Typologies and Their Viability

Country practices have so far been analyzed largely in terms of typologies based on legal and constitutional traditions, political traditions, government economic philosophies, economic conditions and relative stages of prosperity, industrial and commodity orientation, and administrative and political legacies. For example, the legal typology envisaged the analysis in terms of Roman-Germanic law or English law. Countries with a Roman-Germanic legal tradition (civil law countries) have well-developed, comprehensive legislation governing all aspects of expenditure management, whereas countries with an English legal tradition (common law countries) have relatively limited legislation or specification in law.

Similarly, distinctions have been sought in terms of political orientation or the role of the legislature or its corresponding entity (which in socialist regimes may be a people’s congress) in expenditure management. As will be illustrated below, the respective roles of the legislature and the executive in the macro and micro management of a country’s finances differ from one type of country to another. Typologies have also been envisaged in terms of the economic philosophies or the degree of market orientation found in a country’s economic management. Thus, countries were classified as mixed economies, market economies, and centrally planned economies, and as industrial countries and developing countries. In another variation, countries were also classified as rich and poor. Another approach has been to group countries in terms of their administrative and legal legacy and tradition. Each approach, however, provides only a glimpse into the intricacies of the systems, and a system may have some features of each of the preceding groups. Each offers a framework of analysis for specific purposes.

In describing the unique features of national practices, it should be noted that most are the result of colonial legacies, or of the constitutional and legal traditions of countries. Some colonies (for example, the United States) tried to distance themselves from their colonial traditions and developed their own systems, which in turn became models for other countries. In what follows, the approaches of administrative tradition, region, and market orientation are eclectically combined to examine the systems’ features.

Systems Groups

In terms of general traditions and administrative legacies, seven broad and illustrative types of systems can be identified.² The British type of budgetary system is primarily drawn from the United Kingdom, which has evolved its own approaches to financial management over a long time and is to be found in Commonwealth countries in Africa, Asia, and the Caribbean. Although the United Kingdom itself had few budgetary laws, the former colonies have a well-developed legal charter governing expenditure management. The system in these countries largely revolves around a consolidated fund, which is cash based, and into which all revenues and expenditures flow. Legislative approval is needed for almost all appropriations except for “charged expenditures,” which continue irrespective of the government in power. Revenue proposals are usually secret, and budgeting of resources follows parallel paths from expenditure budgets that converge only at the penultimate stage of formulation. Operations of spending agencies are subject to different degrees of control during the resource management stage.

The French system is also found in its former colonies (and variants are found in Latin American and Middle Eastern countries) and is distinguished by two features—a highly centralized financial control system and a central treasury. The control system has three operational levels: comptrollers attached to spending ministries and overseeing their transactions; a cadre of public accountants responsible for collecting and disbursing public moneys; and inspectors of finance representing a staff function and embodying the government’s financial conscience. The treasury functions as both a cashier and a banker. Although the number of funds that form the nucleus of the financial system were initially only a few, they tended to grow as a result of “debudgetization.” Special funds outside the purview of the budget are more numerous in some French-speaking African countries.

A third type may be identified as the European system. Included in this group are Germany, Italy, the Netherlands, Portugal, and the Nordic countries. Of these, the Dutch, Italian, and Portuguese systems are to be found in their former colonies, such as Indonesia and Somalia. The Dutch system shows greater adaptation to the practices of the commercial world, including double-entry bookkeeping, provision for depreciation, and, until recently, accrual-based accounting. The Italian system, until the changes in the mid-1970s when cash-based systems were introduced, had provisions for continuation of funds beyond the fiscal year and a parallel operation of the preceding and current years’ budgets controlled by the Comptroller General.

The U.S. system is largely centered around a general budget and several trust funds. A major feature of this system, as distinct from others (that also have a general fund and several trust funds), is the role of the legislature, which, in the end, prepares its own budget.

A somewhat more amorphous category is what may broadly be called the Latin American type. These countries, which initially adopted procedures that had a strong Spanish influence, developed their own hybrid systems as a by-product of their administrative experience.³ The main features of this system are extensive earmarking of funds, decentralization of government activities into autonomous agencies, reliance on modified accrual or noncash basis, and, in some countries, combined accounting and audit machinery. Within these broad types of systems, various financial management practices have evolved, with several common and dissimilar features.

Another distinct variety is the Far Eastern budgetary system, which appears to have been influenced, in terms of both organization and approaches to budgeting, by the United States and Japan. This system usually comprises a general account, several special accounts dealing with specialized or quasi-trading activities, and extrabudgetary accounts, of which the most important are the fiscal investment and loan programs, largely financed by borrowing. Practices of this type are found in the Republic of Korea, the Philippines, and Thailand.

The final group comprises those countries that now constitute centrally planned economies in transition, which include countries from Eastern Europe (excluding Yugoslavia, which has a unique system), Algeria (with an additional layer of central planning over the traditional French-type system), China, Myanmar (formerly Burma), and Viet Nam. The budgetary and accounting systems in these countries have significant common features, all of which have been heavily influenced by the central planning system that evolved in the former Soviet Union. The budgets follow the framework indicated in their development plans, and the coverage is frequently the same as that of the national government in that the budgets of provinces, municipalities, and communes are included in the national budget. Also, because of the preponderance of public enterprises, the transactions between government and enterprises (including taxes paid, depreciation resources transferred to the government budget, subsidies to enterprises, and investment transfers) dominate the budget. In recent years, this factor has also contributed to the emergence of a large variety of extrabudgetary accounts comprising enterprise and administrative activities, as a result of the change in the approach toward market-oriented management. The extent of dependence of the government on its central bank for managing its liquidity and maintaining its accounts is another feature of these economies.

Other Approaches

The economic conditions of a country strongly affect the country’s approach to expenditure management. The case of what started as “undeveloped,” later became “underdeveloped,” and later, “less developed” or “developing” countries is an illustration. These countries, which gained independence during a two-decade period after the Second World War, resorted to large-scale development planning, which then revealed the limitations of traditional budget systems. The traditional systems, which were primarily input oriented and with legal accountability as their primary objective, proved inadequate to meet the emerging needs of investment budgets. Investment appraisal was therefore introduced, and a number of countries also took the opportunity to bring in development budgets instead of traditional capital budgets. This change contributed over the years to a whole set of new practices as well as to a multitude of issues in relations between ministries of finance and ministries of planning and to the relative primacy of each in overall expenditure management. Years of planning experience contributed to a general acceptance of this element as a standard fixture of expenditure management, which, since the late 1970s and early 1980s, has taken the form of rolling expenditure planning and multiyear estimates that are now common in a number of industrial countries.

Another response to changing economic conditions relates to the impact of inflation. Countries with high rates of inflation had to devise new methods to examine the implications of monetary expansion for expenditure estimates. This, in turn, contributed to a more in-depth examination of the mix of labor and capital in the expenditure profiles of each agency, and to the development as well as the use of indices that would reflect the unique features of each spending agency. Inflation also caused the introduction of a system of cash limits to ensure that government expenditures were maintained at stipulated levels rather than increased by automatically applying various types of indices.

Events since the early 1970s, such as stagflation and the high level of budget deficits, demonstrated the linkages between the economy and the budget and their mutual impact on each other. These linkages contributed over the years to a greater integration of economic analysis with budget making so that the resource constraints could be explicitly recognized in the process. But such integration is more common in the industrial countries where National Income Accounts data are available on a regular basis. Although a growing trend toward integration is also discernible in developing countries, data limitations prevent full utilization of the potential benefits.

The fiscal stress—in terms of the structural imbalance between government receipts and expenditures as well as the short-term imbalances—has contributed to a common experience in several countries regardless of their economic philosophy and market orientation. Further, it also gave rise to several questions about the adequacy of fiscal instruments, which are examined more intensively in Chapter 3.

Current Practices

Generally, all countries have an annual budget system. In Bahrain, the budget is on a biennial basis. In Uruguay, a five-year budget is formulated in real terms and the annual budget is updated in nominal or monetary terms, using a complex vector of prices. In Sweden, since 1990, a triennial budget has been prepared within the overall framework of multiyear estimates. In most cases, funds lapse at the end of the fiscal year, but there are exceptions. In some countries, although annual budgets are formulated on a cash basis, the appropriations are on the basis of obligation authority (for example, the United States), which permits the agencies to spend amounts so long as such authority is valid. In some countries (for example, in the Middle East) appropriations for the development budget are made on an extended basis and funds are available until projects are completed.⁴ Sweden has a system of extended grants in which funds can be spent over a period of years. In a number of Central and South American countries, there is a complementary period that may well extend to six months beyond the fiscal year that permits funds to be spent during the extended period.⁵

Budget offices are usually located in ministries of finance. In a number of developing countries, the purview of these ministries has been limited to revenues and current budgets, whereas foreign aid and related external resources as well as outlays for development undertaken as part of a plan were the responsibilities of the ministries of planning. In some countries, budget offices are located in the office of the president (for example, the United States), in the office of the prime minister (Thailand), in the planning bureau (Korea), or are organized as a separate department (Australia), or as a separate ministry (France, until recently). The functions of the budget office are similar even though locations differ.

In some systems, the role of the legislature or its equivalent (such as a people’s congress in China and the former Soviet Union) is more pronounced than in others, as noted previously. The legislature may formulate its own budget, substantially modify the proposals of the executive, or may merely acquiesce in the proposals of the executive. The approach of the legislature may sometimes be restricted to the increments proposed in the budget, whereas in others it may be required to approve both continuing and new outlays. In some countries, the legislature imposes ceilings on the level of budget deficit (for example, the United States), whereas some others require a balanced budget (for example, Japan and Indonesia). Such a requirement is more like an accounting balance as receipts (which sometimes include proceeds from domestic and external borrowing) have to equal outlays. Legal limits on domestic borrowing exist in some countries (the Netherlands and the United States), and in others such borrowing cannot be undertaken without the approval of the legislature (Canada). These legal aspects cover, in some cases, the details of financial management, including restrictions on the creation of posts in government, reappropriation from one program to another or within a program (virement), and excess of expenditure over that approved by the legislature.

Budget coverage varies from one country to another. In general, however, there has been a gradual tendency to create autonomous funds, generally financed by earmarked revenues, to perform activities traditionally carried out as part of the budget. Such autonomous entities are numerous in Central and South America. A related aspect is the existence and operation of what are known as quasi-fiscal accounts operated by the central bank. Both these practices suggest that, in determining the goals of fiscal policy, the total transactions—within and outside the budget—should be taken into account.

Classifying the budget into a functional and program approach is now common. Two countries—Chile and New Zealand—follow a modified balance sheet approach to present the receipts and outlays of each agency. A number of both industrial and developing countries provide multiyear estimates, usually ranging up to three years. In some countries (for example, Australia and the United Kingdom), these multiyear estimates are of considerable importance and usually provide the framework within which annual budgets are made.

The other features may be examined in terms of resource management and information systems needed for resource planning and management. Resource management involves the application of three basic principles: propriety, accountability, and the adequacy of systems for delivery of services to the community. Propriety refers to the application of funds for the purposes approved by the legislature, and accountability to implementing policy prudently and transparently, and producing results commensurate with outlays. A wide variety of practices are found at this stage, particularly in regard to payments. In most countries, the spending agencies are empowered to authorize payments against their budgetary provisions and apportionments. (In systems of the British type, no organized procedures for apportionments exist to facilitate a time-slice-based release of funds.) However, certain specified transactions (usually above monetary ceilings) require the prior approval of the ministry of finance. In systems of the French type, a visa has to be obtained from the relevant authorized officials before making commitments. In some countries, however, the spending departments and agencies are free to make commitments and to process payment authorizations within approved budget estimates. In most countries, the final issue of checks is made by the ministry of finance and its agencies. In systems of the British type, checks are issued on the basis of the review of vouchers and related documentation by the pay and accounts officers or accountants general who serve under the ministry of finance. In systems of the French type, they are issued by the treasury, which is also responsible for managing all financial resources. In the United States, checks are issued by the disbursing officers who are the specified agents of the treasury.

In the centrally planned economies, spending agencies are free to spend (authorize and pay) the budgetary allocations after approval of the budget. In most cases, the productive or developmental departments (a classification traditionally urged by economists but applied so far only in centrally planned economies) are even assigned a government-owned development bank that acts as a payment agency. This bank is also sometimes responsible for compiling the accounts of the agency for which it is acting as banker.

In some countries, payment authorizations are subject to internal audit by the general accounting office or similar organization, and checks are issued only with their clearance. In spite of these elaborate checks and balances, expenditures in excess of approved amounts do occur but the process of dealing with them differs among systems. In systems of the British type, although excess expenditures are not encouraged, they are legalized on the recommendations of legislative committees. In systems of the U.S. type, excesses are not permitted. In others, excesses are in principle subject to penalties, but in practice they are rarely invoked. Failures in resource management contribute to overpayment and underpayment and to fraud in the handling of government moneys.

These practices should also be seen in terms of the design of the information systems, which play a supporting role and are primarily intended to produce data for use by decision makers inside and to some extent outside government. In recent years, there has been a greater commonality among countries, largely reflecting the availability of computer technology. The introduction of technology has facilitated the operation of payrolls, recording of commitments and payment lags and of the availability of goods and services, maintenance of inventory of assets, and compilation of domestic and external debt transactions. It is now common in a number of countries for budget requests and data on monthly financial transactions to be processed on diskettes. In some others, project accounting has developed significantly (for example, Chile) through the introduction of electronic data processing. In Middle Eastern countries, where massive development plans revealed a shortage of trained manpower, timely investment in the introduction and use of computer technology appears to have paid handsome dividends. The differences are now largely in terms of the capacity of the computer and the end-use of the information produced. Practices in industrial and developing countries show a number of common problems. First, accounting statements are often not useful for expenditure control and seem to be more geared to compliance with the law.⁶ Enormous delays and reconciliation of different transactions continue to be major sources of frustration. Second, the accounting statements are still inadequate for evaluating programs and for assessing performance in terms of costs and effectiveness. Third, the statements’ utility in aiding decision making by providing adequate cost information on whether services should be performed by government or contracted out is still to be demonstrated. Fourth, the statements are not yet helpful in indicating the magnitudes of postemployment benefits or the current status of assets.

Modular Presentation of Features

The general features described above permit only a glance into the broad functioning of the system. In practice several other features need to be taken into account, and for this purpose, expenditure management is divided into seven modules—macroeconomic framework, budget preparation and planning, budget coverage, financial control, fiscal reporting, the institutions engaged in budget administration and decision making, and budget classification. To illustrate these aspects, data on 46 countries from various regions, representing a cross section of the broad groupings discussed earlier, are presented in tables in Appendix I. These tables show the range of devices and the stages at which they are deployed in the management process. The data presented in the tables, however, may have changed in some countries since their preparation. The tables should therefore be considered illustrations. Also, in selecting countries, less emphasis has been placed on the origins or the legacy of the system. Indeed, a cursory examination of the tables suggests several commonalities in institutions, systems, and operational procedures. These features also illustrate the need for viewing these modules as part of a composite culture rather than as separate fields in which actions converge more by accident than by design. The success of the SEEE paradigm is dependent on the unity of purpose shown through the various stages.

Little can be said about the success attained from the use of instruments. Indeed, without an evaluative framework, it is difficult to determine the extent to which they have been used at all. Their existence alone should not be taken as proof that they are used and used objectively. In public expenditure management, the existence of an instrument suggests that some thought has been given to a problem, and an approach evolved to deal with that problem. But the actual usage is a different matter that cannot always be gleaned from organizational charts and related regulations.

Thus, to ascertain the different problems stemming from the use of the various systems, a questionnaire was prepared and circulated to several budget officials from industrial and developing countries as well as from former centrally planned economies. This survey conducted by the author in two successive years yielded consistent results over the period, but differed according to the type of country surveyed. To facilitate grading or ranking, problems were divided into a dozen clusters–public expenditure planning, attention to special areas, resource planning, budget structure and classification, economy and efficiency in expenditure, fiscal management stress, quality of information, budget implementation or resource use, budgetary outcomes, accounting and financial reporting, and public enterprises—and the respondents were asked to rank the problems in degree of severity and occurrence.

In public expenditure planning, industrial country representatives felt that excessive political interference was a major problem. The representatives of planned economies thought that the major problem areas were excessive rigidity in expenditures and fragmentation of responsibilities between planning and finance agencies, whereas officials of the developing countries, in particular those from sub-Saharan Africa, viewed the poor implementation of rolling expenditure planning as a major problem.

In the cluster relating to the attention paid to special problem areas, officials from industrial countries believed that productivity in government and operation and maintenance expenditures received the least attention. While sharing this view, officials of planned economies thought adjustment for inflation received too little attention. Officials of developing countries believed that control of personnel expenditures was the major problem. In regard to resource planning, officials of industrial countries believed that the absence of convergence between expenditure and revenue budgets at an early stage of the process was a problem, while those from planned economies and developing countries felt that the planning of revenue resources (and external resources for the developing countries) constituted a major problem.

The officials of industrial countries believed the budget structure to be adequate for accountability but in need of improvement for internal management by agencies. The developing and planned economies’ representatives felt that the classification of current and capital items was inconsistent and that in general it was inadequate for both economic analysis and program review. Securing economies and efficiency in expenditures seemed to be an unexplored area in planned economies, while the officials of industrial and developing countries believed that evolving reliable and consistent performance indicators was a major problem. In the cluster relating to fiscal management stress, it was generally agreed that across-the-board cuts did not have much effect. Reductions in manpower and related inputs were common dilemmas, regardless of the countries and their systems, and were partly attributable to the poor quality of government information. Officials of industrial countries considered the major problem was lack of reliable data on the quantitative or volume aspects of expenditures.

In regard to budget implementation, all officials shared to varying degrees the view that the problem was a rush of expenditure toward the end of the fiscal year, while those from the developing world felt in addition that a major problem was the identification, measurement, and clearance of arrears in payments. The different budgetary outcomes were attributed by those from the planned economies to the price levels that were higher than assumed in the budget, and all agreed that changes in the macroeconomic assumptions underlying the budget were an overall problem. In regard to accounting, officials of industrial countries viewed implementation of accrual accounting as the major problem, while all others believed that the archaic functioning of treasury systems was the issue. The assessment of the financial performance of state enterprises and their supervision and control by governments left a lot to be desired, all groups felt.

These views, which were collected during 1990 and 1991, may reflect the priorities of the time and may therefore change in the future. But together they provide a snapshot of the period and the challenges that lie ahead.