment may not be recorded or consolidated, or be a commitment in accounting terms and distinctions need to be made between final payments and transfers that really represent payments
- The excessive use of suspense accounts, below the line accounts, supplementary estimates and virement usually indicates a lack of budget discipline, although supplementary estimates are not always bad. Some switches may also not be genuine.
Key recommendations to rectify weaknesses are that:
- Accurate, reliable data should be obtained in a timely way, and the administrative capacity to analyse it is essential. Bank accounts should cover the same information as Ministry of Finance reports
- Monitoring at the verification stage (where goods have been delivered and a bill has been received) is ideal. The next best stage for monitoring is the commitment stage
- Expenditure controls and reductions need to take place at an early stage of the process and Ministers of Finance should take a hard line approach to supplementary estimates. They should also be approved at fixed times of the year
- Budget and cash plans should be realistically prepared, and committed expenditures should follow formal procedures
- Funds existing in multiple bank accounts in developing countries should be put into one treasury account
- An accrual-based accounting system should be used in industrialised countries.
