Budget execution

1. Budget execution …downstream …or up the creek? Jim Brumby, FAD.

2. “Much of the budgetary dislocations and the seeming planlessness, waste, and ineffectiveness of government ministries/agencies can be traced to the virtual failure of the processes for the release of funds” Professor Dotun Phillips, Nigeria, 2000

3. Budgetary allocations • Three levels pursued through harmonious use of institutions (information, rules and roles) • Budget formulation • Constrained approval process • Execution consistent with approved budget • Timely, audited reporting • Evaluation

4. Objectives of budget execution • Manage spending and revenues to budget (L1) • promote macrofiscal discipline • allow budget to be planning and steering tool • Enable program implementation (L2,3) • support choices of elected officials • assure resources flow to programs • allow budget to be aid to operational efficiency through spending unit advance planning, efficient administration • reduce opportunities for corruption • enable managers to achieve objective

5. Budget allocation • Poor countries • Pathologies of: unrealistic budgeting; hidden budgeting; escapist budgeting; repetitive budgeting; cashbox budgeting; deferred budgeting • Encourage enclave budgeting Allocation becomes determined through execution Formal budgets disappear

6. State of play focus on the downstream, but a desire to link upstream • Many manual or stand alone systems • A: controlling commitments and eliminating arrears • F: strengthening accounting and cash management systems • HIPCs: systems for poverty monitoring • BRO: developing treasury systems

7. Recently emerging priorities • Continuing core program • HIPC relief monitoring • Fiscal data quality • ROSCs • Re-organization of delivery • Africa and non-African HIPCs • ROW

8. Some issues • Arrears • Fiscal data • HIPC tracking work

9. Arrears • Outstanding payment obligations not discharged within reasonable (contractual) time • Difficulty in measurement • May involve offsets

10. Arrears – why a problem • Flow disguises size of govt; and nonsustainability of current settings • Breakdown in contracting; encourages informal ways to get paid • Reverberates through the economy, with more arrears

11. Arrears – root causes • Unrealistic budget preparation (revenue over-estimated ; expenditure under-estimated) • Poor budget execution (pathologies) • Lack of political commitment to hard budget • Unanticipated negative events • Reporting system which does not reflect economic substance

12. Arrears - how serious a problem • 45% of all countries in programs 1993-99 had PC on domestic arrears at some point • AFR 77% • EU2 64% • More PCs over time • They stick • Many received TA

13. Arrears - what to do • Bolster preparation • Control commitments and verify arrears • Neutralize incentive to create arrears

14. Arrears - preparation • Relate to needs and availability • Bringing plans and budgets into alignment • Cost basis • Using contestability in forecasting • Prudence

15. Arrears – execution • Registering commitments • Hard constraints, with no commitments above a given amount • Can reward good behavior • Differentiate commitments, liability and arrear – but watch all • Focus on problem ministries • Quarterly verifications • Auditor general or external auditors • LT: GFMIS

16. Arrears - neutralize • Capture ‘hard’ arrears number in expenditure tracking • Pay to zero regularly • Migrate to accruals – accounts payable and receivable

17. Fiscal data quality • National (and Fund) supported monitoring • Coverage (ggs) and central budget sector • Alignment of execution and preparation data • Realistic estimates on base of adequate costing • execution numbers – accurate and timely • Economic and functional classification • Internal consistency – bank accounts, ledgers, debt stock and flow • Contingent liabilities recorded • Parallel to ELRIC

18. Data quality missions • C1 – inconsistency between levels, exclusions • C2 – inconsistent coverage, stock-flows • C3 – non-cash transactions • Fix data through exacting process • Reinforce good data with transparency (PETS) & audit • LT: GFMIS and need for consistent budgeting and accounting classification

19. GFMISs • Direct risks • High cost • User requirements uncertain • Technical competency of users • Lumpy • Soft budget constraint • Indirect risks • Sucks resources • Undermines current systems

20. Comprehensiveness Reporting Final Audited Accounts Projec- tion Classi- fication Recon- ciliation Internal Control Execution Formulation Reporting Relative need for upgrading

21. HIPC execution findings Internal Control • About two-thirds of HIPCs do not currently have serious payment arrears problems • Expenditure tracking surveys have been recently introduced in several HIPCs • About one-third of HIPCs are reported to have active internal audit systems, but… Reconciliation • About 40 % of the countries now undertake regular reconciliation between fiscal and monetary accounts. Management Reporting • Less than 20 % of HIPCs provide in-year tracking reports within two weeks of the end-of-period, and two-thirds within two to four weeks. • About two-thirds of HIPCs surveyed provide a functional classification for the budget; 40% not in year

22. Tracking – lessons from field • What is planned • Important to know all that is going on; • Medium term tends to focus on all PEM, not just poverty reducing programs • Realism about timing and implementation difficulties • What is needed—particularly before HIPC completion point • Short term to be consistent with medium term but focused on poverty reducing spending