A new IMF FAD Technical Guidance Note on Budget Classification prepared by Davina Jacobs, Jean-Luc Helis and Dominique Bouley of the IMF Fiscal Affairs Department provide solutions for a number of crucial questions coming up in countries’ public financial management reform agendas when they want to modernize their budget classification system, e.g.:
- why is a budget classification system important?
- what constitutes a sound system of budget classification?
- what is the relationship between the budget classification and the chart of accounts (COA)?
- what could be the role of the Government Finance Statistics Manual (GFSM 2001) in developing a new budget classification;
- what are the preconditions for successful implementation of a new budget classification system; and
- what are likely to be the critical steps and milestones in the reform of budget classification?
This note draws on the extensive experience gained from FAD technical assistance missions to various countries in past few years. Click here to
Download technical_guidance_note_4_budget_classification.pdf
The main reasons a budget classification is important are that:
- The budget classification is one of the fundamental building blocks of a sound budget management system, as it determines the manner in which budgetary data is classified and presented, and as such has a direct impact on the transparency and coherence of the budget as a primary policy instrument of government. In countries where the budget nomenclature is weak, upgrading the budget classification system should itself be considered a basic step—indeed a pre-condition—of embarking on other reforms of public financial management (PFM).
- A budget classification system provides a normative framework for both policy decision-making and accountability. Classifying expenditures and revenues correctly is important for: (1) policy formulation and performance analysis; (2) allocating resources efficiently among sectors; (3) ensuring compliance with the budgetary resources approved by the legislature; and (4) day-to-day administration of the budget. A sound budget classification scheme should also make it possible to determine the budget lines affected by poverty-reducing expenditure.
To reach these objectives, a sound system of budget classification should at a minimum comprise:
- a classification of revenues; and
- an administrative, economic, and functional classifications of expenditures.
Many countries use additional classification schemes to enhance transparency and accountability, and to better manage their finances (such as classification by geographical location, beneficiaries of government transfers and subsidies, source of financing, and program classification). However, it is necessary to be careful in expanding the different types of classifications to be used. Such an expansion could possibly lead to unreliable information, due to the complexity of the budget nomenclature. It also requires more capacity and resources to generate the required information and maintain the system.
In any case, the main critical features of a sound system of budget classification is 'mutual exclusivity.' Every line item in a well-designed budget classification system must be mutually exclusive of all other line items. That is, a functional classification includes only functions of expenditure, not a mixture of functional, program, and economic classification. Each type of classification is unique, even as it relates to other types. (For example, under a functional classification, one would still know the administrative allocation and/or economic classification.) The mutual exclusivity of each type of classification is an essential requirement if they are to provide useful and reliable information.
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.
