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June 10, 2019

Life at the Sharp End – Controlling Public Spending

Odi
Posted by Bryn Welham, Sierd Hadley and Mark Miller[1]

A former chair of the US Federal Reserve once wrote in relation to setting interest rates that it is the job of central bankers to take away the punch bowl just as the party gets going.  Budget officers – staff in finance ministries who supervise the in-year spending of line ministries – also have a similarly thankless task: making sure that just the right amount of punch is available as promised, but no more and no less.  A recent publication by the ODI looks at the critically important role of budget officers in the UK, the Netherlands, Malaysia, Slovenia, and Myanmar.

The work of a budget officer

Budget officers – often located in the finance ministry – are the staff who answer the phone when a spending ministry wants something: whether that be clarification on guidance, permission to spend on a sensitive area, or more money.  This area is relatively under-explored.  There is a wealth of literature on what governments should be doing on expenditure policy; how best to construct a budget; how much spending can be afforded within a country’s fiscal framework; and how spending should be reported and accounted for.  The role of the budget officer tends to fall between these cracks.  Indeed, it is often assumed that once a budget is agreed, it will simply ‘happen’. 

This is rarely the case in practice.  Even the best laid plans go off-track.  What does a budget officer in one of these five countries do when a line ministry calls and asks for an ‘adjustment’ of their budget?

Dealing with budget uncertainty in different ways

The response will vary substantially depending on the nature of the supervisory role.  This is often expressed as a ‘macro/micro’ divide in spending control. In general, more advanced countries focus on ‘macro’ controls, low-income developing countries on ‘micro’ controls.   

Countries with ‘macro’ controls provide substantial autonomy to line ministries to plan, budget and manage their own affairs – as long as they abide by their spending limits and follow mandated expenditure rules.  This is clearly shown in the Netherlands and the UK, where approved ministry budgets may be only a handful of high-level numbers with no line item detail.  Before asking for more, ministries would be expected to have exhausted all possible means of adjusting and if necessary reprioritizing their spending allocations within the limits set by the budget office.  The challenge of a budget officer in these countries is less about ‘controlling spending’ but more about ‘solving budget problems’ within agreed totals. 

At the other extreme, budget officers operating in a ‘micro’ spending system often play a significant role in actively controlling what ministries do.  A large part of the Myanmar budget officers’ work involves approving individual transactions, releasing cash, and checking that expenditure data is correctly submitted.  This puts an emphasis on the ‘control’ aspect of spending supervision.  Slovenia and Malaysia lie somewhere between the two ends of the spectrum.

Two interesting commonalities emerged from the five countries.  First, budget officers almost never need to undertake complex analytical work themselves.  Instead, they typically undertake basic checks to ensure that a ministry’s expenditure outturns for the previous period and its forecasts for the coming period are in line with expectations.  Any discrepancy would inevitably involve picking up the phone and asking the ministry to provide the details.  The role of the budget officer would then be to check, challenge and review this information.  Second, whereas conventional wisdom might suggest constant conflict, the relationship between ministries and their budget officer was reported as usually consensual and productive.  Budget supervision was less dog-eat-dog and more about generating trust through repeated interaction according to mutually understood rules.

Supporting developing country budget officers

What does this mean for developing countries – and their external supporters – who are looking to improve spending supervision?

First, the nature of the budget officer role varies.  The formal and informal rules of the spending framework, the political and administrative tradition of the country, and the capability of budget officers will heavily determine what is possible.  There is no single model of ‘good’ practice given the diversity of spending regimes and the different roles that budget officers must play. Developing countries should avoid moving too fast to a system of ‘macro’ control when there are large challenges in executing the budget as planned and internal controls are weak.

Second, it is important to ask ‘what are you trying to control’?  Among the countries surveyed, budget officers are being asked to control very different things.  Some focus on approving individual foreign currency transactions; some focus on the impact of higher inflation on billions of dollars of annual welfare payments; while others are verifying that ministry spending plans can absorb the impact of unexpected in-year economic or fiscal shocks.  Support to budget officers needs to start with an understanding of what they are actually doing rather than assumption of what they should be doing.

Third, basic but robust spending information is crucial.  Those who wish to support budget officers should invest in timely and quality information systems that can clearly show the headline story of how actual spending is tracking against the budget allocations.  Despite significant investment in financial management information systems, some countries still struggle to pull this kind of information together.  Access to basic robust aggregate spending information emerged as more important to the supervisory work of budget officers than developing complex analytical skills.

Life at the sharp end can be a thankless task but it is certainly one of the most important in a finance ministry.

 

[1] Overseas Development Institute, London.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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