Guidelines for Public Expenditure Management

Barry H. Potter and Jack Diamond



When mission teams from the International Monetary Fund visit countries for either surveillance or program work, one person is usually designated as the “fiscal economist.” This economist’s duties extend over both the revenue and expenditure sides of the fiscal accounts.

Traditionally, economics training in public finances has focused more on tax than expenditure issues, and within expenditure, more on policy considerations than the more mundane matters of public expenditure management. Thus, many economists participating in their first IMF mission may have relatively little experience of practical issues in public expenditure management; typically, they face questions that are more about accounting and institutional structures than economic theory or policy.

For many years, the IMF’s Public Expenditure Management Division has answered specific questions raised by fiscal economists on such missions. Based on this experience, these guidelines arose from the need to provide a general overview of the principles and practices observed in three key aspects of public expenditure management: budget preparation, budget execution, and cash planning. For each aspect of public expenditure management, the guidelines identify separately the differing practices in four groups of countries–the francophone systems, the Commonwealth systems, Latin America, and those in the transition economies.

Following the preparation of an internal document for training and guidance purposes in early 1998, it was suggested that this document might be made more widely available to the public. This publication is thus intended for a general fiscal, or a general budget, advisor interested in the macroeconomic dimension of public expenditure management.


The authors wish to acknowledge the contributions from other members and former members of the Public Expenditure Management Division of the Fiscal Affairs Department, particularly Taryn Parry, José-Luis Ruiz, Véronique Bédague, and Ian Lienert. In addition, comments from G.A. Mackenzie, Sanjeev Gupta, and Adrienne Cheasty on earlier versions were especially helpful in assisting the authors in the preparation of the final text. Special thanks are due to Theresa Garrison for her patience and diligent production of many drafts of this manuscript and her editorial suggestions. Jeff Hayden of the External Relations Department edited the manuscript and coordinated its production.


The budget as approved by the legislature for a line item of spending. The budget law gives the executive branch the authority to incur obligations, which become due during the budget year up to a specified amount for specified purposes within a financial period (usually one fiscal year).

Below-the-line items
These are below the line drawn to establish the deficit between revenues and expenditures; correspondingly, above-the-line items comprise expenditures and revenues. Below-the-line items thus normally relate to the financing of the deficits.

Budget provision
The amount of appropriation proposed or approved for a line item or for a higher aggregate set of line items, such as a subprogram, program, sector, etc.

The placement of a purchase order or signing of a contract or other agreement for the provision of goods or services.

Contingency reserve
A small portion of the total budget that is set aside for expenditures on unexpected needs or emergencies, not appropriated in other budget lines.

Any spending program where expenditure is open-ended (usually transfer/grant payments) and where recipients must be paid or given transfers/grants, if they meet certain criteria. Some common examples are found in social security programs, unemployment programs, and poverty programs.

Extrabudgetary funds
Accounts held by government bodies but not included in the governmental budget; expenditures from such accounts are often financed by earmarked revenues or user fees and charges.

Organic budget law
A law specifying the schedule and procedures by which the budget should be prepared, approved, executed, accounted for, and final accounts submitted for approval.

Actual revenues and outlays on expenditures.

Payment order
Authorization for payment against a bill or invoice made by officials of line ministries, the ministry of finance, and others.

Planning reserve
A small portion of total planned budget expenditure that is (notionally) set aside by the ministry of finance before the budget is formulated, and then allocated to budget line items by the cabinet according to perceived policy priorities on individual sectors, programs, etc.

Provisional appropriation
Legislation that permits an expenditure to get under way before the actual budget appropriation, without any further authorization procedures. This is most commonly used at the start of the fiscal year (e.g., when the legislature has not yet finalized the budget).

Quasi-fiscal operations
Activities of the central bank (or possibly other state-owned financial or nonfinancial enterprises) that are in nature similar to fiscal actions pursued by the government. Although undertaken at the direction of the government, they are usually financed by the banks or state enterprises but not included in the government’s budget. Examples include credit to commodity boards (or other entities) at below-market interest rates, and central bank expenditures on the bailout of failing banks.

Usually, the process of checking payment orders issued by a government agency against actual payments according to bank statements; (reconciliation can also apply to other stages of the expenditure process, such as commitments made and payment orders issued).

Special accounts
Accounts recording transactions of an “exceptional” character that are made outside the normal procedures for expenditure approval and recording; many refer to temporary accounts (such as advances), or to transactions whose authority is questionable or to the accounts of formal extrabudgetary funds or “below-the-line” accounts.

Special funds
Usually similar to extrabudgetary funds, but sometimes refer to funds financed by earmarked revenues/user charges that are within the government’s budget.

Supplementary appropriation
Legislation passed during the budget year to provide for expenditures additional to the original budget.

Suspense accounts
A type of special temporary account used to record balances, or correct mistakes in amounts, that have not yet been “posted” to the relevant line item. Such transactions often include payments of adjustable advances, until the final amount chargeable is known.

Once a bill for goods or services has been received, the relevant line ministry/spending agency must confirm that the bill is correct and that the goods or services have in fact been received. At this point, the bill becomes a liability of the public sector; in accrual accounting terms, an expenditure is recognized even though the bill has not yet been paid.

The process of transferring expenditure provision from one line item to another during the budget year. To prevent misuse of funds, spending agencies must normally go through administrative procedures to obtain permission to make such a transfer.

A release of all, or more commonly a part, of the total annual appropriation on a quarterly or monthly basis that allows a line ministry or spending agency to review commitments.


Section 1

Economists working on fiscal policy and fiscal management need a good understanding of how the expenditure side of the budget is planned, prepared, and executed.1 This publication is designed for those interested in the macroeconomic impact of such budget processes, rather than in the perhaps more familiar microeconomic perspective of expenditure policies.

The analysis provided and the guidelines offered on good practices in budget management are intended for economists reviewing the fiscal sector of the economy and judging the feasibility of fiscal policy actions. The material should also provide a helpful background to other advisors or officials working on budgetary matters in developing countries and economies in transition who do not have specialized macroeconomics training.

The guidelines cover what such individuals need to know to:

  • ensure that consistent data on planned and past public expenditures are prepared in a consolidated format, compatible with a macroeconomic framework;
  • assess the adequacy of budget preparation procedures, in particular the level and composition of public expenditure planned before the budget year starts;
  • analyze whether the budget execution system can deliver planned spending within the budget aggregates; whether any steps are necessary to strengthen expenditure control; and how to intervene to enable any necessary in-year adjustments to be made to planned spending; and
  • assess whether there are adequate cash planning and management arrangements for a government to meet its fiscal targets on borrowing and prevent sudden, unanticipated borrowing that could disrupt achievement of monetary policy targets or undermine monetary discipline.

The focus of the analysis is on how to accomplish the above tasks within a country’s existing budget system, which may be considered as given in the short run. This short-term focus, however, should not deter fiscal economists and general budget advisors from being interested in, and able to identify the need for, longer-term improvements.
The structure of the guidelines is as follows:

  • Section 2 gives a brief introduction to the coverage of the budget and sources of expenditure data required for expenditure projections;
  • Section 3 focuses on the budget preparation process: how total planned spending is determined; the allocation of resources among spending programs to reflect priorities; and the scope, feasibility, and targeting of expenditure changes;
  • Section 4 describes the key features of budget execution, identifies problems that often interfere with the efficient execution of the budget, and discusses the use of in-year expenditure adjustments to help meet fiscal targets; and
  • Section 5 considers the interaction between expenditures, cash flows, cash planning, and borrowing, and how cash management can help ensure that no unanticipated borrowing disrupts the achievement of monetary policy objectives.

At the outset, a fundamental distinction needs to be drawn between expenditure management and expenditure policies. Effective expenditure management is not feasible without clear and well-defined expenditure policies, whose costs are properly identified in the relevant budget appropriations (see glossary). Expenditure budgets, in the form of line item appropriations, represent the cost of agreed expenditure policies. No improvements to budget preparation or execution can compensate for inappropriate or misguided policies.

These guidelines do not cover expenditure policy issues. Extensive material has already been prepared by the Fiscal Affairs Department of the IMF on expenditure policy issues, notably the Public Expenditure Handbook,2 two pamphlets–Unproductive Public Expenditures3 and Guidelines for Fiscal Economists Participating in Fund Missions4–and Occasional Paper No. 160, Fiscal Reform in Low-Income Countries: Experience under IMF-supported Programs.5

The style of the guidelines is interrogative: to pose questions that a fiscal economist or general budget advisor might have about budget processes and procedures and then to offer answers, often differentiating between the different expenditure management systems in francophone, Commonwealth, Latin-American, and transition economy systems. First, however, by way of a basic introduction, Figure 1 illustrates a typical timetable for preparing an annual budget. Figure 2 identifies the very basic elements of a typical budget execution process, and Figure 3 describes the main steps in cash planning and cash management. A glossary is also included at the end of the book for those unfamiliar with some of the terms used.

1Revenue and financing issues are clearly also of concern to fiscal economists, but they are not considered in detail in this publication.
2Ke-young Chu and Richard Hemming, eds., Public Expenditure Handbook: A Guide to Public Policy Issues in Developing Countries (Washington: International Monetary Fund, 1991).
3Fiscal Affairs Department (Expenditure Policy Division), Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis, IMF Pamphlet Series, No. 48 (Washington: International Monetary Fund, 1995).
4Prepared by Karim Nashashibi and Claire Liuksila, (Washington: International Monetary Fund, 1993).
5George T. Abed and others, Fiscal Reform in Low-Income Countries: Experience under IMF-supported Programs, IMF Occasional Paper No. 160 (Washington: International Monetary Fund, 1993).

 Section 2

The Expenditure Aggregates and Data Sources

Before considering how the expenditure side of the government’s budget is planned, prepared, and executed, it is necessary first to clarify the coverage and sources of data on public spending. This brief section discusses three critical, if basic, questions: What is the appropriate definition of government expenditure from a macroeconomic perspective? What are the data sources for public expenditure aggregates? How can expenditure projections for a short-term perspective best be prepared?

What government activities should be covered?

When considering the macroeconomic impact of government expenditures, fiscal transparency demands that the economist work with a very broad definition of the government sector.6 While several different aggregates may be referred to in IMF programs, “General Government Fiscal Operations” (GGFO), or general government for short, is usually identified as best suited to the macroeconomic perspective. This aggregate covers the activities of all levels of government (central and state level), and the quasi-fiscal operations of nongovernment entities.7 General government should thus reflect the overall magnitude of government operations, the aggregate burden of taxation, the allocation of public resources, and the size of the government borrowing requirement. This last item is, of course, crucial to IMF work since the financing of the government deficit plays a critical role in financial programming.

Tables on past and projected general government expenditures can normally be prepared by consolidating inputs from a series of spreadsheets, covering at a minimum the central government, aggregate state and local governments, and social security expenditures within any separate fund. In some cases, however, other important government transactions (besides social security) take place through special or “extrabudgetary” funds (e.g., road funds or health funds). In others there are quasi-fiscal operations undertaken through the banking system (e.g., subsidized loans to state-owned enterprises). Those preparing general government tables should, ideally, try to identify all such transactions, quantify their magnitude, and include them within the consolidated total.

Some countries–but by no means all–already provide a good consolidation of their data. But it is often desirable to check that the data conform to appropriate norms for coverage, as well as acceptable standards of accuracy and consistency. In practice, problems are often encountered in ensuring the data are sufficiently accurate and comprehensive, including the following:

  1. Some extrabudgetary funds are set up by a special law and may follow different accounting rules, classification systems, or even different fiscal years. A good understanding of these differences is necessary before consolidation can be attempted.
  2. It is also not unusual to encounter government transactions that are reported on a net rather than gross basis–for example, by spending agencies;8 this practice creates a transparency problem by hiding the scale of government operations and their impact on the economy. These transactions should be unraveled and, wherever possible, the data prepared on a gross basis.
  3. Some central government expenditures take the form of transfers to local governments. When consolidating general government spending, it is necessary to avoid double-counting such transfers.
  4. Some developing countries still maintain “dual budgeting,” that is, separate recurrent and development budgets. While this is now generally viewed as undesirable because it risks both inadequate macroeconomic control and poor resource allocation, it is often a given in the short term. Those preparing a general government budget need to consolidate the two carefully, keeping a watch for inconsistencies (e.g., timing, economic assumptions, etc.).
  5. In some instances, debt servicing is handled separately–for example, by the central or a commercial bank. Data have to be obtained from the bank(s) and consolidated with the information on other central government expenditures.
  6. The misclassification and/or exclusion of expenditures is a frequent problem. There is often a confusion between expenditure and financing transactions. A common example is the incorrect inclusion of loan amortization as expenditure. Net lending operations by government are often difficult to track down and are sometimes “off-budget”;9 but they should be consolidated in the government accounts. Similarly, within a general government table, only transfers and net lending to the nonfinancial public enterprise sector from general government (not any “commercial” expenditures such as the wage bill of the enterprise) should be included. But it can often be difficult to unravel these transactions. There may also be quasi-fiscal expenditures involved in lending to this sector directly from the central bank or from “commercial” banks, under government or central bank direction.
  7. Data on quasi-fiscal activities may be very difficult to obtain, if possible at all. Quantification of such activities is, in itself, often very difficult (see Section 3).10

In practice, it may be necessary to work with incomplete data on general government or to use only information on central government, even though the objective is to attain a macroeconomic perspective on fiscal activity. In many IMF programs, the central government budget is used, because information on the other (typically smaller) components of general government is not available. In other IMF programs it is possible to augment the data on central government budget to gain a better view either of a wider measure of the central government sector, or a rough proxy for general government. (The coverage of the central government, which is defined in the organic budget law, will vary with the type of budget system encountered.) As a general guidance, the following broad categorization may be helpful.

  • In francophone Africa, the main tables prepared by the authorities usually cover the central government budget–which does not include social security operations (typically rather small). To this, social security operations and other extrabudgetary fund operations (like commodity stabilization funds) should be added whenever possible.
  • In Latin America, much the same practice applies. However, social security operations can often be more readily included, since information on the social security budget has to be provided annually to the legislature.
  • In the (British) Commonwealth system, local governments are usually highly dependent on central transfers for support and the extent of major extrabudgetary funds is minimal. Central government budgets are typically the main operational tables.
  • In transition economies, extrabudgetary funds are extensively used, especially for social purposes; are usually important; and need to be consolidated. Moreover, very centralized systems are giving way to greater autonomy at the subnational government levels. The movement of budget authority to subnational levels, however, has often not (yet) been translated into significant local revenue assignments or important shares in total taxes.

In a number of cases, it will be appropriate to work with a wider aggregate than general government–the nonfinancial public sector–by including the nonfinancial public enterprises. The nonfinancial public sector should be used when public enterprises undertake quasi-fiscal activities, such as the provision of schooling on a significant scale. This is particularly the case in a num-ber of Latin American countries, where the operations of these enterprises and the linkages to the government’s budget need to be fully explored.

The key point is that, in deciding which public expenditure aggregate will best allow a macroeconomic perspective, a balance needs to be struck between the desirable (as wide a coverage of fiscal transactions as possible) and the realistically achievable. Ideally, all relevant nonbudgetary transactions should be included or at least some adjustments made to the aggregates reported in the budget. But how far this will be practicable is inevitably constrained by the availability of information.

To sum up, the key questions to ask about the coverage of the data are:

  • Is it possible to work with general government or with central government only?
  • Is the coverage of government operations complete as defined in general government? If not starting with central government budget data, which other transactions should be included and how feasible is it to estimate and monitor their size? Have intersectoral transfers (e.g., central government grants to local government) been counted only once in the consolidation?
  • Are estimates gross or does netting take place? If netting takes place, are these transactions sufficiently large or strategically important enough to necessitate conversion to a gross basis?
  • Are the scale and nature of activities undertaken by nonfinancial public enterprises sufficient to justify working with the nonfinancial public sector rather than GGFO?

What are the data sources?

Those preparing expenditure aggregates need to be able to get timely, reliable, and accurate information on both outturn and planned expenditures (see glossary for definition of outturn). Data on outturn central government expenditure as a whole are generally available from some unit in the ministry of finance. More detailed information on month-to-month spending can sometimes be obtained from line ministries or spending agencies. But there are important differences, particularly when gathering information during the fiscal year (“in-year”), in terms of data availability on outturn expenditure among the francophone, Commonwealth, Latin American, and transition economy systems. Such in-year information is crucial for fiscal monitoring and fiscal adjustment.

  • In francophone systems, accounting for government expenditures is more centralized, so that data are available, usually quickly, on cash outturn–and even on earlier stages in the spending process (see Section 4)–from the ministry of finance.
  • Commonwealth systems are, by contrast, often more decentralized. Typically, consolidated reports of payment orders and checks issued by government are available; checks cashed may also be available, but often only with a reporting lag from the banking system and through the central bank. Data on earlier stages of spending, however, require special reports from the line ministries, except where a centralized general accounting office is in charge of issuing payment orders directly.
  • In Latin American countries, the expenditure process is quite decentralized. Data on monthly limits for payment orders are available; however, there are typically no data on the earlier stages of the spending process.
  • In transition economies, the position is in flux: now the information is normally available from the ministry of finance, often the treasury department, but there are still some reporting lags.

Data on central government will need to be complemented or augmented by data from other sources to develop a consolidated picture of general government operations. First, it is necessary to consider extrabudgetary funds and where data on these accounts can be acquired–for example, on pension funds from a ministry of pensions.11 Second, line ministries or the ministry of finance should be able to provide information on state or local government expenditures. Third, where there is a separate development budget, information on expenditure may be available only from a separate ministry of planning or planning commission, or only from line ministries. Fourth, the measurement of foreign-financed development expenditures (mostly but not wholly capital) can be problematic, where systems for monitoring aid inflows and development projections are inadequate. At worst, full consolidation of such expenditures may not be achievable (see Section 4).

All these outturn data are termed “above the line;” that is, accounting records of government expenditures undertaken. The monetary survey can be an important source of “below-the-line” data on cash outturn expenditures; that is, data extracted from the financing of government expenditures from banking, nonbank, and external sources. While the banking system provides data on government bank accounts, rather than on a detailed line item budgetary basis, it can provide a useful check on the budgetary data from the ministry of finance (this is explored further in Section 4).

It is thus necessary to determine what data on outturn government accounts are available within the ministry of finance; and what ancillary sources–line ministries, planning commission, central bank–can be used to get the necessary information on the consolidated government sector.

Finally, data on planned expenditures for the setting of the next budget can usually be found from a combination of the ministry of finance, any planning ministry, and in some instances the central bank (for debt payments)–see Section 3.

How are short-run expenditure projections to be made?

Most country authorities, whether working with IMF programs or World Bank projects or not, prepare and publish at least annual projections of public spending.12 Many also make projections, at least in aggregate and often by line ministry, of annual expenditure in each of the two subsequent years. Budget advisors can readily subject these to economic analysis, particularly on volume measures, cost factors, and underlying economic assumptions. In the context of macroeconomic forecasting, the techniques for projecting annual expenditures are well known. However, the fiscal economist may be less aware of how to make short-term projections on expenditures, on a monthly, quarterly, or semi-annual basis. Yet, such projections can be critically important in the context of taking in-year fiscal remedial action.

Whatever data are provided by the authorities, a fiscal economist may wish to make a separate assessment of short-term expenditure trends–for example, for the second half of the fiscal year. (For financial programming work in the IMF, for example, it is always important to estimate a time path for public expenditures in order to derive the quarterly–and sometimes monthly–financing requirements of the government.)

The starting point will usually be the latest annual expenditure projections, usually presented in the annual budget by the authorities and, ideally, with estimated figures for the last year and projections at least for the next two years. (Some such forward projections represent expected expenditures; but more often, they are normative. For example, in many low-income countries, the annual figures for years two and three are likely to be residuals from a targeted fiscal deficit and projected revenues. The positive or normative nature of projections needs to be properly understood.)

A breakdown of the annual projections into quarterly and monthly figures may be provided by the authorities, but this is not always the case. Short-run focus projections do not usually require sophisticated modeling approaches. Rather, to prepare expenditure projections with any precision requires a close understanding of (1) the different stages of the spending process; (2) different categories of expenditure, identified by economic type, and often individual projects; and (3) the patterns of spending in preceding years.

Ideally, all government expenditure transactions should be classified in four ways:

  1. by administrative responsibility–the ministry, department, or spending agency that undertakes the expenditure;
  2. by economic category–defined by Government Financial Statistics standards;
  3. by function (e.g., health, education)–defined by the United Nations; and
  4. by program (e.g., by policy goals and objectives).

In principle, all transactions should have a coding (e.g., on the payment order) that incorporates all four dimensions. In practice, this is found mainly in industrial countries. Only the first three will, to some degree, be present in most other countries. Moreover, if the classification system is a mix of economic type and function, then considerable work may be necessary to convert it to a consistent economic basis.

But expenditure classification is important, particularly for short-term projections. It is usually easiest to adopt a disaggregated approach that projects government expenditure transactions, by month or by quarter, separately for broad economic categories. Apart from its relative simplicity, this classification facilitates broader economic analysis; for example, it allows easier simulation of the effects of varying economic assumptions or projections on the exchange rate, inflation, etc. Starting from the very simplest economic categorization,13 wages and salaries are nearly always paid on a well-defined timetable (weekly, biweekly, monthly, or bimonthly).14 Some grants and transfers are paid monthly but others quarterly. Debt interest payments can usually be projected from a schedule of due payments. So, once the budget is set, the likely pattern of such recurrent expenditure outlays can be determined in a fairly straightforward way. By contrast, the profile of the purchase of other current goods, services, or capital goods may be more variable from month to month and thus more difficult to assess.

Projections should thus be based on a combination of budget plans, known commitments (see Section 4), and past expenditure patterns. For analytical purposes, once a base projection has been established, the economist may also need to examine particular scenarios and thus to distinguish between those economic categories that are most sensitive to different economic assumptions, such as the exchange rate or inflation rates; or consider whether some expenditures are particularly sensitive to changes in output. Especially when the inflation rate is high or volatile, even three- or six-month projections need to be built up from a very short-time profile, typically monthly. Also, particularly during periods of economic crisis or fundamental macroeconomic structural problems, such that revenue receipts (and often external financing) are very uncertain, monthly expenditure projections are especially important and may need to be constrained by available financing.

Greater disaggregation than the broad economic categories identified above may also then be desirable, to build up projected spending patterns. Moreover, it may also be necessary to identify large or volatile items of expenditure from past years’ outturns (e.g., on capital projects, or payments of transfers) and make special efforts to estimate their magnitude and timing in the period ahead. Any additional or exceptional expenditures that arise will have to be factored into the projections separately.

In developing short-term expenditure projections, therefore, the following are key questions to bear in mind:

  • What information by economic category can be identified?
  • What components are susceptible to changes in which economic assumptions?
  • What guidance can be found from past expenditure patterns?
  • What special expenditures may occur in the projection period?
  • Does a high or volatile inflation rate require the development of a very short-time profile (e.g., monthly) projections?
  • What constraints on expenditure projections may be implied by the projections or revenue or financing?

In essence, therefore, any expenditure projections prepared should be examined carefully and subjected to sensitivity analyses (again by economic category), taking into account consistency with past patterns; acknowledgment of factors that are new or different in the period ahead; and the latest economic indicators.

6See IMF, Code of Good Practices on Fiscal Transparency available at
7Definitions of GGFO and central governments may be found in the IMF’s Government Financial Statistics (GFS) manual.
8In this publication, separate ministries or departments of state charged with the delivery of public services are referred to as “line ministries” (to distinguish them from the ministry of finance). Spending agencies are smaller units that deliver public services, either reporting to a line ministry or directly to the ministry of finance.
9The term “off-budget” is used differently from “extrabudgetary” throughout this publication. An “off-budget” transaction is one conducted by a spending agency or line ministry whose transactions should be within the budget. An extrabudgetary fund (typically set up by law and executed to rules) conducts transactions that are, by definition, outside the budget.
10See also IMF, Code of Good Practices on Fiscal Transparency.
11Usually these data are not available from the ministry of finance, or if they are, only with a considerable time lag.
12This may not be on a consistent definitional base with the annual budget.
13The simplest categories of expenditure are recurrent wages and salaries; recurrent grants and transfers; recurrent debt payments; recurrent other goods and services; and capital expenditures.
14But bonus payments can also make them more variable from month to month.

 Section 3

Budget Preparation

A full understanding of the budget planning and preparation system is essential, not just to derive expenditure projections but to be able to advise policymakers on the feasibility and desirability of specific budget proposals, from a macroeconomic or microeconomic perspective. It is much easier to control government expenditures at the “upstream” point of budget preparation than later during the execution of the budget.

Thus, fiscal economists and general budget advisors need to know:

  • what is the framework in which budget decisions are made;
  • who is responsible for planning and preparing the budget;
  • what are the basic steps;
  • what are the typical weaknesses in procedures and how can these be overcome; and
  • how can changes in budget plans be programmed and targeted?

Answers to these questions are set out in the subsections below.

Budget planning and preparation are (or should be) at the heart of good public expenditure management. To be fully effective, public expenditure management systems require four forms of fiscal and financial discipline:

  1. control of aggregate expenditure to ensure affordability; that is, consistency with the macroeconomic constraints;
  2. effective means for achieving a resource allocation that reflects expenditure policy priorities;
  3. efficient delivery of public services (productive efficiency); and
  4. minimization of the financial costs of budgetary management (i.e., efficient budget execution and cash and debt management practices).

Budget preparation is the principal mechanism for achieving items (1) and (2); item (3) typically features as an element of budget preparation only in industrial countries, while item (4) is essentially an issue in budget execution and cash management (see Sections 4 and 5). Moreover, no system of budget execution or cash planning (the subjects of Sections 4 and 5) can do more than mitigate the problems caused by poor quality or unrealistic budget preparation.

What is the framework in which budget decisions are made?

Budget preparation is a process with designated organizations and individuals having defined responsibilities that must be carried out within a given timetable (see Figure 1 in Section 1 for a typical time line). This process is normally established and controlled by a legal and regulatory framework. While generally sharing broadly common procedures, budget preparation (and execution) systems do exhibit differences depending on their historic origin. Given the common heritage of many countries, it is possible to identify four main patterns–francophone, Latin American, (British) Commonwealth, and transition economies.

To understand the budget preparation process in a given country, it is important to:

  • assess the basic soundness by judging the budget preparation system against certain internationally accepted standards or “budget principles”;
  • know where to find the rules governing the budget preparation process; and
  • from those rules, identify who has the responsibility for what elements of the budget preparation process.

Recognizing the usefulness of budget principles

Based on the objective macroeconomic assessment of available revenues and financing, ideally, the expenditure budget should aim to be comprehensive, transparent, realistic, policy-oriented, and allow for clear accountability in budget execution. These concepts form a standard by which the soundness of budget systems can be judged (see Box 1).

Box 1. Assessing the Soundness of the Budget

The soundness of budget systems can be judged by the following:


  • Is the coverage of government operations complete?
  • Are estimates gross or does netting take place?


  • How useful is the budget classification? Are there separate economic and functional classifications that meet international standards?
  • Is it easy to connect policies and expenditures through a program structure?


  • Is the budget based on a realistic macroeconomic framework?
  • Are estimates based on reasonable revenue projections? How are these made, and by whom?
  • Are the financing provisions realistic?
  • Is there a realistic costing of policies and programs and hence expenditures (e.g., assumptions about inflation, exchange rates, etc.)
  • How are future cost implications taken into account?
  • Is there a clear separation between present and new policies?
  • How far are spending priorities determined and agreed under the budget process?

In most Organization for Economic Cooperation and Development (OECD) countries, comprehensiveness and transparency are achieved by designing a budget system with three key characteristics.

Annuality. A budget is prepared every year, covering only one year; voted every year; and executed over one year. While maintaining the core concept of annual authorization, this principle has been modified at the preparation stage, such that most OECD countries now develop the annual budget within a multiyear perspective, through the preparation of medium-term revenue and expenditure frameworks. A very few are moving toward determining budget appropriations for more than one year at a time.

Unity. Revenue and expenditure (as well as borrowing constraints) should be considered together to determine annual budget targets. The budget should cover all government agencies and other institutions undertaking government operations, so that the budget presents a consolidated picture of these operations and is voted on, as a whole, in the parliament.

Universality. All resources should be directed to a common pool or fund, to be allocated and used for expenditures according to the current priorities of the government. In general, earmarking of resources for specific purposes is thus to be discouraged; but the case of extrabudgetary funds is considered in more detail below.

These three characteristics are essential to ensure that, in budget preparation, all policy proposals for undertaking government expenditure will be forced to compete for resources, and that priorities will be established across the whole range of government operations.

They are usually considered a prerequisite to meeting the first two of the four main goals of effective public expenditure management noted at the beginning of this Section: exercising the macroeconomic constraint of affordability on the total, and ensuring efficiency in the allocation of resources. These characteristics are typically enshrined in a legal and administrative framework regulating the budget process.

Knowing the rules

Although the precise legal framework for central government budgeting varies from country to country, it is usually set out at several levels.

The constitution is the highest in the legal hierarchy. Although it deals only with broad principles, the constitution may clarify three important aspects: (1) the relative powers of the executive and legislative branches with respect to public finances; (2) the definition of the financial relations between national and subnational levels of government; and (3) the requirement, for example, in Commonwealth systems, that all public funds be paid into designated accounts, and that these funds be spent only under the authority of a law.

The organic law is usually the main vehicle for establishing principles of public financial management. These laws may take the form of a single law that guides budget preparation, approval, execution, control, and auditing (loi organique relative au budget in the francophone system; ley de administración financiera in the Latin American system), or there may be several general laws covering specific areas of public finance management (e.g., under Commonwealth systems) that may also relate to subnational levels of government. They are called “organic” because they relate to organizational matters and systems, and do not therefore require annual reenactment. Moreover, they can often be modified only under certain conditions, such as qualified parliamentary majority.

Financial regulations. The organic budget law also gives to the government, or the minister responsible for public finance, the authority to issue detailed regulations and instructions (for instance décret portant réglement de la Comptabilité Publique in the francophone system, and decreto para la contabilidad pública in the Latin American system). These are often quite detailed.

The constitution, the budget organic law, and financial regulations are permanent and form the legal framework within which the annual budget law, which includes the revenue and expenditure estimates for a given year, is prepared, approved, executed, and audited. The annual budget law can take different shapes depending on the system.

In the francophone and Latin American systems, the coverage of the annual budget law (called budget or loi de finances in francophone countries and ley anual de presupuestos in Latin America) is rather wide, since it contains the amount and details of revenue and expenditure, the balance, and also any new tax legislation measures and some changes to spending. Under the Commonwealth system, both revenue and expenditure estimates are presented. Often the latter are further divided into recurrent and development estimates, sometimes presented as separate volumes. Typically, the presentation is detailed by institution and line item. By contrast, the annual budget in many transition economies has often been rather summary in format: prior to any recent reforms, budget estimates were presented by budgetary institution–typically only the major supervisory institutions and not their subordinate units–and broken down only by broad “functions,” more or less the sectors used in the previous central planning framework.

Identifying the responsibilities within the budget system

The powers assigned to the legislative and executive branches, and, within the executive branch, who does what, essentially define the responsibilities for preparing the budget (Box 2).

Box 2. The Framework that Regulates the Budget:
What Do You Need to Know?

The following summarizes some of the key questions on the overall budget preparation framework.

What is the budget timetable?

How are budgeting powers distributed between the executive and legislative branches?

  • legislative power to propose spending
  • power of amendment
  • one vote–global vote on spending
  • executive powers to limit spending below appropriations

How are budgeting powers distributed within the executive?

  • number of agencies involved; who does what?
  • agenda for setting budget negotiations; how is this determined?
  • structure of negotiations–who has veto power?

How are activities funded?

  • revenue accounts
  • borrowed resources
  • extrabudgetary mechanisms
  • multiple funds
  • contingency funds
  • special funds

Any legislative limits on:

  • expenditure?
  • deficit?
  • borrowing?
  • carryover of spending authority to next year?

Any earmarking?

  • special or hypothecated funds
  • constitutional or legal commitments on specific public services (education, health)

For instance, when considering expenditure changes at the budget preparation stage, countries vary in the extent to which the parliament can change the budget, once it is submitted for their consideration. Many countries, for example, allow for the composition of the expenditure or revenue plans to be changed but not the global total; in others, particularly in a number of transition economies, new expenditure proposals–often poorly costed–can be put forward, approved by the parliament, and thus enter into the budget. Although those preparing the budget can help improve parliamentary understanding through discussions, the budget must ultimately be negotiated by the executive with the legislature.15

Who is responsible for the planning and
preparation of the budget?

The responsibility for preparing the budget usually lies with the ministry of finance with input from the line ministries and some smaller spending agencies. This exercise is normally controlled by a central budget department located in the ministry of finance, or sometimes in a separate budget ministry.

The character of central budget departments differs widely between countries, however. Some are only responsible for preparing the current budget, excluding debt. In such cases, the capital budget may be prepared by a planning or development ministry (or even at a higher level in the prime minister’s or president’s office), while the debt service costs are assessed (and paid) by another entity. Some budget departments are in charge of preparing the entire budget, although not involved in implementation of the budget. Others have a say on expenditure commitments, and some are also in charge of monitoring budget execution. It is therefore important to know the precise responsibilities of the budget department. It is particularly useful to know if the budget department is responsible for supplying partial or complete data on budget preparation, expenditure commitments, and full budget execution data.

In many developing countries, only partial data on budget preparation may be available in the budget department. It is important that all data on the current budget, the capital budget, and the debt service (including data on secondary and tertiary tiers of government) are consolidated to ensure that, in total, they are consistent with macro objectives. In some countries, research departments of the central bank may carry out this task.

What are the basic steps in budget preparation systems?

In principle, the basic steps in a standard budget preparation system comprise the following:

  1. The first step in budget preparation should be the determination of a macroeconomic framework for the budget year (and ideally at least the next two years). The macroeconomic projections, prepared by a macroeconomic unit in the ministry of finance or elsewhere, should be agreed with the minister of finance. This allows the budget department within the ministry of finance to determine the global level of expenditure that can be afforded without adverse macroeconomic implications, given expected revenues and the level of deficit that can be safely financed. In a few countries, there are fiscal rules in place that may limit total spending or recurrent spending (e.g., the “golden rule”).16
  2. The second step should be the allocation of this global total among line ministries, leaving room for reserves (a separate planning and a contingency reserve as explained below) to be managed by the ministry of finance.
  3. The next step should be for the budget department to prepare a budget circular to give instructions to line ministries, with the indicative aggregate spending ceiling for each ministry, on how to prepare their estimates in a way that will be consistent with macro objectives. This circular will include information on the economic assumptions to be adopted on wage levels, the exchange rate and price levels (and preferably differentiated price levels for different economic categories of goods and services).
  4. Step four is the submission of bids by line ministries to the budget department. Once received there needs to be an effective “challenge” capacity within the budget department to test the costing of existing and any new policy proposals.
  5. The next step comprises the negotiations, usually at official and then bilateral or collective ministerial level, leading finally to agreement.
  6. Finally, step six is Cabinet endorsement of the proposals for inclusion in the budget that will go to parliament.

While the principles should be broadly familiar in most ministries of finance (and would even be considered out of date in those industrial countries with the most advanced budgeting systems), actual practices may fall a long way short. For example, in too many countries the budget department does not prepare a macro framework, nor even a first outline of the budget, let alone indicative ceilings by line ministry, before sending out the budget circular. In such cases, the circular is an administrative mechanism that initiates the budget-making process, usually providing a timetable for budget submissions–that is, estimates of financial requirements by line item and by line ministry or spending agency–but not giving them much guidance in the preparation of their estimates or overall spending limits. Thus, when preparing their budget requests, the ministries often merely add percentages, guided by an inflation projection in the circular, to their previous year’s budget. With this “bottom-up approach,” line ministries are able to overstate their needs, exerting upward pressure on overall spending.

Early in the preparation stage, that is before the budget circular is issued, those advising on the preparation of the budget should ask:

  • Is the budget based on an aggregate level of general or central government expenditure, in cash terms, that is consistent with the macro framework, and any fiscal rules in place?
  • Does the budget circular to the line ministries provide adequate guidance on preparing budget estimates? Does it include a guideline or limit for each line ministry on this total spending?
  • Are there suitable reserves? Ideally, within the aggregate total there should be a planning reserve (not allocated in guidelines given to each line ministry), so the ministry of finance can assign extra resources later during budget negotiations for the most urgent priorities, without breaching the macroeconomic constraint. Moreover, after all final line ministry allocations have been made, there should still be a contingency reserve within the aggregate that will be held and administered by the ministry of finance to meet genuine contingency spending during the budget year.

What are the typical weaknesses of budget
preparation systems?

There are often weaknesses in budget preparation systems: their nature, scale, and significance need to be understood, both to assess the value of the data produced and, where there are separate projections to be made by an IMF team or other external advisers, to accommodate such weaknesses. Eight common problem areas can be identified:

  1. The central government budget is not really unified. It is a dual-budget system with separate recurrent and capital or “development” budgets that may be based on inconsistent macroeconomic assumptions, budget classifications, or accounting rules. Each budget may be compiled by a different ministry–for example, the ministry of finance for recurrent expenditures and a planning ministry for capital or “development” expenditures.17
  2. The macroeconomic constraint is not explicitly taken into account in the budget process, or the economic assumptions underlying the estimated costs of expenditure programs are weak or erroneous.
  3. Projections for the outturn of the previous and current years’ budgets are not prepared, or the experience to date is not analyzed, so that budget preparation becomes a simple incremental exercise based on the previous year’s (often erroneous) budget estimates.
  4. Satisfactory procedures do not exist for review of expenditure policies and program prioritization.
  5. There is no multiyear planning.
  6. Extrabudgetary funds are used to divert spending to one or more “off-budget” accounts.
  7. Quasi-fiscal expenditures, contingent liabilities, etc., are not taken into account.
  8. Appropriations-in-aid are used inappropriately.

In many cases, remedying the problems encountered in the above areas would require extensive reforms, so there may be limited scope to make an immediate impact. Even in the short term, however, those reviewing budget preparation can play an important role in sensitizing policymakers to certain weaknesses and so assist in reorienting the system.

Table 1 provides a summary of certain weaknesses and some of their implications. The next subsection deals with the individual issues in more detail.

Table 1. Potential Weaknesses in Budget Preparation

Ideal Situation

Common Weakness

Resulting Problems for Those Preparing Budgets

Unified budget with full coverage. Dual budget (separate development and recurrent budgets); many extrabudgetary funds. Difficulty in developing a consolidated budget. Blurring of capital and current expenditure concepts. With two different budgets it is more difficult to enforce expenditure limits or develop a fiscal adjustment program.
Universality: all revenues go into one fund for financing central government activities. Earmarked funds, especially common for financing extrabudgetary funds. Rigidity in spending priorities leading to inefficient allocation of public resources. Again, this makes fiscal adjustment a more difficult task.
Knowledge and analysis of previous year’s projected outturn expenditures; availability of volume indicators. Lack of data; data not communicated to budget office, or data are not analyzed. Data in the budget office may be misleading. For example, actual expenditures are usually different from budgeted expenditures, and the actual number of persons employed may be very different from the original budget projection.
Use of macroeconomic framework. Separate price indices by category of expenditure. Inadequate knowledge (or incorporation) of macroeconomic constraints. Poor estimates of program costs. Leads to a bottom-up approach where the budget is determined more by spending-agency requests. This and inadequate program provision generally lead to overspending.
Multiyear planning. Focus on current year only; no anticipation of future circumstances. May have a negative impact on fiscal sustainability: shortsighted policies often cannot be maintained in the long term. Alternatively, a lack of planning means imminent problems or recurrent consequences of capital spending are not foreseen.
Procedures for resource prioritization implemented early in budget preparation. No direction in priority setting, or attempt to prioritize until too late in the budget preparation process. Procedures for prioritization are especially important for meeting deficit targets or spending targets. If priorities are not communicated in a top-down approach early in the budget preparation process, overspending relative to budget is a likely outcome
Budget classification according to implementing institution (administrative), purpose of expenditure (functional), and use of expenditure (economic). Inconsistent nomenclature–for example, mixing functional and economic or budget nomenclature is not consistent with the chart of accounts nomenclature. An economic classification is most useful when designing a fiscal adjustment program. Sometimes the only classification available is administrative–by budget institution–so that reducing the budget requires cuts by institution, and the quality of the fiscal adjustment suffers. Nor is it possible to understand how expenditures are distributed among different items or for what purpose.


What are the typical questions?

Is the central government’s budget really unified?

While the budget document presented to the legislature may appear to be a unified one, in reality the current budget and the capital budget are often prepared following different procedures. In such cases, difficulties can be encountered in meeting macro objectives where the two budgets are prepared without full coordination, or on different economic assumptions. For example, in many developing countries the development budget or Public Investment Plan/Program (PIP) may include a combination of capital and current programs. Such a system can also lead to an inefficient use of funds because, for example, the same item of expenditure may be included in the two budgets, or, more typically, investment projects may be included in the budget, without providing for the necessary corresponding current expenditure. The supposed superior status of items included in the development budget may also tend to squeeze out current expenditures within the affordable total.

Information on planned capital expenditures may be partial, where donor-financed expenditure is significant and coordination with the donors is inadequate. It is important to check the extent to which the budget is unified in the above sense of ensuring the internal consistency of different components. Quite apart from checking whether the economic assumptions are common and consistent (see below) however, it is also essential to ascertain whether there has been policy agreement (e.g., on start dates for new policies, on levels of staffing for new development projects when completed, or whether the ministry of finance has ensured that the recurrent cost implications of capital spending in future years have been taken into account). If there is inconsistency, the coordination between the two budgets should be strengthened by whatever means available. A meeting with key donors may also be necessary.

Is the macroeconomic constraint explicitly taken into account?
Are the economic assumptions underlying the budget accurate
and consistent?

In some countries the budget is prepared with surprisingly little reference to the macroeconomic prognosis. Often, there is little macroeconomic analytical capacity in the government, or the budget department has no contact with those undertaking such analysis (e.g., a research department at the central bank). The absence of proper macroeconomic analysis is particularly common in countries that have a “dual-budget” system, that is, separate development and recurrent budgets as described above.

With inadequate macroeconomic analysis, there can be insufficient discipline to limit the size of the sustainable budget deficit at the beginning of the budget process. As a consequence, the budget preparation procedure can be principally driven by the requests from the ministries for increased spending (i.e., the bottom-up approach). Without a firm top-down limit, the ministry of finance can only challenge proposals on technical or policy grounds, rather than in terms of affordability constraints and priorities within a fixed total. There will be a higher probability that the deficit obtained through this procedure will not be sustainable. Fiscal adjustment will be easier if the macroeconomic constraint and the acceptable deficit is defined first (i.e., a top-down approach). From this, spending departments can be given some guidelines to limit their requests.

However, even if a macro constraint on aggregate expenditure is set, the fiscal economist needs to probe their validity. Since many countries have proven to be perennially optimistic in revenue forecasting, realistic revenue projections and the financeable fiscal deficit must be decided before the budget preparation procedure begins, not at some late stage just before or, worst of all, after, its completion. (In the worst examples, the revenue forecast can become a residual derived from line ministries’ aggregated spending plans less external financing and “acceptable” domestic borrowing.) Those preparing the budget need to ensure that the budget preparation timetable is sufficiently long, and the process transparent and comprehensive, so that there is no need for arbitrary expenditure cuts late in the process, when revenue or borrowing constraints become clear.

Another source of weakness is that the economic assumptions to be used in estimating the cost of present and new policies may not be accurate, consistent across line ministries, or sufficiently discriminatory between different economic categories of expenditure. For example, a sharp fall in the exchange rate will have a much different impact on the cost of health programs (because of the import of medicines) than on the costs of servicing domestic debt. Poor unit cost estimates are one of the most common weaknesses in budget preparation. Fiscal economists need to urge the budget department to specify by category different price factors before budget estimates are prepared. The higher and more volatile the inflation rate, the greater the need to differentiate by category of expenditure.

Are recent budget execution figures known and analyzed?

The budget department–and others involved in budget preparation, such as the planning ministry–are often unaware of the provisional outturn for the last completed financial year, or the projected outturn for the current financial year, because the budget is executed by a separate treasury department, rather than by the budget department. Budget preparation for year t + 1 begins early in the current fiscal year (t) before the provisional outturn for the previous year (t ­ 1) is known, and usually before any projected outturn for the current year has been made available, with the consequence that the budget department/planning ministry prepares the budget by reference to the previous and current years’ initial budgets, and not to the provisional or projected budget outturn for the current and preceding years.

If there is economic instability–for example, in times of high inflation–the budget preparation exercise can become seriously unrealistic. Uncertainty about likely price levels can also “excuse” and thereby perpetuate a lax attitude to budget preparation: when the budget is subsequently executed, the results may include wasted administrative efforts spent switching resources from one budget line to another (virement); excessive use of supplementary appropriations; loss of macroeconomic control over the total; poor allocation of resources among programs; and expenditure arrears.

At the preparation stage of the budget, when discussing the budget figures, in addition to the budget department and any planning ministry, the treasury (or budget execution department) should be fully involved. In particular, the treasury department should provide estimates of spending in the previous year and the spending to date in the current year (both in general and on specific programs or economic categories), as well as its forecast of the likely outturn for the current year. The best basis for forecasting expenditure on a given policy is usually the estimated cost of that policy for the most recent year available.

Do procedures exist for resource prioritization?

An efficient budget preparation procedure should aim at making the government’s priorities clear and at selecting, from the many budget requests by spending ministries, those which are really important to the government. In principle that requires two elements. First, a budget strategy needs to be determined at a political (typically cabinet) level, which determines (1) the affordable total, (2) new policies to be accommodated, and (3) any changes (often reductions) in existing policy provision. Second, each spending ministry and the budget department/planning ministry should meet to discuss each ministry’s estimates. To accommodate new policies, the budget department/planning ministry must require each spending ministry to prioritize its requests.

But this ideal is rarely matched by the practices in many countries. Quite apart from weaknesses in the institutional arrangements, decisions on priorities at the budget preparation stage can be wholly artificial because (1) subsequent cash allocations or supplementaries will render them redundant; (2) amounts given by line item are deliberately loose or unclear, in anticipation of a real allocation during budget execution; and/or (3) in practice, the priorities are set outside the formal budget framework, for example, by the president’s office.

Ultimately, the allocation of resources across spending programs is a political decision, although those preparing the budget will need to advise on what is realistically achievable. For this, economic analysis should play an important role. For example, ministries need to have as much information as possible on expenditure policies and programs, on costs, and, ideally, on their outputs and outcomes.18

Whenever possible, however, the cost of all new policies that a line ministry wishes to pursue should be estimated separately from the estimates of the costs of ongoing policies. As supporting information, the spending ministry should provide data on expected results/performance from such new policies and incremental spending (ideally, outputs and outcomes) and preferably in a format that enables the requests across ministries to be compared. The ministry of finance should have a role in reviewing, and commenting on, such cost estimates. The data should be presented with enough detail to allow the budget department to judge the reasonableness of the budget request, the activities the request is intended to support, and the corresponding staffing levels.

Such systems are most advanced in a small number of industrial countries: even there, the practices (and results) are not wholly in line with the above principles. Real political agendas are sometimes nontransparent or inadequately articulated; the economic value of marginal expenditures across functions cannot be properly compared; and the measurement of policy outcomes, and their links to individual programs, has proved quite difficult in practice. Yet, considerable progress has been made, particularly on measuring output and on requiring better assessments of the results of new policies or programs proposed before they can be incorporated in the budget. Developments in this direction are to be encouraged, and there are some useful short cuts.

As noted earlier, to facilitate discussion on resource allocation, it is helpful for the budget department to set, within the macroeconomic total, guidelines/targets for each spending ministry on their total spending, when the budget circular is issued. In addition to targets by line ministry, an allowance should be made within the affordable total for suitable planning and contingency reserves (see below). This allows budget negotiations to coalesce around a realistic target for each ministry, consistent with the affordable macroeconomic total.

Such guidelines or targets can be normative (e.g., when they are derived from a medium-term expenditure planning framework; see below) or purely indicative (e.g., based on shares in the latest year’s outturn figures).

Each line ministry/spending agency can be asked to put forward its estimates for its existing or baseline policies within that guideline. (This should automatically be the basis of the data when the figures are derived from a medium-term framework.) Separately, each ministry should be asked to identify what policies and programs would be enhanced/introduced or cut back, if their allocation were 5 or 10 percent above/below the guidelines. While such an approach can be abused (by line ministries offering only politically unacceptable items for reductions), with experience, and with a well-informed challenge capacity within the ministry of finance that identifies lower-priority items in advance, it can help to concentrate discussion on priorities at the margin, within an affordable total.

A planning reserve is a sum (usually one or two percent of total expenditure) not allocated in the guidelines, which the ministry of finance later plans to allocate to new programs, if necessary above the guidelines during budget negotiations. A contingency reserve is a reserve for in-year expenditures above appropriations for handling genuine contingencies; it should be modest in size (if too large, a bidding process from ministries may quickly set in) and thus it is unlikely it should exceed 2 or 3 percent of total expenditures.19 It should be under the control of the ministry of finance, and access should be granted by the ministry of finance only under stringent conditions.

Where priorities are not being clearly established during the budget preparation process, the budget department/planning ministry can establish benchmarks using these mechanisms and thus set the basis for a discussion by policymakers of the priorities among the requests.

Is there any multiyear planning?

Focusing on the current or next fiscal year’s expenditures alone can be misleading. Expenditure planning should be extended beyond one year, not least to gain a full appreciation of the future spending implications of present policy decisions. Nowhere is this more important than on the recurrent costs of capital spending. For countries with multiyear PIPs, such plans need to be reintegrated with recurrent expenditures and into a multiyear expenditure plan that provides the basis for establishing a realistic global budget. Although the introduction of a regular procedure of medium-term planning frameworks by function, by ministry, and (ideally) by program takes time to develop, those analyzing and preparing the budget should begin this process by preparing medium-term fiscal scenarios.

There are several variants of such a planning framework. The simplest has only aggregate projections for public spending for the two or three succeeding years beyond the budget year. A second has “illustrative” figures by line ministries–sometimes on a mechanistic basis (e.g., shares of a global total are assumed to be held constant to the proportions in the budget year). A third is normative in that it projects costs of existing and any new policies agreed for introduction over the medium term, but these medium-term figures play no role in subsequent-year budget negotiations. The best approach uses these figures for the past budget year as the starting guideline for the next year’s budget negotiations.

Is there a legitimate need for extrabudgetary funds?

Extrabudgetary funds (as defined in the GFS manual) generally refer to accounts of government transactions that are not included in budget totals or documents and typically do not operate through normal budgetary execution procedures. Such transactions may, for example, be financed through foreign aid or earmarked revenues not included in the budget.

Unfortunately, extrabudgetary funds are often set up for inappropriate reasons, not consistent with principles of good governance. For instance, they may be designed to allow the president or some parts of the executive branch to bypass the normal budget procedures (for example, the comptes spéciaux in the francophone system). In this case, the fiscal economist should aim to identify all such funds and then ensure that they are consolidated on a gross basis in fiscal tables. This may be difficult where expenditures from these accounts cover security or presidential spending, which can be considered highly sensitive issues. When consolidated, however, and when the political authorities can be persuaded to consider them as a legitimate component of the published budget, at some point those preparing the budget may be able to close these accounts or at least to reduce their number. The affected expenditures should then follow regular budgetary procedures and appear in the relevant heading in the consolidated budget.

Another reason to create this kind of account may be to earmark revenue for a particular purpose. In this case, a specific kind of revenue is transferred to this account when collected, and whatever funds are available must be spent on a given item. While there are advantages and disadvantages in operating such funds in many countries, in many cases the disadvantages far outweigh the advantages (see Box 3 on the pros and cons of extrabudgetary funds). In the worst instances, new extrabudgetary funds may be established specifically to divert expenditures out of the budget, sometimes with the aim of publishing a lower fiscal deficit. The practice of opening such accounts is often an indication that the budget process is not functioning properly, and that resources for priority tasks must be allocated through other mechanisms. Unfortunately, this practice gives rise to rigidities in the short and long term. In the short term, financial management will be impaired because resources transferred to a special account are typically not available to the treasury for cash management purposes–for example, to relieve short-term cash shortages (see Section 5). In the medium term, a shift in government priorities may be impeded by the fact that a part of the available resources is set aside for a special task.

Box 3. Pros and Cons of Extrabudgetary Funds


  • Can increase efficiency by simulating private market conditions where levels and standards of service are linked directly to fees or charges.
  • Can provide more consistent source of funds for expenditures that yield high benefits yet do not get much recognition (road maintenance expenditures are a primary example).


  • Can result in a loss of aggregate expenditure control; such expenditure may be outside the control of ministry of finance.
  • Can distort allocation of resources by circumventing the budget process and review of priorities.
  • Earmarked revenues can become entrenched so funding is no longer based on priority needs.
  • Less transparency may lead to inefficiency and/or misuse of funds.
  • Can facilitate rent-seeking and abuse of monopoly power.
  • Leads to less flexibility at the margin to reallocate when budget is under stress.
  • Is incompatible with good cash management practices.

While having too many extrabudgetary funds should be discouraged, there can be a case for a selective use of such funds, quite apart from separate social security funds that are a feature of many countries–for example, for earmarking resources for infrastructure maintenance. If it is apparent that a lack of maintenance is leading to higher capital expenditures in the long term, for example, earmarking may prevent the diversion of resources needed for road maintenance (often seen as not politically attractive) to other purposes. But the use of earmarked revenues should be accompanied by either administrative mechanisms or market-like incentives that promote accountability and efficiency (sometimes referred to as the “agency model”)–something that is rarely achievable in developing countries.20 Without such extrabudgetary controls, funds can end up serving corrupt interests and weaken good governance. Box 4 provides a list of diagnostic questions for assessing the legitimacy of using extrabudgetary funds.

Box 4. Key Questions Concerning Extrabudgetary Funds

What is the purpose of the extrabudgetary fund? What is the rationale for keeping such a fund off-budget?

Financing Issues
What is the source of funding? Does the source of funding make sense; does it help to relate marginal benefits to marginal costs–for example, user fees? How are user fees determined; are there limits to prevent abuse of monopoly power (especially if demand is inelastic)? Are there general benefits (positive or negative externalities, public goods arguments) in addition to user benefits that justify support from general budget revenues? If there is a split, how is the share of financing determined? Is the source of financing an important government revenue, and can the government afford to lose the associated degree of flexibility in prioritizing expenditures? Do earmarked revenues detract from the government’s capacity to collect traditional revenues?

Expenditure Decisions
How are expenditure decisions made by the extrabudgetary fund? What use is made of cost effectiveness or cost-benefit analysis? Does the management of the extrabudgetary fund promote efficiency, for example through quasi-market mechanisms or through mission statements, objectives, performance measures? How are consumer interests represented and taken into account in expenditure decisions? If governed by a board, is membership of the board biased toward certain needs–for example, regional needs?

Management Issues
Does the management of the extrabudgetary fund meet good governance requirements? Is it free of political interference or unduly influenced by suppliers or trade unions? Is it possible for funds to be diverted to other uses? Can these accounts be “raided” for other uses? Is the extrabudgetary fund independently audited?

How are the cash resources of the extrabudgetary fund handled? Does the government have access to these funds for overnight borrowing to minimize government borrowing needs? Does the treasury or ministry of finance have the legal right to reduce funds available for expenditure in extrabudgetary funds if the budget is under severe pressure?

How are quasi-fiscal activities and contingent liabilities to be taken into account?

Some operations of a fiscal nature are not conducted through the budget. Examples of such quasi-fiscal expenditures include interest subsidies paid by the central bank on loans to public enterprises, and special support operations for banks and public or private sector enterprises administered through the banking system. Quasi-fiscal expenditures also include spending by nonfinancial public enterprises that represents the provision (or subsidization) of public goods (e.g., schools or hospitals). By definition, such expenditures do not pass through the budget and cannot be easily consolidated with the statement of general government operations.

In general, it is difficult to extract information on, let alone estimate the cost of, quasi-fiscal activities so as to consolidate such data in the general government tables. But, to gain an overall assessment of the fiscal stance, it may be necessary to assess the size of such operations and to notionally add the figures to the information on general government operations. In addition, those preparing the budget should take every opportunity to persuade policymakers to transform such nontransparent activities into explicit subsidies, transfers, etc., to the extent they should continue at all, within the budget.

Governments also have, at any point in time, certain contingent liabilities. The most common is the existence of explicit government guarantees, usually on bank lending to industry or lower tiers of government, which can fall due. But there are other forms of implicit contingent liabilities: for example, there may be a challenge in the courts to the government interpretation of a law that, if the judicial decision goes against the government, will have expenditure implications.

In general, countries should be urged to ensure that a careful record of all such explicit contingent liabilities is maintained (while recognizing that there will always be some uncertainty on aspects like judicial decisions as well as moral suasion pressures on “implicit” government guarantees) and to make prudent allowance for such guarantees being “called” (i.e., payments being due) or for adverse judicial decisions, by ensuring that there are sufficient resources in the contingency reserve to meet such expenditures. Of course this will always be a difficult judgment; in some years the reserve may be more than adequate–in which case the unused balance can be used to improve the fiscal position relative to the budget. In other years, some excess, even after the contingency reserve, may arise and should be met transparently through supplementary estimates–see Section 4. Those preparing the budget should ensure that some estimate of expenditures from both explicit and implicit contingent liabilities is allowed for in budget preparation.

How should appropriations-in-aid be handled?

Many countries have spending agencies that are able to finance a large part of their activities from their own sources of revenue–normally fees and charges. An example might be a dedicated passport office that charges for the issue of passports but receives budgetary resources for its capital expenditures. These budgetary resources are often termed appropriations-in-aid, or sometimes net appropriations–that is, the amount sufficient to meet the gross service costs, after an assumed contribution from the fees and charges they raise.

There are three issues in this regard. First, irrespective of how far the costs of the service–for example, the issue of passports–are financed from earmarked charges rather than from general budgetary resources, the activity is essentially within the government sector. Thus, in terms of measuring the size of government, the appropriations-in-aid data are insufficient. The gross expenditures or gross costs of the service need to be identified, as well as how much is financed from own fees and charges, and how much from general budgetary resources. Second, though it is essentially a budget execution issue, there are often cases where the fees are paid into a separate bank account held by the relevant spending agency in a commercial bank. As explained in the next Section, this is generally poor budgetary practice, which can lead to abuse with the monies being diverted into other areas of expenditure. Third, in budget preparation, it is often necessary to be aware of deliberate underestimation of the likely revenues from fees and charges, so as to maximize the contribution from general budgetary resources. In particular the ministry of finance needs to insist on the annual updating of fees and charges to allow for inflation–quite apart from any separate expenditure policy issues about how much of the service cost should be met by users and how much by the general taxpayer.

How are changes in expenditure plans to be targeted?

Whatever the weakness of the budget preparation system itself, the fiscal economist or general policy advisor may be called upon to advise on options for changing expenditure plans (typically, but not always, for reductions in spending). In the past, fiscal adjustment through reductions in planned expenditures has often proved problematic. Changes in expenditure plans, relative to the authorities’ original intent, have been implemented in ways that were disruptive to budget execution or were unsustainable in the long run. Where expenditure reductions have been undertaken, they have sometimes produced short-run savings at long-run cost–for example, by cutting needed capital expenditure or by so severely contracting maintenance expenditure that the capital stock was partially consumed. Where planned expenditure reductions have failed (in the sense that outturn expenditure was above the revised budget), they have typically led to payment arrears, and/or to excess spending above appropriations. This has damaged both the private sector economy (its bills are unpaid) and the credibility of the government in financial markets.

A fundamental problem is that changes in the budget are often proposed at too late a stage in budget preparation. Yet, whatever the time constraints, proper evaluation of expenditure policy options is vital. Those preparing the budget may be tempted to grasp quick solutions. However, budgets must represent an objective estimate of the costs of stated and agreed (within government) expenditure policies. Correspondingly, the only sustained (and sustainable) changes in expenditure plans are those rooted in changed expenditure policies.

Thus, expenditure reductions planned under a revised annual budget are not likely to be successful where:

  1. they are made in appropriations without accompanying changes in the underlying expenditure policies. Just changing the estimates makes the budget provision less than objective; the likely consequence is overspending against appropriation and/or the emergence of payment arrears;
  2. estimates for open-ended, demand-led programs are revised downward; again this is typically the triumph of hope over past experience;
  3. inconsistent agreements are made between the ministry of finance and several line ministries to reduce the budget provision for certain line items, but with a “nod and wink” that access will be granted in-year to the contingency reserve; this reserve tends to become overcommitted when real contingencies arise;
  4. “revised” economic assumptions on the exchange rate or inflation rate are invoked as justifying lower provision;
  5. overoptimistic assumptions are made on “efficiency savings” through reductions in the number of civil servants and cuts in equipment purchases, utility charges, or fuel bills; and
  6. reductions are made in transfers to lower-tier governments–this just passes on the problem.

Planned expenditure reductions are also not likely to be successful, if they are essentially reliant on administrative actions in the budget execution process, where:

  1. they are imposed by the ministry of finance through cutbacks in planned appropriations (often at a late stage in the budget preparation process) without the concurrence, or over the heads of, line ministries;
  2. the appropriations are not themselves changed but rather the ministry of finance undertakes to control total spending within the appropriated sum–for example, through controls in-year on monthly cash allocations to line ministries; and
  3. they are to be accomplished by creative accounting measures–greater use of suspense accounts, the establishment of new or additional extrabudgetary funds, etc. (such transactions should, in any case, be consolidated within fiscal tables).

When presented with specific expenditure proposals (increases or reductions), it is necessary to examine both expenditure policies and expenditure management aspects.

In terms of expenditure policies, the important questions include:

  • Are the proposed expenditure policies soundly based? (Guidance here is contained in the IMF’s Expenditure Policy Handbook).
  • Do the proposals fit in with existing established policy priorities as laid out in any published medium term strategies of the government? Will they be rejected by parliament?

In terms of expenditure management:

  • Are the cost estimates for the new proposals accurate? Will the proposals achieve the projected adjustment? Is there an important quantitative difference between their immediate and longer-term costs (e.g., do they just have a short-term benefit rather than representing some fundamental fiscal adjustment)?
  • How would they be enforced (through revised appropriations or cash allocations)?

Those preparing the budget need to prepare and analyze options. This is not an easy task, especially in countries that have inherited budget systems designed for compliance control (rather than macroeconomic or financial management). Budget execution has traditionally been seen as ensuring that spending is carried out according to the budget approved by the parliament. Some budgets are so strongly driven by the wishes of the executing institution (line ministry or spending agency) that the ministry of finance may not be well-placed to suggest a likely scope or targeting for changes to the spending plans. Also, the budget classification systems in many countries are weak and may inhibit a satisfactory analysis of options for changes in government expenditures.

While there are no hard rules about how planned public expenditure can best be adjusted, experience suggests some guidelines. Three broad approaches can be reviewed: (1) changes by program and policy; (2) changes by individual ministry; and (3) changes by economic category.

  1. Changes to budget plans by policy or program are the optimal (though not always achievable) approach. Governments should use–or develop–mechanisms for identifying the most and least efficient and effective expenditure policies and programs, and target expenditure changes accordingly. (In this context, a number of more advanced countries are moving toward output-oriented budgeting.) In practice, country programs agreed with the IMF and the World Bank may include commitments for increases in expenditure in, say, health and education, together with reductions in unproductive expenditures. Outside such agreed priority (or nonpriority) areas, the ministry of finance should, in principle, assess the costs and benefits of alternative policy packages. In many cases, however, it will not be possible to review individual functions or policies, even in cases where good expenditure classification exists. Time pressures will often force consideration of other approaches.
  2. Changes in expenditure plans by an individual ministry may be considered, for example, where there is a lack of information by economic category (see next item). Such an approach can be helpful in supporting or expanding initiatives in areas like health and education (albeit on a ministry rather than sectoral basis). Reductions, where needed, can be targeted elsewhere; for example, where one or more line ministries or spending agencies has a record of poor expenditure control or in support of a policy decision that affects only a few ministries.

A common variant of this approach is “across-the-board” reductions by ministries, in response to a call for lower than planned expenditures. By allowing each ministry to decide how to cut a fixed percentage off its expenditure plans, it often seems attractive and broadly equitable. But there are many drawbacks to such an approach. Despite the apparent fairness, in reality across-the-board reductions avoid consideration of priorities and leave individual ministries to allocate among line items, with not only an uncertain economic and social impact, but also potential damage to the efficient delivery of services. Such reductions also may all too often be seen as temporary, so line ministries apply them in areas that allow payment arrears to build up (e.g., payments to utility companies). Across-the-board reductions should be avoided, therefore, with preference given to adjustments by economic category (if changes by specific policy or program are not achievable).

  1. Changes in expenditure plans by economic category may have to be made where budgetary pressures emerge at a late stage in budget preparation. Again, they have the appeal of representing rough justice (e.g., if all ministries are asked to reduce their wage bill by a fixed percentage)–even though they do not imply proportionally equal aggregate changes by ministry. Adjustments based on this economic classification enable some economic analyses of expenditure patterns and prescription. Moreover, they can be targeted at wider expenditure policy objectives, such as reducing the wage bill or the number of civil servants, reining in travel costs, or cutting back generalized price subsidies to consumers or subsidies to industry. But they also have a downside. Often, they do not encompass any judgment about priorities between programs. Also, some of the measures applied tend to be simplistic (because they are “last-minute”), such as wage standstills or freezes, or percentage cuts in purchases of supplies. They are thus necessarily a blunt instrument, best seen as interim in nature, pending a deeper review of policy options. They may have short-term benefits but long-term costs–for example, increasing the financial cost of completing a capital project and postponing the benefits. Again, they may be seen as temporary, rather than representing a structural fiscal adjustment.

Against that background, and with the renewed warning that there are no hard-and-fast rules, budget advisors are best advised to:

  • make any revisions to emerging budget plans as soon as possible (last-minute changes tend to be ineffective);
  • seek, as a starting point, expenditure changes that are in line with previously agreed decisions or views on expenditure policy priorities–this is especially important where there is room for additional spending;
  • be sure that cost estimates for new expenditure proposals are realistic and accurate, not just for the year ahead but over the medium term, and that the proposals can be implemented at the political level;
  • be wary of the individual ministry or agency approach, except where this is consistent with pre-agreed policy priorities or to address glaring past failures to exercise proper control;
  • avoid “across-the-board” cuts;
  • where expenditure plans need to be scaled back, use reductions by economic category if fundamental policy changes cannot be achieved. The first target should be any reductions consistent with the pursuit of outstanding policy goals, and ideally within the context of ongoing wider reforms–for example, measures to reduce civil service numbers or changes in wage policies to improve the alignment of public and private sector wages; and
  • be cautious in reaching for the obvious but overly simplistic targets, like freezes in new or ongoing public sector capital projects or in public sector wages; or percentage reductions in the purchase of goods and services (unless and until the longer-term damage to the economy or to overall government operations is assessed as bearable).

15At the budget execution stage, however, those preparing the budget should also be aware of the degree of executive power to limit spending below or to increase spending above appropriations (see Section 4). This power can be an important determinant of the degree of flexibility for fiscal adjustment.
16Refers to the provision that the budget deficit must not exceed investment or capital expenditure, that is, borrowing only for capital spending.
17“Development” budgets often include both capital and current spending on projects, mainly, but not exclusively, financed externally.
18Outputs are typically physical measures of production: for example, hospital patients treated and miles of roads built. Outcomes refer to measures of policy impact: for example, fewer road accidents after reductions in speed limits.
19 Larger reserves can be justified in very specific circumstances. An example would be a plan to liquidate payment arrears, whose aggregate size is not yet clear.
20See Barry H. Potter, “Dedicated Road Funds: A Preliminary View on a World Bank Initiative,” IMF Paper on Policy Analysis and Assessment 97/7 (Washington: International Monetary Fund, 1997), for a related discussion on earmarking revenue for dedicated road funds.

Section 4
Budget Execution

For fiscal economists, the key issues on budget execution are always whether deficit targets are likely to be met, and whether any budget adjustments (both on the revenue and expenditure sides) agreed at the preparation stage (or in-year) are being implemented as planned. On the expenditure side of the budget, the key issues are whether the outturn is likely to be within the budget figure; whether any changes in expenditure priorities (as against past patterns) are being implemented in specific areas as planned; and whether any problems are being encountered in budget execution, such as the buildup of payment arrears.

Fiscal economists therefore need to fully understand any weaknesses in the country’s budget execution process. Is it transparent? Are there clear lines of accountability? Is information on execution of the budget available on a timely, reliable, and accurate basis? Is it thus consistent with the principles of good governance? Based on this understanding, where are problems likely to arise, and how might they be avoided or overcome? In some instances, action may be needed through budget execution procedures to bring expenditures back on track to the budget provision; hold expenditures below budget, in response to below-target revenue developments; or bring irregularities to the attention of the decision makers.

Thus, for fiscal economists and general budget advisors, the key questions are:

  • What are the different stages of the budget execution process?
  • Who is responsible for budget execution?
  • How can budget appropriations be revised during the year?
  • How good is the information on outturn expenditure?
  • What are the problems encountered in budget execution procedures and how can these be overcome?
  • How can expenditures be adjusted in-year?
  • How should “good governance” be pursued?

This section answers these questions in turn.

What are the different stages of the budget
execution process?

After the legislative appropriation of expenditures, there are usually six main stages in the spending process.

1.  The authorization stage

Once a budget is approved by the parliament, ministries are authorized to spend money, consistent with the legal appropriations for each line item. Where parliament has not yet approved the budget before the budget year starts, it is normal to allow governments to start spending on a “Vote on Account” basis–a temporary authorization, often restricted to one-twelfth per month of the previous year’s expenditure. In the francophone, Latin American, transition, and many Commonwealth countries, once approved, parliamentary authorization is for one year. In some Commonwealth countries, however, the authorization period may be set monthly or quarterly by warrant.

In the majority of countries, unspent funds in one year cannot be carried forward (carryover) to be spent in the next. In some OECD countries, however, unspent operating funds can be carried forward, usually up to a specified small percentage of the total funds (e.g., Australia, Canada, most Scandinavian countries, and the United Kingdom); and in some countries cash to pay for obligations incurred in one fiscal year but falling due in the next can be carried over (e.g., Italy, Japan, New Zealand, and the United States). However, it is more common to allow the carry-forward of some element of capital appropriations (or in some cases program expenditures), to allow for changes in the phasing of projects compared with the original budget plans, while still maintaining the same total cost.21

In some OECD countries where the emphasis is on giving agencies more freedom to manage their resources within an overall agency-specific budget to improve efficiency, and where multiyear expenditure planning is well established, the trend has been toward a greater use of such carryovers. However in these countries, aggregate expenditure control is much less of a problem and the prime objective is ensuring the most efficient and effective use of government resources. These circumstances do not typically apply in non-OECD countries, where the use of carryovers should generally be discouraged in the interest of financial discipline.

2.  The commitment stage

This is the stage where a future obligation (liability) to pay is incurred. The precise definition of commitment varies not only from one system to another but even among those well-versed in public sector accounting. Broadly, a commitment arises when a purchase order is made or a contract is signed, which implies that goods will be delivered or services rendered, and that a bill will have to be paid later on. But, as noted below, there are shades of interpretation. Good budget systems maintain data on commitments that can be monitored, because these will (for the most part) ultimately be reflected in actual expenditure and because their profile, in terms of cash payments to be made, may have important financial programming implications. But there are complications to be aware of.

  • The existence of a commitment does not ensure that the goods will actually be delivered or the service rendered because the relevant ministry or spending agency may change its mind or disagree with the supplier later. This is especially true in countries with poorly organized public expenditure management systems, not least because suppliers are not guaranteed payment.
  • The nature of commitments varies by economic category of expenditure. A critical dimension is the lag between entering into a commitment and the associated cash payments: this is especially important for the purchase of capital goods and current nonwage goods or services. But a debt interest payment or the wage bill, both due monthly, are also types of commitment.
  • A commitment does not mean that a payment will be made within the same fiscal year–the payment may be made the following year. This is especially true for investment expenditure.
  • In many countries, exceptional procedures allow an expenditure to be made without a previous commitment.
  • In some countries, what is interpreted as a “commitment” is at best a reservation; that is, the request from a spending unit to the budget authority to put aside an allotment for a future expenditure. This cannot be considered a commitment in accounting terms, because no contract is signed at this stage. Some officials in transition economies tend, erroneously, to equate commitments with budget appropriations.
  • In francophone and some other countries, there is a dual control over commitments: administrative control via the line ministry or spending agency and financial control by the ministry of finance. The ministry of finance’s financial control represents a kind of “preaudit” confirmation that a commitment can be entered into, consistent with the appropriation.
  • In many systems, commitments are either not recorded at all or the accounting for commitments is not consolidated (e.g., the line ministries and spending agencies record these only internally). When there is no centralized accounting of commitments, there is a potential danger of accumulation of payment arrears because no one ensures, when commitments are incurred, that they are consistent with planned future cash availability.

3.  The verification stage

This signifies that goods have been delivered fully or partially according to the contract, or the service has been rendered and the bill has been received. Physical delivery can precede verification by some period of time. The line ministry or spending agency making the purchase usually has the financial and the administrative responsibility to check the bill; that is, to verify that the supply has been received in full compliance with any terms or conditions. The bill at this stage is recognized as a liability of the public sector, in an accrual accounting sense, and is therefore an important stage of the expenditure process. Even though it represents an accrued liability, it may not yet represent a cash liability, however–for example, when a grace period of 30 or 60 days was included under the terms of the purchase order. Information on verifications within the central government sector, however, is not usually available on a centralized basis.

4.  Payment authorization or payment order stage

This stage may have a different significance in different systems.22 In the francophone system a guiding principle is that the person who orders the supply (engagement) has to be different from the one who authorizes the payment (ordonnancement). The payment officer is normally a public accountant who belongs to the Comptabilité Publique and has specific responsibilities in terms of the expenditure process for authorizing the payment of verified bills. After verification of the bill, the spending unit must then hand it on to this public accountant, and request that the bills be paid; payment orders are normally centralized at the ministry of finance. For expenditure management purposes, this procedural distinction is not of major significance, although it does imply a different institutional source of data on payment orders than under many commonwealth systems (see below).

In contrast, in some Latin American countries the function of postaudit and payment is undertaken by the same institution, a Contraloría General, which also exerts a preaudit function on commitments. In this case the source of data on different stages of spending is the same institution.

In Commonwealth systems the issue of payment orders is typically the responsibility of the financial officer with delegated responsibility for this function. Systems vary: the issue of payment orders and checks may be decentralized–with spending ministries carrying out these tasks and reporting back to the center–or centralized in a treasury department, typically called the accountant general’s department within the ministry of finance, which acts both as paymaster and prepares the final accounts of the government.

In transition economies, the situation also varies, but most countries now have treasuries that are increasingly responsible for the issue of payment orders. Some so-called “power” ministries, like defense and internal security, often have (so far) retained separate systems. Other inherited elements of the previous system can also be very misleading: where there are different tiers of spending units (first, second, third, etc.), some ministries of finance regard expenditure as having taken place when money is transferred from ministry of finance bank accounts to the first-tier units. But, in unreformed systems, that money may take some time to be further transferred to subsidiary units and then constitute “final” expenditure on goods and services. It is therefore necessary to distinguish between such final payment orders and transfers that really represent payment authorization.

5.  Payment stage

At this stage, the bill is paid–by cash, check, or electronic transfer. In some systems, the payment is made through a single ministry of finance account in the central bank or in a designated bank. In others, the payment is undertaken through the commercial banking system via bank accounts held in the names of individual line ministries. (This latter approach can make it more difficult for the ministry of finance to reconcile its accounts with those of the banking sector.)

6.  Accounting stage

The cash transactions are recorded as complete in the books, which allows a reconciliation from the cash based “above-the-line” fiscal accounts with the financing of any deficit “below the line.” Some countries are moving toward accrual accounting, whose differences with cash accounting are discussed in Box 5.

Box 5. Cash Accounting versus Accrual Accounting

In contrast to cash-based accounting, which only recognizes expenditure when it is paid and income when it is received, accrual-based accounting requires that

  • expenditure and liabilities are accounted for when goods and services are delivered, even if payments have not been made; and
  • revenue and receivables are recorded when goods are sold, even if proceeds have not been received.

There are many grounds for recording government expenditure transactions on an accrual basis and some industrialized countries have now begun to do so.

First, the accrual basis requires governments to pay more attention to areas they have largely ignored–in particular accounting for their real and financial assets, setting a depreciation policy, etc., and so obtaining better information on the costs of providing services

Second, as more government activities that cannot be, or are not being, privatized are put on to a more commercial basis–through contracting out, fees for services, etc., an accrual accounting regime more in line with private sector practices is appropriate, and so better able to measure performance.

Third, in national accounting terms, government expenditure is measured on an accruals basis: a liability, and thus an expenditure, is incurred when a commitment is fulfilled and verified–not when the cash payment takes place.

The GFS is in the process of moving to an accruals basis for government expenditures, in the interest of creating a greater statistical harmony between fiscal and national accounts. However, accrual-based accounting is more complex, often difficult to administer, and hence typically not yet appropriate for many developing countries.1

1For a more in-depth treatment, see A. Premchand, Effective Accounting (Washington: International Monetary Fund, 1995).

The accounts may be held centrally, as under the French and Latin American systems and those Commonwealth countries with accountant general’s offices. In unreformed transition countries, the accounts are held by line ministries at one or more commercial banks. These accounts will be audited at a later stage. Table 2 shows the similarity of the stages in the four groups of countries, with the terminology that typically describes the stage.

Table 2. Stages in the Expenditure Process




Latin American

Transition Economies

Commitment Contract signed, order placed. Information not recorded in central accounting system. Contract signed, order placed (engagement). Authorized by the ministry of finance or financial comptroller. Contract signed or order placed (compromiso). Information is not reliable, not timely. Order is placed, often no contracts. Typically no record is made at this stage.
Verification Bill is received. Work is verified as complete or supply delivered in full. Bill is received. Work is verified as complete or supply delivered in full. Bill is received. Work is verified as complete or supply delivered in full (devengado). Information is not reliable, not timely. Use of preaudits. Bill is received. Work is verified as complete or supply is delivered in full. Some use of preaudits by control departments.
Payment order Treasury processes orders and issues checks; or done directly by line ministries. The Comptabilité Publique, a part of the Ministry of Finance and Economy, processes orders and issues checks (liquidation, ordonnancement) or an entry is made in deferred payments account. Payment orders (órdenes de pago) are processed and checks issued. Unless system has been reformed, the central bank processes payment orders and transfers are made between accounts electronically. No issuing of checks.
Cash payment Checks are cashed. Checks are cashed. Checks are cashed. Not applicable.
Accounts Transaction recorded in accounts. Transaction recorded in accounts. Transaction recorded in accounts. Transaction recorded in accounts: sometimes accounts are held by banks, not the ministry of finance.

For the fiscal economist seeking to monitor budget execution, choosing which stage(s) of the expenditure management procedure to monitor is often constrained by information availability. In principle, the data given at the verification stage may be particularly relevant because they measure the actual liability of the public entity and thus the accrued account liability. For example, if bills are verified promptly when they arrive, it allows a good measure of the potential arrears, where strict cash limits constrain the amounts available to make payments.23 But such information is rarely available. The next best stage is commitment, and adequate data on commitments can often be obtained, particularly in francophone countries. In many countries, however, the only reliable and comprehensive information available is that derived from the accounting for payment orders issued or payments encashed. Introducing better accounting through commitment recording and monitoring typically requires considerable time.

For fiscal monitoring purposes, countries with less well-developed systems often concentrate on the final encashment stage of payment, when checks from government accounts are cleared through the banking system–the cash accounting stage. This is usually the most reliable, with timely information available on a centralized basis, and it allows for direct reconciliation with the monetary accounts. Indeed, the payments accounting data from the banking sector act as a check to ensure that the “above-the-line” information from government accounts is comprehensive and accurate. But, in many countries, it is also necessary to estimate expenditure in accrual terms, or, as it is sometimes termed, on a commitment basis. In principle, this enables an assessment of the extent of payments that will fall due or the arrears being accrued. Such data are most readily available under the French system. In Commonwealth and transition countries, it may be difficult to obtain reliable information directly: in some instances, the information must be assembled as payments made, plus estimated arrears (see the subsection on problems in budget execution).

Thus, the fiscal economist should always be sure whether information conveyed about spending to date refers to commitments, verifications, payment orders issued, or payments encashed. All data received should be collected at the same stage of spending or adjusted to reflect any inconsistencies. This may not be an easy task when data are derived from more than one source.

Who is responsible for budget execution?

Budget implementation, in the sense of delivering services by undertaking expenditures, is the responsibility of the line ministries and spending agencies, within regulatory controls set by the ministry of finance. While financial information on budget execution is usually available on a centralized basis in the ministry of finance, the data are collected either through the line ministries or through ministry of finance controls in the system. These information flows must be identified; and they may differ substantially depending on the systems.

In the francophone system, such information is, in principle, most easily accessible. Commitments may be authorized by the ministry of finance or by the financial comptrollers;24 in both cases the ministry of finance should have a consolidated statement of commitments. A department in the ministry of finance may centralize all the payment orders or these may be authorized by the financial comptroller (comptabilité publique), so again this information should be centrally available. The ministry of finance should be able to produce regular statements–every day where the system is computerized–on cash payments.

In Commonwealth countries, by contrast, some fragmentation in the budget implementation process is typical. A treasury or finance department may be in charge of authorizing expenditures–perhaps by issuing annual, quarterly, or sometimes monthly warrants to line ministries, which in turn contract and undertake expenditures, maintaining their own books of accounts. The monitoring of the implementation of development and recurrent budgets, however, may be undertaken by different ministries (e.g., the ministry of planning and the ministry of finance, respectively). In many countries, however, the accounting for budget execution transactions is carried out by the chief accountant in the spending ministry, who is nominally on the staff of the accountant general’s department, a statutory appointee. The accountant general’s department itself is in charge of keeping accounts of the government, making reports to top ministry of finance management, and presenting the final accounts to the legislature.

Typically the accountant general’s department also has paymaster functions, being responsible for the issue of checks and the distribution of cash to meet other types of payment. But,

  • sometimes debt service payments, at least the preparation of payment orders, are handled separately by a department other than the ministry of finance; and foreign-financed projects often have different payments procedures;
  • sometimes the issue of checks is decentralized and carried out by staff from the accountant general’s department in line ministries;
  • sometimes it is centralized and carried out by the accountant general’s department. But the centralization of check writing can lead to delays in processing payments due.

In Latin American countries, responsibilities are typically also quite fragmented. It is not unusual to have a ministry of finance responsible for revenues and financing, while another ministry–the ministry of economy–may be in charge of the budget or at least the development budget. A powerful accounting organization–contraloría general–often carries out preaudit and postaudit functions, in addition to acting as the accountant to the government. Payment orders are typically executed through the contraloría, which hence maintains overall control of budget execution.

Transition economies have been moving away from a system where the budget was a part of the state plan, and replacing it with a centralized treasury system. Under the prereform system, spending targets, which were set sectorally in conformity with the sectors of the state plan, formed the basis of the budget. The main features were as follows:

  • Budget execution tended to be more decentralized. The ministry of finance distributed funds to the main ministries, which in turn distributed these funds to the bank accounts of a large number of ministries and from these to an even larger number of budget institutions–many of them being enterprises.
  • Payments were executed through the banking system usually electronically, and through the previously monolithic state bank system, reports were generated on payments made by each institution. While timely, the information derived was on a highly aggregated functional basis, with little economic content.
  • Line ministries and spending agencies did report quarterly, in great detail, on their progress in executing their budgets, though with a considerable lag.
  • Thus, despite the preconception of being highly centralized, budget execution was rather decentralized. Usually, a department within the central ministry of finance compiled the data on budget execution and prepared the accounts to reconcile them with the records of the state bank.
  • This centralized department within the ministry of finance has typically formed the basis of new treasury departments that have subsequently been developed in these countries and that usually have assumed responsibility for the budget execution process.

How can budget appropriations be revised during the year?

During budget implementation, many countries find that they wish, or need, to change the line item appropriations approved by parliament. Some such revisions are necessary and desirable, but excessive switching of budgetary provision between items of expenditure (virement) and excessive use of supplementary estimates cause difficulties, and usually indicates a lack of budget discipline.

Once budget appropriations are set in the budget on a line-item basis, there is often a need to shift budgetary provision from one line item to another; an example might be the delay in one capital project because of bad weather, and the need or opportunity to accelerate work on another such project elsewhere. In general rules are set out (e.g., in the Organic Budget Law or in Financial Regulations in Commonwealth systems) on who can undertake such switches–often called virement. Typically, within a single economic subcategory and program, the spending agency itself is permitted to make switches–for example, from the provision for one utility bill (say, water) which is below estimate to, say, the electricity bill, which is above. But switches between economic categories–for example, from subsidies and transfers to purchase of goods and services or from one program to another (even if the responsibility lies with the same line ministry) typically should require the approval of the ministry of finance. Some switches, for example, from any other economic category to wages and salaries are usually absolutely forbidden. In some countries, the authorization needed to make switches between line ministries may require approval by the president or parliament.

Although virement is an acceptable practice it should not be abused because:

  1. Excessive virement is an indication that budget preparation has been too casual; such virement exercises are not costless (they absorb administrative resources) and they discourage effective expenditure planning.
  2. The use of virement ostensibly for one purpose, which then “leaks” into another; for example, higher wages and salaries, is often a reflection of poor budget classification.
  3. The switch may not be genuinely one for one–that is, the reduction taken on one line item is not sufficient to pay for the increased expenditure on another.

Excessive virement is linked to the second general problem of too great a use of supplementary estimates. Essentially a supplementary estimate is necessary under the law in most systems, if the expenditure on a line item is to exceed the amount provided for in the budget appropriation approved by parliament and the necessary additional amount cannot be accommodated by virement. The basic principle, of course, is that supplementaries should not be necessary, as long as the budget is well prepared and any unexpected spending is covered from a contingency reserve. But, even in industrial countries supplementaries do arise. (Even under a contingency reserve system, supplementary estimates are still required to sanction the switch between the line items and the contingency reserve to become legal expenditures in the final accounts.)

The principles to observe in the use of supplementaries are as follows.

  1. It is better to acknowledge expenditures in supplementaries than resort to “off-budget” transactions, to using suspense accounts (see glossary), etc.; the basic concept that the parliament should approve all expenditures must be regarded as sacrosanct.
  2. That said, it is the responsibility of ministries of finance to exhort line ministries and spending agencies to live within the budget resources allocated to them–the “hard” budget constraint; that means not giving supplementaries too readily but encouraging the switching of resources from lower-priority expenditures to provide for expenditures above budget provision elsewhere, wherever possible during the fiscal year.25
  3. Financial regulations, backed by actual practices, must stick to the basic concept that supplementaries cannot be assumed. Spending above provision without an agreed drawing on a contingency reserve, virement, or a specific supplementary for that item is an illegal act that should be subject to disciplinary action.
  4. Supplementaries should be approved only at fixed times of the year. The best practice is once at the end of (or in some systems immediately after) the financial year in question, where the expenditures have been legally financed from a contingency reserve in the meantime. In other systems, twice-a-year use of supplementaries is followed; the more frequent use (more than twice a year) of supplementaries is again an indication of a poorly prepared budget and inadequate budget execution.

How good is the information on outturn expenditure?

The targeted phasing of credit to government throughout the year is typically a crucial component of fiscal (and monetary) policy. To meet such credit targets, the authorities must be able to monitor expenditure aggregates. The ministry of finance therefore needs to ensure that (1) aggregate expenditure data are being obtained in a timely way, (2) the data are accurate and reliable; (3) the ministry of finance has sufficient capacity to analyze and monitor these data, and (4) some unit has been explicitly assigned the responsibility for this task. These conditions are not always satisfied. Thus, improving the quality of the government’s information system on expenditures is often essential, so that the ministry of finance can develop the capacity to adjust spending in response to macroeconomic and fiscal developments, while maintaining expenditure control.

At the heart of any fiscal and financial information system is the accounting system, which maintains the basic records of government transactions and, thus, outturn expenditures. How well the accounting system is operating can be judged indirectly by asking the following questions:

  • How quickly are final accounts prepared after the end of the fiscal year?
  • What are the lags in the reconciliation of above-the-line budget accounts with the below-the-line accounts of the government in the banking system? How often is reconciliation done and at what level of aggregation?
  • To what extent are data at different stages of the expenditure process measured and reconciled; that is, commitments and verifications; verifications and payment orders; payment orders prepared and payments issued; and payments issued and payments recorded by the banking system?
  • How pervasive are “suspense accounts” and “below-the-line accounts” (see glossary for definition of terms).
  • Is there a genuinely independent audit (i.e., an audit body reporting to the legislature rather than the executive); and how quickly does the audit of the annual accounts appear?

Even a very broad assessment of the accounting system along these lines tends to reveal any inadequacies in the information available to the ministry of finance for control purposes.

Ideally, the government accounting systems are integrated into a fully networked Government Financial Management Information System and can give the necessary information on expenditure developments on-line. But that capability is largely confined to industrial economies and a number of Latin American economies.26 Existing accounting systems in many developing countries were set up to monitor and control the legal compliance of expenditures with authorized budget provisions. As such, they may be poorly suited to provide the financial information required for macroeconomic, fiscal, and financial management. More usually, therefore, the ministry of finance may need to devise fiscal reporting solutions, outside the regular budgetary process, to provide some critical monitoring information, in the form of “flash reports.”

Such “flash reports” on the expenditure side are usually prepared by collating and consolidating monthly reports of (and in some systems from) each line ministry, setting out the monthly total payments made. Better developed systems can also report commitments entered into, likely profiles for the associated cash payments, and payment arrears. The basic solution, however, is a fundamental improvement in the budget system’s regular reporting capability, typically by longer-run improvements to the accounting system, through the introduction of a double-entry general ledger system, and the development of a Government Financial Management Information System.

Whatever the shortcomings in the information system itself, the capacity of the ministry of finance to consolidate, analyze, and use this outturn expenditure information is also important. Many developing countries have the information to monitor and control expenditure, but fail to make good use of it, because of a lack of administrative capacity in budget analysis.

Some key questions include:

  • Is the ministry of finance short of suitably qualified people capable of budget analysis?
  • Can the ministry of finance set up and operate a fiscal monitoring unit that could create and manage a monthly reporting system?
  • How well does the ministry of finance use the information, if analyses of budget developments are prepared? Is there any kind of feedback mechanism for adjusting policy when an expenditure report shows unexpected, and particularly unwelcome, developments?

Technical assistance and staff training may be required to boost the administrative capacity and skills so that staff may make effective use of the information.

What are the problems encountered in
budget execution procedures?

Some typical problems identified at the execution stage are the following:

  • the multiplication of exceptional procedures that bypass expenditure control arrangements;
  • the difficulty in reconciling bank statements with budget accounts and thus in obtaining reliable and timely data on cash expenditures;
  • the accumulation of payment arrears;
  • the lack of fund consolidation; and
  • difficulty in managing and accounting for aid flows.

Each of these topics is discussed on the following pages.

What are the typical questions?

How should the multiplication of exceptional procedures be dealt with?

In some countries, the fear of corruption, or an unwillingness to share information among the organizations involved in the expenditure management process, have prompted the authorities to add “special” stages of control. The expenditure process can then become so cumbersome that incentives are created to bypass it, through “exceptional procedures,” which are supposed to speed up the process for “urgent” expenditures. Many ministries of finance have tolerated (or been forced to tolerate) special accelerated procedures for politically sensitive expenditures.

The use of exceptional procedures is, however, all too often abused and should generally be discouraged. Sometimes, such procedures are used by officials to order supplies, without making a formal commitment; only later do unexpected bills surface. Sometimes suppliers are prevailed upon to make additional supplies available on credit. It is therefore unclear whether the appropriation limit has been respected, or whether there will be cash available to pay for the expenditures. This contributes to the emergence of payment arrears. It can also be very difficult, after the fact, to identify the kind of expenditure on which public monies were spent because regularization–that is, the formal recording of the expenditure in the accounts–occurs much later, if at all. The multiplication of exceptional procedures also has long-term implications, creating incentives for spending agencies to go outside the budget system to avoid control altogether; that is, encourage extrabudgetary activity. Sometimes, indeed, all too often, such procedures are associated with corruption.

Moreover, such procedures are often linked to the misuse of supplementary appropriations. When ministries wish to undertake expenditures on a specific line item beyond the appropriations approved by the parliament (and there is either no scope to switch resources into that line item from another, or they have been denied permission by the ministry of finance to do so), they need to seek parliamentary approval for supplementary appropriations. As noted earlier, if these are issued regularly during that year or after the year has ended–with the expenditures in the meantime financed from, and “frozen” in, a suspense account–budget overspending is being routinely financed.

Excessive use of exceptional procedures and supplementary appropriations should be discouraged, but, as noted, supplementary appropriations are not always bad. First, they are preferable to the buildup of payment arrears, excessive use of suspense accounts, or other “creative accounting” measures to temporarily hide expenditures. Second, they may be necessary to authorize new in-year expenditures that are justified by the fiscal situation.

The fundamental point, however, is that transparency requires all government transactions to go through the budget. Contingency reserves are there for exceptional expenditures. There should never be recourse to “exceptional procedures” or off-budget accounts.

How can the reconciliation of budgetary and banking
data be handled?

Exceptional procedures that bypass standard controls are one reason why it may be difficult to reconcile bank statements on cash expenditures with the budget accounts held on payment orders issued. But there are many other reasons for gaps between the data obtained from the banking system and those reported by the ministry of finance:

  • differences in coverage;
  • deficiencies in government accounting;
  • the problem of arrears; and
  • the “float.”

These potential sources of discrepancy in fiscal tables should be identified and minimized to the fullest extent possible.

Differences in coverage

Often, central government financial statements do not cover special funds and other extrabudgetary operations, while the central bank may identify accounts as belonging to the government in a residual (and, hence global) way–that is, all nonpublic enterprise accounts and nonprivate sector accounts. Those responsible for the budget should ensure that the bank accounts, which the central bank considers to be part of government, cover the same entities that the ministry of finance reports in government operations. Unless the coverage matches, reconciliation is not possible.

Differences in government accounting

Apart from coverage, many countries have trouble maintaining their accounting systems and hiring qualified staff. Long delays and many errors in recording transactions and reporting them are common. As the accounting system is put under stress, accountants take various short-cuts, such as the extensive use of below-the-line accounts and suspense accounts, to record transactions on a temporary basis, before “posting” them to the correct line item in the government accounts or obtaining supplementary appropriations. Unfortunately, many developing countries experience large backlogs in regularizing these accounts, and they become open channels for abuse and malpractice. These practices undermine the reliability of the ministry of finance’s accounting data; it is necessary to ascertain how widespread such practices are and discourage their use.


Perhaps one of the most common sources of discrepancy between bank accounts and ministry of finance reports arises from misguided attempts to slow down the recording of expenditures at the final stages of the spending process. Faced with a monthly or quarterly financing constraint, countries are often tempted to slow down the payment process, either by delaying the issue of payment orders or the encashing of checks, in order to meet financing ceilings. In accrual accounting terms, once goods or services are verified as delivered, the government has incurred a liability; only in cash accounting terms do such practices have any purpose (albeit misguided). If the above practices are relied on for a prolonged period, the ministries’ liabilities (and hence expenditure levels) are not correctly reflected in the bank accounts, owing to the existence of unpaid overdue bills, which represent expenditure arrears. The ministry of finance should therefore carefully compare its reports on bills received and payment orders issued with those on payment orders encashed, as recorded by the central bank or government payment agency.

The “float”

Another source of discrepancy between the ministry of finance reports and bank accounts is the “float” of uncashed checks. While the term “float” can be variously defined, the term is most frequently used to mean the check float; that is, the gap between the amount of checks or payment orders issued by the government and the amount encashed by recipients through the banking system. It is usually a small and predictable percentage of total expenditure transactions, but the “float” needs to be taken into account in reconciling the data from above and below the line.

How can the accumulation of arrears be measured–and avoided?

Payment arrears can arise on any expenditure item, including wages, transfers, and debt servicing. Thus, while they are most commonly found on payments due to the private sector for the supply of goods and services, that is by no means the only item affected. For such goods and services, except in those cases legally disputed, an arrear exists when a bill has been received for services verified as successfully delivered but not paid after what is considered the “acceptable grace period,” normally 30­60 days.27 A typical problem encountered in measuring arrears is that accounting systems are unable to determine which bills are already beyond their grace period–for example, when bills received are not carefully noted in either a general ledger or separate bookkeeping record. Often, the amount of arrears can only be defined through a proxy, which is the difference between the amount of bills received (if known) and the amount of bills paid.

In practice, as Box 6 shows, the extent of arrears can be very difficult to establish. The amount of arrears should never be defined as the difference between expenditures committed and payments made, or as was formerly the practice in some transition economies, the gap between appropriations and payments made. Either will lead to an overestimation of the figure. As previously mentioned, not all the committed expenditures lead to an actual delivery of services; and the interval between the commitment and the actual payment often varies considerably from one kind of expenditure to another. An estimate of arrears as the difference between payment orders prepared for issue and payment orders cashed (and an allowance for the “float” of checks issued but not yet cashed) can be realistic–but only where the spending ministries verify the bills and send the corresponding payment orders as soon as they receive those bills. If such discipline is not followed, it is necessary to add also any bills received and due for payment at line-ministry or spending-agency level, for which no payment order has been prepared.

Box 6. Payment Delays and Arrears

After an order has been fulfilled and verified, a payment delay may arise for a number of reasons.

  1. The supplier may not submit the bill within the normal period, giving an extra period of credit (this cannot be regarded as a genuine arrear). It may, however, entail economic costs, that is, adding a premium to normal prices to allow for anticipated delay in payments.
  2. The supplier may be put under pressure by the line ministry/spending agency not to submit the bill, forcing him to become a creditor. This is a genuine arrear.
  3. The relevant line ministry or spending agency official who sanctioned the expenditure can put the bill in a drawer, perhaps knowing there is no money available under a monthly cash limit. No payment voucher is drawn up for the transaction (nor is any recording of the receipt of the goods or services necessarily made).
  4. As in 3, but a payment voucher completed for the bill is held back by the ordering line ministry or spending agency.
  5. As in 4, but the payment voucher is passed to the accounts section for eventual processing when the cash is available.

In the first four instances, no official within the ministry of finance may know what the true volume of arrears is. Only an audit of all the unpaid bills in categories 3, 4, and 5–which means checking with all heads of line ministries and spending agencies with authority to incur expenditures–will give a comprehensive view of the arrears. Even then, reason 2–which is unlikely to be large–will be excluded.

In francophone systems, expenditure is recorded in the treasury accounts by debiting the relevant expenditure provision (account) line item. The counter-entry reflecting payment (under a double-entry bookkeeping system) can be made in various accounts, depending on the way the payment is discharged. Apart from cash, one typical method of payment is through the cash voucher (bon de caisse); and another, if the treasury decides to defer payment, is through a credit entry in a suspense account (compte d’attente). Hence the francophone system, when functioning properly, offers this direct, although perhaps not wholly complete, indicator of the emergence of arrears. In principle, to gain a measure of arrears, one has only to take the balances of these accounts recording expenditures due for payment. These typically include the suspense account and the account that records the outstanding amount of cash vouchers.

In Latin American countries, arrears (atrasos) in the expenditure process can be estimated, when data are available, as the difference between the verification stage (devengado) and the payment stage (pago). In general, it is difficult to measure arrears owing to either the total lack, or the weak reliability, of this information. In this case, the second best alternative for calculating arrears is to use the payment order (órdenes de pago) prepared as a proxy variable for the verification stage, and compare this with the payment stage (pago).

The Commonwealth system does not offer an easy indicator of arrears. Payment orders are usually prepared and issued by the receiving ministry, after certification that delivery has been made. Spending agencies are supposed to maintain commitment ledgers and to record their requests to the treasury for payment or for payment orders to be issued, against authorized appropriations (sometimes called “vote books”). But the vote books are not always completed reliably, or even at all, as regards the column for entering commitments. A comparison of actual deliveries with payment orders issued is likely to be carried out only in a piecemeal fashion by spending departments. As noted earlier, checks or payment orders may be issued centrally or by the spending ministry to the suppliers. Only in a central system is it relatively straightforward to get a governmentwide comparison of payment orders issued against checks issued, and then only after some delay. To estimate the size of arrears under a decentralized system, reliance has sometimes been placed on data generated at a late stage in the spending process, on the gap between payments authorized and checks cashed. As Box 6 indicates, such a measure can often be inaccurate.

When tackling arrears, the sources of problems need to be established. An accumulation of arrears may arise because:

  • the budget provision is unrealistic and line ministries are allowed to commit expenditure within that appropriation (i.e., budget provision), even though there is no cash available to liquidate the expenditure;
  • the budget figures are realistic, but the cash plan (and monthly cash limits) associated with the budget are not, or there is no in-year guidance on when expenditures can be committed;
  • commitments are not recorded and therefore do not respect the budget ceilings or the timetable defined by the cash plan; or
  • the spending ministries do not work efficiently and bills remain unprocessed.

To avoid a continued flow of arrears, the ministry of finance should aim to ensure that the budget and its associated cash plan are realistically prepared, that all committed expenditures follow formal procedures, and that procedures are in place, so that the relevant data on progress at each stage of spending are available in a timely manner, centralized, and analyzed. That often takes time–one reason why problems with arrears keep emerging.

The treatment of payment arrears in the fiscal accounts also poses a number of difficulties. (See Diamond and Schiller for a full explanation.)28

The standard presentation of the deficit in the GFS Manual is, for the present, on a cash basis. This requires expenditure incurred in terms of payment arrears to be shown as a memorandum item. Adding the size of the “float” of uncashed checks and the memorandum item on arrears to the financing data from the monetary survey should facilitate reconciliation with the above-the-line deficit measured from the fiscal data.

But the GFS Manual also rightly states that expenditure is incurred by the government when goods and services are delivered and verified, and the payment is due. A better presentation in fiscal accounts (sometimes termed a modified cash basis) is to show expenditures on a commitment basis, with the difference between the above-the-line deficit total and cash financing identified as “forced financing” (i.e., by unpaid suppliers). The kind of data available on commitments from a French-style system can enable a full presentation. In other countries, such information may not be obtainable, except when a special survey of commitments/arrears has been undertaken.

Another form of presentation is to show the deficit measured on a commitment basis, the net change in arrears, and the corrected overall deficit on a cash basis. But, again, that requires data that are often not available or are very difficult to integrate. In practice, data constraints will often drive fiscal economists to the standard approach or to some broad form of showing expenditures on a commitment basis in preparing fiscal tables.

Besides taking measures to stop the accumulation (flow) of new arrears, those responsible for the budget should be familiar with the size of, and the strategy for resolving, any existing stock of arrears. This stock can be very difficult to estimate, as Box 6 implies. However, in many instances, the only reliable source of information would be an audit of the existing bills, making sure that the goods or services have actually been delivered. (Some suppliers may take advantage of accumulating arrears and the disorganization of the expenditure process by sending bills for goods that were never provided or that have, in fact, already been paid for.) Legitimately disputed arrears should not be included in the stock of outstanding arrears for clearance.

Once the stock is known, it is advisable for some central agency in the ministry of finance, say the treasury, to take over the responsibility for the payment of the stock of past arrears, so that this can be programmed as an identifiable component of the current fiscal year’s expenditure. But liquidating a stock of arrears raises a number of issues:

  1. If provision is made by line ministries from within their appropriations (typically at a late stage in budget preparation), it leads to reductions in the financial provision for other policies and programs. When paying off the old stock of arrears, it is important to avoid the accumulation of new arrears. Moreover, some line ministries or spending agencies may choose to incur new commitments with their resources rather than meet past liabilities.
  2. If provision is made for repayment arrears by the ministry of finance, on the other hand–for example, from within its contingency reserve without reducing the line ministry appropriations–this may ensure the arrears are liquidated. But it generates a “moral hazard” problem. The line ministries may conclude that if they incur arrears in the future they will again be bailed out by the ministry of finance.
  3. A third option is to finance the accrued liability by “securitization,” a form of government borrowing. There is a range of options, including promissory notes that are discountable by the commercial banks (but should not be rediscounted by the central bank, as that would lead to monetization of the deficit); the issue of treasury bills; or the issue of longer-term bonds. This approach has the advantage of not disrupting the budget provision and may enable the private sector to be repaid more quickly, but it adds to government debt and to the government’s interest bill; and it again raises “moral hazard” issues. Moreover, whereas the issue of treasury bills and bonds is often associated with full payment of arrears, promissory notes can be used to prioritize (by varying the terms of the promissory notes) and can only be cashed at a discount. Thus, the creditors face a loss relative to cash payment. Also, the issue of promissory notes can be nontransparent, being open to favoritism and corruption. In no cases should the arrears be directly offset against tax liabilities. This would only undermine tax compliance and encourage the future accumulation of arrears.
  4. While option (2) and/or (3) may often be preferred, it should always be accompanied by a genuine strengthening of expenditure controls to avoid future arrears, and thus reduce the moral hazard problem. Its acceptability will also depend on many other wider factors: the case for prompt payment versus deferral; the interaction with any arrears on tax payments;29 the mode of financing; and the pursuit of monetary policy objectives.

Is there a complete consolidation of funds?

In most countries, the government’s funds–for example, tax and customs revenues, proceeds from internal and external borrowing, etc.–flow into a single bank account (often called the treasury account) held in the central bank. This is thought not only to facilitate budget execution, particularly cash and debt management, but also to be the safest depository for government funds. But there is no theoretical reason why this must be so; in a few industrial countries, the role of government banker has been contracted out to a single commercial bank. In the vast majority of countries, however, the current practice (or the aim) is for government resources to flow speedily and efficiently into a single account held in the central bank.

Government funds are, however, often fragmented in developing countries. In some countries, the main treasury account coexists with other public accounts, such as the account of the amortization funds in francophone countries, or public entities are allowed to open accounts in private banks. In such cases, government funds may be available as deposits in bank accounts, even while the government is borrowing in the market and/or payment arrears are accumulating in the private sector, because the main treasury account has no cash available. Thus some fiscal tables–which are consolidated reports–can show a buildup of idle cash balances and the accumulation of arrears.

This fragmentation of funds undermines budgetary operations and generally implies additional costs to the government. Often the government is borrowing at high interest rates, while unused funds accumulate in bank accounts and earn a low rate of interest, if any. Commercial banks use the government’s own money to lend back to them at a profit.

Such practices should be changed. First, information on these accounts–at least on the aggregate flows and balances in all central and commercial banks belonging to the government–should be available to the ministry of finance.30 (This is necessary to enable the ministry of finance to reconcile aggregate bank accounts with the government’s fiscal tables.) The second step is to consolidate as many of these accounts as possible within a single treasury account at the central government. Any accounts that are designed to bypass normal budget procedures should be closed, and expenditure previously financed from these accounts would then become regular budgetary expenditure and follow the normal budget procedures.

How efficient is foreign aid management?

For many developing countries, the degree of their reliance on external foreign assistance has increased over the years. Unfortunately, the growth in aid flows has often not been matched by the administrative capacity to manage them well. This can create several problems for fiscal economists.

Many of the problems concern the timing of aid flows. Commodity aid that enters a country may be recorded at different times by the donor (on shipment), by the central bank (on clearing the port), and by the ministry of finance (when the commodity is sold and money flows into the government bank account). When the aid involves basic commodities that have to be processed, distributed, sold, and the profits remitted back to the government, the delays can be quite substantial. Often the receipts from such commodity aid do not enter the government’s main account but go into special “counterpart funds,” which are administered jointly by the government and the donor. Sometimes these funds can be released only for donor-approved purposes. This source of financing should be regarded as tied aid rather than as general budget support. In countries dependent on such aid, it is important to understand the timing of these flows; distinguish financing from public expenditure transactions; and record such flows appropriately in government accounts.

For project aid, the reimbursement principle is increasingly employed, whereby the government first spends funds linked to a donor-supported project (expenditure), then claims reimbursement from the donor (financing). There are often large administrative delays in processing these claims, so that spending initially has to be financed from domestic sources. The extent of these delays should be investigated, and, if they are substantial, the executing ministries, in collaboration with the donors, should be encouraged to implement measures to speed up the processing of claims.

Another common practice is for the donor to set up special project accounts, sometimes in the central bank but often in a commercial bank, to which all project disbursements will be channeled, and from which all payments for the project will be made. This makes it administratively easier for the donor to monitor implementation, allows some control over the use of funds, and can be used as a means to regulate the speed of project implementation. However, since these accounts may be kept outside the regular government accounts, and so bypass normal accounting procedures, there are often delays in reporting and problems in consolidating these accounts with the government’s main account.

Even more difficult for the accounting system is the practice of donors paying foreign suppliers directly on behalf of the recipient country. In this, and the case of special project accounts, the government is often dependent on information supplied by the donors to monitor the implementation and financing of projects. In many cases the flow of information breaks down or is available only after considerable lags.

Further domestic problems arise because of uncertainty about the timing of receipts of aid flows. On the one hand, there can be the need to make provision for counterpart funds within the budget–which are not used if the aid is not disbursed as planned. On the other, foreign aid can arrive unexpectedly, requiring the authorities to direct money into counterpart expenditures. Often, there is a lag between when foreign resources arrive at the central bank and their crediting to the government’s accounts.

For so long as donors require the separate accounting and banking of their grants and loans, there can be no generalized accounting (or financing) solutions. In countries highly dependent on foreign aid, the fiscal economist should make a special effort to understand how commodity and project aid is handled on a case-by-case basis, so that consolidation of all government expenditures can be achieved, so far as possible. It may even be desirable to visit local agencies of the principal donors and discuss with them their main implementation and reporting problems; and, as necessary, to discuss with the authorities how procedures can be improved. The fiscal economist should encourage the government to maintain an up-to-date record both of its external liabilities and the timing of foreign inflows due.

How can expenditure be adjusted in-year?

Those executing the budget may be faced with requests to consider additional expenditure in-year; or they may be asked to look at the scope for cutting back spending in-year–for example, when revenue inflows have proved disappointing.

The most important point is that, as noted in the preceding section, only changes in expenditure policies can deliver sustained changes in expenditure levels. Yet, some country authorities can be tempted to seek ways to avoid expenditures being recorded as the first means of “cutting” spending.

First, fiscal economists and budget advisors need to keep in mind the difference between an accrued and a cash liability for public expenditures. As noted above, once goods are delivered and the bill is received and verified, an accrued liability has arisen. Moreover, in economic terms expenditure should be recorded as having taken place. But all too often governments, aware of the paramount importance of the monetary variables in macroeconomic adjustment programs, seek to avoid recording a cash liability. Limiting the amount of cash liability allows the government to hold down (below target, for example) borrowing in cash terms.

Such schemes for “cutting” expenditures should be eschewed as they typically involve:

  • building up payment arrears;
  • recording expenditures in suspense accounts;
  • reductions in cash availability not matched by reduced appropriations and appropriate policy changes to reduce commitments; or
  • delayed submission of bills (particularly at the end of the year).

They are creative accounting devices that misrepresent and understate the economic impact of the government sector and often cause financial damage to the private sector.

Second, the basic principle must be that, in seeking to introduce expenditure reductions in-year, any attempt to reduce or slow down the rate of spending must be directed toward the commitment stage–that is, before a liability is incurred. It follows that the scope and targeting for such measures is restricted both by timing (for some expenditures such as debt servicing, the commitment and its timing are or should be immutable) and by the critical need to alter expenditure policy on discretionary expenditures, so that a commitment can be avoided. For example, in-year, it is easier to hold up a capital project than to reduce employment quickly so as to reduce the wage bill. In general, the earlier action is taken, the greater the flexibility that exists.

Thus, there are very real constraints on the adjustments to the planned budget that can be made through action on budget execution during the year. Large components of spending–usually termed nondiscretionary–are generally fixed in the short term. These nondiscretionary expenditures include commitments made in prior years that cannot be changed, such as debt service;31 spending mandated by other legislation, such as indexation laws, pension and wage legislation, or other social benefits or entitlements; wages and salaries for existing employees (in the short run); and many transfers, such as those to other tiers of government.

Although governments may often claim that all (or virtually all) expenditures are nondiscretionary, in practice, much of the spending on purchases of goods and services is, to some degree, discretionary–and even the size of the wage bill can often be reduced in-year. The degree of budget lock-in–that is, how much expenditure is genuinely nondiscretionary–needs to be assessed to give a reasonable picture of the maximum degree of expenditure reduction that can be imposed in any fiscal year.

Thus, any proposed actions need to be carefully crafted.

  1. Changing the level of new commitments must be the target. This requires a conscious decision to change some expenditure policy, even if it is only advancing the start date of a capital project (to raise spending) or postponing a salary increase (to hold down spending).
  2. Even if action can be taken, for example, to delay the start of a capital project, there may be economic costs (project delays), financial costs (penalty clauses), and wider repercussions of loss of goodwill when donor-financed projects are scaled back.
  3. Within commitments, attention often focuses on capital items as the most obvious targets.
  4. One other category–current purchase of goods and services–may be targeted for reductions, but it is often tricky. If a common percentage reduction is proposed, line ministries may leave important bills unpaid (e.g., utilities) or make unrealistic reductions in sensitive items, hoping to embarrass the ministry of finance later into releasing more resources.
  5. Also to be eschewed are reductions in intergovernmental transfers. Such action represents passing the problem from one tier of government to another, with aggregate general government borrowing often unaffected.

Rather more imaginative approaches to holding down expenditure can sometimes be found, such as delaying the introduction of a planned wage increase or the start date of a new policy, or placing a freeze on hiring or prohibitions on external travel. The key point is that those executing the budget should be encouraged to look for opportunities to pursue preexisting expenditure policy goals when reductions or increases are to be made. The scope for “consolidating” an in-year emergency action as a new policy in the next year’s budget should also be an important consideration.

How should good governance be pursued?

A fundamental role for those advising on budgetary matters is to support public sector reforms and policies that promote the efficient use of resources and sustainable economic growth. In recent years, a greater awareness of governance issues has focused attention on fostering public sector efficiency, transparency, and accountability.32 A well-functioning budgetary system ensures accountability, in the sense that:

  • every action is transparent;33
  • every participant is held accountable;
  • every action is properly documented and reported; and
  • every action can be subject to independent, professional, and unbiased audit and review.

Since the budget system plays such a crucial role in achieving good governance, the fiscal economist or budget advisor should develop an awareness of weaknesses within this system and consider how the system might be improved by pursuing more transparent practices, promoting accountability, and delivering public goods more efficiently. In this context, the following points are important, as a means to foster or maintain sound governing practices.

Define the government sector clearly and comprehensively. This means not only that central government, state/local governments, and government financial and nonfinancial operations should be separately identifiable, but also that the respective roles of the executive, legislative, and judiciary should be clearly defined and widely understood. Also, the true extent of government quasi-fiscal activities and the contingent liabilities of government should be identified and monitored by governments.

View the budget as a complete process. Interference in any one element of the budget process may have repercussions on the system as a whole. Too often, when formulating fiscal adjustment strategies, attention on the expenditure side is focused on the last stage–actual cash payments–where the impact of government spending is manifested in the monetary sector accounts. As noted above, expenditure control needs to take place at a much earlier stage, long before payment orders are prepared and processed.

Adjust spending at the earliest stage possible. Indeed, the aim should be to have an input at the policymaking stage of budget preparation, when existing expenditure policies are confirmed or new policies adopted.

Minimize disruptions to the expenditure process. The budget system fulfills more functions than that of helping ensure macroeconomic stability. Its original function was to ensure compliance with the budget appropriation law, the basis of sound governance. The budget system should also promote other objectives, an efficient allocation of resources among programs, effectiveness of government operations, and efficient financial management of government resources. Care must be taken, therefore, that stabilization objectives are not pursued at the expense of these other objectives. This is often not easy to accomplish. Cash controls, though attractive for securing aggregate control and compliance with the monetary dimension of an adjustment program, tend to bear more heavily on easily controlled elements like operations and maintenance expenditures; they may distort, over time, the patterns of government expenditures and be damaging to longer-run government efficiency. Widespread arrears, often associated with overreliance on cash controls, may lead to dislocations in the private sector (see Section 5).

Respect the budget system’s internal and external controls. At each stage of the expenditure process there are controls in place. In periods of fiscal stress there is a tendency to bypass regular budgetary procedures and circumvent controls. Often the result is an increase in corruption. The extent of opportunistic corruption, whereby individuals take advantage of a poor control system, varies but is all too common. Systemic corruption, though perhaps more rare, involves using political power to subvert the control systems. This can have a macroeconomic impact and may be indicative of the authorities’ limited commitment to adjustment and reform. But it is not susceptible to any direct or quick solution; and only a strong political commitment will bring needed improvements.

Limit exceptional procedures. In some countries, the expenditure process has become so cumbersome that there are substantial incentives to bypass it, through “exceptional procedures.” Procedures should be defined in laws and regulations; inspections and audits should be timely and comprehensive; infractions should be dealt with, and seen to be dealt with through appropriate disciplinary action.

Poor governance can undermine fiscal adjustment. Governance issues affect the ability to deliver fiscal objectives. Countries successful in fiscal reform either started with a sound public expenditure management system or began their effort improving a deficient one.34 Weak governance should be addressed early in the reform effort.

21The primary objective for the introduction of carryover is to prevent the typical end-of-the-year rush to spend unused funds. In some Nordic countries and Australia, however, the carryover can be positive or negative: overspending by an agency in one fiscal year leads to a deduction from its available funds in the next.
22It should be understood that, from the government accounts perspective, the transaction is completed at stage (4) above–completion of payment order.
23There may, of course, still be disputes between the government and individual suppliers on specific bills received.
24These may or may not be subordinated to the ministry of finance.
25Typically, supplementaries are not needed for excess spending on a line item, where the resources are found by transferring monies from another line item in the same program.
26For a description of such systems, see A. Hashim and W. Allan, Information Systems for Government Fiscal Management, World Bank Sector Studies Series (Washington: World Bank, 1999).
27Arrears thus do not include unpaid bills received for goods verified but still within the usual grace period.
28Jack Diamond and Christian Schiller, “Government Arrears in Fiscal Adjustment Programs,” in How to Measure the Fiscal Deficit, edited by Mario I. Blejer and Adrienne Cheasty (Washington: International Monetary Fund, 1993).
29A number of former centrally-planned and francophone African countries have indulged in the netting out of tax and expenditure arrears as a “one-off ” (but all too often repeated) exercise. As noted, such offsetting is to be avoided in general, as it creates an incentive not to pay tax bills and prolongs unrealistic budgeting. However, the accumulation of arrears can sometimes be so large that such netting out is a necessary first step to reduce the size of the outstanding stock, whose residual must be handled by the options discussed above.
30It is sometimes necessary to exclude amounts held in trust funds where the government is the trustee, not owner, of the monies.
31This does not prevent some countries from building up debt arrears; for example, on domestic debt held by a country’s own central bank.
32See for example, IMF, Good Governance: The IMF’s Role (Washington, 1997).
33See also George Kopits and Jon Craig, Transparency in Fiscal Operations, Occasional Paper No. 158 (Washington: International Monetary Fund, 1998) and “Code of Good Practices on Fiscal Transparency: Declaration of Principles,” IMF Survey,
April 27, 1998, pp. 122­24.
34G.A. Mackenzie, David W.H. Orsmond, and Philip R. Gerson, The Composition of Fiscal Adjustment and Growth: Lessons from Fiscal Reforms in Eight Economies, IMF Occasional Paper No. 149 (Washington: International Monetary Fund, 1997).

Section 5
Cash Planning and Management

As an integral element of public expenditure management, governments need to develop cash planning and management to keep within budgeted expenditure in cash terms; to prevent unanticipated borrowing that might disrupt monetary policies; and to help identify the need for in-year remedial fiscal action. Variations in in-year actual versus planned patterns of expenditure are not without cost. Even if the total limit on borrowing were not exceeded over a fiscal year, higher-than-planned expenditures within a short period may lead to a surge in borrowing and can disrupt the achievement of monetary policy objectives.

The ability to adjust central government spending, both in the timing as well as the amount, is of strategic importance in any budget system. Careful financial planning and efficient in-year management of budget delivery are essential, but both planning and management will work well only if the budget information systems are comprehensive, timely, accurate, and reliable–and if all the departments involved, both inside and outside the ministry of finance, cooperate closely. These conditions are rarely fulfilled in developing countries, thus making monitoring of the fiscal program difficult and cash management more challenging. This section will outline the main cash planning requirements for ensuring that expenditures are smoothly financed throughout the year and that overall fiscal targets are met.

The main questions are:

  • What are the essential features of cash planning?
  • Who is responsible for preparing and monitoring the cash plan?
  • What are the main constraints that disrupt smooth financing of expenditure plans and how can these be overcome?

What are the essential features of cash planning?

Cash planning has three main objectives: (1) to ensure that expenditures are smoothly financed during the year, so as to minimize borrowing costs; (2) to enable the initial budget policy targets, especially the surplus or deficit, to be met; and (3) to contribute to the smooth implementation of both fiscal and monetary policy. An effective cash planning and management system should:

  • recognize the time value and the opportunity cost of cash;
  • enable line ministries to plan expenditure effectively;
  • be forward-looking–anticipating macroeconomic developments while accommodating significant economic changes and minimizing the adverse effects on budget execution;
  • be responsive to the cash needs of line ministries;
  • be comprehensive, covering all inflows of cash resources; and
  • plan for the liquidation of both short- and long-term cash liabilities.

Even if a budget is realistic in the sense of having well-prepared and objective aggregate revenue and expenditure estimates, this does not mean that budget execution will be smooth. Timing problems can be expected between payments coming due and the availability of the cash necessary to discharge them.

Ideally, a cash plan for central government expenditures should include, for the month ahead, a daily forecast of cash outflows (i.e., mainly expenditures) and cash inflows (receipts from tax and nontax revenues and also from borrowing, including issues of government securities as well as other external and domestic borrowing).35

But some such daily systems found in developing countries are essentially misdirected and represent “emergency” cash budget regimes that pay out tomorrow what flowed in today. Where such cash planning systems do exist, they are rudimentary, dirigiste, and unresponsive in practice, to unanticipated shortfalls in revenues or borrowings. They have many drawbacks. While they can be broadly effective in limiting cash payments to available cash inflows, they often do so at considerable cost to the effective allocation of resources (sudden cuts in cash provision relative to budget appropriation) and to the timely delivery of services (because there is insufficient information on the likely flow of cash available to enable managers in line ministries to plan their delivery of services). Moreover, such systems are often associated with a buildup of payment arrears. Governments need to pursue a more sophisticated approach to cash management.

Developing countries should aim to deliver their budget by adopting a monthly cash plan, based on projected aggregate cash inflows and limits on cash outflows. The principal components should be as follows:

  • The starting point should be an annual cash plan, prepared in advance of the fiscal year, setting out projected cash inflows and cash outflows month by month.
  • Past patterns can help establish likely month-to-month inflows of tax and nontax revenue receipts. The likely timing of external borrowing is also often partly known in advance, so that total inflows can be projected. Past patterns of expenditures can usually be a guide to the cash outflows each month.
  • However, factors such as irregular capital expenditure patterns, variations in the timing of donor grant receipts (whether for specific capital projects or general budgetary support), and the precise timing of new borrowing (which may have to await a conjunction of beneficial market conditions) are likely to mean variation from year to year in monthly patterns of cash inflows and outflows.
  • When it appears from the initial projections that there might not be enough cash available within a given month to cover expenditures falling due, a government can delay the planned commitment of the expenditure; speed up the collection of revenue; or borrow. The choice among the three options will depend on feasibility and costs.

Once the annual plan is established, it should become the basis for rolling three-month projections, and within that projection an operational cash management plan for the month ahead. These should operate as follows:

  • The three-month projections and monthly plans need to be revised each month on a rolling basis in the light of actual revenues and expenditures (and often experience in borrowing domestically and externally).
  • When the three-month rolling projections indicate there may not be enough cash available within one or more of the three forward months to cover expenditures, action can be taken to delay expenditure commitments, accelerate revenue collection, or borrow, with the choice depending on feasibility, costs, and borrowing constraints.
  • The operational cash management plan for central government expenditure for the month ahead should, ideally, include a daily (or at least weekly) forecast of cash outflows and inflows. This cash management plan should be prepared and updated at least every week.

The operational monthly cash management plan is often translated into a monthly cash limit set on some, or all, expenditures of individual ministries or spending agencies. In some instances–and not just in post-chaos situations or as a temporary means of reimposing control–there can be cash limits on economic categories of spending or even individual line items. Some industrial countries have put limits on certain subaggregates like “running costs”–wages, utilities, and residence costs for individual spending agencies. These cash limits are often seen as being the way in which a “hard” budget constraint operates. But, as noted, as a means of expenditure rather than cash control, cash plans on their own are ineffective when there is no separate control over commitments, and often lead to a buildup of (unpaid) liabilities.

The cash plan assists in determining the realism of fiscal criteria or benchmarks for each month/quarter. It can engender a sense of confidence among the authorities that they have cash control and give them greater confidence that other important fiscal and monetary targets (e.g., credit ceilings) will be respected. Thus, to be viable, the targets included in an adjustment program should always be supported by a cash plan that is updated to take into account the latest available information on revenues collected, other receipts (including borrowing), and expenditure committed and paid.

The continuous monthly updating of the cash plan should help in ensuring that the initial budget targets will be met. When it is clear from the latest forecast available that targets may not be met in the future or at the end of the year, measures will have to be taken to constrain expenditure or to increase revenues. The cash plan can contribute to the decisions on the size, type, and targeting of the measures required. (See the previous section for a discussion of such measures.)

Who is responsible for preparing and monitoring
the cash plan?

As noted, in principle, within the monthly cash management plan for the central government budget, the figures should be prepared and updated at least every week by the treasury or cash management department of the ministry of finance, as the government’s financial manager. This often does not occur in developing countries–although sometimes the central bank may undertake all or part of such an exercise. The budget advisor should encourage the creation of some kind of cash management unit within the ministry of finance (typically as one of the components of the treasury department) to prepare and maintain cash plans and monitor outcomes.

To monitor delivery of the cash budget, the treasury department must get all the necessary information as quickly as possible from all the departments involved–not only from the ministry of finance departments, (e.g., the tax and customs administration and budget department) but also from the planning ministry, the line ministries, the spending agencies, and the central bank. This task is often not adequately carried out because, among other reasons, the reporting system is not fully networked. As a first step, before more lasting comprehensive reforms are put in place, a provisional monitoring system may have to be introduced.

For this purpose, one approach is to set up a small team, headed by someone with enough authority to obtain information from the various departments. For example, in some francophone African countries, the Direction de la Prévision or Cabinet du Ministre des Finances are already operational in coordinating budget execution and cash planning. In Latin American countries, the unit in charge of monitoring is either in the central bank or within the ministry of finance under the supervision of its minister. The functions of this unit should be to:

  • prepare a monthly cash plan;
  • keep an inventory of the existing in-year fiscal reports, on the revenue side of the budget as well as on the expenditure side, and propose the preparation of new reports if those existing do not fulfill their requirements;
  • centralize the outturn revenue and expenditure information in “flash reports,” summarizing main developments with minimum lags;
  • analyze the reports, and update cash forecasts on the basis of these flash reports;
  • make proposals for adjusting cash flows if the need arises; and
  • keep the central bank fully informed (because government operations can have important consequences for bank liquidity).

What are the main constraints that disrupt smooth financing of expenditure plans?

In OECD countries, cash plans are typically prepared within the ministry of finance for year (t + 1) on the basis of estimated revenue and expenditure profiles for year (t ­ 1), and the information being collected, as the budget year (t) unfolds, from the tax and customs administrations and from the treasury department or line ministries (at least for large expenditure items). In many industrial countries with well-developed capital markets, the ministry of finance can readily borrow the amount necessary to meet both temporary shortfalls, when timing problems occur, and to finance the deficits. When there are temporary surpluses, these can be invested in the money markets, even overnight, to earn a return.

In contrast, many non-OECD countries do not have access to a well-functioning capital market. Either the ministry of finance cannot borrow easily, or it is not permitted to borrow from the central bank36 or the money market to finance short-term shortages of cash. In these cases, cash plans have a more fundamental importance. Unanticipated expenditures cannot simply be passed on to the ministry of finance for payment. The cash expenditure forecast for a given month then becomes a real limit that should not be overshot.

There are five prerequisites for good cash management: (1) a realistic budget, (2) clear procedures for the release of appropriations, (3) strict observance of the budget execution rules, (4) experienced and skilled staff to prepare and monitor the cash plans, and (5) clear borrowing rules.

What are the typical questions?

Is the budget realistic?

A good cash plan cannot compensate for an unrealistic budget. Indeed, the cash plan–and any monthly cash limits typically derived from it–must not become substitutes for the budget itself. The budget preparation procedure is the prioritization process within specific financial constraints, and this prioritization process should be fully in place before expenditure is broken down into monthly cash limits.

Yet the reverse is often the experience–for example, in a number of economies in transition and some African countries. Decisions about expenditure priorities are not adequately discussed or settled at budget preparation time by the line ministries and the ministry of finance, or the budget avoids hard decisions to appease the parliament. Then, it is the ministry of finance that has to exercise the real prioritization and expenditure cuts through cash allocations. This can strain budget execution beyond its breaking point.

Are the procedures for the release of appropriations adequate?

The way appropriations are released is also important because it defines how much may be spent in a given month or quarter. Three systems are possible, depending on the legal framework (usually the organic budget law), and/or the country’s situation.

In most industrial countries, budgetary appropriations are available to the spending ministries as soon as the budget is approved. The spending ministries are free to commit their expenditures and issue payment orders when they wish, and the treasury will borrow on the market if necessary. This is possible because the profile of expenditure is relatively stable, and because the government can borrow easily from a well-established capital market.

In some less developed countries, fixed amounts are released for a specific period of time (month or quarter)–for example, 1/12 of appropriations is released at the beginning of each month. If the situation does not change, 1/12 of the appropriations will be released every month. If, however, the situation worsens, the release of appropriations can be slowed down.

In many developing countries, particularly Commonwealth countries, formal warrants can be issued by the ministry of finance to spending agencies that control specific categories of spending, and budgetary allocations can be made available only in part, again for various periods of time–monthly, quarterly, or even by special request. This allows fine-tuning of the release of appropriations.

In all cases, when the appropriations are released, the line ministry or spending agency has authorization to commit the expenditure. But additional controls on cash releases (e.g., monthly cash limits) can be an effective method of controlling the rate at which appropriations are used. In a very few countries with severe cash shortages, commitments and payments have to be almost simultaneous, because suppliers will not accept an order nor deliver unless payment is assured.

Are there adequate experienced and skilled staff to carry out this task?

The preparation and the maintenance of cash plans require some financial skill. Officials have to analyze the available information, make judgments as to its reliability, and, based on this information and their past experience, make realistic projections. In particular, they have to regulate the flow of commitments with all the instruments available to make sure the cash necessary to cover the expenditure, when due, will be available and thus avoid payment arrears. This is not easy–depending on the type of expenditure, there may be a lag of months, or only a few days, between the commitment stage of the expenditure and the payment.

Another important task is to liaise with the central bank to ensure that financing requirements can be met and will not cause adverse monetary repercussions. The scope for borrowing from different sources, and the terms of such borrowing, will also be matters of concern, since the future debt service implications of present borrowing will also have to be factored into spending plans. Officials executing the budget should possess adequate skills and technical capacity. Sometimes fiscal economists and general budget advisors need to identify where training is necessary.

Are there clear borrowing rules?

Government borrowing quickly leads into wider questions of monetary policy. In this publication, only two aspects are considered: are the institutional arrangements sufficiently robust to permit effective cash planning for government and to facilitate short-term borrowing?

As noted earlier, it is all too common for the government’s monies to be held on deposit in a number of different bank accounts–some in the central bank and some in commercial banks. Ideally, the government should have all its resources either in a single account–such as the Treasury Single Account as established in a number of transition economies–or in accounts that can be consolidated every night. If a consolidated balance rather than some subset of bank accounts can be drawn upon, that may prevent the government from borrowing when it does not need to do so. (There are many occasions when government deposits in a commercial bank are used by that bank to purchase treasury bill issues. The government is literally borrowing its own money and paying interest for the privilege.)

Thus, all government deposits in the banking system should be consolidated overnight so as to ensure that government borrowing requirements are minimized. This can be more problematic than first appears–common difficulties include:

  • hypothecated funds such as health, road, and even social security funds may be established by separate legislation. The money in these funds is often not available to the government, even on a short-term borrowing basis; privatization funds have often been established on this same basis in some East European and other transition economies;
  • donors may regard money committed to a government and held on deposit in the central or a commercial bank, but not yet disbursed, as theirs (the donors)–not the government’s; and
  • there may be a lack of transparency between monetary and fiscal instruments; thus large government deposits in the commercial banking sector may be serving a secondary monetary role (e.g., providing liquidity needs for the banking system).

In this area, the basic principles are that:

  • government money belongs to the government;
  • money in different accounts is usually fungible and should be consolidated;
  • the government has a right and a duty to make effective use of its own funds; and
  • the government should earn a market rate of interest on its deposits, while paying overdraft rates on its borrowing and a negotiated service fee to banks that conduct transactions for it.

Where the government is budgeting for a deficit, planning for the financing of that deficit is a major task–outside the scope of this publication. Governments need to have an annual borrowing strategy implemented in close coordination with the central bank and in line with monetary policy. But for efficient cash management, within that borrowing strategy, the government also needs a mechanism for dealing with unanticipated day-to-day or week-to-week cash shortfalls in the least-cost way, and without unnecessary disruption to the delivery of public services.

How then is a temporary shortfall to be met? First, great care should be taken in attributing an unanticipated borrowing need to temporary causes. Poor revenue performance or sudden increases in expenditure above plan are very often not temporary factors; rather, any temporary causes should be tracked down, and the authorities must be convinced that this cause will unwind within a short interval. Only then will any associated borrowing be genuinely temporary (and readily repaid).

Once it is clear that the country is facing a temporary cash shortfall, there may be scope for postponing some payments. But this can damage the government’s financial credibility and is normally best avoided. As noted earlier, if the government does not hold all its deposits in a single account, the scope for financing a temporary cash shortfall on the main treasury account by borrowing from other government funds should always be investigated. Some countries maintain a separate “stabilization fund,” into which windfalls, donations, etc., are directed, that can be used in such circumstances. This is (or should be) the least-cost option in terms of interest forgone, being less than the cost of an overdraft facility.

Finally, many countries have an automatic overdraft facility (sometimes called a “ways and means advance” in Commonwealth countries) at the central bank. Clear rules must govern the use of such overdraft facilities:

  • the size of the overdraft facility should be limited (preferably in statute);
  • the duration of any overdraft should be limited (again preferably in statute);
  • to avoid monetization of the deficit, any short-term borrowing that is not quickly repaid (through the arrival of delayed inflows into the treasury account) should be transformed into a treasury bill or bond issue and sold (ideally to the nonbank public) by the central bank; and
  • the cost of the overdraft facility should be transparent and be paid by the ministry of finance.

35Except where state expenditures are very large, the macroeconomic focus on financial management is on the central government level. State and local governments, however, have the same incentives to manage their finances efficiently by following the same cash planning and management practices recommended here (see B. Potter in T. Ter-Minassian, Fiscal Federalism in Theory and Practice (Washington: International Monetary Fund, 1997).
36For example, under a currency board arrangement.


ADB-Managing Government Expenditures 1999

ODI-A guide to public financial management literature

Managing Public Expediture

World Bank – Public Expenditure Management Handbook