16 Government Accounting in Poland1

A. Premchand
Published Date:
June 1990
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As is generally recognized, state budgets arose earliest in countries that had developed parliamentary traditions. Parliaments initially decided about state revenues and later about their allocation. In Poland the first budgetary records in the form of financial registers have been traced to the fourteenth century. Since that time Polish kings have been asking Parliament for permission to levy new taxes on citizens. However, the first Polish budget was passed by Parliament in 1768, and the Constitution of 1792 established a right for Parliament to approve revenues and public expenditures. This Constitution and the principles of the Polish budget subsequently served as a model for many European countries.

After regaining independence (1918–39), public finance and the State Treasury were reorganized based on the model of parliamentary democracies. However, after the Second World War, and in the context of the introduction of a centrally planned economic system, considerable change took place in the state finance system. The state budget, together with the central plan, began to play the role of regulating the economy. It was and still is not only a plan of state revenue and expenditures with its usual functions, but it also constitutes a substitute for the market in the redistribution of financial resources between profit-yielding and nonremunerative industries. The Government operates here as a super manager. The institution of the State Treasury disappeared; the accumulation and distribution of financial resources is effected in an irreclaimable form by the state budget and in a repayable form by state banks. Similarly, local government budgets are replenished to a great extent from the central budget.

It was not until the end of the 1980s with the political and economic reforms aimed at democratization, decentralization, commercialization, and autonomy that there was a change in this situation. As part of these reforms, enterprises were made responsible for their own management, and the state budget deficits were financed by the central bank. Similarly, autonomy was provided to the municipal governments with rights to levy taxes and the like. The role and functions of the state are in transition.


In Poland, where state ownership dominates, the budgetary system is inextricably bound up with the economic activity of the state. The budget is broadly understood as the set of socioeconomic relationships involved in the accumulation and redistribution of state finances (Kaleta, 1985). The budgetary system consists of rules and procedures for budgetary receipts; rules and procedures for budgetary expenditures; budgetary planning; budgetary accounting and financial reporting; and budgetary control, which can also be called “auditing.”

Local budgets are incorporated into the state budget, which facilitates the planned redistribution of national income among the provinces.

The distribution of tax revenues and other payments is as follows (Budgetary Act, 1984):

  • The state budget comprises income taxes from state-owned enterprises; turnover taxes from state-owned enterprises; customs duties; social insurance; and payroll taxes and others.

  • The local budget comprises real property taxes; estate duties; turnover taxes and income taxes from private, legal, and local entities; enterprises’ taxes; participation in central budget revenues; and general subventions and specific subventions from the central budget and others.

The Polish budgetary system and financial planning were developed within a comprehensive legal framework. The main roles of the central agencies are as follows:

  • Parliament and Local People’s Council: Promulgation of the budget; control of budgetary implementation; review of periodic accounting statements; and discharge of the functions of the executive.

  • The Supreme Chamber of Inspection: This organization is responsible for the audit of government transactions and reports on budgetary management to Parliament.

  • The Council of Ministries: As the main executive arm of the Government, it is responsible for the following tasks in the area of financial management: prepares and submits a draft of the state budget to Parliament; defines rules of budgetary resources utilization; and generally supervises budget administration.

  • Ministry of Finance (including the Supreme Inspectorate of Finance Control): Drafts budgetary policies and presents them to the Council of Ministries; manages the central budget implementation; organizes supervision over local budget performance; submits periodic reports on budgetary performance to Parliament; prepares statements on state budget performance for the Council of Ministries; formulates tax system rules; and standardizes financial planning and financial policy through the issuance of norms, which regulate preparation of budgetary drafts and utilization of budgetary resources; classification of budgetary receipts and expenditures; and accounting, financial reporting, and auditing.

  • State administrative bodies supervised by the Ministry of Finance: The Financial Office deals with assessment and collection of taxes and other budgetary receipts, tax control, and penal cases, while the Treasury Chamber is responsible for planning, control, and disposition of central budgetary subsidies for enterprises and verification of annual financial statements of nationalized enterprises in coordination with state-authorized accountants, tax supervision, and Financial Office supervision.

  • Local authorities have the following budgetary bodies: departments of finance of provincial or municipal authorities (which work under the overall supervision of the People’s Councils), formulate drafts of local budgets, and exercise control over local budget implementation.

  • Financial departments of budgetary units and entities that are managed by chief accountants with responsibility for formulating plans of receipts and expenditures and maintaining records and reports to inform about budgetary compliance.

All spending ministries have their own budgetary departments. This description would be incomplete if no mention were made of the National Bank of Poland, which fully and exclusively provides cash service to the central budget and local budgets, and therefore has a major role in the process of control over budgetary compliance (Weralski and others, 1982).

In principle, the state seeks to balance its budget, but since the late 1970s it has been borrowing from the National Bank of Poland to finance its expenditures.

Budgets cover one year, and the fiscal year is the same as the calendar year. The following principles underlie their construction (Pirozynski and Winter, 1961):

  • Equilibrium: they should be balanced;

  • Coverage: they must be comprehensive and should include outlays; they should also follow the “gross budgeting method.” However, the “net budgeting method” is permitted at the level of budgetary units and entities;

  • Unity: the national budget plan must include all receipts and outlays, including local government budgets;

  • Clarity and specialty: strict criteria for the classification of receipts and outlays are to be followed;

  • Anticipation: the budget law governing the annual budget must be passed before the beginning of the financial year;

  • Reality: valuation of needs should be adjusted for inflation;

  • Openness: the budget law must be published and parliamentary debates should be carried out openly;

  • Economy: not only concepts of economy but also standards and norms of expenditures should underlie budget preparation and implementation.

In addition, other considerations stem from a system of nationalized means of production and central planning. First, there is an obligation of budgetary compliance with five-year national plans and the financial balances of the state, and second, there is the principle of democratic centralism, which requires the state budget to incorporate the receipts and outlays of the local governments, and, to the extent that local expenditures are higher than their receipts, they receive subventions from the central budget. The organizational relationships are illustrated in Chart 1. The observance of this principle, however, has not been without its difficulties in that a gap exists between the local needs and the centrally redistributed financial resources. Application of the incremental budgeting method may have repeated and compounded the errors even more (Hofstede, 1978, 1981).

Chart 1.Organizational Structure of the Polish State Budget

In a socialist state, the state budget encompasses far more aspects of the economy than under capitalism, for it must finance not only administration, defense, and expanding social services, but also the basic investments required to implement the long-term, national physical construction plans. Through the budget, the Government provides part of the investment funds required to expand urban housing facilities to meet the housing needs of the entire urban population and to subsidize urban housing to keep rents down to about one fifth to one tenth of the workers’ income.

Through the budget, the state assumes control of insurance and pension schemes under an integrated national social security program to provide uniform and equitable benefits for all.

Another feature of the Polish state budget is subsidies for consumer goods and services whose prices are set below unit production costs. They are four times the expenditures for science and education and more than twice as much as the outlays of the capital budget in the 1989 state budget. In addition, subventions provided to state-owned enterprises are over 10 percent of all their receipts.

It is almost a truism that in a centrally planned economy the use of the state budget to implement its financial distribution and redistribution tends to be considerable (Jaruga, 1988a). A more general observation, however, is that the greater the centralization of planning and control, the greater would be the degree of redistribution of finance through the state budget, which provides a substitute for the market mechanism, and in turn puts greater emphasis on the uniformity of all classes of accounting. To the extent that there is greater reliance on market mechanisms, the degree of redistribution of resources in the economy by the state budget is likely to be smaller, and greater emphasis is put on accounting information for decision making and efficiency measurement (Jaruga, 1988b).

Owing to the compulsions of central planning, the whole economy is dichotomized into the spheres of “material production,” which is also called the productive sphere, and “nonmaterial production,” which is called the nonproductive sphere. It is assumed that only enterprises in the sphere of material production supply goods and services that create the national income, as, for example, industry, construction, agriculture, transportation, trade, municipal services, and film and publishing houses.

The nonmaterial sphere consists of institutions and units rendering services to individual citizens (for example, health, social welfare, and education) and the general public (for example, science, state administration, justice, national defense, internal security, finance, and insurance). This sphere includes budgetary units, budgetary entities, auxiliary holdings, and special resources.

Budgetary units are units of the state whose receipts and expenditures are fully financed by the state budget. Typical examples are state administrative bodies, hospitals, schools, and museums. Their services are free of charge. The mechanism for financing is an appropriation of credits within the General Budgetary Fund to the budgetary units. This fund is held at the National Bank of Poland. Unexpired credits at the end of the fiscal year are lost to the General Budgetary Fund.

Budgetary entities render public services on a break-even basis. They are accountable only for their financial results. If there is under-spending against the annual appropriations, the unused resources can be carried forward into the next year. Budgetary entities, as well as budgetary units, do not depreciate fixed assets and do not pay taxes. They include nursery schools, clubs, and sports centers.

Auxiliary holdings are economic activities undertaken by budgetary units but financially separated. Typical examples are workshops attached to schools, and small farms attached to agricultural schools. They act as small enterprises, charge depreciation, and cover their costs from sales of goods and services. They can retain profit in the form of earmarked funds and are able to obtain bank loans. They belong to the productive sphere.

The category known as special resources covers, for example, broadcasting and television, and food supplied to schoolchildren (Cewe, 1978). These special resources are expected to be self-financing. Subsequent surpluses are paid over to the associated budgetary units.

State-owned enterprises in the material sphere are divided into three groups (Jaruga, 1988b): profit oriented; infrastructure and strategic; and public utility and municipal.

The first group is expected to be oriented to market signals, self-financing, autonomous, and self-governed. The second group encompasses infrastructure industries, such as fuel and power generation, coal mining, public transportation, and telecommunication, whose main objective is to provide products and services as effectively as possible. They are organized in obligatory unions and operate under mandatory prices, often set below cost, the so-called social prices.

The three groups of nationalized enterprises are distinguished primarily by the role that market mechanisms play in their functioning and development. An extension of this approach is that whereas the second and the third groups cannot go bankrupt because they are subsidized from the state budget or local budget, the first group can. Nationalized enterprises, mainly the first group, are allowed to enter joint ventures in the form of limited liability companies and joint-stock corporations and to create mixed-capital companies in the form of limited liability companies.

All budget-supported units are covered by budgetary accounting, whereas a system of enterprise accounting is followed for nationalized enterprises. (Following the analogy of nationalized industries in the United Kingdom (Jones and Pendlebury, 1984), one could include them in public sector accounting. The phrase “government” accounting is unknown in Poland.) Both types of accounting are uniform and follow the same general principles of accounting and the general plan of accounts. There are different types of plans of accounts and some of the basic concepts are different as well. The Ministry of Finance is entitled to regulate public sector accounting. Auditing is carried out mainly by state-authorized accountants for nationalized enterprises, and by the auditors of the highest chamber of inspection for budgetary units.

Recently, as a result of developments in democratization and decentralization, economic freedom, equality of all business units, and competition, a trend has emerged to enhance economic effectiveness and efficiency in both spheres. The way to do that is through more commercialization, the extension of market prices to some social services, and the shifting of some activities to the material production sphere. As far as social and public services are measurable and could be sold, financial results would provide measures of performance. Hence, the state or local government could practice budgetary control, using only the bottom-line approach, and these organizations would replace budgetary accounting by more developed enterprise accounting and cost accounting.

Because of the requirements of the national accounting system all accounting entities have to follow the distinction between the two spheres, although where the line between the productive and the nonproductive activity should be drawn remains an open question.

On the other hand, even the nationalized enterprises were unable to be accountable in the long run. One-year performance evaluation and the incentives approach made them “budgetary entities.” Capital investment funds were mainly centralized, and profitability was equalized by state budget subsidies. Therefore, state-owned enterprises were not fully adaptive organizations nor were they real commercial accounting entities but were rather a sort of governmental accounting entity (Lueder, 1989). Since January 1989, this situation has changed. State-owned enterprises have become autonomous and have started to be commercial accounting entities. They are supposed to pay dividends to the Treasury for a newly created Foundation Fund. They pay taxes, but they cannot decide about their future financial position and long-run strategy.

Structure of Accounting System

Budgetary accounting is defined as the quantification of budgetary outcomes in money terms, and its purpose is to ensure compliance with the accumulation, redistribution, and spending objectives of the national budget (Buszym, 1980). The budget system, including the capital budget and capital investment appraisal, both in the literature and in practice is understood as a part of finance, economics, and planning. Hence, budgetary accounting is limited to monitoring and reporting performance against the budget, following the budget law, the financial system, and the uniform principles of accounting and reporting specified by the Ministry of Finance, for example, the Typical Plan of Accounts for Budgetary Units (1988), a book of 283 pages.

Budgetary accounting maintains a strict separation of funds for different purposes. In the accounting system budgetary classification is as indicated below:

Part:organizational entities (e.g., Ministry of Finance)
Sections:a branch of services (e.g., health protection)
Chapters:budgetary units within a given section
Line:type of receipts and outlays
Paragraphs:receipts by source (e.g., income tax outlay); receipts by purpose (e.g., wages and benefits)
Items:separation of receipts and outlays in a given budgetary entity or earmarked fund

In addition to the normal spending of the ministries, separate funds are established for specific important needs such as an environmental protection fund; a science and technical development fund; a health protection fund; an agricultural development fund; and a housing fund.

The cash basis is used in budgetary units accounting, and a limited accrual basis in budgetary entities. Fixed assets are not realizable. Therefore, the equity measurement concept has not been applied. It has been made possible in nationalized enterprises since 1989, after forty years of a centralized, command economy. Cost accounting in budgetary units is relatively underdeveloped. No distinction is drawn between variable and fixed costs, and the concept of cost centers is not employed.

Capital investment appraisal is covered by central planning and is an integral part of national economic policy, outside the realities of the accounting system. The accounting function is only to monitor capital spending against the plan budget. Many budgetary units do not have legally separated organizations—for a group of schools, there is only one reporting entity, for example.

Budgetary accounting has been based on the double-entry system since the early fifties. Nevertheless, budgetary accounting has been treated as a bookkeeping, and a formalized system. Owing to relatively high inflation rates, unified adjustment procedures have taken place, based on the estimates of changes in general purchasing power.

There is no integrated electronic data processing system in the budgetary sphere yet. This branch of accounting has not been developed as a tool of financial control and accountability to the electorate or for formulating financial policy. Budgetary accounting is also not a part of the curriculum. The accountants in budgetary institutions are paid relatively less than in the state-owned enterprises, or in the newly developing private sector firms.

Fiscal Reporting

The form, contents, and frequency of financial reports are determined by the Central Statistical Office with some support from the Ministry of Finance. In principle, these reports are used for the fiscal policies and planning of the Ministry of Finance; control by the National Bank of Poland; financial management by spending ministries; audit by the Supreme Chamber of Inspection; financial management by local governments and managers of budgetary units; and the consolidated financial report for approval by the electorate.

The reports, which are prepared semiannually or annually, include a statement of budgetary receipts; a statement of budgetary expenditures; a statement of inventories, receivables, and payables; a statement of performance against budgetary coefficients; a statement of budgeted and actual salaries and wages; a balance sheet; and a statement of off-budget receipts and expenditures.

The balance sheets are intended only to be reports of the closing ledger balances. Budgetary reporting, as well as financial reporting as a whole, emphasizes external users. This external, statistical emphasis is often at the expense of internal users and internal management.

Accounting and financial reporting are the financial tools of overall state control of a centrally planned economy. State control takes the form of control by each spending ministry over its budgetary units and especially the Ministry of Finance and its subordinate fiscal and inspection institution, the Supreme Chamber of Inspection. In the budgetary units the emphasis is on control of the financial and economic inputs. The outputs, which are often difficult to measure, are mainly under the control of the relevant professionals, for example, school inspectors. The criteria for the auditors’ examinations are legal compliance, reliability, the existence of comprehensive records, economy, and effectiveness (Cewe, 1978). On the revenue side, the auditors and even the state-authorized accountants determine whether taxes and other charges have been collected in compliance with the law. On the expenditure side, they determine whether expenditures have been made in accordance with the budget, the applicable law, and other regulations. Budgetary discipline is so strict that there are serious consequences, for both individuals and organizations, when budgets are not executed in accordance with budget law. Sanctions can take the form of monetary penalties.

The structure of the reports used permits the aggregation of expenditure for the National Accounts System. Funds and expenditures are reclassified by tasks and programs.

The resource allocation in the budgetary process is based on incremental negotiations between the Ministry of Finance and the budgetary departments of the spending ministries. The spending ministries negotiate in the same way with their subordinate budgetary units. Expenditures are roughly estimated for the new fiscal year, since they have been based on the previous year’s budget figures with some minor adjustments. Budgeting is mainly based on rules and limits being sent as guidance to local governments and is based on the real results for the early part of a year.

In conclusion, budgetary accounting and reporting has been under the traditional, legally oriented, financial control of the Ministry of Finance and, during the last few years, of Parliament. Public managers use it mainly for compliance with financial rules. The recent transition to a pluralistic political system and civic society will require a new budget law and a more sophisticated and flexible accounting system. The state superstructure will be replaced by democratic institutions. In addition, efforts will be needed to educate the public on the importance of sound financial reporting by the Government, which Morton Egol (1980) emphasized in a broader context. It is even more important in the current economic context of Poland.

Major Problems and Recent Efforts

As has been emphasized before, the budget is at the very heart of a centrally planned economy. Real coordination of the budget with the so-called financial balance did not occur until the 1980s. Integration of the budget and the financial plan has been reached during the last two years. The formulation of the costs of debt and investment appraisal is involved.

Financial management is also not developed in practice. For many years public accountability has not really existed. Investment decisions have been political ones. Studies on the costs and benefits of alternative ways of achieving policy goals have been quite rare. They were carried out by the Planning Commission, which has been recently downgraded to a Planning Department, with an agenda mainly limited to methodological aspects.

Under these circumstances, budgetary accounting in practice is confined to the first stage of development defined by Dean (1980) as “regularity and control.” On the other hand, budgetary accounting and macrostatistics are highly integrated.

Financial reports of the budgetary institutions are not yet available to the public. However, it is expected that deeper democratization and orientation to market mechanisms will be followed by more public accountability, requiring more elaborate accounting and auditing.


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A reform of the budget and accounting systems is now being undertaken in Poland. This paper depicts the systems as they were operating in 1989.

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