Module 1.3 - The Budget and Budget Preparation.ppt

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

2. 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
Detailed procedure instructions & manuals
Financial Instructions
Accounting Standards
Legislation
Constitution
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
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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
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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
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2. Budget Principles

11. 11
Traditional budgeting Performance oriented
budgeting
Input-oriented Results-oriented
Annual Multi-annual
Central control Devolution
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
ActivitiesInputs Outputs
Intermediate
outcomes
Efficiency Quality
End
outcomes
Effectiveness
Operational arrangements;
or other benchmarks
Policy objectives
Traditional
Performance oriented
Economy

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

17. 17
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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
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18. 18
Health
Education
Agriculture
Defence
Justice
But the pie is nibbled…
Earmarked
revenues
Funds
Agencies
Special
accounts
2. Budget principles
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19. 2. Budget Principles
•… and by-passed:
Donors’ off-budget projects
Tax earmarked to specific purposes
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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
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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 ?
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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
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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
Planning and
budget
formulation
Budget
execution
Monitoring,
Accounting,
Reporting
External Audit
&evaluation
Cross-cutting
issues, legal and
technological
infrastructure
Parliament
scrutinizes and
votes the
budget bill
Parliament
investigates
executive's
audited reports
Evaluation studies;
Public Expenditure
Reviews
National
Strategies
/Plans
Sector
Strategies
MT
Program-
ming
Budgeting
P
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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
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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

I. Determine budgetary
ceiling
M
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F
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L
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m
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V. Submit to
Parliament for
authorisation

II. Send budget
circular
III. Submit bid
IV. Negotiations
Parliament
Cabinet

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

35. Form of fragmentation Cause of potential
misallocation
Remedial action
Project loan and grant Imposition 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 expenditures Benefits mistargeted,
poorly monitored
Consideration with all
expenditures, reports
Quasi-fiscal activities Subsidies 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. 3. Strategic & Detailed preparation
Ministry of Finance -
Line Ministries
Step 1
Sector review
of ministry
objectives/
outputs and
activities
Step 1
Agreement
on programs
and
subprograms


Strategic

39. 3. Strategic & Detailed preparation
Step 1
Sector review
of ministry
objectives/
outputs and
activities
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
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
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
Macro-
economic
framework /
Availability of
resources

Step 3
Approval of
ceilings by
Cabinet
Ministry of Finance
Strategic

41. 3. Strategic & Detailed preparation
Step 1
Sector review
of ministry
objectives/
outputs and
activities
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
Macro-
economic
framework /
Availability of
resources
Step 4
Preparation
of 3 year
estimates
within cabinet
approved
ceilings
Step 3
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
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
Macro-
economic
framework /
Availability of
resources
Step 4
Preparation
of 3 year
estimates
within cabinet
approved
ceilings
Step 5
Determine
Fiscal space
for new
Activities
Step 3
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
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
Macro-
economic
framework /
Availability of
resources
Step 4
Preparation
of 3 year
estimates
within cabinet
approved
ceilings
Step 5
Determine
Fiscal
space for
new
Activities
Step 3
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
Step 1
Agreement
on programs
and
subprograms
Step 2
Detailed
expenditure
and sector/
ministry
ceilings for 3
years
Step 2
Macro-
economic
framework /
Availability of
resources
Step 4
Preparation
of 3 year
estimates
within cabinet
approved
ceilings
Step 6
New
Budget
Policy
Paper
Step 5
Determine
Fiscal
space for
new
Activities
Step 3
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
JFMAMJJASOND
Preparation of macro-economic framework
MDA estimate baseline & identify new initiatives
Ceilings by sector prepared by MOF
Cabinet approves strategy and ceilings
Budget circular is released
Line ministries submit budget requests
Budget requests reviewed by MoF-Negotiations
Draft budget prepared by MOF
Draft budget reviewed by Cabinet
Budget submitted to legislature
Legislature scrutines and approves budget
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. Key Messages
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.