Designing and Implementing an Administrative Classification

Posted by Jason Harris

 
A neglected area of PFM reform is the administrative (or organizational) classification, also known as the administrative segment of the budget classification. There appears to be no publicly-available documentation of comprehensive reform of an administrative classification. This despite the apparently unanimous view of PFM experts that a sound administrative classification is fundamental to a sound budget classification and a sound budget classification is fundamental to a sound PFM system.[1] The article on the reform of Tajikistan’s administrative classification posted earlier this week on this PFM Blog by John Zohrab, Robert Brudzynski, and George Gridilian gives a good illustration of why having a sound administrative classification is important and of the challenges met in introducing one.

A possible reason for the lack of publicly-available documentation of comprehensive reform of an administrative classification is that most countries have relatively sound administrative classifications.[2] According to this view, the work involved in reforming an administrative classification is so obvious and straightforward that it should be part of the day-to-day responsibilities of ministries of finance and should not warrant separate reform status.

Budget Classification Design and Implementation: Tajikistan’s Administrative Segment

 
Tajikistan has embarked on a major reform of its budget classification. The main element of this reform is the inclusion of an adminsitrative segment in the budget classification. The attached article (Download TAJIKISTAN ADMINISTRATIVE CLASSIFICATION ) by John Zohrab, Robert Brudzynski, and George Gridilian provides a detailed description of the reason for this reform and of its key characteritics. 

The conclusions of the article are as follows:

"Although there is further work to be done to complete the implementation of the new administrative segment of Tajikistan’s budget classification, some preliminary conclusions can be drawn.

Conformity with Fiscal Transparency Code and Manual

The new administrative segment is internationally accepted in the sense that:

• It conforms almost completely  with the principles set out in the relevant IMF technical manual and in specific technical assistance reports; and
• Other donors and international experts funded by them working on PFM issues have explicitly or implicitly accepted it.

It is standardized in the sense that, subject to some clarification, its structure conforms consistently to its design principles. It has a uniform coding structure.

A Common Language for a Sound Budget Classification System

Posted by Jean-Luc Helis

 
From its presentation to the parliament to its reporting on television or in newspapers to its execution by government institutions, the language of the budget should be consistently understood. When citizens become interested in the fiscal affairs of their country, they want to see financial information that is transparent and that they can understand. Moreover, there are occasions for exchanging information and reporting fiscal status to agencies outside the country. Consequently the financial language used within the country must be such as to directly communicate or, at least, be able to be easily “translated” into the language used for international fiscal communication.

Un Langage commun pour un système cohérent de classification budgétaire

Posté par Jean-Luc Helis

 
De sa présentation au Parlement à sa communication à la télévision ou dans les journaux en passant par son exécution par les organismes publics, le budget devrait être formulé dans un langage qui soit compris par tous. Lorsque les citoyens s'intéressent aux affaires budgétaires de leur pays, ils souhaitent en effet avoir une information financière qui soit transparente et qu'ils puissent comprendre. Par ailleurs, il arrive que l'on échange des informations budgétaires avec des organismes et des institutions en dehors du pays. Ces informations devraient pouvoir être communiqués directement ou, du moins, être «traduits» facilement pour être comprises au niveau international.

Gender Budgeting and Equity Issues in Fiscal Federalism Arrangements: Some Lessons from India

Posted by Davina F. Jacobs

Despite the growing recognition of gender factors in budget planning and execution, there have been relatively few attempts to translate them to the intergovernmental sphere. An interesting working paper by Lekha Chakraborty (attached below), drawing on her own analysis and that of an earlier study of the Indian National Institute of Public Finance and Policy (NIPFP), discusses this up to now often neglected area. The question discussed is basically can gender issues be incorporated into financial devolution approaches. She discusses these issues in the context of the policy agenda of the Thirteenth (and latest constituted) Finance Commission of India.

India has and continues to be a pioneer in institutionalizing gender budgeting within its Ministry of Finance. The process of gender budgeting in India gathered momentum with a NIPFP study in 2003. To provide the analytical framework for gender budgeting, this study constructed an econometric model to link spending on public education and health to the Gender Development Index (GDI), showing the positive effect of such spending on this indicator of gender inequality—see the development of the GDI as set out in Box 1, page 8, of Chakraborty’s paper. This approach did not refute the widely explored link between economic growth and (gender-sensitive) human development; rather it confirms this link through higher public expenditure, particularly through healthcare and education.

Compiling Government Finance Statistics (GFS) -- an IMF Fact Sheet

Posted by Sagé de Clerck, IMF Statistics Department

The IMF has prepared a Fact Sheet describing what is involved in compiling government finance statistics (GFS), and how these data relate to the fiscal cycle, source data, and accounting systems. GFS are key to economic analysis and also a major input for national accounts statistics. GFS facilitate consistency with other macroeconomic datasets and enhance international comparability.

Data users are often faced with a myriad of fiscal data: from the budget process, from various specialized budget reports, or from audit reports, and users can easily get lost in the data labyrinth. The Fact Sheet will help users of fiscal data better understand these differences. Compilers of GFS will also find it helpful to understand differences among these various datasets and how they relate to each other. Where necessary, GFS compilers should publish reconciliations of the data to instill confidence in the reliability of the data.

Frequently asked questions from users suggest a need to clarify the different types of data and their applications. For example, “central government budget data” are used in policy decisions at a national level while “budget execution reports” are useful to monitor progress with implementing these decisions. In contrast, to capture governments' involvement in the production and growth of the economy, as measured in the national accounts, a more comprehensive measure covering the "general government" is required.

Almost All You Ever Need (or Want) to Know About Budget Classification

Posted by Davina Jacobs

Why should budget and treasury officials see the “budget classification” as one of their most important tools? What exactly is the budget classification? A new IMF Technical Note and Manual on Budget Classification (TNM/09/06) (attached below) prepared by Davina Jacobs, Jean-Luc Hélis and Dominique Bouley of the Fiscal Affairs Department addresses the following main issues:

• Why is a budget classification system important?
• What are the main features of a sound budget classification system?
• How should a budget classification system be structured?
• What is the relationship between budget classification and the chart of accounts (COA)?
• What are the pre-conditions for successful implementation of a new budget classification system?
• What are likely to be the critical steps and milestones in the reform of a budget classification?

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.

Incorporating Budget Programs in the Government Accounting System - The case of Namibia

Posted by Dimitar Radev [1].

Many countries do not fully benefit from all the possibilities of program budgeting in terms of budget credibility, expenditure control and public resource allocations. One common reason is that while they prepare the budget based on programs, they do not organize their accounting and expenditure control systems on a program basis. There is little value for these countries in further developing program budgeting if spending cannot be accounted for, reported, and controlled according to programs.

Namibia presents a good example of how such an issue can be successfully addressed.

Integrating Cross-cutting Themes into the Budget Process

In his essay on Objectivity in Social Science, Max Weber pointed out that all theoretical constructs do violence to reality.  The world of budgeting seems to offer no end of support evidence to support this simple but profound observation about the dangers of making overly fine distinctions.  The annuality of the budget cycle in most countries ignores the fact that not all expenditure can be sliced into discrete 12 month chunks - giving rise to complementary accounting periods and carryover arrangements to address the resulting behavioural distortions. Golden Rules allow governments to borrow to fund investment but not current expenditure despite the reality that school teachers are as important as school buildings to the long-term health of nations economic and finances.

And so it is with national systems of budget classification, most of which continue to rely on the line ministry as the fundamental unit of expenditure allocation and control despite the fact that many of societies' problems cannot be neatly contained within ministerial silos.  How do these systems cope the complexity of "real world" problems and the need for cooperation between line ministries in addressing them?  This posting looks at three recent attempts to address inter-ministerial policy challenges through the budgeting process.

State Budget Control at your Fingertips--Financial Management Information Systems Have Modified Public Finance Management in the State of Sao Paulo - Brazil

Posted by Mario Pessoa

The Brazilian State of Sao Paulo has implemented a set of financial information systems in the 1990s and 2000s to enhance transparency and reliability of fiscal data. Two of the most relevant systems are: SIAFEM and SIGEO.

The first one is a typical integrated financial management information system (IFMIS) that encompasses all fiscal transactions from the budget preparation and execution to the preparation of the financial statements. SIAFEM is used by more than 5,000 civil servants of 800 entities. All budgetary transactions have to be done using the system. Additionally, SIAFEM is linked to a treasury single account. The general ledger is the core of the system that uses the same economic classification for both budget and accounting purposes. All reports regarding the fiscal responsibility law and the financial statements are generated by the system.

Budget Reform in Greece – A Practical, Phased Approach

Posted by Dick Emery

The current government of Greece came into office in 2004, inheriting a budgeting and fiscal reporting system that were among the less reliable, less transparent and less effective in Europe. Greece had over the years received criticism on this by the EU, Eurostat, the IMF and the OECD. The new government accepted the challenge of improving its budget management and reporting system and launched several reforms. During 2005/2006, the IMF reviewed the Greek budget system and developed recommendations for a broad agenda of reform. The IMF prepared a report on transparency issues and one on budget management reform. These reports presented both the “before” and the “after” situation, capturing the challenges facing Greece as it moves toward a modern budget system, as well as a roadmap for implementation.

Since the IMF reports, the government has established two offices to pursue the reform agenda in accounting and budgeting. As a first step, it developed a prototype program budget which was included in the Budget for 2008. The Greek government invited the OECD in 2007 to undertake a peer review of its budget system which was presented to the OECD Working Party of Senior Budget Officials (SBO) this June. Working with the OECD, the government has developed an action plan for reform to serve as its road map for its budget reform efforts. This article reviews the reform agenda and the development of the action plan.   

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

International Journal on Governmental Financial Management Available

Posted by Bill Dorotinsky

The latest issue of the International Journal on Governmental Financial Management (Volume VIII, No. 1, 2008) --- formerly known as the Public Funds Digest --- is now available. The Journal, sponsored by the International Consortium on Government Financial Management (ICGFM), is available for download in PDF format from the ICGFM website link above.

This issue has some interesting articles, covering a range of topics from anti-corruption to gap analysis on auditing standards. Specific articles include

• diagnostic tools for auditing and accounting, enabling gap analysis between national and international standards
• the Europe and Central Asian peer-assisted learning initiative in public expenditure management
• measuring and improving supreme audit institutions in developing countries
• two articles related to accrual accounting, one of which explains the 'German' cameral accounting model as an alternative to accrual accounting
• as well as articles on fighting corruption in Nigeria, Nigerian pension reform, and bureaucracy in Bangladesh.

A good collection of articles for public finance aficionados.

Any Problems with Programs?

Posted by François Michel

“Program budgeting as a platform for performance-based budgeting has been approached entirely from the standpoint of strategic planning; however, programs interact with a host of other “structures,” including the structures of control associated with appropriation bills, accounting systems, and organizational structures.” This is the beginning of the conclusion of the illuminating article that Carolyn Bourdeaux, from Georgia State University, dedicates to the State of Georgia’s effort to develop a program-based budget (Public Budgeting and Finance, Summer 2008).

Ms. Bourdeaux leads us to adopt successively the different perspectives of the legislature, agencies, and the executive office of the Governor on how programs should be structured. In the program design process, each body strives to maximize its powers in that principal/agent chain that goes from the legislature (principal), the executive (agent of the legislature, but principal of agencies), to agencies (agents). Ms. Bourdeaux vividly shows that up to the point where they acknowledge that too strict controls discourage entrepreneurialism and may be challenging to manage (e.g. a large budget bill), principals favor disaggregated program structures (or, more generally, budget classifications); in contrast, agents want large, fungible programs. Logically, the analysis then turns to the State’s budget control framework.

A Hitchiker's Guide to Budget Classification....

... or how to recognize a budget classification from quite a long ways away.

Posted by Jean-Luc Helis and Davina Jacobs

Why should countries care about budget classification? Who cares about budget classification? These questions appear at first glance to be of concern only to economists doing research on public finance and budgets or to officials in the ministry of finance in a country. However, everyone-from members of parliament or congress and yes, also the proverbial "man in the street", should be interested in budget classification. Properly defined revenues and expenditures give us information on the intimate workings of the budget and government. Do you want to now how much was spent last year on education? Or health? How much company income taxes were collected by the government? To get the answers to these questions, the budget has to be appropriately classified.

Extrabudgetary Funds -- Removing the 'Extra' and Minimizing the Risks

Posted by Bill Dorotinsky

Extra-budgetary funds (EBFs) are a large and persistent issue in developed and developing countries. An October 26, 2007, blog post highlighted the magnitude of such funds, offered a taxonomy of EBFs, and suggested some questions for evaluating them. This post offers a similar perspective, drawing on a draft World Bank policy note prepared for the Polish authorities in 2001.

Public finance professionals generally oppose creation or continuation of 'extra-budgetary funds' because they undermine comprehensive budgeting, fragment financial reporting and cash management, and frequently there are transparency, oversight, and accountability concerns for the EBF's directly. But there are principles that, if followed, can minimize the risks from EBF’s, effectively removing their ‘extra-budgetary’ character.

Secrets of Public Accounting in Brazil are Revealed!!!

(unfortunately only in Portuguese)

Posted by Mario Pessoa

If you are interested in understanding how the public accounting system in Brazil works and what are the concepts behind the government financial information system (SIAFI), you have a good guide through the book Public Accounting in Brazilian Central Government (“Contabilidade Publica no Governo Federal” in Portuguese). (Click the link to access the book and the spreadsheet exercises.)

A primer on Public-Private Partnerships

Posted by Francois Michel

If experts still argue about the proper definition of Public-Private Partnerships (PPPs), their microeconomic foundations, or their possible role as an antidote to the worldwide downturn in infrastructure investment, there is one fact that garners universal agreement: PPPs are one of the most popular reforms of the last decade in public financial management. A growing number of countries show interest in following the most advanced administrations on the topic, including Australia (Partnership Victoria) and the U.K. (Private Finance Initiative). Developing countries, in particular, try to develop PPPs to address economic infrastructure bottlenecks. However, the trend is universal: a recent study of PPPs in Europe found that between 1990 and 2005, more than a thousand partnerships had been signed in the European Union alone, representing an investment of almost 200 billion euros.

These developments have triggered intense (and remarkably fruitful) academic research. Thus, although much remains to be done, the major opportunities and challenges posed by PPPs, especially the fiscal risks induced by the absence of an effective accounting framework and the crucial notion of risk sharing, were identified with enough precision by the end of 2003 to allow the IMF to issue a series of reference publications on the subject.

From Line-item to Program Budgeting - Opening the 'black-box' of spending

Posted by Bill Dorotinsky

A perennial question of annual public budgeting for Ministries of Finance and legislatures, and the general public, is "What are we getting for the money?" It is the proverbial "black box" of annual spending, where funds are allocated by traditional line-item budgets to agencies, but there is no sense of what the money actually achieves. While under line-item budgeting, budget offices know what inputs are being purchased, there is no clear indication of what activities, purposes, or objectives -- or ultimately outputs or outcomes -- are being purchased, or how government policies translate into spending. A common first step for many countries towards opening the black box of spending is to adopt a program classification of spending, and introduce program budgeting. A program classification is often thought of as a first step in introducing a performance orientation into the budget process.

While sounding like a very dry, technical exercise, the reality of successful introduction of program budgeting is more complex, involving elements of change management across government. Various governments across the globe have been introducing program budgets over many decades, including within the past decade in Russia, Brazil, and more recently, the Republic of Korea (RoK). A recent book by the Korean Institute of Public Finance and the World Bank, From Line-item to Program Budgeting (John Kim, Editor; Seoul, 2007), summarizes some key lessons from the global experience, and offers practical advice to countries embarking on this journey.

New Danish Accrual Budgeting System

Posted by Marc Robinson

Denmark has this year introduced an accrual budgeting system, and in doing so has joined the ranks of a very small group of countries with such systems (including the UK, Australia, and New Zealand). The core feature of the new Danish system is that government agencies receive a budget appropriation for the expenses – i.e. operating costs as measured using accrual accounting – they will incur in the financial year. No longer do they receive a budget limiting the expenditure (payments) that they may make.

Transitioning to accrual -- IFAC resource

Posted by Bill Dorotinsky

As a follow-up to our October 15 blog "Transition to Accrual Accounting," a reader suggested we also highlight the International Federation of Accountants(IFAC) International Public Sector Accounting Standards (IPSAS) research paper Study 14 "Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities (second edition)" (December 2003). This authoritative, 268-page guide covers issues of managing the process of change, skills assessment and training, financial reporting issues, as well as coverage of specific topics such as treatment of cash and intangible assets. This guide is available for free electronic download at the IFAC web bookstore link above.

Program and Performance Budgeting Enthusiasm in India -- IMF Training Course

  An IMF training course in Pune for senior civil servants from India and around the region went into the varied experiences with this “second generation” budget reform. Making program and performance budgeting (PPB) work in the context of capacity constraints and politicians familiar only with traditional line item budgeting led to lively discussions with the 29 participants from India’s central and state governments, and invited representatives of other countries' ministries of finance.