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FreeBalance ® Public Financial Management Good Practices
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Public Financial Management
Good Practices

PFM Domain

BUDGET FORMULATION

Good Practice

PFM GOOD PRACTICES

Applicable

ALL GOVERNMENTS

PFM Domain B UDGET F ORMULATION Good Practice PFM G OOD P RACTICES Applicable A LL
how is the quality of government budget management evaluated? The Public Expenditure and Financial Accountability

how is the quality of government budget management evaluated?

The Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework highlights the four objectives for budget formulation:

Credibility of the budget The budget is realistic and is implemented as intended

Comprehensiveness and transparency The budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public.

Policy-based budgeting The budget is prepared with due regard to government policy.

Predictability and control in budget execution The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds.

of control and stewardship in the use of public funds. what is the budget formulation process?

what is the budget formulation process?

Budget formulation differs among countries and levels of government. The budget formulation process typically starts economic analysis and prediction for government revenue. The process follows sets of budget rules during a budget calendar that includes a broad set of financial information.

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how does budget planning fit into PFM processes? Government budget planning begins during the fiscal
how does budget planning fit into PFM processes? Government budget planning begins during the fiscal

how does budget planning fit into PFM processes?

Government budget planning begins during the fiscal year and leverages historical and current revenue and expenditure information. Budget planning processes align, in the World Bank Treasury Reference Model, with economic forecasting, debt management and treasury systems. Liquidity and cash management is critical to understanding the expected revenue and expenditure variations in government.

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what budget categories are used by governments? Budget planning categories differ among countries. The processes

what budget categories are used by governments?

Budget planning categories differ among countries. The processes used can be different depending on the categories. Typical categories include:

 

Special budgets for procurement (procurement planning) and Public investment planning (PIP), particularly national infrastructure projects

Separate planning for debt and aid that informs the budget planning process

Human resources and payroll planning can be a special categories because salaries make up the greatest portion of the expenditure budget

how do budget classifications enable budget formulation across categories?

Government budget formulation software can adapt to the planning workflow and categories used by governments through budget classifications. Government budget classifications, often called Charts of Accounts (COAs), represent the underlying meta data for Public Financial Management (PFM).

The COA structure can be used within the budget formulation software to map:

Users and roles to elements in the COA to ensure that planners are only able to see the correct sub-section of data

Workflow processes and that the budget formulation process follows government standards for different budget preparation categories

Revenue sources such as donors (aid), debt and government revenue can be shown in “fund” source segment or included in the accounting codes

Capital, recurrent and salary categories are typically modeled in the accounting (or object) codes

Program segment and can be combined with object codes can be used to model public investment projects

Organization or location segment can be used to control decentralized budgets across line ministries, government owned enterprises and sub-national governments

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what are the major trends in government budget preparation?  Analysis: government budgeting is transitioning
what are the major trends in government budget preparation?  Analysis: government budgeting is transitioning

what are the major trends in government budget preparation?

Analysis: government budgeting is transitioning from a ceremony where more time was spent creating a budget than analyzing it to more rigorous thinking to rethink action plans including techniques such as macro-fiscal frameworks, zero-based budgeting and spending reviews

Decentralization: enabling bottom-up budget proposals from those who are closer to citizens

Multiple year: use of multiple-year planning to develop more credible budgets

Performance: Budget formulation and execution was traditionally focused primarily on resource allocation and input control is maturing towards a focus on resultsor government performance.

Participation: use of participatory budgeting outreach to citizens and civil society, particularly at the local and regional levels of government

Policy: techniques that align government policy and objectives to budget categories

Transparency: use of open data and budget reports throughout the budget cycle to be more responsive to citizen needs by encouraging advocacy

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how does budgeting differ among developing and developed country governments?  Budget performance : Government

how does budgeting differ among developing and developed country governments?

what is fiscal sustainability?

Governments need to develop credible budgets to ensure that long-term spending is sustainable. Credible budget planning takes into account the four dimensions of fiscal sustainability:

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how are credible budgets achieved?  Policy : linking policy and resources including the presentation
how are credible budgets achieved?  Policy : linking policy and resources including the presentation

how are credible budgets achieved?

Policy: linking policy and resources including the presentation of budget priorities to align budgets with government objectives

Economic analysis: linking macroeconomic framework with revenue forecasts to provide realistic projections of tax and other revenue sources and reducing the need for additional debt

Risk: identification and determining risk and risk mitigation strategies to identify potential deviations from the forecast of the key economic assumptions underlying the budget

Trend analysis: analyzing past outturns to predict future budget needs to ensure that programs are neither overfunded or underfunded

Multiple year perspective: planning for multiple years identifies medium term costs for programs

Comprehensive financial budgets: articulating all details for capital and recurrent expenditures, information on budget financing, debt and the government’s financial position to ensure that supplemental budgets are not necessary under regular conditions and all activities aligned to government priorities in a unified budget

Controls: linking of the legal budget allotments and appropriations with budget execution controls in the public finance management system

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what are Medium Term Expenditure Frameworks (MTEF)? MTEFs represent rolling plans, normally over three to

what are Medium Term Expenditure Frameworks (MTEF)?

MTEFs differ among countries depending on the fiscal context, capacity and tradition. MTEF is an aggregate term that can include:

Medium Term Macroeconomic Frameworks (MTMF) to provide a multiple year view on expected and relevant economic activity that can drive

Medium Term Fiscal Frameworks (MTFF) to predict the government revenue and expenditure envelop to inform

Medium Term Budget Frameworks (MTBF) that provide the basic structure of expenditures based on government priorities that can include

Medium Term Sectoral Strategies (MTSS) of specific programs designed to improve economic sectors whose performance can be managed by

Medium Term Performance Frameworks (MTPF) that align budgets with desired performance outputs and outcomes

Performance Frameworks (MTPF) that align budgets with desired performance outputs and outcomes FreeBalance ® 9
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why are MTEFs challenging? Traditional approaches to budget reform – multiyear budgeting, output based and

why are MTEFs challenging?

Accounting: poor accounting processes and bad execution data can lead to poor plans

Off-budget: donor funding and government-owned enterprise budgets can be “off-budget” where governments are unaware of the full revenue and expenditure footprint for effective planning

Political will: unwillingness to change policy to reflect macroeconomic analysis or performance measures

Fiscal sustainability: focus on the medium-terms makes the process not attuned to long-term issues

makes the process not attuned to long-term issues Component model for budget formulation automation software.

Component model for budget formulation automation software.

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how does government budget planning software meet unique requirements? Effective government budget planning software

how does government budget planning software meet unique requirements?

Effective government budget planning software can be configured to meet unique requirements. There are numerous budget management software applications available but, in practice the World Bank and aid agencies have funded the introduction of private sector financial systems, which do not include core budgeting functionalities.

Government budget formulation software must support:

 

Financial functions including the ability to develop budgets in any combined top- down/bottom-up process. Effective budget preparation software can take previous data and adjust by formula (such as reduce by 5% all revenue categories or increase the cost of oil by 10%). The software enables linking budget justification directly with the budget classifications. The budget passed by the legislature, often called the “organic budget law” or “the vote” is automatically integrated with the budget execution/accounting system to ensure proper budget controls.

Content. Budget formulation software needs to use data from other sources including importing spreadsheet data directly to the financial budget plan, attaching narrative to budget requests and referencing documents.

Workflow: Flexible workflow functions are necessary to follow the government budget calendar and address budget categories. Multiple budget versions are required.

Performance: Governments with higher capacity can integrate output and outcome data to the COA and develop scorecards.

what are the inputs for government budget software?

Inputs in the budget formulation process include:

Financial transactions from previous years (and the active fiscal year) including the tracking of multi-year commitments that roll-over to subsequent years

 

Budget variances from previous budgets including changes that occurred to the budget during operation such as budget transfers and virements to provide trend information

MTEF year 2 and 3 budget estimates to provide a baseline for the working budget

Macroeconomic data that predicts government revenue, identifies risks, and creates baseline budget assumptions such as currency exchange rates

Cost drivers or established estimates for products and services so that budgets use credible assumptions and align with scenario planning such as analyzing the impact of changing energy costs and currency fluctuations

Documents like budget justification, policy information and reports

Integration with underlying systems and spreadsheets

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what are the outputs for government budget software? why are budget controls a critical output

what are the outputs for government budget software?

why are budget controls a critical output of budget formulation software for government?

Outputs in the budget formulation process include:

Budget controls to be integrated with the treasury system components of the Government Resource Planning (GRP) software for commitment accounting including support for warrants, supplemental budgets, continuing resolutions

Scenario plans that enables government to quickly adjust budgets should risk factors come to fruition during the fiscal year

Documents generated from the system such as budget books

Budget controls are necessary because, in many governments, practices do not match rules. Institutional or governance factors may lead to gaps between formal PFM regulations or procedures and actual practices (e.g., a technically sound internal control is not enforced). Therefore automated controls with the financial management software provide internal controls to reduce overspending and ensure compliance with government accounting regulations.

Controls are modeled in budget formulation software and automatically integrated with budget execution and commitment accounting functions within the GRP. These controls should be adapted to meet legal and fiscal discipline requirements.

within the GRP. These controls should be adapted to meet legal and fiscal discipline requirements. FreeBalance
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  Flexible controls in GRP software are critical for governments to match regulations and enable
 

Flexible controls in GRP software are critical for governments to match regulations and enable modernization:

why are flexible controls required?

Budget laws address high-level budget items in the COA. Therefore, strict control at details or “line item budgeting” is not material to the law

Capacity is critical when determining decentralization and needs to be flexible to support more discretion in spending and budget transfers to improve results

Allotments, appropriations, warrants and cash controls differ among countries based on legal frameworks, traditions and liquidity

Treasury departments provide more value to governments by managing liquidity and adjusting allotments based on surplus and deficit forecasts than approving commitments and transferring amounts among budget line items

what budget control functions are necessary in GRP software?

Multiple Controls: numerous controls can operate simultaneously such as cash warrants and annual appropriations

Periods: different controls can be active for different time periods, typically from a month to a year

 

Aggregate: controls can operate from detailed line item to high level and where the total of detailed line items could equal or not equal the total for the high level controls

Tolerances: discretion enabled for some controls such as the ability to overspend some monthly controls by a fixed amount or a percentage as long as aggregate controls are not overspent

Commitment Controls: where tolerances can be applied to commitments and obligations

Segregation of Duties: workflow controls to ensure proper separation of duties for spending approvals, payment approvals and budget transfer approvals that meet government fiscal regulations

Organization Configurations: support of different control schemes for different government organizations reflecting legal status and organizational capacity

why not use spreadsheets or simple web applications for budget preparation?

Spreadsheet and simple web applications do not provide sufficient control, error management and integration for budget planning:

Version management and approval: versions of budgets and approvals for budgets require more sophisticated software that uses workflow control

Controls: budget formulation software is required to create controls, manage segregation of duties integrate with commitment accounting

 

Errors: validation on data input is not sophisticated in spreadsheet and simple web applications resulting in mistakes

Historical information: integrated budget preparation and budget execution software provides accurate analytical information for budget planners

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what are good practices for budget formulation? Conclusions 1. Budgets are the legal embodiment of
what are good practices for budget formulation? Conclusions 1. Budgets are the legal embodiment of

what are good practices for budget formulation?

Conclusions

1. Budgets are the legal embodiment of government policy and is critical in public financial management

2. Budget formulation practices should match country conditions and human capacity

3. The Chart of Accounts is critical for effective budget processes

4. Budget formulation software can help to create more credible budgets that

provide fiscal sustainability and internal controls

There are very few “best practices” but many “good practices” in Public Financial Management.

FreeBalance, a global provider of Government Resource Planning (GRP) software and services shares good practices from experience with developed and developing country governments around the world.

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