public financial management good practice budget formulation

7/29/2019 Public Financial Management Good Practice Budget Formulation

1/14

PFM Domain BUDGET FORMULATION

Good Practice PFMGOOD PRACTICESApplicable ALL GOVERNMENTS

FreeBalance Public Financial Management

Good Practices


2/14

FreeBalance

2

why is budget

formulation

important ingovernment?

Profitability is the key concept in the private sector. Budget is the key conceptin government.In business the budget is only an internal document. In

governments and not-for-profits, the budget is the key fiscal document. Budgeting in the public sector is fundamentally different from budgeting in the

private sector. At the heart of the difference are the absence of a bottom line

and the presence of a shared and limited source of funding.

Governments operate using commitment accounting where budgets controlexpenditures.The budget is the governments key policy document : the legal

embodimentof government policy.

Budget formulation, or budget preparation, is the process by whichgovernments produce budgets.An effective budget pursues three (partially

competing) objectives: maintaining fiscal discipline, allocating resources in

accordance with policy priorities and efficiently delivering services, or value formoney. Budgets should be comprehensive, transparent and realistic.

Budget formulation needs to be aligned with budget execution which is the wayin which spending is managed and in-year budget changes are enabled.

Budgeting in the public sector is a complex exercise. It involves the combinationof information from multiple sources, bringing together different perspectives

and dealing with diverse interest groups, all influencing complex decisions.
http://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdfhttp://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdfhttp://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdfhttp://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://pdf.usaid.gov/pdf_docs/PNADK595.pdfhttp://pdf.usaid.gov/pdf_docs/PNADK595.pdfhttp://pdf.usaid.gov/pdf_docs/PNADK595.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://pdf.usaid.gov/pdf_docs/PNADK595.pdfhttp://pdf.usaid.gov/pdf_docs/PNADK595.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdfhttp://media.wiley.com/product_data/excerpt/01/EHEP0015/EHEP001501-1.pdf


3/14

FreeBalance

3

how is the quality of

government budget

managementevaluated?

ThePublic Expenditure and Financial Accountability(PEFA)Performance

Measurement Frameworkhighlights the four objectives for budget formulation:

Credibility of the budget The budget is realistic and is implemented asintended Comprehensiveness and transparency The budget and the fiscal risk

oversight are comprehensive and fiscal and budget information is accessible to

the public.

Policy-based budgeting The budget is prepared with due regard togovernment policy.

Predictability and control in budget execution The budget is implemented inan orderly and predictable manner and there are arrangements for the exercise

of control and stewardship in the use of public funds.

what is the budget

formulation process?

Budget formulation differs among countries and levels of government. The budget

formulation process typically starts economic analysis and prediction for

government revenue. The process follows sets of budget rules during a budget

calendar that includes a broad set of financial information.
http://www.pefa.org/http://www.pefa.org/http://www.pefa.org/http://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://siteresources.worldbank.org/PEFA/Resources/PMFEnglishFinal.pdfhttp://www.pefa.org/


4/14

FreeBalance

4

how does budget

planning fit into PFMprocesses?

Government budget planning begins during the fiscal year and leverages historical

and current revenue and expenditure information. Budget planning processesalign, in theWorld Bank Treasury Reference Model, with economic forecasting,

debt management and treasury systems. Liquidity and cash management is critical

to understanding the expected revenue and expenditure variations in government.
http://go.worldbank.org/OAF23YYF60http://go.worldbank.org/OAF23YYF60http://go.worldbank.org/OAF23YYF60http://go.worldbank.org/OAF23YYF60


5/14

FreeBalance

5

what budget

categories are used

by governments?

Budget planning categories differ among countries. The processes used can be

different depending on the categories. Typical categories include:

Separationofcapital expenditures from operating or recurrent expenditures.Experience shows that in the absence of properly organized capital budgets,governments resort to borrowing without due consideration of the

sustainability aspects, assets are inadequately maintained, and major projects

suffer from overall poor management and performance

Special budgets for procurement (procurement planning) andPublicinvestment planning (PIP), particularly national infrastructure projects

Separate planning for debt and aid that informs the budget planning process Human resources and payroll planning can be a special categories because

salaries make up the greatest portion of the expenditure budget

how do budgetclassifications enable

budget formulation

across categories?

Government budget formulation software can adapt to the planning workflow andcategories used by governments through budget classifications. Government

budget classifications, often called Charts of Accounts (COAs), represent the

underlyingmeta datafor Public Financial Management (PFM).

The COA is made up of a number of hierarchical data segments and is considered

the lynchpin of a governments accounting and reporting system and serves as a

key tool to meet its business requirements.

The COA, although appears to be just concerned with classifying and recording

financial transactions, is critical for effective budget management, including

tracking and reporting on budget execution. The structure of the budgetin

particular the budget classificationand the COA have a symbiotic relationship.The COA structure can be used within the budget formulation software to map:

Users and roles to elements in the COA to ensure that planners are only able tosee the correct sub-section of data

Workflow processes and that the budget formulation process followsgovernment standards for different budget preparation categories

Revenue sources such as donors (aid), debt and government revenue can beshown in fund source segment or included in the accounting codes

Capital, recurrent and salary categories are typically modeled in the accounting(or object) codes

Program segment and can be combined with object codes can be used tomodel public investment projects

Organization or location segment can be used to control decentralized budgetsacross line ministries, government owned enterprises and sub-national

governments
http://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.gfoa.org/downloads/GFOA_ManagingtheSalaryandWageBudgetingProcessBP.pdfhttp://www.gfoa.org/downloads/GFOA_ManagingtheSalaryandWageBudgetingProcessBP.pdfhttp://www.freebalance.com/blog/?p=1787http://www.freebalance.com/blog/?p=1787http://www.freebalance.com/blog/?p=1787http://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.imf.org/external/pubs/ft/tnm/2011/tnm1103.pdfhttp://www.freebalance.com/blog/?p=1787http://www.gfoa.org/downloads/GFOA_ManagingtheSalaryandWageBudgetingProcessBP.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdfhttp://www.odi.org.uk/resources/docs/7542.pdf


6/14

FreeBalance

6

what are the major

trends in government

budget preparation?

Analysis: government budgeting is transitioning from a ceremony where moretime was spent creating a budget than analyzing it to morerigorous thinking to

rethink action plansincluding techniques such asmacro-fiscal frameworks,

zero-based budgetingand spending reviews Benchmarking:many government agencies began emulating private-sector

best practices by integrating benchmarking activities into planning and

budgeting processes

Decentralization: enabling bottom-up budget proposals from those who arecloser to citizens

Multiple year: use ofmultiple-year planningto develop more credible budgets Performance: Budget formulation and execution was traditionallyfocused

primarily on resource allocation and input control is maturing towards a focus

on results or government performance.

Participation: use ofparticipatory budgetingoutreach to citizens and civilsociety, particularly at the local and regional levels of government Policy: techniques that align government policy and objectives to budget

categories

Transparency: use of open data and budget reports throughout the budgetcycle to be moreresponsive to citizen needsby encouraging advocacy
http://www.pmsquare.com.au/assets/Uploads/PDFs/Bestpracticesbudgeting.pdfhttp://www.pmsquare.com.au/assets/Uploads/PDFs/Bestpracticesbudgeting.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1327423997641/Day2_1MacroFiscalFramework.pdfhttp://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1327423997641/Day2_1MacroFiscalFramework.pdfhttp://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1327423997641/Day2_1MacroFiscalFramework.pdfhttp://en.wikipedia.org/wiki/Zero_Based_Budgetinghttp://en.wikipedia.org/wiki/Zero_Based_Budgetinghttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://en.wikipedia.org/wiki/Participatory_budgetinghttp://en.wikipedia.org/wiki/Participatory_budgetinghttp://en.wikipedia.org/wiki/Participatory_budgetinghttp://internationalbudget.org/who-we-are/http://internationalbudget.org/who-we-are/http://internationalbudget.org/who-we-are/http://internationalbudget.org/who-we-are/http://en.wikipedia.org/wiki/Participatory_budgetinghttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://www.oecd.org/dataoecd/13/2/37714836.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.imf.org/external/pubs/ft/wp/2003/wp0333.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://www.nasact.org/nasact/benchmarking/downloads/AssessBenchmarkGovOrg.pdfhttp://en.wikipedia.org/wiki/Zero_Based_Budgetinghttp://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1327423997641/Day2_1MacroFiscalFramework.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://www.civicus.org/new/media/Budgeting.pdfhttp://www.pmsquare.com.au/assets/Uploads/PDFs/Bestpracticesbudgeting.pdf


7/14

FreeBalance

7

how does budgeting

differ among

developing anddeveloped country

governments?

Budget performance: Government deficits caused by weak revenuemobilization, profligate government spending and anticipatory spending,

including anticipation of donor inflows. Poor budgetary discipline will raise

demand-pull inflation, crowding out the private sector from the financial

market because of high interest rates and unsustainable debt profiles, all of

which slow private sector growth and reduce business confidence in the

economy.

Resource Shocks:Low-income countries are inevitably subject to the risk ofresource shocks.

Short term focus:In migrating from underdeveloped to highly developedcountries, fiscal sustainability has shifted in focus from the near term to the

distant future. In less developed countries, the immediate concern is whether

the government will be able to service its debt if capital flees, the currency

depreciates, and interest rates surge. Under spending:In developing countries, and particularly in fragile states,

under spending is frequently as much of a problem as overspending. A failure

to spend funds in a timely manner and in accordance with the budget points to

a failure to deliver planned services. It is therefore useful to consider the

budget execution responsibilities of spending agencies

Unreasonable Expectations:Even in developed countries with access tosignificant resources, such systems have taken many years to implement, and

not always successfully. Indeed, some developed countries themselves see the

challenge and complexity of say, implementing accrual budgeting as too great,

preferring instead to adopt a modified accrual methodology. So to expect smalldeveloping and middle-income countries to implement such systems seems to

be overly ambitious and more often than not doomed to failure. Where

implementation fails, the effect can be to set back process reform many years .

what is fiscal

sustainability?

Governments need to develop credible budgets to ensure that long-term spending

is sustainable. Credible budget planning takes into account the four dimensions of

fiscal sustainability:

Solvency the ability of government to pay its financial obligations. Growth fiscal policy that sustains economic growth. Stability the capacity of government to meet future obligations with existing

tax burdens. Fairness the capacity of government to pay current obligations without

shifting the cost to future generations.
http://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdfhttp://new.uneca.org/Portals/agr/agr2/Chapter02.pdf


8/14

FreeBalance

8

how are credible

budgets achieved?

Policy: linking policy and resources including the presentation ofbudgetpriorities to align budgets with government objectives

Economic analysis: linking macroeconomic framework with revenue forecaststo provide realistic projections of tax and other revenue sources and reducing

the need for additional debt

Risk: identification and determining riskand risk mitigation strategies toidentify potentialdeviations from the forecast of the key economic

assumptions underlying the budget

Trend analysis: analyzing past outturns to predict future budget needs toensure that programs are neither overfunded or underfunded

Multiple year perspective: planningfor multiple years identifies medium termcosts for programs

Comprehensive financial budgets: articulating all details forcapital andrecurrent expenditures, information on budget financing, debt and the

governments financial positionto ensure that supplemental budgets are notnecessary under regular conditions and all activities aligned to government

priorities in a unified budget

Controls: linking of the legal budget allotments and appropriations with budgetexecutioncontrols in the public finance management system
http://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www.oecd.org/governance/budgetingandpublicexpenditures/1905258.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.odi.org.uk/resources/docs/7542.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdf


9/14

FreeBalance

9

what are Medium

Term Expenditure

Frameworks (MTEF)?

MTEFsrepresent rolling plans, normally over three to five years, which move

forward each year with the first year representing the budget and the outer

years representing projections of spending. The purpose of MTEFs is to enable

more credible budgets, address fiscal sustainability and better linkpolicy, planning

and budgetingformeaningful shifts in spending priorities. However,although there

is widespread recognition that this is a promising way forward, in practice

establishing MTEFs is difficult, and implementation takes longer than is often

anticipated.

MTEFs differ among countriesdepending on the fiscal context, capacity and

tradition.MTEFis an aggregate term that can include:

Medium Term Macroeconomic Frameworks (MTMF) to provide a multiple yearview on expected and relevant economic activity that can drive

Medium Term Fiscal Frameworks (MTFF) to predict the government revenueand expenditure envelop to inform Medium Term Budget Frameworks (MTBF) that provide the basic structure of

expenditures based on government priorities that can include

Medium Term Sectoral Strategies (MTSS) of specific programs designed toimprove economic sectors whose performance can be managed by

Medium Term Performance Frameworks (MTPF) that align budgets withdesired performance outputs and outcomes
http://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.worldbank.org/afr/wps/wp28.pdfhttp://www.worldbank.org/afr/wps/wp28.pdfhttp://www.worldbank.org/afr/wps/wp28.pdfhttp://www.worldbank.org/afr/wps/wp28.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.odi.org.uk/resources/docs/2051.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdf


10/14

FreeBalance

10

why are MTEFs

challenging?

Traditional approaches to budget reform multiyear budgeting, output based and

accrual budgeting have been particularly difficult to implement in developing

countries and the development landscape is littered with failed reform strategies.

Challenges to effective MTEF implementation include:

Accounting:poor accounting processes and bad execution datacan lead to poorplans

Economic stability: highuncertainty in terms of their terms of trade and hard-to-predict commodity price earnings, as well as in the predictability of aid)

Off-budget:donor fundingand government-owned enterprise budgets can beoff-budget where governments are unaware of the full revenue and

expenditure footprint for effective planning

Overloading:doing too much at once can overload human capacity preventprogress on all reforms

Political will: unwillingness tochange policyto reflect macroeconomic analysisor performance measures

Fiscal sustainability: focus on the medium-terms makes the processnot attunedto long-term issues

Component model for budget formulation automation software.
http://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.oecd.org/gov/budgetingandpublicexpenditures/43481125.pdfhttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://www.powershow.com/view1/8744b-N2Y0Y/MediumTerm_Expenditure_Framework_Lessons_flash_ppt_presentationhttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://www.mfdr.org/rt3/Glance/Documents/P&B_final.pdfhttp://blog-pfm.imf.org/pfmblog/files/mtefs_overview.ppthttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.htmlhttp://blog-pfm.imf.org/pfmblog/2011/12/ho-ho-hostrategic-budgeting-is-here.html


11/14

FreeBalance

11

how does

government budget

planning softwaremeet unique

requirements?

Effective government budget planning software can be configured to meet unique

requirements. There are numerous budget management software applications

available but,in practice the World Bank and aid agencies have funded the

introduction of private sector financial systems, which do not include core budgeting

functionalities.

Government budget formulation software must support:

Financial functionsincluding the ability to develop budgets in any combined top-down/bottom-up process. Effective budget preparation software can take

previous data and adjust by formula (such as reduce by 5% all revenue categories

or increase the cost of oil by 10%). The software enables linking budget

justification directly with the budget classifications. The budget passed by the

legislature, often called the organic budget law or the vote is automatically

integrated with the budget execution/accounting system to ensure properbudget controls.

Content. Budget formulation software needs to use data from other sourcesincluding importing spreadsheet data directly to the financial budget plan,

attaching narrative to budget requests and referencing documents.

Workflow: Flexible workflow functions are necessary to follow the governmentbudget calendar and address budget categories. Multiple budget versions are

required.

Performance: Governments with higher capacity can integrate output andoutcome data to the COA and develop scorecards.

what are the inputsfor government

budget software?

Inputs in the budget formulation process include: Financial transactions from previous years (and the active fiscal year) including

the tracking of multi-year commitments that roll-over to subsequent years

Budget variances from previous budgets including changes that occurred to thebudget during operation such as budget transfers and virements to provide trend

information

MTEF year 2 and 3 budget estimates to provide a baseline for the workingbudget

Macroeconomic data that predicts government revenue, identifies risks, andcreates baseline budget assumptions such as currency exchange rates

Cost drivers or established estimates for products and services so that budgetsuse credible assumptions and align with scenario planning such as analyzing theimpact of changing energy costs and currency fluctuations

Documents like budget justification, policy information and reports Integration with underlying systems and spreadsheets
http://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdfhttp://www.acbf-pact.org/Data/Sites/1/docs/occasional/Occasional%20Paper9.pdf


12/14

FreeBalance

12

what are the

outputs for

government budgetsoftware?

Outputs in the budget formulation process include:

Budget controls to be integrated with the treasury system components of theGovernment Resource Planning (GRP) software for commitment accountingincluding support for warrants, supplemental budgets, continuing resolutions

Scenario plans that enables government to quickly adjust budgets should riskfactors come to fruition during the fiscal year

Documents generated from the system such as budget books why are budget

controls a critical

output of budget

formulation

software for

government?

Budget controls are necessary because, in many governments, practices do not

match rules. Institutional or governance factors may lead to gaps between formal

PFM regulations or procedures and actual practices (e.g., a technically sound internal

control is not enforced).Therefore automated controls with the financial

management software provide internal controls to reduce overspending and ensure

compliance with government accounting regulations.Controls are modeled in budget formulation software and automatically integrated

with budget execution and commitment accounting functions within the GRP. These

controls should be adapted to meet legal and fiscal discipline requirements.
http://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdfhttp://www1.worldbank.org/publicsector/pe/CFAAGuidelines.pdf


13/14

FreeBalance

13

why are flexible

controls required?

Flexible controls in GRP software are critical for governments to match regulations

and enable modernization:

Budget laws address high-level budget items in the COA. Therefore, strict controlat details or line item budgeting is not material to the law Capacity is critical when determining decentralization and needs to be flexible to

support more discretion in spending and budget transfers to improve results

Allotments, appropriations, warrants and cash controls differ among countriesbased on legal frameworks, traditions and liquidity

Treasury departments provide more value to governments by managing liquidityand adjusting allotments based on surplus and deficit forecasts than approving

commitments and transferring amounts among budget line items

what budget

control functionsare necessary in

GRP software?

Multiple Controls: numerous controls can operate simultaneously such as cashwarrants and annual appropriations

Periods: different controls can be active for different time periods, typically froma month to a year

Aggregate: controls can operate from detailed line item to high level and wherethe total of detailed line items could equal or not equal the total for the high

level controls

Tolerances: discretion enabled for some controls such as the ability to overspendsome monthly controls by a fixed amount or a percentage as long as aggregate

controls are not overspent

Commitment Controls: where tolerances can be applied to commitments andobligations

Segregation of Duties: workflow controls to ensure proper separation of dutiesfor spending approvals, payment approvals and budget transfer approvals that

meet government fiscal regulations

Organization Configurations: support of different control schemes for differentgovernment organizations reflecting legal status and organizational capacity

why not use

spreadsheets or

simple web

applications for

budget

preparation?

Spreadsheet and simple web applications do not provide sufficient control, error

management and integration for budget planning:

Version management and approval: versions of budgets and approvals forbudgets require more sophisticated software that uses workflow control

Controls: budget formulation software is required to create controls, managesegregation of duties integrate with commitment accounting

Errors: validation on data input is not sophisticated in spreadsheet and simpleweb applications resulting in mistakes

Historical information: integrated budget preparation and budget executionsoftware provides accurate analytical information for budget planners


14/14

FreeBalance

14

what are good

practices for budget

formulation?

Conclusions

1. Budgets are the legal embodiment of government policy and is critical in publicfinancial management

2. Budget formulation practices should match country conditions and humancapacity

3. The Chart of Accounts is critical for effective budget processes4. Budget formulation software can help to create more credible budgets that

provide fiscal sustainability and internal controls

There are very few best practices but many good practices in Public Financial Management.

FreeBalance, a global provider ofGovernment Resource Planning(GRP) software and services

shares good practices from experience withdeveloped and developing country governments

around the world.

www.freebalance.com
http://www.freebalance.com/http://www.freebalance.com/http://www.freebalance.com/products/http://www.freebalance.com/products/http://www.freebalance.com/products/http://www.freebalance.com/customers/http://www.freebalance.com/customers/http://www.freebalance.com/customers/http://www.freebalance.com/customers/http://www.freebalance.com/http://www.freebalance.com/http://www.freebalance.com/http://www.freebalance.com/customers/http://www.freebalance.com/customers/http://www.freebalance.com/products/http://www.freebalance.com/