Front Matter

Front Matter

A. Premchand
Published Date:
June 1990
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    Issues and Country Studies

    Edited by A. Premchand


    Washington, D.C.

    © 1990 International Monetary Fund

    Library of Congress Cataloging-in-Publication Data

    Government financial management : issues and country studies/(ed.)

    A. Premchand.

    • p. cm.

    Includes bibliographical references.

    ISBN 1-55775-149-8

    1. Budget—Case studies—Congresses. 2. Finance, Public—Case studies—Congresses. 3. Finance, Public—Accounting—Case studies—Congresses. I. Premchand, A., 1933-

    HJ2043.G68 1990

    350. 72–dc20 90-41275


    Price: US$21.50

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    Prefatory Note

    Government financial management represents an area in which there are developments taking place all the time. The situations described in Part II containing country and regional studies reflect by and large the position in mid-1989. While every effort has been made to update the studies, it is not unlikely that, in a few cases, events have overtaken the description provided in the papers.

    Any publication of this type involves the crucial assistance of several individuals. The editor is indebted in particular to the contributors, who have been most cooperative in preparing and, where necessary, in revising the papers included here.

    Mrs. Yoke Kum Hee persevered cheerfully in typing various drafts and in preparing the final manuscript; Mrs. Elin Knotter of the Editorial Division provided assistance in seeing the book through publication. Her vigilant eye and keen understanding proved valuable assets. Mr. Philip Torsani of the Graphics Section designed the cover.

    The opinions expressed in the following pages are those of the authors and do not in any way reflect or represent those of the International Monetary Fund or the organizations with which the contributors are associated.

    List of Contributors *
    Donald AxelrodProfessor Emeritus, Rockefeller College

    State University of New York, Albany
    Rifaat K. BasantiEconomist, Fiscal Affairs Department

    International Monetary Fund

    Washington, D.C.
    Hema R. De ZoysaDeputy Division Chief, Budget and

    Expenditure Control Division, Fiscal Affairs

    Department, International Monetary Fund

    Washington, D.C.
    Jack DiamondSenior Economist, Fiscal Affairs

    Department, International Monetary Fund

    Washington, D.C.
    Kenneth M. DyeAuditor General of Canada, Ottawa
    Alicja JarugaProfessor of Accounting

    Universytet Lodzki, Lodz
    Gert JônssonAssistant Auditor General

    The National Audit Bureau, Stockholm
    Michael KeatingPermanent Secretary

    Department of Finance, Canberra
    Turan S. KivançConsultant, Fiscal Affairs Department

    International Monetary Fund

    Washington, D.C.
    Andrew LikiermanProfessor of Accounting

    London Business School, London
    Paul W. McDonaldDirector, Australian Department of Finance

    Regional Office, Washington, D.C.
    Ron PointsDirector of Governmental Accounting

    Office of Government Services

    Price Waterhouse, Washington, D.C.
    A. PremchandAssistant Director, Fiscal Affairs Department

    International Monetary Fund

    Washington, D.C.
    David RosalkyFirst Secretary

    Department of Finance, Canberra
    D. SwarupDirector of Audit, Office of the

    Comptroller & Auditor General

    of India, New Delhi
    Allen SchickProfessor of Public Policy

    University of Maryland, Maryland
    Elmer B. StaatsComptroller General of the United

    States (Retired)

    Washington, D.C.
    Tang YunweiFaculty, Shanghai University of

    Finance and Economics

    Vito TanziDirector, Fiscal Affairs Department

    International Monetary Fund Washington, D.C.
    Wang Song NianVice-President, Shanghai University of

    Finance and Economics

    James P. Wesberry, Jr.Senior Financial Management Advisor,

    U.S. Agency for International

    Development, Washington, D.C.

    The titles and affiliations listed for contributors are those they had at the time the papers were prepared.

    The titles and affiliations listed for contributors are those they had at the time the papers were prepared.




    This book is the result of a combination of two projects. The first project was a Seminar on Budgeting and Expenditure Control organized periodically by the International Monetary Fund to meet the requirements of senior officials of its member countries. The first part of the book represents the papers contributed to the seminar that was conducted in November-December 1989 at Fund headquarters in Washington, D.C.

    The second part of the book was organized as a separate project to complement some of the editor’s previous work. Professor Jesse Burkhead and the editor organized a symposium of country studies during 1983–84, which was published in Comparative International Budgeting and Finance (New Brunswick, New Jersey: Transaction Books, 1984). Since then, a need was recognized to supplement it with country studies specifically devoted to the recent developments in government accounting and financial management. Accordingly, countries representing the diverse systems (British Commonwealth, French, centrally planned economies, Nordic, and Latin American) were selected, and authors were requested to contribute papers. To facilitate comparisons, a framework was outlined to the authors; the studies included in this book reflect that framework.

    The need for studies on budgeting and on related issues in individual countries can hardly be overemphasized. Public sector management in general, and public expenditure management in particular have been under stress, and their capabilities are increasingly under scrutiny. This concern is only natural in a context in which it is recognized that the success of macroeconomic policies depends to a very substantial extent not merely on the mix of policies and their timing and phasing of implementation but also on the attention and effort devoted to improving microeconomic aspects. It is essential that fiscal management machinery be adequately prepared and responsive to the changing requirements of macroeconomic policies. In considering both these aspects, policymakers and administrators in government evince considerable interest in ascertaining the experience of other countries in facing the issues and the lessons of experience. This book attempts to provide a discussion of the issues, as well as the experience, and is offered as an aid to public discussion of subjects with a vital bearing on the effective functioning of the public sector institutions. Traditionally, budgeting, as a discipline, tended to be associated more with economics and public administration, whereas financial management has its roots in accounting. Notwithstanding the considerable interdependence between the two, they have been treated, regrettably, as separate, and thus the unique features of governments and public institutions have been ignored. For the purposes of this book, a broader view of financial management has been taken, and it includes budgeting, expenditure control, accounting, and financial reporting.


    In announcing the first seminar on budgeting and expenditure control in 1980, it was noted that “numerous problems are being encountered in public expenditure planning, in the formulation and execution of government budgets, and in administering expenditure controls.” The announcement further noted that “although many countries have acted to strengthen budgetary and expenditure control systems, progress has been uneven and difficulties persist. There is a need for a more precise identification of problem areas, assessment of their magnitude, and a discussion of possible solutions and their usefulness in specific situations.” To a substantial extent, this statement holds good today and, while providing the continuing rationale for the seminars, also underlines the need for more attention to be devoted to some of these areas so that viable fiscal policies can be pursued. Some of the problems that were prevalent at the end of the 1970s and early 1980s have been successfully addressed. However, some continue, and meanwhile, new ones have emerged. Moreover, some new techniques that were envisaged as solutions to the problems then prevalent have since become problems in their own right and are now being addressed. The changes in the size and structure of the public sector, on the one hand, and the continuing budgetary strains, together with emerging demands on public resources, on the other, are contributing to an intensive discussion on the need to scrutinize critically the methods in use for recognizing the resource constraint and internalizing it in government operations and for raising public sector efficiency in general. This debate emphasizes the need to identify the forces of change and to establish an analytical framework to review the policy and technical responses to those changes and to develop principles and criteria for evaluating those responses.


    The secular growth in expenditures and the accompanying policy implications have generally received considerable attention, and measures were taken to mobilize additional revenues or to reduce expenditure growth. But these efforts have not been entirely successful, and along with a variety of other factors—such as pressures for maintaining political, social, and economic commitments—this failure has led a number of countries to follow permissive fiscal policies. The experience indicated the need for more comprehensive efforts to mobilize additional revenues, to reduce expenditure growth, and to strengthen the institutions, systems, techniques, and operational procedures of fiscal management. But in considering the steps needed to improve budgeting and expenditure control, five options appear to have been available.

    First, there were those who argued that what was needed was not a strengthening of control mechanisms but a reduction in the size of the government. This view, however, was more philosophical in nature and even where there was a reduction in the size or in the rate of growth of the size, there was a continuing need for greater attention to control. Indeed, such attention tended to become more important as hopes were raised by the new mechanisms introduced as a part of this effort.

    Second, the nature of the control itself was debated. It was recognized that the exercise of conventional control in terms of minutiae was not effective, nor was the idea of adding too many layers of control—interpreted not in terms of review of policies but in terms of verification—meaningful. Over the years, a gradual movement away from the candle-ends approach to financial control has occurred. Instead, a growing emphasis on planning and management has emerged. But even as this approach did not yield the results expected, the issue was raised whether more would be gained by returning to earlier practices. It appeared to be an option between planning on the one hand and technical control on the other. In reality, however, no option existed, because a planning system that does not recognize the control implications has little value, as does a control system that is devoid of planning.

    Third, the issue was raised of whether the problems—present and future—should be solved by introducing new techniques or by a more effective functioning of existing controls. Here, again, the choice was dependent on an objective assessment of the strengths and weaknesses of the existing machinery.

    Fourth, the question whether the controls should be centralized or decentralized arose. What was more efficacious—a powerful central agency or a coordinated functioning of central and spending agencies, with the latter being given some degree of autonomy and responsibility? If controls were centralized during periods of acute financial stringency, should they be relaxed during periods of relative improvement? If controls were decentralized, what safeguards were needed so that central agencies could discharge their own responsibilities? These matters were not ones for which universally acceptable solutions could be considered. Rather, they were aspects that needed to be determined in the context of a country’s own administrative traditions, economic context, and related factors.

    Fifth, there was a choice in terms of the goals of a budget—between accountability and economic management. Although these two aspects were ascribed as being independent or mutually exclusive, in reality they were always symbiotic and could not be considered in isolation.


    Countries made their own choices within the broad framework described above. Their responses were both structural and technique oriented. In contrast to the experience of the mid-1960s and the decade of the 1970s, the emphasis was not so much on formulating complex systems as on formulating pragmatic responses to selected aspects. Strengthening the existing systems rather than totally replacing them occurred, and often themes that were a part of the landscape of the 1950s were revived. Such a selective strengthening seemed only natural as several improvements of a systemic nature were made in the 1950s and 1960s. It appeared prudent to build on the existing foundation. The new phase of improvements covered, as in previous decades, a wide area. In structural terms, budget classifications were refined and new classifications were introduced to show the full implications of proposed outlays. Some governments gave up the traditional distinction between current and capital budgets, while others that had never had a capital budget began to explore the advantages and feasibility of introducing one. There were more attempts to measure and contain costs, although the efforts to measure and enhance productivity in government did not yield any quick results. New techniques were introduced to understand the expenditure profiles of spending agencies and distinctions were made between “running costs” and “others.” Forward estimates in terms of rolling expenditure planning became a common feature, although critical comments have more recently been made on “current services baseline” budgeting. It is now viewed in some quarters as having “unfortunate and misleading effects” and a “curious wonderland quality” because it treats some spending programs as “immortal” and “inflation as an acceptable given.” Budget deficits began to be analyzed in more detail, and now, at least 15 concepts of deficit are used for various analytical and operational purposes. Concerted efforts were also made to improve the management aspects of government programs, and similar efforts were and are being made to expand the application of electronic data processing and to reap the full benefits of these systems.

    These efforts were neither universal nor uniform but indicate in broad terms their range. The issue is whether they were successful, whether they had a durable impact on the systems of budgeting and expenditure control, and whether the general goals of these systems are being better achieved now than before. While the importance of these issues cannot be denied, no systematic evaluation framework to reach answers on these vital matters yet exists. This is not to say, however, that there has been no evaluation. Quite the contrary. But most evaluations appear to reflect the immediate concerns of those evaluating and were often narrow in scope. Moreover, in some cases, it was too early to evaluate the new efforts as they were still being made.


    A quick analysis of international experience suggests several problems. Certain broad features of these problems may be noted in terms of six categories: (a) economy and the budget; (b) annual budget making; (c) targeting and tracking; (d) management improvement; (e) austerity management; and (f) approaches to expenditure control.

    Recent experience clearly indicates that the budget has, of necessity, become more complex, reflecting the size and diversity of government operations. These features of government and the recent fiscal trends have emphasized the need to consider more explicitly the linkages between the economy and the budget and to provide for mechanisms that equip the fiscal machinery to deal with the volatility in the economy. While a good deal of progress has been made in formulating economic scenarios and in providing for contingency mechanisms, progress is still necessary on bringing revenue and expenditure planning together, improving allocations for public investment, relating manpower controls to expenditure programs, and dealing with inflation. In some countries, budgeting continues to be an accounting exercise more concerned with the increment over the previous year’s accruals and its distribution, thereby turning the implementation phase into an exercise in coping with the realities that were not recognized in the formulation phase.

    Annual budget making, it is felt in certain quarters, is becoming an increasingly fruitless exercise. Flexibility is hampered by previous commitments, and the time-consuming process, while contributing to greater expectations and an apparent ability for more effective management, appears to have belied hopes. The argument for biennial budgeting—controversial in itself—is gaining ground. At least one industrial country has decided to move to a three-year allocation system under which about one third of government activities would be brought annually under more intensive scrutiny to achieve economies, and thus cover the whole government in a three-year period. While the benefits of a biennial or a triennial system remain to be fully demonstrated, the problems of annual budget making appear to be self evident.

    Budget is a framework intended to give coherence to what the government does and why. As an integral part of this framework, targets are set, and in effect each estimate, whether of revenue or of expenditure, is in itself a target whose attainment, or the failure to attain it, has an impact on other aspects of government work and on the economy. During budget implementation, a tracking network is needed to ensure that targets are being attained, or, if difficulties arise, that alternative strategies are being formulated. However, most tracking systems in government, including those in some industrial countries (as attested to by the country studies included in this volume), appear to need improvement. Reporting is still designed ostensibly for what is described as accountability purposes and not for the uses of the fiscal policymaker. Fiscal reports are generally incomplete, produced with inordinate delays, and in a form ill suited to the decision makers. This view has to be tempered by a recognition of the experience of several countries where more comprehensive reports are being obtained speedily, owing largely to the installation of electronic data processing machinery. The problem of the tracking system is that it has not been fully oriented to the needs of economic management, and doubts remain whether it has ably served accountability.

    Improvement of management is still nascent. Measurement of the cost of programs remains largely unfulfilled. Although it was expected that a switch to the double-entry bookkeeping system would promote a greater awareness of cost aspects and a facility for computing costs, they have not yet been achieved. Even in those countries that have moved to double-entry systems, accounting is used as a system for recording transactions and as a process for exercising repetitive (and mostly unrewarding) controls, and not for setting up performance indicators and assessment of efficiency. In fact, some argue that in a context in which more attention is to be paid to the management of fiscal crises, assessment of efficiency is less important. Postponement of efficiency considerations would not however avert or minimize fiscal crisis; it would have the unfortunate effect of exacerbating it.

    Continuation of fiscal crisis over an extended period has made an austerity-oriented budget a compelling need rather than a soft option considered in the scenarios of a policymaker. Experience shows that there was little preparedness for the implementation of the austerity program, frequent resort to formula strategies with avoidable adverse impact on the programs, and needless centralization of power as well as a continuation of such centralization even after the crisis was over. Moreover, expenditure cuts could often not be sustained. It is debatable whether rectifying this adverse impact should be the primary item to be addressed in the next decade.

    Finally, experience with expenditure controls shows periodic shifts from excessive fragmentation to excessive centralization. Often, controls did not appear to be responsive enough to the changing requirements. There was also no long-term agenda, and controls were often tactical, rather than strategic, with frequent changes in position without notice and often in a reverse direction.

    In addition to the above, wide-ranging issues were encountered by countries with structural adjustment facility arrangements with the Fund. It is recognized that improved public expenditure management is a key to better government and accelerated structural adjustment. The problems experienced by these countries include inadequate public expenditure planning, obsolete budgetary structures and processes, poor monitoring of budget implementation, and ill-equipped government accounting systems. A measure of the importance attached to the need for improvement in these areas is to be found in the substantial share of fiscal conditionality in the overall framework of adjustment. The progress in implementing reforms has been somewhat slow, however, confirming the long-held belief that institutional improvement in the public sector requires a longer perspective.


    The seminar covered a wide range of topics. Notwithstanding the differing background of the participants (drawn from developing and industrial countries, countries that were market oriented, as well as those that had hitherto had centrally planned economies), there was consensus on several aspects. The principal themes and the views expressed are summarized below.

    Public sector management in general, and financial management in particular, is in transition, and therefore more efforts to ensure a smooth management of change are indicated.

    Problems of government financial management have a commonality and are not very different, in nature, from budget-surplus to budget-deficit countries. The experience of budget-surplus countries illustrates the readiness of governments to take timely action, which in part explains their current financial status. The credibility of the institutions engaged in public expenditure management needs to be restored through effective strengthening of the systems and operational procedures of financial management. Without such efforts, even greater erosion in the public’s perception of the effectiveness of fiscal machinery is possible. The restoration of an environment that in turn would contribute to economic growth and stability was emphasized.

    Given the transition of government financial management and the current economic context, an urgent need exists to review policies and to ensure that policies and procedures are not continued merely for historical reasons long after they are relevant or useful.

    In view of the rapid changes in fiscal trends and related strains on the fiscal management machinery, it was felt that there was no permanent or once-and-for-all solution. Rather, the public authorities should regularly review their policies and operations and enhance their preparedness for meeting changing events and demands.

    Because partial solutions have the potential for compounding problems, it is important that the linkages of these partial solutions to other elements of financial management be explicitly recognized and addressed.

    Fiscal stress management requires a more concerted effort. Excessive reliance on the application of formula strategies, which may be politically expedient in the short term, was recognized as having the potential to lay the foundation for deferred or new problems.

    Introduction of electronic data processing systems is not to be seen as a panacea for the ills of financial management. If the proper and expected benefits are to be derived from such systems, it is essential for institutions and systems to be specifically adapted to their requirements.

    Expenditure control processes have become more rigid and in some cases have developed the potential to become counterproductive. It is necessary to ensure that they do not permit the triumph of procedure over purpose. They need to be reviewed further to adapt them to the changing requirements.

    The need for incorporating some elements of corporate management, such as cash management, into government financial management was particularly emphasized.

    Budgeting, in the final analysis, is a political process. The impact of political aspects on budgeting needs to be explicitly taken into account. The role of the civil service is to explore the alternatives and assess the implications of each course so that the choice of public policies can be conducted in a more organized, coherent, and empirical environment.

    The introduction of rolling expenditure planning or forward estimates would facilitate a greater understanding of the continuing financial implications of current policies. Such financial planning has the inherent advantage of educating the public, the politician, and the civil servant on the current fiscal status of the government and on its future direction.

    Structural adjustment involves changes in the orientation of institutions and systems. These changes are numerous and cover a variety of areas. It is important that a strategy be formulated to implement reforms first in the priority areas so that the energies of public authorities are not dissipated in too many directions.

    Improvement of financial management in government is dependent on the cooperation extended by the administrative departments and agencies. Particular attention is therefore needed to enhance the capability and financial consciousness of the spending agencies.

    The introduction of accrual-based accounting is desirable for ensuring proper disclosure of government transactions. However, implementation of the system is likely to be a long-term task. Meanwhile, efforts are indicated to ensure registration and monitoring of commitments.

    Introduction of value-for-money approaches is likely to improve the effectiveness and efficiency of organizations. The technique should be viewed as an essential part of management culture rather than as a technique of auditing whose introduction depends on the initiative of the audit agency. Governments have an immediate need to improve the functioning of public organizations and to pursue excellence.

    Increasingly, the budgetary outcomes are being influenced in some countries by active judicial intervention and interpretation of constitutional law. Although such intervention is only beginning, it is important for budget officials to be alerted to the impact of judicial intervention.

    Pursuit of efficiency remains the goal of government financial management. The measurement of efficiency and effectiveness, however, remains to be refined further, as statistical techniques now being used have several limitations. Meanwhile, evaluation in government, both internal to spending agencies and centrally implemented, needs additional stimulus.

    The success of any innovation in government financial management is dependent on the attention devoted to human resource development in government. This area merits more concerted action.


    The book is divided into two parts. Part I contains the eleven papers considered at the seminar, while Part II contains nine country studies and one regional study. Each of the papers in Part I is structured to provide a background and a discussion of the issues, so that perspectives can be formulated on the current status and direction of future reform.

    Tanzi’s paper on fiscal policy considers the evolution of the tasks of official policy and the issues that are being addressed. The editor’s paper seeks to present a survey of the issues in government financial management. Schick considers the political dimensions of public budgeting, specifically in the United States, and underlines the efficacy of external limits when escape mechanisms tend to dominate the scene. Basanti’s paper analyzes in some detail the role of public expenditure management in structural adjustment and the slow progress in achieving institutional and systemic improvements.

    Specific technical aspects are considered in the next seven papers. One of the common efforts, in both industrial and developing countries, relates to the introduction of rolling expenditure planning. Keating and Rosalky’s paper provides a detailed insight into the Australian experience in this regard and the transformation that took place over the years, from a stage of considerable reluctance to the publication of forward estimates to a firm commitment to ensuring the integrity of the system. The editor’s second paper offers an analysis of the types of expenditure controls and the extent to which they have been successful. It also outlines the urgent need for addressing the institutional framework, and, more specifically, the importance of avoiding new layers of control in the rush to strengthen control. Staats considers the dual requirements of accounting—for purposes of disclosure to facilitate accountability and to serve as an aid to management—and notes that, despite years of debate, what has been achieved on both fronts remains small relative to the long agenda for future action. These aspects are further buttressed by the papers of Points and Wesberry in Part II. The issues of cash management illustrate an area in which the public sector stands to benefit from the experience of the corporate world, and these aspects are reviewed in De Zoysa’s paper.

    Measurement of the efficiency of the public sector is one issue on which there is considerable agreement about the need for it, but the progress in evolving a viable system and its application is relatively slight. Clearly, two ways of approaching the problem exist—that of the administrator and of the economist. Invoking the original distinction made by Pigou, it appears that the administrator tends to make use of such tools as are available, while the economist aims at providing more refined tools. Refinement is, however, an ongoing process. Diamond’s paper surveys the literature on this important issue and presents a discussion of the state of the art.

    Even as progress is being made in the measurement of efficiency, it is becoming increasingly clear that a more holistic approach toward improving the functioning of government organization is necessary. In this pursuit, the audit organization has a constructive role to play. Dye’s paper details the effort made in Canada to introduce value-for-money approaches to improve the functioning of organizations. In particular, he considers the constraints affecting the organizations and the issues that need to be addressed.

    Another aspect that is gathering some momentum relates to judicial interpretation of law and its impact on budgets. It is likely that in future citizens will resort to the legal avenues to ensure equity in the provision of amenities and benefits to the community, particularly in a context in which provision of services by third parties but financed by government will be dominant. These aspects are examined in Axelrod’s contribution.

    Part II consists of the country case studies. The paper on Australia covers all the aspects of government financial management, including the forward expenditure planning considered in detail in Keating and Rosalky’s paper.

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