- Jack Diamond, and Barry Potter
- Published Date:
- July 1999
Economists working on fiscal policy and fiscal management need a good understanding of how the expenditure side of the budget is planned, prepared, and executed.1 This publication is designed for those interested in the macroeconomic impact of such budget processes, rather than in the perhaps more familiar microeconomic perspective of expenditure policies.
The analysis provided and the guidelines offered on good practices in budget management are intended for economists reviewing the fiscal sector of the economy and judging the feasibility of fiscal policy actions. The material should also provide a helpful background to other advisors or officials working on budgetary matters in developing countries and economies in transition who do not have specialized macroeconomics training.
The guidelines cover what such individuals need to know to:
ensure that consistent data on planned and past public expenditures are prepared in a consolidated format, compatible with a macroeconomic framework;
assess the adequacy of budget preparation procedures, in particular the level and composition of public expenditure planned before the budget year starts;
analyze whether the budget execution system can deliver planned spending within the budget aggregates; whether any steps are necessary to strengthen expenditure control; and how to intervene to enable any necessary in-year adjustments to be made to planned spending; and
assess whether there are adequate cash planning and management arrangements for a government to meet its fiscal targets on borrowing and prevent sudden, unanticipated borrowing that could disrupt achievement of monetary policy targets or undermine monetary discipline.
The focus of the analysis is on how to accomplish the above tasks within a country’s existing budget system, which may be considered as given in the short run. This short-term focus, however, should not deter fiscal economists and general budget advisors from being interested in, and able to identify the need for, longer-term improvements.
The structure of the guidelines is as follows:
Section 2 gives a brief introduction to the coverage of the budget and sources of expenditure data required for expenditure projections;
Section 3 focuses on the budget preparation process: how total planned spending is determined; the allocation of resources among spending programs to reflect priorities; and the scope, feasibility, and targeting of expenditure changes;
Section 4 describes the key features of budget execution, identifies problems that often interfere with the efficient execution of the budget, and discusses the use of in-year expenditure adjustments to help meet fiscal targets; and
Section 5 considers the interaction between expenditures, cash flows, cash planning, and borrowing, and how cash management can help ensure that no unanticipated borrowing disrupts the achievement of monetary policy objectives.
At the outset, a fundamental distinction needs to be drawn between expenditure management and expenditure policies. Effective expenditure management is not feasible without clear and well-defined expenditure policies, whose costs are properly identified in the relevant budget appropriations (see glossary). Expenditure budgets, in the form of line item appropriations, represent the cost of agreed expenditure policies. No improvements to budget preparation or execution can compensate for inappropriate or misguided policies.
These guidelines do not cover expenditure policy issues. Extensive material has already been prepared by the Fiscal Affairs Department of the IMF on expenditure policy issues, notably the Public Expenditure Handbook,2 two pamphlets—Unproductive Public Expenditures3 and Guidelines for Fiscal Economists Participating in Fund Missions4—and Occasional Paper No. 160, Fiscal Reform in Low-Income Countries: Experience under IMF-supported Programs.5
The style of the guidelines is interrogative: to pose questions that a fiscal economist or general budget advisor might have about budget processes and procedures and then to offer answers, often differentiating between the different expenditure management systems in francophone, Commonwealth, Latin-American, and transition economy systems. First, however, by way of a basic introduction, Figure 1 illustrates a typical timetable for preparing an annual budget. Figure 2 identifies the very basic elements of a typical budget execution process, and Figure 3 describes the main steps in cash planning and cash management. A glossary is also included at the end of the book for those unfamiliar with some of the terms used.
Figure 1.The Budget Countdown: A Timeline for Budget Preparation
1 The term ministry of finance is used throughout the report for simplification, even though ministries of finance go under many different names in practice, including the treasury, ministry of economy, etc. The key functions covered are budget preparation (referred to here as the budget department), and budget execution and government financial management (cash, debt, assets) (referred to as the treasury). In rare instances, the treasury can be a separate ministry from the ministry of finance (e.g., Italy).