New Danish Accrual Budgeting System

Marc Robinsonp

November 16, 2007

Posted by Marc Robinsonp>

Denmark 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.

Accrual budgeting systems differ considerably from country to country in how they handle capital expenditure. The Danish approach to this is unique. There is no annual budget appropriation for capital expenditure. Instead, agencies borrow (from the finance ministry) to finance all capital expenditure, within the limits of a borrowing limit set for their agency. Agencies must then pay interest on the loan, and must repay the principle via  depreciation charges on their expenses appropriation. The objective of this approach, which has similarities to “capital charging”, is to make agencies conscious of the opportunity cost of the funds tied up in capital assets. The Danish approach differs in this respect from both Australia and the UK, which continue to set capital expenditure limits for each agency in broadly the same manner as under a cash budgeting system.

The introduction of this new budgeting systems follows many years of work, firstly in moving to full accrual accounting, and then in developing and piloting models of how accruals could be put to use in the budgeting system.

Staff members from the Fiscal Affairs Department briefly visited Copenhagen in September to discuss the new system with Danish Ministry of Finance staff, as part of ongoing Fund research on accrual budgeting.

The Danish Ministry of Finance has prepared a publicly-available handbook describing the new system, available here in Danish. For an unofficial English translation, click here to Download denmark_costbased_approp_system.DOC