adb grant 0133-cam: public financial management in rural development ministries (component 1)

ADB Grant 0133-CAM: Public Financial Management in Rural Development

Ministries (Component 1)

Linking Strategic Plans with BudgetsJanuary 26, 2010

Session 2: Day 2Contents of Presentation

Royal Government of Cambodia budget structure

• Meaning of budget and its rationale • Government budget• External budget• Private budget

2ADB Grant 0133-CAM: Component 104/20/23

Budget Structure of the Royal Government of Cambodia

MEANING OF BUDGET & ITS RATIONALE• Definition: A budget is a financial document

used to project future income and expenses. The budgeting process is carried out by the government to estimate whether it can continue to operate service delivery and investment with its projected income and expenses.



MEANING OF BUDGET & ITS RATIONALE• Rationale: A balanced budget is a basic budgetary

constraint intended to ensure that a government does not spend beyond its means. At a minimum, balance should be defined to ensure that a government’s use of resources for operating purposes does not exceed available resources over a defined budget period. A more stringent definition requires that a government maintain a balance between operating expenditures and operating revenues over the long term, not just during the current operating period. This latter definition of balance is referred to as structural balance.



CAMBODIA BUDGET & ITS RATIONALE• Principle of balance:

– Article 46 of 1993 Law states:• “During a session of the Council of Minister’s on the report of the

Minister of Economy and Finance, additional appropriations may be made available by a decree authorizing advances exceeding the budget allocations included in the chapter of unforeseen expenditure in the event of disaster or of imperative need effecting national interests”

– Law July 19, 1994 – Article 16 states:• “In exceptional circumstances or in the case of force majeure, The

Prime Minister may, in order to settle necessary and urgent matters, order expenditures larger than those granted in the national budget; he shall immediately submit a report to the National Assembly”



GOVERNMENT BUDGET 2010• The overall budget of $1.99 billion • Defense and security received 14%• Ministry of Health 7.2%• Ministry of Education 9.9%• Ministry of Agriculture 1.1%• Ministry of Water Resources 1.3%• Ministry of Rural Development 2.1%2008 GDP of Cambodia = Agriculture 32% employing 85% of

the people



GOVERNMENT BUDGET• The fiscal year for all government ministries and

public institutions starts with the first day of January until December 31st of each calendar year.

• The budgeting process starts in March in order to provide more time for the budget preparation and deliberation.

• The general budgeting process is described in the following stages [Refer slide 9 onwards]

1. Macroeconomic framework development (Mar-May)2. Budget Preparation (Jun-Sep)3. Approval the National Budget (Oct-Dec)



EXTERNAL BUDGET• Central government budget (2008):

Revenues--$1.3 billion; expenditures--$1.6 billion; foreign financing--$606 million {38%}

• 35 multilateral & bilateral aid partners– ADB– AusAID– FAO– World Bank



PRIVATE BUDGET• NGO – 33 operating in Agriculture Sector• Private Sector 22% of GDP {2008}



BUDGET PREPARATION

• Step 1: Develop National Macroeconomic & Public Financial Policy for submission to the Council of Ministers for review and approval.

• Step 2: Allocation of the global total among line ministries, leaving room for reserves (a separate planning and a contingency reserve as explained below) to be managed by the ministry of finance.

• Step 3: The next step should be for the budget department to prepare a budget circular to give instructions to line ministries, public institutions and sub-national administration on the preparation of the Budget Strategic Plan with the indicative aggregate spending ceiling for each ministry, on how to prepare their estimates in a way that will be consistent with macro objectives. This circular will include information on the economic assumptions to be adopted on wage levels, the exchange rate and price levels



BUDGET PREPARATION

• Step 4: Step four is the submission of strategic budget plan by line ministries to the budget department. Once received there needs to be an effective "challenge" capacity within the budget department to test the costing of existing and any new policy proposals.

• Step 5: Draft Circular on the budget preparation technique with the formats and procedures and other related documents for submission to the Council of Ministers for review and approval.

• Step 6: Review and approve the Circular on the budget preparation technique

• Step 7: Send the Circular to the ministries and public institutions for preparation revenue, expenditure budget plan.

• Step 8: Submit budget plan and priority policy to the MEF



BUDGET PREPARATION

• Step 9: The next step comprises the negotiations, usually at official and then bilateral or collective ministerial level, leading finally to agreement.

• Step 10: Add up the government revenue-expenditure budget for rebalancing the government budget.

• Step 11: Draft Financial Law and prepare the memo of them.

• Finally, step 12 is Cabinet endorsement of the proposals for inclusion in the budget that will go to parliament.



BUDGET CYCLE


Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4

Council of Ministers

Ministry of Economy and

Finance (MEF)

Ministry/Institution

and Provincial/Municipality

MARCH APRIL MAYInstitution

Develop National Macro-

Economic & Public Financial

Policy for submission to

Council of Ministers for

aproval

Issue Circulars to ministries, institutions & sub-national gvts on the

preparation of strategic budget

planning

Prepare strategic budget plan and submit to the MEF before 15 May

Review & ApproveNational Macro Economic &

Public Financial Policy

Approved National Macro

Economic & Public Financial

Policy

Strategic Budget Plan


BUDGET CYCLE


Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4



Finance (MEF)

Ministry/Institutionand Provincial/Municipality

SEPTEMBERJUNE JULY AUGUSTInstitution

Prepare the draft

Circular on the budget preparation technique

for submission

to the Council of

Ministers for review and approval

Prepare of detailed revenue & expenditure proposals budget

and submit them to MEF before 15 July

Review & Approve the

budget preparation technique

Discuss with line ministry/provincial/mucipality on the revenue and expenditure budget proposals

Add up the government revenue and expenditure budget for rebalancing of government budget

Send circular to ministries/

public institution requesting

them for the preparation of revenue and expenditure proposals

Circular on the

preparation of budget

proposal

Collect and add up the budget proposals

Prepare the draft of financial law


BUDGET CYCLE


Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4

Senate

National Assembly



Finance (MEF)

Ministry/Institutionand Provincial/Municipality

OCTOBER NOVEMBER DECEMBERInstitution

Draft Financial

Law

Review and Endorse the Financial Law and submit to the National Assembly for deliberate on and approve

Draft of Financial

Law

Draft of Financial

Law

Deliberate on and approve the Financial Law before 25 December

Deliberate on & approve the Financial Law and submit for final approval


STRUCTURE OF THE GOVERNMENT BUDGET - generic• The principle of comprehensiveness requires that the budget cover all

government entities and institutions undertaking government operations, and present a consolidated and complete view of these operations.

• The principle of unity requires that the budget include all revenues and expenditures of all government entities undertaking government operations. This principle is important to ensure that the budget is effective in constraining total and sectoral government expenditure, and in promoting greater efficiency in the allocation of resources.

• The principle of internal consistency between different components of the budget requires, in particular, that the current expenditure needed for the operations and maintenance of past investment projects be fully reflected in the budget. Moreover, this principle implies that there should be a unitary budget system in which responsibilities for preparing and executing the budgets for current and capital (or development) spending are consolidated within a single central fiscal agency, usually the Ministry of Economy and Finance.



STRUCTURE OF THE GOVERNMENT BUDGET• Administrative Classification: The budget signifies

this classification by ministry but not lower. For example MAFF is code 17, MRD: 20, MOWRAM: 29

• Economic Classification: Expenses, allowances for staff, staff salaries

• Period: One year



BUDGET FUNDING• CAMBODIAN TAX SYSTEM

– Self-assessment– Estimated

• Self Assessment: taxable persons determine their own tax and pay without the intervention of tax authorities– Liable persons are responsible for their tax return and information

therein– Admin expense reduced as they prepare and submit returns

themselves– Minimum annual taxable turnover:

• 500 million Riel for companies providing goods (US$122,000)• 250 million Riel for service sector companies (US$61,000)• 125 million Riel for companies bound by contract with Government

(US$31,500)



BUDGET FUNDING• CAMBODIAN TAX SYSTEM

– Self-assessment– Estimated

• Estimated: Small Economic Activities– 39,086 enterprises – lower income than Self-assessment

classification



BUDGET FUNDING• Description & types of tax

– Income tax– Profit tax– Tax on rental of houses and land– VAT– Excise duties– Specific tax on certain goods and services– Slaughter tax– Stamp duties



BUDGET FUNDING• Description & types of provincial tax

– Tax on unused land– Registration tax– Trade license tax– Tax on motor vehicles– Tax on tobacco and alcohol– Slaughter tax



BUDGET FUNDING• Pros and Cons of Extrabudgetary Funds • Pros• Can increase efficiency by simulating private market conditions where levels and standards of

service are linked directly to fees or charges. • Can provide more consistent source of funds for expenditures that yield high benefits yet do not

get much recognition (road maintenance expenditures are a primary example). • Cons • Can result in a loss of aggregate expenditure control; such expenditure may be outside the control

of ministry of finance. • Can distort allocation of resources by circumventing the budget process and review of priorities. • Earmarked revenues can become entrenched so funding is no longer based on priority needs. • Less transparency may lead to inefficiency and/or misuse of funds. • Can facilitate rent-seeking and abuse of monopoly power. • Leads to less flexibility at the margin to reallocate when budget is under stress. • Is incompatible with good cash management practices.



BUDGET FUNDING {Article 13 of the Law on Public Finance System}

• Current Revenue– Group 1: Real Revenue

• Category 1: Tax Revenue• Category 2: Non-tax revenue

– Group 2: Revenue by Order• Category 3: Revenue by order

• Capital Revenue– Group 1: Real Revenue

• Category 1: Revenue from own sources• Category 2: Revenue from external sources

– Group 2: Revenue by order• Category 3: Revenue by order



BUDGET EXPENDITURE 2007• Current Expenditure

– Group 1: Real Expenditure• Category 1: Operations & Maintenance• Category 2: Financial expenses• Category 3: Public intervention• Category 4: Miscellaneous expenditure

– Group 2: Expenditure for order and unforeseen expenditure

• Category 5: Expenditure by order• Category 6: Unforeseen Expenditure



BUDGET EXPENDITURE 2007• Capital Expenditure

– Group 1: Real Expenditure• Category 1: Repayment of borrowings• Category 2: Fixed assets

– Group 2: Expenditure by order• Category 3: Expenditure by order
