Government budgets

[PSCANDIZZO]

Government accounts are afflicted by a twofold shortcoming:

• on  one hand, they are shortsighted and lack time perspective, since budgets are generally for one year, with only limited perspective on a three year horizon.
• On the other hand, accounts are specialized for liquidity management and do not address either the question of income nor the question of wealth accounting in any significant manner.

 
As tools of management, government accounts have been mostly used to expand parliamentary control over the budget by  trying to incorporate a crucial phase of financial and economic management within the legislative process. This has been used both to control spending of the executive branch and to transfer a significant part of the economic power of the state into the political process, mainly through its “pork and barrel” mode.

Technically speaking, in most advanced countries, the public budget is still a so called “authorization “ budget, formulated on a cash basis, almost entirely devoted to a registration of outlays by expenditure class (typically called  budget chapter). This type of budget is  completely non recognizant of the intertemporal nature of capital expenditure, which is assimilated to current expenditure by either instantaneous amortization or by conversion into debt. Wealth and capital accounting are limited to financial assets and liabilities and is a consequence of current accounting of issuance of paper on the part of the government in form of bonds or money. No comprehensive balance sheet is  maintained on accrual basis and the consequence of instant amortization of capital expenditure is the fact that the government does not know, in practice, what it owns in terms of real assets and productive capital, nor what obligations arise from their maintenance and the servicing.

[STONE]

Interesting observations.  You remind me that IPSAS has been promoting improvements in the way governments present their accounts.

 http://www.ipsas.org/

"IPSAS stands for International Public Sector Accounting Standards
Compliance with the IPSAS standards guarantees that the financial reporting of public bodies conveys what is termed a »true and fair view« of the financial situation. IPSAS take account of the characteristic features of the public sector."

I shall check out where they have got to and I'll be very interested to see to what extent taking account of the "characteristic features" of the public sector means that the public sector can still present accounts that lead to less than complete accounting of the intertemporal issues you raise.

This issue applies as much to the accounting and reporting elements of PFM as to the budget credibility issue.

[PSCANDIZZO]

IPSAS standards are a fine attempt at dealing with some of the problems of public accounts. However, they are developed mainly for "public entities", rather than for the Government (of course the Government is itself a public entity, but its accounts are more problematic).

Furthermore, IPSAS is mostly worried about accountability and transparence of the accounts and appears to give much less weight to their economic use for planning and policy making. Thus, intertemporal issues tend to be neglected or solved with recourse to rather formal accounting models.

Nevertheless, if Government accounts were shaped according with IPSAS standard , there is no doubt that much progress would be made in producing a fair, informative and useful representation of Governement activities.

[Martin Johnson]

What makes a budget credible in a PEFA (www.pefa.org) world, of course, is an 'A' score for PI-1 (aggregate expenditure follows the budget) and an 'A' score for PI-2 (expenditure following budgets at dissaggregated levels - administrative head, function or programme).

But what does that mean? It means plans for spending have been broadly accurate but it says nothing about delivery. At the risk of crossing PFM board topics, there is not a credibility indicator for government budgets in terms of performance information (although there is an indicator which touches on results-oriented approaches - PI-12). Interesting in a world which is paying increasing attention to results based approaches to service delivery. Perhaps this is a challenge for future development of the PEFA tool, although I suspect that will not be straightforward to develop.

[John Short]

I think the PEFA response is that the interconnectivity of the indicators on the budget for example needs to be highlighted in the summary of the PFM Performance report.  The advice on the coverage of procurement in the summary goes beyond PI-19 similarly.

[emagfreek]

I agree with John Short when he says, ''Interesting in a world which is paying increasing attention to results based approaches to service delivery.'' It can be a positive step of PFM but In my opinion, I seriously don't believe that none of any organization is currently in a stand to act like responsible organization in a state. When, they would act like responsible, their clients would be happier. The major problem can non-questioning response.