Budget Classifications, GFS and Footnote 6
Posted by David Gentry.
Joseph Heller’s satirical novel, Catch-22, was published in 1961. The novel is set during World War II and describes the efforts of military servicemen to survive war and the organizations established to wage it. The title comes from a scheme by the novel’s characters to be discharged early from military duty. According to a fictional military manual, a person could be discharged if he certifies that he is crazy, but a clause in the procedure, Catch-22, states that if he knows he is crazy then he isn’t crazy and thus is ineligible for discharge. Catch-22 is a colorful reminder of how significant the fine print of a manual can be.
At the top of the IMF PFM blog web page is a tab labeled “Technical Notes”. One of the topics covered under that tab is budget classifications, the technical guidance note on which is worthy of careful reading by those involved in the day-to-day work of public financial management.
One striking feature of the paper is the wide range of types of data that budget classifications are to contain. Even a single classification has to satisfy multiple information needs. Take the economic classification for example. It should enable analysis of efficiency (least cost) when preparing the budget; reflect expenditure controls that provide the right level of management flexibility to line ministries; provide detailed information needed by managers in line ministries; enable collection of data in a manner necessary for the accounting system; and, enable reporting in accordance with the IMF Government Finance Statistics reporting system.
Each of these information needs is important, and all must be satisfied by a single economic classification. Crafting a classification to meet multiple needs is difficult, requiring active participation in the design process by the national budget office, line ministries, treasury, accounting units, the national audit office and IT departments. Inevitably, some participants are more effective than others in the deliberation process.
The nature of certain data gives an advantage to some participants in the classification design process. Those who want data according to fixed standards are in a stronger position than those who require information that may change from year to year. For example, data requirements associated with national accounting standards and GFS reporting are comparatively easy to justify. Other data, such as information to support line ministry management, or expenditure control levels that the national budget office might change frequently based on experience as it moves toward program budgeting, are more subjective and therefore more difficult to explain and defend.
Database technology can help meet multiple data requirements of a single classification. Lookup tables can take detailed data based on the primary classification and consolidate it in database reports to match groupings required by other data needs. (Terms other than “lookup table” are often used but which have the same meaning, such as “cross-walk”, “mapping” or “side” database tables.) For example, a detailed country-specific economic classification can easily be consolidated to support GFS 2001 reporting using a lookup table, and a program classification can easily be mapped to report according to COFOG.
Over the years I, and a number of my colleagues, have encountered budget officials who had the impression that GFS reporting standards were more important than, or were mutually exclusive with, country-specific data requirements. Given the stable and well defined GFS standards, the importance placed on GFS reporting, and the effort to educate ministry of finance staff worldwide on GFS, it is easy to understand how someone might believe that if GFS reporting can be performed adequately the main work of budget classifications is done. Or, in the absence of pressure from other users of data, that classifications meeting GFS reporting requirements are good enough.
It is appropriate to state in the pages of this blog that, even while emphasizing the strong IMF commitment to GFS 2001 reporting standards, there is no reason why GFS should supplant country-specific information needs, and that effective public financial management requires data in addition to that provided through GFS. Every effort should be made when establishing classifications to identify and address multiple information requirements.
Recently I heard a proposal from a budget official that GFS standards should form the basis for national government financial statements, in effect replacing national government accounting standards. I have heard this more than once over the years. I pulled out my well-used electronic copy of the GFS 2001 manual, and pointed out Footnote 6 on page 5 of the manual, which reads:
Although the GFS system is described in standard accounting terms,
it is important to remember that it is a statistical reporting system that
might differ in important ways from the underlying financial accounting
system from which most of the GFS statistics will be derived.
Sometimes the fine print really is important.