Public Financial Management DFM 2024 PDF

Public Financial Management/Administration DFM 2024-2026 Royal Institute of Management  Overview  Public Finance, PF Management? objectives, Principles, components/segments, key players?  How public finan...

Public Financial Management/Administration DFM 2024-2026 Royal Institute of Management  Overview  Public Finance, PF Management? objectives, Principles, components/segments, key players?  How public finances are managed?  Models, Systems and Practices  Government and the Public Finance- PFM in Bhutanese context  Digital Revolution in Public Finance Public Finance Management Public Financial Management (PMF)? o Central element of a functioning administration, underlying all government activities. o It encompasses the mechanisms through which public resources are collected, allocated, spent and accounted for. o PFM processes comprise the whole budget cycle, public procurement, audit practices and revenue collection. Sound, transparent and accountable public financial management is a key pillar of governance reform and of vital importance to provide public services of good quality to citizens, as well as to create and maintain fair and sustainable economic and social conditions in a country.  PFM involves highly complex, technical tasks and processes, including macroeconomic forecasting, budget allocation, accounting and auditing. The complexity of such processes limits public scrutiny and provides many opportunities for corruption. The risk of corruption varies between and within the different stages of the budget process. Although corruption primarily manifests itself in forms that involve illegal money transfers at the budget execution level, other steps of the budget process may create opportunities for corruption at other stages of the PFM process  1.Review Policy 2.Update Strategy & Policy Public Financial 5.Reporting & 3.Budget Preparation Auditing Management 4.Accounting & 4.Budget Monitoring Execution Budget formulation/Preparation o The government forecasts expected revenue and expenditure and plans the use of resources based on policy priorities. o Corruption can take the form of political corruption, using discretionary budgetary powers to give preferential treatment to certain groups or to allocate budget resources to projects or areas based on political affiliations or rent-seeking opportunities. Budget execution o Resources approved at the budget formulation stage are disbursed to pay the salaries of public servants, running costs of the administration, provision of public goods and services to citizens, public works and infrastructure, debt management, and so on. o Budget execution also covers the collection of taxes, duties, and fees. This stage of the process is the most vulnerable to corruption as the money becomes tangible and a large number of individuals are involved with monetary transactions in various ministries and public institutions and at various levels of the administration. Budget execution o Corruption can manifest itself in various forms, including bribery, kickbacks, embezzlement and theft. In particular, public investment projects can be distorted, both in size and in composition, for rent-seeking purposes. o Bribery and kickbacks in public procurement, bid-rigging and other forms of undue advantages to certain providers of services, goods and works are also common forms of corruption at this stage of the process. o The tax and customs administrations may also be misused to pursue rent-seeking and corrupt practices. Money can be stolen or used for expenditures which benefit certain individuals and their business or political allies. Accounting and reporting o Together with disbursing or collecting money, spending agencies record and account for their expenditures or revenues collected. o Financial reports are subject to internal audits to ensure that the rules and regulations at the department or ministerial level, in terms of procurement processes, contract management and other basic requirement, have been enforced. Accounting and reporting o Financial reports from spending agencies are later centrally consolidated by the Ministry of Finance which issues a report to show how the budget has been implemented and which is subject to external oversight. o Weak, flawed or opaque reporting and accounting practices are likely to increase the corruption risk at other stages of the execution process, by reducing the chances of corruption to be adequately prevented and detected. Turning a blind eye, or allowing for “creative accounting” to cover corruption schemes may also be done deliberately. External oversight o External audits are typically undertaken by supreme audit institutions (SAIs) who have the mandate to ensure the accountability of public funds in general. o Legislative oversight is normally ensured by the parliamentary public accounts committee. o The budget execution of the executive is endorsed in a parliamentary debate and becomes the legal basis for the work of the government for the future period. External oversight o Limited legislative scrutiny, lack of resources, capacity and leverage, and poor executive follow up are likely to hamper external oversight of public accounts. However, in recent years, parliaments, civil society and donors have shown an increased commitment to participate in the process and strengthen external oversight.  Importance of PMF o Sound public financial management is critical to the achievement of the aims of the public sector through its role in improving the quality of public service outcomes; operational and strategic decision-making; long term sustainability of public services; building public trust in the performance of the sector; and ensuring the efficient and effective use of public funds. o Optimal public financial management would additionally display flexibility that allows the targeted sectors to adjust easily and in the desired manner with the public sector induced changes. Importance of PMF ACCA has identified four key objectives that effective public financial management should cover:  aggregate financial management - fiscal sustainability, resource mobilization and allocation  operational management - performance, value for money and strategic financial planning and management  governance - transparency and accountability  Fiduciary risk management - controls, compliance and oversight (Parry 2010). Public Financial Management (PFM) "Public Financial Management (PFM) is concerned with the laws, organizations, systems and procedures available to governments wanting to secure and use resources effectively, efficiently and transparently. While Public Financial Management (PFM) encompasses taxation, borrowing and debt management, its main focus is expenditure management, especially in the context of public budgeting." Role of Government in the Economy iii. Merit goods a. Provision of such goods help in attaining a high level of efficiency and contributes to achieving basic objectives of the society. Provision of education, Public health iv. Market failures b. Generally market tends to fails when operated inefficiently and in absence of law c. Market failure is common not only when riddled with monopolies but also under competitive conditions d. States have to play a corrective role in terms of allocation, distribution and stabilization  Role of Government in the Economy v. Infrastructure a. Infrastructural facilities (social overheads) are commercially non-viable and requires resources beyond the private sector. These facilities have spill-over effects which are non-marketable  2. Historical Angle Role of Government 🖋 Economies were predominantly socialist and the in the Economy State intervention in the economies were substantial. As capitalism grew, disadvantage of State control in terms of productive inefficiency became apparent and provision of goods were left in the hands of the market-guided private sector. 🖋 As demand for more and more social wants increased the State is expected to work for its maximum advantage and expand its activities to promote welfare State. 🖋 The government in the economy operates as a producer of the products and as consumer of resources, further as a employer of labor and an investor of capital. (Public Economics-New Perspectives & Uncertainties. Fiscal Functions Allocation Function Distribution Budget Function Policy Stabilization Function  Government have the responsibilities to put in place effective public financial management systems to protect and ultimately enhance the country’s economic sovereignty.   There are many actors involved in making financial decisions about allocation of public resources-including, political parties, presidential administration, local governments, civil society, Fiscal Functions Ministry of Finance, Central bank, and others.  The goals pursued by the participants in this process may not coincide. Political parties pursue the goal of securing funding for an election campaign. Civil society may insist on at ion increasing transparency and accountability of the spending of oc All nction budgetary funds in the form of taxes paid by them. Local Fu governments focused on achieving results in accordance with the approved budget.  Significant part of the economically active population is interested in the quality and effective functioning of the financial management system in the public sector.  The public sector of the economy, as a RULE, occupies a leading position in the economy of developed countries! (Public Financial Management: Essence, Problems, and Development Prospects)  Need for stabilization policy? ….argument of Stabilization Function(Aikins, 2009) In absence of such policy, economy will subject to substantial fluctuations and may suffer from unemployment and inflation. Forces of instability could transmit from one country to another with growing international interdependence. Level of employment and prices depends on level of aggregate demand which in turn is function of spending decisions of consumers. Spending decision of consumer is function of income (past & present), wealth position, credit availability, and expectations. State may not be able to provide all those goods which have predominantly publicness for the Constraints of State reasons below:  Lack of resources specially in an underdeveloped economies.  The administrative machinery of the State may not be efficient enough to undertake the provision of all goods which are predominantly public in nature.  The efficiency in public undertakings is notoriously low as there is lack of initiative and a proper system of incentives.  Political and social acceptability of government activities and its polices. What is Public Finance? 💈 Related to the financing of the State activities.. 💈 Financial operations of the public treasury deals with the finance of the public as an organized group under the institution of government. The finances of the government include the raising and disbursement of government funds. 💈 “concerned with the operation of the fiscal, or public treasury and hence, it is a fiscal science; its polices are fiscal polices, and its problems are fiscal problems” Public Financial Management? 🏇 It encompasses a broader set of functions 🏇 Field of economics that than financial management & is commonly analyzes government conceived as a cycle of six phases, beginning taxation and spending with policy design and ending with external policies. audit and evaluation 🏇 Concerned with aspects of resource mobilization and expenditure management in the public sector. 🏇 Management of a country’s revenue, expenditures, and debt load through various government and quasi-government institutions Focuses on economic and governance reform programs of developing and transitional economies, using principles of fiscal discipline, legitimacy, predictability, transparency and accountability to reform and strengthen public finances.  Public Financial Management Budget Execution External Budget Accounting security & Formulation & Reporting Audit The term “public financial management” commonly describes elements of an annual budget cycle, which typically centers around (1) budget formulation; (2) budget execution; (3) accounting and reporting; and (4) external security and audit. A general consensus exists around the objectives of the PFM system. Public Financial Management? 🏇 Laws, rules, systems and processes used by sovereign nations (and sub-national governments), to mobilise revenue, allocate public funds, undertake public spending, account for funds and audit results. 🏇 Broader than financial management:  Policy Design  Budget Formulation  Budget Approval  Budget Execution  Accounting  External Audit and Evaluation Objective of PFM 🔅 to exercise effective control of the total budget and management of fiscal risks. Level 1 🔅 Planning and executing the Aggregate fiscal budget in line with government discipline priorities aimed at achieving policy objectives. Level 3 Level 2 Efficient service Strategic allocation of delivery resources 🔅 Using budgeted resources to achieve the best levels of public services within available resources  🌐 Maintain aggregate fiscal discipline: ensure aggregate levels of tax collection & public spending are consistent with targets for the fiscal deficit, & do not generate unsustainable levels of public borrowing. Objectives 🌐 Ensure that public resources are allocated to agreed strategic priorities, allocative efficiency is achieved. 🌐 Ensure operational efficiency is achieved, achieving maximum value for money in the delivery of services. Maximize the government’s capacity of and capability to deliver services. 🌐 follow due process & should be seen to do so, by being transparent, PFM with information publicly accessible, apply checks & balances to ensure accountability. 🌐 Reduce fraud, corruption and wasteful expenditure. Objectives ☔ Aggregate financial management - fiscal sustainability, resource mobilization and allocation. ☔ Operational management - performance, value for of money and strategic financial planning and PFM management. ☔ Governance - transparency and accountability ☔ Fiduciary risk management - controls, compliance and oversight (Parry 2010). Source ACCA members  National Budget Components/ Segments of Expenditure Public Finance Tax collection & management Deficit/ Surplus National debt nents of PFM (WB)  National Budget 💠 A plan of what the government intends to have as expenditures in a fiscal year/Financial Year. 💠 Link Budget to policy 💠 The various PFM processes are structured around the budget cycle. This annual cycle aims to ensure that public expenditure is well planned, executed and accounted for.  National Budget Budget Policy, Systems & Management  Developing and managing national/regional budgets is a critical component of effective public service implementation. If public funds are to deliver the services for which they have been allocated, financial planning, execution and monitoring systems need to be in place, and working.  Linkages between policy and budget allocation, capacity to analyze and prioritize budget allocations.  National Budget Budget Transparency  National budgets are an important source of information as they set out the priorities of the government and link them directly to spending. Budget transparency is a key element of the broader process of public financial management reform as it allows the public to scrutinize and respond to the government programme.  Transparent budgeting has a range of powerful benefits including the development of greater trust in government institutions and in the willingness to contribute through taxes.  A transparent budget process also holds governments to account as progress against-or deviations from the budget are easy to see.  Budget Formulation (Y-1) ASPECTS External Oversight (Y+1) Budget preparation - Capital budgets, ACTORS ACTORS medium-term Cabinet ASPECTS Ministry of Finance expenditure Ministry of Finance Audit Spending agencies frameworks, linking Spending agencies Legislative scrutiny External auditor budgets to policy, Legal reform Legislature Legislature program & performance budgeting Accounting and Reporting (Y) Budget Execution (Y) ASPECTS ASPECTS Accounting ACTORS Cash & commitment - Ministry of Finance management, Reporting - - Spending agencies Adjustments, Payroll, ACTORS Budget monitoring Procurement, Transfers, Ministry of Finance Internal control, Spending agencies The Budget Cycle Automation  Budget Cycle & 5. Control Public Financial & 1. Fiscal Framework Management Audit o Linking budget and accounting processes to ensure that expenditures seamlessly match the budget law. Legal o Identifying outcomes from previous fiscal 4. Framework years to improve results for the current Accounting year. 2. Budget & o Integrating forecasts, trends and Preparation Reporting commitments to improve the use of cash and investments o Determining key performance indicators to enable improved budget execution. 3. Budget Execution  Public Expenditure/PE Management 💰 Everything that a government actually spends money on, such as social programs, education, and infrastructure. Much of the government’s spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. The actual expenditures may be greater than or less than the budget.  Public Expenditure Management (PEM) 💰 is a central instrument of economic and development policy. 💰 The three over-all goals of PEM are fiscal discipline, strategic resource allocation and good operational management. 💰 Effective PEM is also a key component in good governance. The 'four pillars' of accountability, transparency, predictability and participation- ADB.  Dynamics of the Public Spending over 20 years 1. Government spending as a share of national output. 2. Government revenue as a share of GDP. Dynamics of the Public Spending over 20 years o Public expenditure management involves efficient utilization of financial resources for the delivery of public services. o The major theories of public expenditure are classified into four classes: (a) macroeconomic performances, (b) public economics, (c) political system, and (d) budgetary targets. These theories offer guidelines about a benchmark on expenditures to be incurred by the government and thus can possibly contribute to minimize the extent of strategic behavior of the stakeholders in the process of budget preparation of a government.  External Audit  A vital component of a transparent and accountable public financial management system is the ability of a government to undertake external audit, where the auditor is independent of the institution or the individual it is assessing. This is a system that holds ministers, officials, and implementing partners to account for spending public resources.  Effective external audit reduces the opportunity for corruption and makes policy development more effective – so that there is better public service delivery and greater value for money for taxpayers. Public Finance Management Revenue Expenditure (Tax collection) (National Budget) Deficit Borrowings/Debt PMF Cycle and the key actors involved  Tax Collection & Management Tax collection is the main revenue source for governments. Examples of taxes collected by governments include sales tax, income tax, estate tax, and property tax. Other types of revenue in this category include duties and tariffs on imports and revenue from any type of public services that are not free.  Surplus/Deficit Expenditure (National Budget)  If the government spends more then it collects in revenue there is a deficit in that year.  If the government has less expenditures than it collects in taxes, there is a surplus. Deficit  National Debt If the government has a deficit (spending is greater than revenue), it will fund the difference by borrowing money and issuing national debt. Usually, National Treasury is responsible for issuing debt, and when there is a deficit, the Office of Debt Management (ODM) will make the decision to sell government securities to investors.  "Good financial management relies on a collaborative relationship between finance staff, budget holders and stakeholders"— The Chartered Institute of Public Finance and Accountancy