chapter twelve Budget Execution and Cash Management
- A. Premchand
- Published Date:
- March 1989
Between the motion And the act Falls the Shadow
T. S. ELIOT, The Hollow Men
Budget execution has been a neglected area of government financial management. For too long it has been viewed primarily as a process concerned with the preaudit of government bills and procedures of their payment. Legal aspects of payment, the nature of service provided, its relationship to the government budget, the technical authority of the agency that authorized the payment, and the review of the accuracy of the proposed payment were, by and large, the components that received attention. Some viewed budget execution as an administrative process, while others analyzed it as an extension of the budget formulation stage with the same strategies and game plans adopted by central and spending agencies. In reality, however, budget execution and related aspects of cash management (which have become important in their own right during recent years) are more than the sum total of the above elements. Budget execution represents the phase during which the multiple aspects of resource use acquire an importance that is uniquely their own. It is also a phase where the relationship between central and spending agencies is even more important than it is during the budget formulation stage. Formulation is a phase that is relatively short in its duration. Budget implementation, however, is a phase that is felt throughout the fiscal year. As an activity, it involves the mobilization of human, material, and financial resources through a number of techniques and procedures. If the result of the budget formulation stage is a blueprint for the allocation of resources embodied in the budget document, budget execution has more onerous tasks to perform as it has to provide goods and services to the community. Such provision involves all branches of government, unlike the more technical and selective participation of officials in budget formulation. Execution is the cutting edge of the budget and it is the phase in which government interacts more actively with the community it represents. Implementation is, however, a positive process and is dependent for its success on financial procedures and general administrative capabilities. For these reasons, implementation cannot be considered as a budgetary problem alone but has to be examined for its widest implications. Its importance has grown during recent years, primarily because many development plans have run aground on the rock of implementation alone.
Ends and Means Framework
The process of formulating a development plan or the annual budget involves an implicit assessment of the implementation capabilities of the various agencies. The availability of performance budgets, with their emphasis on identification and measurement of the productivity and workload factors, will help such an assessment. In practice, however, owing to the nonimplementation of performance budgeting, and also because emphasis tends to be diverted to the financial aspects, the capabilities of the agencies per se appear not to have been given due recognition. The built-in optimism among government officials that somehow the machinery will be equal to the tasks expected of it may also have contributed to the situation. This feeling is encouraged to some extent by the generally held view among spending agencies that the key problem is one of finances and not that of absorptive capacity of the economy or the implementation capacity of the agency. Experience of both industrial and developing countries suggests that the recognition and evaluation of the implementation capacities have fallen somewhere between the emphasis on the financial aspects of plans and budgets, on the one hand, and the complacency of the agencies, on the other. Over the years the nonfulfillment or partial fulfillment of plans and budgets have led to greater attention to this aspect. The response to this recognition has been twofold: (a) several development plans now contain brief chapters on implementation aspects, and (b) many governments have initiated a series of administrative reforms geared to simplifying government procedures and to an overall improvement in government operations. The impact of these approaches on budget implementation is, however, a moot point. In both cases, the specific tasks of budget implementation do not appear to have been given their due and have been treated in a general fashion.
Implementation of the plan and the budget requires an advance program of action evolved within the parameters of the ends of the budget and the means available. Ideally, this framework should include (a) identification and enumeration of the implementation tasks, (b) assessment of the suitability of the means for achieving the ends, and (c) prospects for the improvement of means if they are less than adequate. This exercise reviews the implementation factors, with specific attention to (a) the nature of government activities and their demands on executive capacity, (b) the adequacy of executive capacity in relation to demands, (c) the capability of the economy to provide real resources and the role of foreign and domestic constraints, and (d) recognition of structural bottlenecks such as monsoon cycles and related weather factors.1 In assessing these factors, an integrated plan indicating the time sequence of administrative action and flow of expenditure has to be formulated. Such a plan would constitute the starting point for the formulation of the budget and its implementation. Lack of attention to these aspects would contribute to the plethora of problems, such as straining the capacity of the administrative system by overpitching demands, and to the facile explanations that lack of progress was due to shortages of finance, labor, and physical resources.
Budget Implementation Process
The primary concern during the implementation of the budget is to ensure the fulfillment of the financial and economic aspects of the outlays. The financial tasks include spending the amounts for the purposes specified, minimizing savings, and avoiding lapses and/or a rush of expenditure toward the end of the financial year. The economic tasks consist of ensuring that the physical targets of programs have been achieved. It is hoped to achieve these two purposes by budgetary controls exercised by the central agencies and spending departments. The budgetary and economic tasks are rendered operational through the administrative process that comprises four major interrelated phases of work: (a) an allocation system under which expenditure is controlled by release of funds, (b) supervision of the acquisition of goods and services to ensure value for the money spent, (c) an accounting system that records government transactions and provides a framework for an analysis of their implications, and (d) a reporting system that permits a periodic appraisal of the actual implementation of the policies. In all these phases, illustrated in Chart 5, the administrative and budgetary tasks interact with each forming the basis for the other's work. Neither of them can be performed in isolation from the other and their relationship, like others in the overall budget process, is symbiotic. The concerns in all these stages are three: (a) to ensure legal accountability, (b) to achieve efficient use of resources and, (c) to ensure the flexible use of resources by avoiding the immobilization of funds. The budgetary process, by its very nature, involves the allocation of funds to a few and the denial of many requests, and there is an obligation that those who are allotted funds actually spend them. This does not necessarily mean an exhortation to spend irrespective of the need. However, the implication is that funds should be diverted to areas where there is need, which is further exemplified by the general compulsions of economic growth. Such flexibility, as noted earlier, is a two-way operation involving restraint and stimulus. These tasks and some procedures are common to both industrial and developing countries. Individual differences have generally occurred because of legislative requirements or administrative background.
Chart 5.Budget Implementation Process
Release of Funds
The procedures for the release of funds have a hoary past going back to the era during which an exchequer system was evolved. For example, in the United Kingdom in this early phase there were three officers—a teller who was the cashier who received and issued the money, a clerk of the pells who recorded on a parchment all receipts and issues, and the auditor who examined the records and whose duty was to see that no money was issued except with the sanction of Parliament.2 With the establishment of the Bank of England, changes were made in these procedures and a formal system of exchequer issues was introduced in the United Kingdom through the Exchequer and the Audit Department Act of 1866. Under this system a Royal Order authorized the Treasury, with the concurrence of the Comptroller and the Auditor General, to issue the amounts voted by Parliament, which are then placed at the disposal of the Treasury. These are then transferred to the account of the Paymaster General, who makes available the requisite amounts to spending departments. The purpose of this somewhat ceremonial and, as Hilton Young called it, pompous affair, is to adhere to Parliament's wishes and to avoid locking up funds with spending agencies. Variations of this procedure are in vogue in most Commonwealth countries. In some Latin American countries, funds are made available in a similar manner by the Comptroller General. In the U.S. system, the appropriation legislation itself specifies the amounts that would become available to the spending agencies but these are regulated, for purposes of overall cash management, by the Office of Management and Budget through a quarterly apportionment system.
The prevailing practices in industrial and developing countries may be classified into three types. The first type is one in which amounts are available to the spending departments as soon as the budget is approved or the departments are given full authority at the beginning of the fiscal year. Some Commonwealth countries such as Bangladesh, India, and Sri Lanka belong to this category. A second arrangement is one under which formal warrants are issued by the finance ministries to the spending agencies. Funds may be placed in their entirety or in part and may be made available by different central agencies for varying periods. For example, in Caribbean countries warrants are issued more as a routine for the entire amounts budgeted. Frequently, however, some limitations may be put on the use of the funds in that specific projects may require prior approval by the central agencies for the release of funds. In Tanzania funds for the recurrent budget are released for the fiscal year, while for the development budget releases are made in an ad hoc way for each major project after ensuring that the previous apportionments have been fully utilized. The authority for the issue of warrants is divided between the Ministries of Finance and Planning, respectively, for the recurrent and development budgets. A third arrangement is the one in which fixed amounts are released for a specified period. In Haiti, for example, one twelfth of the budgeted amounts is released every month. In the United States and the Philippines, and in a few Latin American countries, funds are allotted for each quarter. Under this system, the spending agencies furnish a forecast of their requirements for each quarter on the basis of commitments and expected payments. After review, appropriate apportionments are made and a certain amount is centrally retained for contingent purposes. In the United Kingdom, the issues by the Paymaster General do not strictly adhere to a quarterly pattern but follow a somewhat complex accounting formula under which adjustments are made for the issues already made and utilized, and for those that the agencies are entitled to. After the introduction of the formal expenditure planning system, the issues by the Paymaster General lost their symbolic importance and yielded to the quarterly profiles of expenditure prepared in advance by the spending agencies. These profiles have become the basis for controlling and monitoring expenditures.
The smooth working of the third arrangement requires that agencies prepare forecasts of their requirements. The actual success of the financial aspects of the budget would depend on the care taken in formulating these forecasts. The first and second types of arrangement do not always require such forecasts—a feature that implies the absence of an advance plan of any action. In such a situation, the relationship between central and spending agencies becomes more ad hoc and could frequently become a source of irritation. General and unconditional releases have a deceptive simplicity about them, for they suggest the assurance of funds to spending agencies. In reality, however, these releases are subject to limitations and may frequently involve intervention by central agencies. Release of funds is an instrument that has two edges. Used judiciously, it can facilitate the implementation tasks of the spending agencies. Negative use, in addition to contributing to greater centralization of power, could hamper the activities of the agencies. A common problem experienced in many developing and in some industrial countries is the lack of the phased forecasts of their requirements, which inevitably leads to the types of problems described.
Economic and Administrative Tasks
In analyzing the budget execution process, a distinction has been made between the economic and administrative tasks, on the one hand, and the purely financial management tasks, on the other. The basic concerns of the former are efficiency and economy and involve answers to the three questions that dominate the budget process—in what areas are resources utilized? what is being accomplished with these resources? and how can some of these purposes be better served? These issues require a continuing review of program outlays and the factors contributing to cost increases. In more practical terms, the abstract goals of control are realized through a series of administrative actions, which, while revealing the process at work, also indicate the tasks and issues in greater detail.
Action to initiate implementation
Execution of the budget in the government is best seen, contrary to popular belief, as a cooperative endeavor involving the participation of several levels of government and several agencies at each level. Specifically, there are three organizational factors: (a) Consultation and approval of the state and local governments would be needed for the location of the projects and the provision of municipal services such as water and sewage. These matters involve deliberation by the respective authorities and therefore require time. (b) The division of responsibilities among departments may mean that more than one agency is involved in completing a task. For example, the provision of textbooks (which may be the responsibility of the Education Department) would be possible only with the cooperation of the printing presses, which may be under the control of another government department. In each phase, an agency not only has to plan its own activities but also has to coordinate with another agency; the other agency is an exogenous factor, and the plans of the concerned agency will have to accommodate any uncertainties. (c) For reasons of economy, governments generally have central or common arrangements for the procurement of goods and services or for the delivery of services (e.g., transport pools). Such arrangements impose a degree of rigidity or, at any rate, reduce the overall flexibility of the manager of the programs. Complaints are often made about such arrangements but their drawbacks are less than the overall benefits that result from such common arrangements. Prudent managers, therefore, accept these constraints as a part of the implementation environment and recognize that, if implementation is to proceed smoothly, the original plan of action should itself accommodate them. Accordingly, a major task, soon after the approval of the budget is to ensure that these technical and formal concerns can be adequately dealt with.
Government is by far the biggest organization and it has tended to increase in recent years. This larger size necessitated adopting a decentralized modus operandi. In turn, this requires operations at each level being overseen by higher echelons. The operations of each agency affect the finances of the government as a whole, they also affect the central agencies responsible for the formulation and implementation of fiscal policies. It has never been easy to reconcile the diverse requirements of those having central responsibilities with the degree of autonomy considered essential for performing the implementation tasks. This aspect is even more keenly felt in determining the relative role of the spending and central agencies in the budget implementation phase. The agencies have to undertake a review of their own if the budgetary and economic tasks are to be fulfilled. The responsibilities involved, however, are distinct and supplement each other rather than overlap. For the spending agencies, the purpose of their review is not merely to examine the financial trends but to assess the effectiveness of their own administrative policies. The main purpose of the central agencies is to evaluate financial trends and not to function as a substitute for the legitimate concerns of the administrative agency. Their quest is for the identification of the links between spending agencies and the assessment of their combined impact on the economy.
The spending agencies are mostly equipped with budget and planning units to undertake a periodic review, the content of which should ideally include the analysis of variations, budgetary lags, expenditure patterns, and the relationship between physical and financial progress. Each of these aspects are examined below. At this stage, the focus is on the extent to which the technique of review has been used. Periodic review can be ad hoc but to ensure a lasting contribution should be institutionalized, thus becoming a part of normal administrative life. Although it has the potential of becoming a ritual—a fate that most administrative procedures share—the fact remains that once institutionalized it generates opportunities, expectations, and structured information. A casual examination of the experience of a cross section of countries reveals that periodic review is carried out mostly at the lower echelons, or is routinely performed in systems where funds are released at specified intervals. In some countries, notably India, the spending agencies are required to organize quarterly expenditure control meetings. By and large, this is left more to the initiative, daring, and skill of the individual agency concerned. In crises, however, greater attention is shown at all levels and hitherto dormant channels of communication suddenly come alive with frenetic activity.
The review by the central agencies is, however, more regular and largely reflects the long legacy of centralized financial administration. In the United Kingdom, expenditure divisions of the Treasury are regularly in touch with the finance officers; similarly in the French system the Inspectors General of Finance assume the major responsibility for overseeing budget implementation. In several developing countries these responsibilities are shared by the finance and planning agencies. The requirements of the planning agencies appear to be different and reflect a more active follow-up and intervention in the activities of the spending departments to ensure compliance with the plan. The finance ministries in some countries do not have any means of keeping in touch with spending agencies except for release of funds or during critical periods when the efforts of the government are being guided into specific channels. When normal channels are lacking, the opportunities for the finance ministry to analyze and anticipate the requirements of the spending agencies would also be few and it is likely that major events might develop in an unexpected fashion. These factors underline the importance of having an institutionalized system of periodic review, both within spending agencies and in the central agencies.
Analysis of cost increases
The evaluation reports of the plans and the annual reports of the Audit Department in every country illustrate the general nature of cost increases in government programs and projects. These increases have become a rule rather than an exception and they could often be more than 100 percent in selected areas; however, as a whole, project costs might be more than 10–15 percent of the budgeted costs. This phenomenon can be partly explained by the budgetary approaches of the spending agencies in that the agencies tend to underestimate the costs in order to obtain quick approval for their pet projects. Such window dressing, however, can only be successful in the short run and cannot have a lasting future. Indeed, these approaches may lead to greater attention being devoted to departments that have been known for doctoring their estimates. Practical experience suggests that factors contributing to cost increases are more genuine and cannot be explained purely in terms of the gamesmanship of departments. Several factors, including changes in prices, structural modifications in the size and scope of the project, changes in the construction schedule, occurrence of unforeseen events, inadequate information in the initial stages on characteristics of the project that may have important cost implications (e.g., foundations of river dams), inadequate information on costs of land acquisition, and physical shortages are known to contribute to sharp cost increases.3 To some extent, qualitative factors, such as poor management or poor cost estimation, also contribute to increases. Variations in cost increases among sectors are dependent on the knowledge of costs and the unique features of a sector.
Increases in cost have a major effect in that they have a potential to upset the budgetary balance of the fiscal year, as increased costs could be absorbed only through increased borrowing, revenue mobilization, or expenditure reductions. Approaches for easing the fiscal impact of the inevitable cost increases could be envisaged in two ways. Within the narrow purview of budget implementation, it is important that increases are anticipated in time in order, through periodic review, to facilitate the formulation of policies by which the change could be counteracted or alternatively adjusted.4 A longer-term approach consists of improving the knowledge of costs. However, as this can only be of partial help and to minimize the budgetary imbalance, some countries have established contingency reserves for meeting cost increases. Such reserves have some definite advantages but it has to be ensured that the existence of a reserve does not necessarily lead to laxness in cost control.
The major focus of financial control at the budget implementation stage is on the identification of fiscal slippages that take the form of shortfall and excesses in expenditures. These twin aspects have been discussed in earlier chapters. The concern here is with their treatment at the implementation stage. If cost increases reflect, to a minor degree, the tendency of departments to underestimate costs, shortfalls appear to be the result of a tendency to play too safe or to overestimate requirements.5 It may appear slightly incongruous that overestimation and underestimation should coexist, but the areas to which they are applicable are often different. To a major extent, shortfalls are due partly to forecasting errors and partly to structural bottlenecks or physical shortages.6 The impact of such shortfalls is both positive and negative. In considering the overall fiscal balance, shortfalls mitigate the effect of excesses and thus reduce the adverse effects. However, as these shortfalls are generally fortuitous in their occurrence, they cannot be relied on to provide the necessary neutralizing effect. Indeed, these benefits are more in the nature of hindsight rationalization. In the medium term, however, their impact is more negative as the resulting allocation of resources would be different, depending on the magnitude and area of shortfall, from those planned. Specifically, when these shortfalls occur in growth or employment-oriented expenditures, the objectives in these areas would be less than fulfilled. Further, where actual expenditures are less than estimated, they might have the effect of accentuating the already existing inadequate utilization of available capacities. These economic aspects need to be given greater consideration than the narrow concerns of financial management.
The avoidance or minimization of shortfalls involves more stringent review at the budget stage and the use of improved forecasting methods. Several countries have traditionally used an historical “spend out rate” for each agency in terms of its previous experience, for determining the possibility of shortfalls. This has not eliminated, and cannot entirely eliminate, shortfalls for as long as the contributory factors emanate from other spheres. The budget implementation phase is concerned with the treatment of shortfalls after their occurrence and not with preventing their incidence. Two courses of action are available to the agencies—to shift the unutilized funds to other needy areas where the prospects of utilization are better or, alternatively, to surrender them to central agencies for diversion to other areas. The former course implies the use of “virement” procedures, under which funds can be transferred from one program to another. The general experience in this regard is that powers achieving such controlled flexibility are few and require fresh legislative approval or acceptance by central agencies. Neither of these approaches is considered appropriate by the spending agencies, which prefer the easier option of benign neglect. In some developing countries this aspect of budget management is further aggravated by the needless fragmentation of budget categories that contribute to small amounts being locked up for a variety of jobs. Denial of freedom to move funds is tantamount to an implicit denial of the necessary managerial freedom. To that extent no budget reform that envisages changes in the approaches and techniques of decision making would have any impact unless accompanied by appropriate adjustments at more practical levels. The latter option of diversion of funds is unlikely to be voluntary in character and would need some subtle detection and prodding on the part of the central agencies. This constructive course of action would be feasible only when the central agencies themselves review the flow of expenditures and have the delegated powers to switch funds. In some developing countries patterned on the British system, the diversion of funds particularly among the development-oriented outlays was possible within the overall ambit of the budget because of the greater involvement of the planning agencies. Elsewhere, particularly in the United States, such diversion is frowned upon by the legislative bodies and is viewed as a transgression on the legitimate sphere of accountability.
The impact of excess expenditures on resource allocation is not different from shortfalls but is more aggravating in its implications for stabilization. In the U.S., French, German, and some Far Eastern budgetary systems, expenditures over the total budget are not permitted and there are severe controls to avoid them. In the British Commonwealth systems, although executives are exhorted to avoid excess expenditures and are even threatened with penalties, when these excesses occur, they are routinely regularized through ex post approval by the legislatures. If some systems are stringent to the point of being uneconomic, others appear to be more lenient than necessary. To avoid excess expenditures, greater control is required at commitment, so that a more orderly phasing can be formulated. To the extent that not all excesses can be controlled, it is imperative that they be anticipated and advance action taken to obtain additional funds.
A feature associated with spending is the rush of expenditure at the close of the fiscal year. Variously described as “spree spending” or “squander mania,” this does not constitute a slippage as much as an avoidable nuisance. It is an age-old axiom—although its current validity is not free from doubt—that the pulse of expenditure is not an unimportant index in judging the efficiency of administration. It is also widely held that unless the amounts are spent, there is a potential that future allocations will be scaled down. Both these aspects continue to encourage the agencies to spend the budgeted amounts before the year runs out. This is a common feature of budgetary systems and there is a monotonous regularity in its incidence. Some spending for its own sake inevitably leads to situations where what is needed may not be obtained, and to situations where funds are easily procured but the need is questionable. The adverse impact is obvious. (It is presumably for this reason that no empirical studies have been made regarding the magnitude of this impact.)
This phenomenon can be avoided by two methods: (1) The release of funds may be so controlled as to prevent high expenditures in the last quarter.7 More is to be gained by having an integrated plan for the year as a whole than concentrating on a specific part of the year. As with shortfalls and excesses, there could be a periodic review of commitments and the timing of the releases synchronized with the fulfillment of commitments. (2) The central agencies can assure spending agencies that funds will continue to be provided for as long as they are allocated to approved programs. Rush of expenditure is a manifestation of the anxieties of the spending department. The remedy, therefore, should be to assuage its feelings rather than to exercise controls imperiously. Some countries have sought to make this continuity of budget provision a permanent feature by having nonlapsable grants for sections of the budget (e.g., development).
Data about the pace and magnitude of expenditure do not fully reveal how tasks are performed. Financial bias, which has been inherent in the traditional budget system, was reduced somewhat with the growing emphasis on ensuring an adequate link between physical and financial progress. The need for such a link becomes even more obvious when there are excess expenditures and an inflationary environment. Excess expenditures may not always reflect cost increases and, sometimes, may well be the consequence of poor management. Similarly, in an inflationary situation, money expenditures may be on schedule and may frequently reflect the implementation of the directives from the central agencies that each department should absorb cost increases within allotted funds. In both situations, however, the actual physical progress may be much less than scheduled and the overall outlays on the project be more than scheduled. These facts do not become evident when attention is focused only on annual outlays and money expenditures. Periodic reviews should identify the lags in physical progress, the areas where money expenditures are far ahead of the physical pace and the factors contributing to each. It is to be noted that reviews of this kind have not been undertaken and there is more often a general resignation that physical progress is bound to be inevitably less. Admittedly, such feeling of expressions of despair are unlikely to be of much avail unless they are channeled into constructive action. The only course available, however, is the periodic review, a grim determination to face the facts, and a search for alternatives within given parameters.
Expenditure and aggregate patterns
Another aspect that is not revealed in all its depth is the occurrence of budgetary variations with their impact on government policies. Progress of expenditure in comparison with budget estimates or physical progress in relation to that scheduled reveals a complete picture but may not show to the same extent the linkage with other aspects. Such interrelationships will be evident only when these data are supplemented by an analysis at the aggregate level. Analysis is of two types: (a) aggregate expenditure patterns and (b) aggregate analysis of other fiscal variables.
The experience of a number of developing countries reveals that, at an aggregate level, there is an excess of expenditures in the low priority areas and underexpenditure in the high priority areas. These are contributed by a combination of factors described earlier. While in a broader sense issues may be raised about the areas of low and high priority, the fact remains that governments arrange their priorities as seem fit. This high achievement where it is not needed, and low achievement where it is needed, naturally lead to distortions in plans and policies. As a result, planned investments will not materialize, revenues expected to accrue will not be generated, and meanwhile the general level of expenditures may show an upward surge. These issues cannot be solved at the implementation stage of the plan but they must be considered vital for improved policymaking.
Budget implementation devolves different responsibilities on the central agencies, whose concerns are both immediate and slightly remote. The immediate concerns are with the behavior of the fiscal variables such as revenues, expenditures, internal and external borrowing, and with the changes in the impact of these items on the economy. Major changes from expectations require action even during the course of the year while, in some cases, action may be feasible only in subsequent years. Periodic review involves a broad oversight on the specifics of expenditures of the agencies, as well as on aggregate fiscal variables.
The tasks of budgetary management comprise appropriate regulations concerning the disbursement of funds, the establishment of a reporting system, and arrangements for processing supplementary grants. Each of these provide the means for some or all of the administrative and economic tasks described earlier.
A significant contribution of the traditional budget system has been the series of vantage points provided in the implementation phase during which control could be exercised. Following the distinct duties of the teller, clerk of the pells, and the auditor, several checks and balances have been built into the system to (a) comply with the legal requirements, (b) secure prior review and approval in accordance with existing regulations, (c) conform with technical specifications, and (d) avoid maleficent acts and ensure propriety in the handling of public monies. The procedures necesssary for achieving these goals are by and large common to all the systems, although they have been more formally specified in the French system, where payments by the Treasury (controlled by the Finance Ministry) are preceded by three consecutive expenditure control operations, executed by an official (ordonnateur) in the department where the expenditure is incurred. These are (a) commitments (engagements), which are initiated within the limits of budget appropriations, followed by (b) the verification of documentary evidence that the service was actually performed (verification) and the establishment of the exact amount of the claim (liquidation), and (c) the issue of a pay order (ordonnancement) to the Treasury, which, after a further review, arranges for the issue of a check or cash.
These procedures are well understood and preserved in government manuals and regulations. In implementation, however, there are degrees of institutional adequacy. In industrial countries, over the years, firm procedures have been established for the preaudit of claims and their payments. In some developing countries, particularly in some areas of Africa, very little progress has been made to establish well-staffed prepayment audit units despite the vast sums of money handled by spending agencies. Inevitably in such situations, delays, classification errors, and incorrect payments occur.
Progress reporting systems
Control, in its wider connotation, needs to be exercised earlier than at the penultimate points of payment. To this end, a system of reporting is needed that effectively shows the progress of the budget. The objectives of the reporting system, in the light of the economic tasks discussed above, are to ascertain budgetary lags, to identify cost overruns, and to permit a quantitative and qualitative assessment of the work, in turn formulating a feasible corrective action where needed. From the early stages of budgeting to the most recent decades, the emphasis of progress reporting has been primarily on producing accounting data for the various categories of the budget.
For this purpose, the overall purview of the reporting system covers personnel, contractual services, and capital projects. The progress made in installing reporting systems in these areas is, however, by no means uniform. Personnel and contractual services have, traditionally, received most attention. Given the legislative pronouncements on the need to avoid excessive growth, it is only logical that more information is collected on the status of the personnel. Progress reports for personnel deal with the organizations, their subdivisions, classes, or grades, authorized and actual strength at the beginning of the year, additions approved, progress in recruiting, vacant positions, and pending personnel action, and are generally reported by the agencies concerned. Similar data are also collected on other items of expenditure, such as travel, transportation, utilities. Reports on contracts (for construction or delivery of goods) usually indicate the purposes of bids, relationship to programs, tenders received, and their current status. Separate reporting systems for capital projects are, however, relatively of recent origin. These reports, which are both general and specific (in that the features of each major project are taken into account), are normally derived from the control schedules of projects which, in turn, may have been prepared with reference to a variety of techniques such as Critical Path Analyis, Project Evaluation and Review Technique, Scheduling Program for Allocating Resources. Two major components of these reports generally are (a) schedule reporting and (b) cost reporting. The former refers to the project status report, which indicates the progress in the critical areas of the project. Cost reporting focuses more attention on minimizing the excesses over original project cost estimates and usually provides data on the nature and extent of cost overruns. For both components, the physical and financial progress, slippages, slack, changes in the completion data, and related aspects are reported.
The information systems are multifaceted and the above areas represent only selected aspects. If systems are as well developed in implementation as they are in their conceptual framework, probably all would be well with government financial management. In practice, however, there are a number of drawbacks which again differ in their incidence. The reporting systems do not always reconcile the differing requirements of the central and spending agencies. In some countries, systems were primarily designed to meet the aggregate requirements of the central agencies, which are not suited to the requirements of the departmental managers. Even when they have been partly adjusted for the spending agencies, the bias is toward personnel or object class and their relationship to programs do not appear to have been given their due. Progress reports in practice are often chronicles of past events and, in the absence of goals, do not offer a viable basis for judging progress. Moreover, the impact of the improvements in progress reporting systems on the financial management system is not always clear. It appears that the considerable progress made in designing these systems has not been matched by their utilization and, as such, improved information has not necessarily contributed to improved policymaking. This is partly because the reports tend to become so elaborate that the operating official does not bother to report all the aspects. In his view this entails a disproportionate investment of his time. Another aspect is in decision making, where owing to lack of institutionalized procedures for utilizing data, the reports have not had much impact. One could take comfort in the old saying that while a horse can be prevented from drinking water it cannot be forced to drink. All that the innovators can do is to provide water, so that when a horse chooses to drink it may do so readily.
The need for supplementary appropriations during the fiscal year arises primarily for three reasons. First, it is one of the axioms of legislative control that amounts appropriated should be spent only for the purposes for which they were intended. This means that as new needs emerge requiring expenditures, the latter must be approved by the legislature even if funds are available from the previously approved budget. Second, many agencies do not have the details required for a full submission of the financial requirements for their projects. However, where political decisions have been made in their favor, in principle, only token outlays are shown in the budget for legislative approval and during the year, when full data are available, supplementary appropriations are sought from the legislature. Third, they are also sought when the initially approved funds have proved to be inadequate. Traditionally, advocates of parliamentary control have viewed these appropriations as a breach of contract between the government and the Parliament and as a “diseased excrescence.”8 Those who prefer the need for maintaining fiscal stability view them with alarm and consider them as concealed time bombs that threaten the balance envisaged in the budget. In a wider sense, however, supplementary appropriations are inevitable both because of the long lags between preparation and approval of the budget and because of forecasting errors. Every budget maker wishes for a stable world but as this is not possible, supplementary grants constitute a necessary backup mechanism. Denying the use of such a mechanism would impart a rigidity that could be more harmful and could mean the abrupt closure of several programs or the exclusion of those that are needed. It would also mean the triumph of a technicality over the ultimate objectives of society.
The preferred alternative should be a better preparedness for meeting every eventuality. Contingency reserves and midterm mobilization of resources are among the instruments whose relevance has been considered in Chapters 8 and 9. From the point of view of budget implementation, the aspect that merits recognition is that the processing of supplementary appropriations involves reallocation of resources and, therefore, deserves the same care as the budget. In practice, however, these appropriations have become too frequent and are processed for each one as the need arises, or are processed toward the end of the year more as a formality for obtaining legislative approval.9 In both cases, the overall impact of these supplementary appropriations on resource adequacy or on the pattern of distribution of resources appears to have received less consideration. Inevitably, in such situations, budgets as implemented turn out to be different from those planned.
The term “evaluation” has been interpreted in a number of ways and has been variously described as auditing, performance auditing, implementation review, and program monitoring. Evaluation can be both prospective and retrospective. The latter refers to the assessment of progress and impact, analyzing the reasons for success and failure and deriving lessons that, in turn, could contribute to the achievement of government objectives. The term is used here in this context. The ideas of control as described above and evaluation are not mutually exclusive. In fact, they are integral parts of the overall budget implementation phase. Evaluation is not a mere analysis of expenditure flows but is wider and comes into its own after expenditures are incurred. More specifically, its features are (a) an analysis of the objectives of each program, the approach to their formulation and target setting, and the adequacy of the system evolved for their implementation; (b) the examination of the effectiveness of the procedures and schedules used for the implementation of the budget; (c) an assessment of the impact of programs in the light of their objectives and analysis of the flow of benefits and their use; and (d) to ascertain the wastage of men, materials, and money. It is therefore larger than a routine financial audit. Unlike audit, which needs the specification of the funds and the objects of expenditure, evaluation involves defined goals and specific measures of impact. This would, inter alia, involve the establishment of the units of measures of productivity, costs, and of actual accomplishment. In other words, as a prerequisite, evaluation needs the availability of features or conditions associated with performance and program budgeting systems. Without them, evaluation would be substantially less than expected. These prerequisites are not as yet fully available and evaluation has therefore become selective, confined, as it were, to a few areas of government operations. The implementation of evaluation and reaping its full benefits, as practical experience shows, has not been free from some major issues. The first of these is the location of the evaluation authority; or more fundamentally who evaluates whom. It could be argued that if the authority is located in spending agencies, it could be used in a self-serving way and no programs would be conceded as failures. The spending agencies wish to show the results in a better light so that more funds can be obtained. This approach is in conformity with the maximizing behavior of the agencies and the bureaus. However, location of the responsibility in a central agency may soon lead to the adoption of too critical attitudes, which may, in due course, deaden the initiatives of the spending agencies. It is also believed that the activities of some agencies are so specialized that central agencies are not able to evaluate them. An ideal solution would, of course, be to have evaluation systems within the spending agencies as well as to have the central agencies evaluate them. This would cause a certain amount of needless redundancy that many governments cannot afford. It is also likely that the final results of such evaluations may be too obvious or too negligible to warrant an enormous organization. Recognition of these factors has contributed to a variety of practices. In some countries evaluation is carried out by the spending agencies (Canada); in some the responsibility is with the President's Office (Latin America); and in some it is carried out as a part or an appendage of the plan organizations (India and Tanzania, for example). A second issue relates to the difficulty of specifying the criteria for evaluation. For most general services, such criteria are either not attempted, are too elusive, or require extensive statistical surveys for measurement. Finally, it appears that evaluation is not integrated with the budget cycle and the priority areas chosen for evaluation are frequently different from those emphasized in the budgetary process. Difficulty is also experienced in funding appropriate personnel for undertaking evaluation. Several of the programs require interdisciplinary approaches and related expertise that may not be available in government. However, following the tradition of the French Audit Court, some countries have often co-opted outside members and associated them with the evaluation exercises. Although the progress achieved is far from what might be expected, given the intractability of some of the issues, neither is it insignificant.
Cash management, which is a neglected area of budget implementation, has twofold purposes. First, to ensure that borrowing is well within specified limits and, second, to ensure that interest on debt is minimized. Both these aspects are neglected because of the practices of debt management, as well as the lack of consciousness of the cost of interest, in government. In several countries borrowing is undertaken because limits for such borrowing have been specified in the constitution and because funds are needed anyway. Some borrowing is undertaken partly for the reason that some government-owned sinking funds, which are otherwise liquid, cannot be utilized for meeting cash requirements in view of legislative restrictions. Borrowing, however, has consequences for the conduct of general economic policy. For one thing, such sinking funds may mean the withdrawal of purchasing power from the community, which may be appropriate in conditions of inflation or excess demand but will have little relevance if the purpose of the policy is to expand demand. Similarly, if the objective of the authorities is to restrict credit expansion, and if governmental procedures permit agencies to hold balances with banks (either from sinking funds or other earmarked funds), they may have an effect that is contrary to policy aims. An extension of this situation is frequently witnessed in many countries when governments continue borrowing to finance their overall deficit, while some government agencies build up balances with commercial banks and induce credit to the private sector.
Interest as a cost is rarely recognized in government because of the way in which government is organized not to impose a penalty on those responsible for incurring interest expenses.10 Interest costs arising from ad hoc debt and cash management approaches are borne by the budget as a whole and are not allocable to government departments. This neglect is further exacerbated by the general concerns during the budget implementation stage that are more oriented to the release of funds and the delivery of services. It is obvious, however, that because of costs of interest and the associated consequences for economic policy management, more attention is paid to this crucial aspect.
Effective cash management would require, inter alia, assessment of the seasonality of revenues and expenditures, preparation of forecasts of cash requirements, and adoption of the portfolio management approaches to optimize the liquidity positions so that cash is available when needed. The opportunity cost of funds needs to be given the proper recognition and it appears possible, with the recent improvements in banking operations, that greater ease in cash management can be obtained. The interests of governments with budget deficits are not geared as much to invest idle funds as to minimize their own costs of borrowing, while the objective of governments with budget surpluses and liquid cash balances is to ensure a greater return for their monies. These approaches imply the need for more coordinated cash management, which, while being in conformity with monetary policies, is also financially sound.11
In some countries, the political factors may also have a dominant role. These may contribute to several distortions. For an illustration of the working of these factors, see Edwin Dean (1972), p. 50, et seq.
See Maynard F. Hufschmidt and Jacques Green (1976), p. 270, et seq.
In some countries (India and Saudi Arabia) cost increases in selected areas and within specified percentages are adjusted as a matter of routine. This implies a tacit acceptance of the inadequacy of cost estimates, as well as the inevitability of price increases.
It is even suggested that in some industrial countries government operations may have grown so much that the central agencies may not have the central capability to detect the upward estimation bias of the spending departments. For an illustration of this aspect with reference to the United States, see Robert W. Hartman (1978), pp.301–305. The British expenditure plans specifically provided for a shortfall as there was a tendency to undershoot their “planning figures” by a small margin. See United Kingdom, “The Management of Public Expenditure” (1979b).
In developing countries shortfalls in foreign aid contribute to shortfalls in expenditures as the implementation of foreign aid projects is held up.
The U.S. Congress has legislated that the last quarter expenditures should not be more than 20 percent of the total budget. Agencies could circumvent this by spending more in the earlier quartets. Clearly, the dynamics involved are such that they cannot always be fully legislated.
Sir Hilton Young (1924), p. 65.
The annual reports of the audit departments in commonwealth countries abound with examples of infructuous supplementary appropriations.
For a recent criticism of this lack of attention in Canada, see Canada (1979), pp. 145–50.
The Canadian Commission recommended that the management of finances be conducted wholly by the Finance Minister, that governments' banking arrangements be placed on a competitive commercial basis, and that accounting methods be improved so that departmental costing systems gave proper recognition to the cost of borrowing.