Public Financial Management: An Introduction

Training for Support PAC StaffHilton Hotel,

Windhoek, Namibia 10-12 May 2012

Objectives/Outcomes

• Basic understanding of the concepts and importance of PFM increased.

• Participants should understand the background for the increased policy attention to PFM and understand the principles and importance of PFM tools and processes (PEFA Framework & MTEF).

• Training will include generic case exercises and group discussions in addition to presentations.

Positive Developments Within Africa

• CSOs are producing a review of how government has implemented the national budget in Cameroon, for the purpose of helping Members improve their understanding of budgetary processes.

• Youth Development Organisations in Ghana have published an analysis of the 2012 budget statement

• Kenya’s new Constitution (2010) gives Parliament an expanded mandate in the national budget process.

• Creation of a PAC in Rwanda• New Parliamentary Budget Offices in Uganda and Kenya • Enactment of the Public Finance Management Act in Zimbabwe gives

Parliament more powers to engage in the budget process. • In Uganda the MTEF is now five years to resonate with the National

Development Plan.• Other Examples?

Public Financial Management (PFM)

• A system of institutions, rules, regulations, procedures and processes through which decisions are made and implemented.

• PFM concerns itself with the instruments in place to achieve policy objectives.

• Crucial question is how well has money been spent? Has it been used efficiently and whether it has achieved the purposes for which it was allocated?

• This has become even more relevant in the current climate of deficit reduction and spending cuts.

• Created new challenges for parliaments and parliamentarians.

Context of PFM

Working GroupsConsider the major implications for PFM of the

– Governance Context– Institutional Context– Global Context

Which is most important?

PFM Objective 1: Aggregate Fiscal Discipline

• Basic expenditure control.• Budget totals should be the result of explicit,

enforced decisions (danger of repetitive budgeting); they should not merely accommodate spending demands.

• These totals should be set before individual spending decisions are made, and should be sustainable over the medium term and beyond.

PFM Objective 2: Allocative Efficiency

• Expenditures should be based on government priorities and on effectiveness of public programs.

• The budget system should spur reallocation from lesser to higher priorities and from less to more effective programs.

• A medium-term framework will take account of future implications of current allocations.

• Problems of limited resources that can be allocated; legally binding commitments; off-budget expenditure; political will.

Budgeting Systems

• Budgeting Systems can be classified according to the purpose of the authorization by the legislature; to purchase inputs for government activity; to produce specific outputs; or to achieve certain results:– Line-item budgeting (the purchase of vaccines for

child immunizations)– Output budgeting (the number of child

immunizations performed)– Program budgeting (reduction in incidence of a

particular child disease)

PFM Objective 3: Operational Efficiency

• Value for Money• Agencies should produce goods and services

at a cost that achieves ongoing efficiency gains and (to the extent appropriate) is competitive with market prices.

• Importance of managerial discretion and an adequate control system and a culture of compliance

Can Legislatures be more disciplined and independent in budgetary matters?

• One argument is that centralized executive control of budgetary powers and procedures and limited powers of legislatures ensures fiscal discipline is maintained. – Danger is that this may also impede accountability mechanisms in the

legislature and allocative and operational efficiency.• Is a reduction of fiscal discipline a price worth paying for greater

legislature involvement?• One solution is to fix an overall constraint before the legislature

proceeds to consider sectoral spending. A legislature can vote on budget totals before the consideration of departmental appropriations. – The Swedish Parliament fixes the aggregate level of expenditures and

revenues; a Finance Committee recommends to the House the division of aggregate expenditure; and departmental committees prioritize departmental allocations within the agreed total for their expenditure area.

Can Legislatures be more disciplined and independent in budgetary matters?

• Clear fiscal rules related to fiscal discipline can also help ensure fiscal discipline (Indonesia, Mongolia, Chile)– Special fiscal requirements in Mongolia stipulate that the total budget

expenditure growth rate shall not be more than the greatest of the non-mineral GDP growth rate and the average of non-mineral GDP growth rate for 12 consecutive years preceding the particular year.

– These special requirements may be suspended temporarily if the GDP growth of a particular year compared to a previous year equals to 0% or below or in the event of a disaster and emergency situation (Article 8).

• Some budget laws allow the Parliament to increase budget appropriations as long as it does not lead to a higher fiscal deficit(either through budget reallocations or by increasing revenues).

Objectives of PFM

• None of the main objectives of public financial management can or should be pursued in isolation from the others.

Aggregate Fiscal Discipline

Allocative Efficiency Operational Efficiency

B u d g e t t a b l e d i n t h el e g i s l a t u r e

C o n s i d e r a t i o n b yp a r l i a m e n t a r yc o m m i t t e e ( s )

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S p e n d i n g d e p a r t m e n t ss u b m i t d r a f t b u d g e t s

N e g o t i a t i o n a n d f i n a ld e c i s i o n s b y e x e c u t i v e

D r a f t i n g L e g i s l a t i v e I m p l e m e n t a t i o n A u d i t

F u n d s a p p o r t i o n e d t os p e n d i n g d e p a r t m e n t s t oi m p l e m e n t a c t i v i t i e s

F i n a n c e m i n i s t r ym o n i t o r s s p e n d i n g

R e q u e s t f o r l e g i s l a t i v ea p p r o v a l o f a d j u s t m e n tb u d g e t i f n e c e s s a r y

S u p r e m e a u d i t i n s t i t u t i o na s s e s s e s d e p a r t m e n t a la c c o u n t s a n dp e r f o r m a n c e

A u d i t r e p o r t s p u b l i s h e da n d r e v i e w e d b yp a r l i a m e n t

B e f o r e b e g i n n i n g o f r e l e v a n t f i s c a l y e a r F i s c a l y e a r s t a r t s a n d e n d s F o l l o w i n g e n d o f f i s c a l y e a r

S t a g e s o f t h e a n n u a l b u d g e t p r o c e s s