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December 2011

December 29, 2011

The PFM Blog Top Ten of 2011: A diverse bunch…….

Posted by Holger van Eden, with support from Sasha Pitrof

If there is a theme in the best read blog posts of 2011, it is perhaps the continuing struggle in the PFM profession to improve the performance of government expenditure. Given the ongoing major adjustments of governments around the world, and especially in Europe, it is perhaps not surprising that doing “more with less” or even doing “less with even less” is high on the agenda. At number 7 our colleague Guilhem Blondy describes how in a developing country as Mali the budget has only gradually become more effective, more aligned with the strategic objectives of government, by introducing program budgeting, but not forgetting to improve basic budget functions. At number 6 Sanjay Vani from the World Bank describes how waste and inefficiency plague even advanced countries’ public sectors through a lack of incentives and excessive zeal for procedure. Blog post number 4 from David Gentry, the Fund’s PFM Advisor in Mongolia discusses the dilemmas of actually rewarding success in the government. If agencies achieve all their objectives isn’t that a sign that they could do with a smaller budget? But if this is carried through then of course no agency will want to perform well. Performance management and budgeting remains an area were the profession is still looking for practical approaches.

The top three this year is a very diverse bunch. The World Bank’s Cen Dener reports at number 3 that the Bank now understands better how to make the development of Financial Management Information Systems a success, and perhaps that criticism on the Bank in the past has been overdone. At number 2, one of our star bloggers, Richard Allen, describes how on the one hand national planning systems are essential for development (even for advanced economies?), but on the other hand should, in developing countries, be less directive and more aligned with medium-term budgeting. Finally, many congratulations to the winner of the best read blog post of the year, Carla Sateriale, our talented, research assistant in the PFM divisions of the Fiscal Affairs Department (FAD). In an interview with our former director, Vito Tanzi, she managed to elicit some sage advice on how academics and policy makers should remain grounded in reality, and know there history.

If you haven’t read up on all these interesting topics, please find the top ten blogs of the year below. On behalf of us here at the PFM Blog, I would like to thank all our authors for their productivity and our readers for their attention. Happy New Year to all!

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December 27, 2011

Fiscal Consolidation Plans in OECD Countries: What Do They Mean for the Role of the State?

Posted by Natalia Nolan Flecha[1]

Times are challenging and “austerity” is the watchword. After all, the pressure is on- with the OECD estimating that, on average, a total fiscal surplus of nearly 4% of potential GDP will be needed over the next 15 years just to stabilise public debt levels. Nearly 7.5% will be needed over the same period to reduce debt-to-GDP ratios to the Maastricht-approved level of 60% of GDP.

With their backs against the wall, what choices are governments making regarding their (current and future) obligations to citizens and firms? Where are governments holding their ground, and where are they willing to retreat and make more room for other service providers? Choices taken now could be telling and, to those looking for signs of what’s to come, may even provide some clues into the changing role of the State in a post-crisis world.

A 2011 survey of OECD member countries’ fiscal consolidation plans shows some interesting trends. Noteworthy was that, on average, more than two-thirds of planned retrenchment efforts will take the form of spending cuts (as opposed to revenue raising measures). Operational cuts were a staple of all countries surveyed; on average making up 27% of countries’ total retrenchment efforts. These included across-the-board reductions and/or freezes on such line items as staff wages, IT, procurement, as well as expected efficiency gains from mergers and restructuring of public sector organisations. Second, “big ticket items” also emerged as important targets of finance ministries. As of the end of 2010, 20 of the 30 OECD countries who participated in the study had announced cuts to social protection spending (e.g., pensions, unemployment and other social benefits). Health was next in line, with 15 countries reporting planned reductions here. In total, these two government functions accounted for about half of total general government spending in pre-crisis times.

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December 23, 2011

Fixing the Foundations: A Global Call to Action on PFM!

Posted by Steve Freer[1]

CIPFA – the UK-based Chartered Institute of Public Finance and Accountancy – is inviting organisations which share its passion for Public Financial Management (PFM) to come together and deliver a quantum leap in the quality of governments’ accounting, auditing and financial management practices. Steve Freer, Chief Executive of CIPFA explains why the present may be the best time for action……

Readers of this blog will know – better than anyone - the value of sound, effective PFM. You’ll also be aware of the potentially dire consequences of getting it wrong. Sadly, shortcomings in governments’ financial management practices are all too common in many jurisdictions around the world.

Many of our weaknesses have been exposed by the current sovereign debt crisis. Markets depend upon certainty and confidence. But what could be more uncertain than government accounts prepared on a cash basis without full balance sheet disclosure of assets and liabilities? How can that inspire confidence when governments are at the same time entering into complex guarantees to shore up ailing financial institutions?

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December 21, 2011

Designing “virementally”-friendly budgets

Posted by Sami Ylaoutinen

If you didn’t get the joke in the title, you’re probably part of the 99.99 percent of the population whose favorite topic is not public financial management. If you did, congratulations!, that’s why you’re reading this blog. Virements, the authority to reallocate budget appropriations, are important tools to introduce flexibility in government budgets. Why this flexibility is necessary, and why increasingly countries are moving to a situation where virements are less needed, I will discuss in this post.

A budget is a mechanism though which governments try to achieve several objectives simultaneously: spending the right amount of money (maintaining aggregate fiscal discipline), spending it where politicians want it to be spent (facilitating a strategic allocation of expenditure), and spending it to achieve maximum benefit for the population (using resources to most efficiently produce the desired outputs).

As has been painfully clear during the past few years, we live in a world filled with uncertainties. Budgets are clearly not isolated from the effects of this uncertainty, and therefore there is often a need to make adjustments to the budget approved by the parliament in order to achieve the objectives, or at least some of them, mentioned above.

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December 19, 2011

New Flyer on "Government Finance Statistics: Cash and Accrual Data"

Posted by Claudia Dziobek and Phebby Kufa, Statistics Department, IMF

A state-of-the-art fiscal data presentation should follow a balance sheet approach similar to the private sector accounting. The main principles are laid out in the Government Finance Statistics Manual 2001 (GFSM 2001). Some policy makers and fiscal analysts assume incorrectly that theGFSM 2001 requires onlythe accrual-recorded data, which may imply substantial reform of the fiscal reporting and government accounting system.

This assumption is only partially true. The GFSM 2001 in fact requires both, cash and accrual-based data. The misconception has contributed to delays in phasing-in the GFSM 2001 framework for various purposes e.g. budgeting, auditing, or macroeconomic analysis.

A new flyer on Government Finance Statistics: Cash and Accrual Data was prepared to address this misconception. It explains why both the cash-recorded and accrual-recorded data are needed for fiscal management. Cash-recorded data are used to produce a cash flow statement, which explains changes in the stock of cash and deposits, helps control payments, and determines the cash-financing gap. Accrual-recorded data are presented in an operation statement, which links in with the balance sheet. These accrual-based data better capture economic events and are needed for macroeconomic analysis.

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December 16, 2011

The "Soft" side of PFM Reform is often the Hardest

Posted by Jack Diamond

While international organizations can give excellent advice on the direction of PFM reform, i.e. why going from “bad” situation A to “good” situation B will provide important benefits to the country, advice on the change processes necessary for moving from A to B is much more fuzzy and more often than not subject to failure. Jack Diamond, former division chief in the Fiscal Affairs Department, recently gave a presentation (The Soft Side of PFM Reform is the Hardest) at IMF HQ on what the PFM profession knows about PFM reform processes, what determines their success and failure, and how this should change our approach to reform implementation.

 

One of the advantages of having spent a large part of your working life providing TA in the PFM area is that it often provides the opportunity to visit the same countries over a period of time. The downside is that despite the amount of TA having expanded exponentially, and despite the occasional success stories, one is often disappointed to find how little has changed or how long change has taken to implement. In some cases it even appears that countries have gone backwards. Sadly, too often one ends up re-iterating the same advice that was given years before, and then perhaps resigning oneself to the same disappointing results. This leads me to the motivating question of my presentation:

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December 14, 2011

Ho, Ho, Ho……..Strategic Budgeting is here!

Posted by Martin Bowen

Straight from the North Pole a new, promising approach to budget planning is discussed by CARTAC advisor Martin Bowen that could help countries with limited resources and capacities get a grip on their public finances using elements of more advanced and complex reforms usually only seen in advanced economies.  

Caribbean countries have been hit particularly hard by the downturn in US economic activity following the global recession. The resulting decline in revenues has seen a dramatic deterioration in the fiscal balances of many of these countries leading to significant increases in borrowing and debt. Countries have recognised that the level of their fiscal deficits and borrowing is not sustainable in the longer term and that correcting fiscal imbalances requires strong measures both on the revenue and expenditure side. In support, the IMF’s regional technical assistance (TA) centre in the Caribbean (CARTAC) has been providing extensive TA to member countries across a range of PFM areas including macroeconomic analysis, revenue forecasting, budget planning and preparation and treasury management.  

In particular, over the last two years, CARTAC has assisted a number of countries to develop and implement revised budget planning processes that support both strengthened fiscal discipline and better value for money from the increasingly scarce budget resources available. The approach to reform has focused on getting the basics right first. Traditional approaches to budget reform – multiyear budgeting, output based and accrual budgeting – have been particularly difficult to implement in developing countries and the development landscape is littered with failed reform strategies. This post suggests that a major reason for this failure is that, too often, development partners have attempted to transplant developed countries’ sophisticated budget management processes and systems into countries with very limited resources and within unrealistic timeframes.  

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December 12, 2011

Liberia Budget Reflection Workshop: Laying the Foundation for a Medium-Term Budget Framework

Posted by Kubai Khasiani, Steve Gurr, and Florence Kuteesa

Liberia is set to introduce a medium-term budget framework starting July 2012. The government of Liberia—with support of a joint team of IMF staff and the UK ODI’s Budget Strengthening Initiative—conducted a workshop in August 2011 to discuss implementation issues and challenges, chart a way forward, and obtain commitment from the various government institutions and stakeholders. The workshop was attended by officials from a wide variety of government institutions and generated lively debates as participants came together and candidly shared their experience. A set of recommendations was agreed at the end of the workshop, which would enhance cooperation and political commitment from all parties and facilitate the consultative process.

The introduction of a medium-term budget framework (MTBF)[1] by the government of Liberia, starting in the fiscal year 2012/13 budget, is stipulated in the 2009 Public Financial Management Act. The provisions of the Act set new challenges for the Ministry of Finance (MoF), line ministries, and development partners. The reform implication(s)—such as mandates and responsibilities of the various actors, and coordination perspectives—formed the focus of a five-day budget process reflection workshop held in Monrovia during August 29 and September 2, 2011. The workshop, organised by the MoF and facilitated by a joint IMF /ODI[2] technical assistance team, allowed an exchange of views between representatives of the ministries responsible for finance and planning on the one hand, and spending agencies on the other, on the potential challenges and prerequisites for a sustained reform implementation. The workshop was attended by 175 officials from the MoF, the Ministry of Planning and Economic Affairs (MoPEA), as well as line ministries and agencies across the government of Liberia.

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December 09, 2011

Enhancing the Role of the Accountant General’s Department in the Caribbean - A Challenge from the Sidelines!

Posted by Mark Silins

In the Caribbean, and in many English-speaking countries for that matter, the State Treasury is called the Accountant General’s Department (AGD). In this post I will explore what the main tasks and functions of the AGD should be, and what minimum functionality should be expected from them.

The AGD is, one could say, the engine room that supports effective public financial management, or at least it should be. Ensuring the completeness of all financial information in the accounting system each day ensures that key financial reports are available to support timely decision making. The AGD is also the processing centre for expenditures and receipts.  Its systems should support the proper classification of all financial stocks and flows of government and provide reports on these for all different stakeholders, including parliamanent.   

 

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December 07, 2011

Are PFM Reforms Always Worth It?

An Interview with Allen Schick

Posted by Carla Sateriale

If PFM were a rock band, Allen Schick, Professor of Public Policy at Maryland State University, would be its lead singer. It is hard to overestimate the influence Allen Schick has had on the field of public financial management, and on the many that have enjoyed his always entertaining lectures. Rather than resting on his laurels he presented this week the keynote address of the ICGFM (International Consortium for Government Financial Management) Winter Conference held at the IMF in Washington, D.C. Carla Sateriale, Research Assistant in the IMF’s Fiscal Affairs Department spoke with Prof. Schick on his favorite topic……    

Ms. Sateriale: Professor, what is PFM really all about?

Prof. Schick: For me, PFM is a way of organizing and thinking about reforms that would otherwise be unrelated. It’s a way of connecting a lot of dots: accounting, auditing, budgeting, financial planning, fiscal risk analysis, and fiscal rules, to name a few.  It’s easy to see each of them in isolation, but PFM ties them together and allows you to see them in a more holistic way. 

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December 05, 2011

Treasury Single Account is an Essential Tool for Government Cash Management – A New FAD Technical Note & Manual

Posted by Sailendra Pattanayak

A treasury single account (TSA) is a prerequisite for effective cash management and is a key tool for the ministry of finance/treasury to establish oversight and centralized control over government’s cash resources. It also provides a number of other benefits and thereby enhances the overall effectiveness of a public financial management (PFM) system. In particular, a TSA facilitates better fiscal, debt management, and monetary policy coordination as well as better reconciliation of fiscal and banking data, which in turn improves the quality of fiscal information. The establishment of a TSA significantly reduces the government debt servicing costs, lowers liquidity reserve needs, and helps maximize the return on investments of surplus cash.

A new Technical Note and Manual (TNM) entitled “Treasury Single Account: An Essential Tool for Government Cash Management” has recently been published by the IMF Fiscal Affairs Department (FAD). This TNM is largely based on the previous IMF working paper “Treasury Single Account: Concept, Design and Implementation Issues,” authored by Israel Fainboim and myself,[1] and published on the PFM blog on July 12, 2010. The TNM discusses the main features of a TSA, alternative TSA structures and associated transaction processing systems, and various design issues and preconditions that need to be addressed for setting up a TSA system. In addition, it explains the key sequential steps for implementing a TSA and provides practical tips on accounting and reporting under a TSA regime, bank reconciliation, and service level agreements with banks for TSA operation.

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December 02, 2011

Spending Cuts without the Cheese Slicer!

Posted by Bat-el Berger[1]

There isn’t a household in Holland which doesn’t have the handy cheese slicer to cut a Calvinistically thin slice from a big Dutch piece of cheese. In Dutch public finance the term “cheese slicer” has become synonymous for across the board expenditure cuts needed to achieve deficit targets. These cuts are easy from a bureaucratic point of view—all ministries share equally in the fiscal pain—and can be rationalized as cutting away government increases of productivity. However, ministries often play games with these kinds of cutback tools; at best priority and non-priority spending are hurt equally. In the hands of line ministries the cheese slicer is not really suited for weeding out ineffective expenditure programs or fundamentally changing the direction of government policies. For that a more fundamental analysis of government expenditure is needed.

Given the broad agreement in Dutch society that fiscal consolidation was needed after the 2008 economic crisis, the Dutch government ordered a new type of in-depth spending review (“brede heroverwegingen”, abbreviated BHO) in September 2009. The objective was to investigate more clever ways to cut public expenditure. No topics were declared off limit. Studies included entitlements levels, civil service cutbacks, tax expenditures, and social security, housing market and health care reforms. After 6 months, just before the new elections, it resulted in a “menu” of spending cuts from which a new coalition government could choose (a) its total amount of “fiscal consolidation” and (b) the expenditure and tax composition of that consolidation, according to the political priorities of the winning coalition. The release of the review on the first of April, 2010, was timed to allow political parties to incorporate the findings of the review in their programs for the election in June the same year. Some parties campaigned on how much they would cut back the welfare state, other on how little.

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