financial management
TRANSCRIPT
PUBLIC FINANCIAL MANAGEMENT
A case for reforms……
BACKGROUND……
Second Administrative Reforms Commission was constituted by the Govt. of India, Ministry of Personnel on 5 August 2005 under the chairmanship of Veerappa Moily.
The purpose of its constitution is to prepare a plan of action for a complete makeover of public administrative system.
Terms of Reference:- The commission will suggest ways to make Indian public administration more accountable, sustainable, proactive and efficient
THE COMMISSION WILL INTER ALIA CONSIDER THE FOLLOWING:-
Organizational structure of the govt. of India
Ethics in governance Refurbishing of the
Personnel administration
Strengthening of Financial Management system
Steps to ensure effective administration sat the state level
Steps to ensure effective District Administration
Local self government/panchayat raj institutions
Social capital, trust and participative public service delivery
Citizen centric administration
Promoting e-governance
Issue of federal polity Crisis management Public order.
FUNDAMENTALS OF FINANCE……. defined as the management of money or funds
management. includes all those activities that includes the origination,
marketing and management of cash and money through a variety of capital accounts, instruments and markets created for transacting and trading assets, liabilities and risks.
addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects .
it is conceptualized, structured, and regulated by a complex system of power relations within political economies across state and global markets. Finance is both art and science.
Financial system consists of public and private interests and the markets that serve them. It provides capital from individual and institutional investors who transfer money directly and through intermediaries to other individuals and firms that acquire resources and transact business.
TYPES OF FINANCE…. Three overarching divisions exist
within the academic discipline of finance and its related practices:
personal finance: the finances of individuals and families concerning household income and expenses, credit and debt management, saving and investing, and income security in later life,
corporate finance: the finances of for-profit organizations including corporations, trusts, partnerships and other entities, and
public finance: the financial affairs of domestic and international governments and other public entities.
PUBLIC FINANCE…..
Public finance describes finance as related to sovereign states and related public entities or agencies. It is concerned with:
Identification of required expenditure of a public sector entity
Sources of that entity's revenue
The budgeting process
Public finance is the study of the role of the government in the economy.
The purview of public finance is considered to be threefold: governmental effects on
efficient allocation of resources,
distribution of income, and macroeconomic
stabilization
PUBLIC FINANCIAL MANAGEMENT….. Collection of sufficient resources from the economy in
an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management.
Resource generation, resource allocation and expenditure management (resource utilization) are the essential components of a public financial management system.
basically deals with all aspects of resource mobilization and expenditure management in government.
an essential part of the governance process and it includes resource mobilization, prioritization of programmes, the budgetary process, efficient management of resources and exercising controls.
Rising aspirations of people are placing more demands on financial resources. At the same time, the emphasis of the citizenry is on value for money, thus making public finance management increasingly vital.
GOVERNMENT FINANCING….EXPENDITURE AND RECEIPTS. Government expenditures are financed in two ways: Government revenue
Taxes Non-tax revenue (revenue from government-owned
corporations, sovereign wealth funds, sales of assets, or Seigniorage)
Government borrowing Privatization How a government chooses to finance its activities
can have important effects on the distribution of income and wealth (income redistribution) and on the efficiency of markets (effect of taxes on market prices and efficiency). The issue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution of tax burdens after market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.
TAXATION….. A tax is a financial charge or other levy imposed on an
individual or a legal entity by a state central part of modern public finance. significance arises not only from the fact that it is by
far the most important of all revenues but also because of the gravity of the problems created by the present day heavy tax burden.
main objective of taxation is raising revenue. used as an instrument of attaining certain social
objectives i.e. as a means of redistribution of wealth and thereby reducing inequalities.
in a modern Government,it is thus needed not merely to raise the revenue required to meet its ever-growing expenditure on administration and social services but also to reduce the inequalities of income and wealth.
GOVT DEBT….. Governments, like any other legal entity, can take out
loans, issue bonds and make financial investments. Government debt (also known as public debt or national
debt) is money (or credit) owed by any level of government; either central or federal government, municipal government or local government. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or revenue bonds.
As the government represents the people, government debt can be seen as an indirect debt of the taxpayers
Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills.
GOVT BUDGET…. A government budget is a legal document that
is often passed by the legislature, and approved by the chief executive-or president
The two basic elements of any budget are the revenues and expenses.
revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits.
FISCAL POLICY
fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy
It refers to the use of the government budget to influence economic activity.
The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy:
Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.
FISCAL POLICY CONTD….
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment
MONETARY POLICY.
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls
(i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.
it provides insight into how to craft optimal monetary policy.
Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money.
MONETARY POLICY
Monetary policy is the tool by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment.
an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.
GOVT REVENUE AND EXPENDITURE
Government revenue is revenue received by a government. Its opposite is government spending and forms an important part of fiscal policy.
Revenue may be from taxation or non-tax revenue (such as revenue from government-owned corporation or sovereign wealth funds).
REVENUE AND EXPENDITURE. Government spending (or government expenditure)
includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (gross fixed capital formation), which usually is the largest part of the government gross capital formation. Acquisition of goods and services is made through own production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. Government spending can be financed by seigniorage, taxes, or government borrowing
GOVERNMENT EXPENDITURE……
Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits--- such as infrastructure investment or research spending--- are classed as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money--- such as social security payments--- are called transfer payments.
PUBLIC FINANCIAL MANAGEMENT
With reference to the recommendations of the second report of the Administrative reforms Commission….
Why was the need for reforms was felt? What are the specific areas in which these
reforms are focused at? What do we want to aim at by focusing on
these grey areas?
ONE OF THE KEY TERMS OF REFERENCE OF THE SECOND ARC IS STRENGTHENING FINANCIAL MANAGEMENT SYSTEM WHICH MEANS----- Capacity building in all levels of governance to
ensure smooth flow of funds for the programmes,proper maintenance of accounts and timely furnishing of necessary information.
Strengthening of internal audit system to ensure proper utilization of funds
An institutionalized method of external audit and assessment of the delivery and impact of programme.
The commission is of the view that reforms in the financial management system are an integral part of the reforms in governance in general,therfore these reforms are critical in achieving the national developmental objectives.
WHAT CONSTITUTES GOOD PUBLIC FINANCIAL MANAGEMENT?
ESSENTIAL COMPONENTS OF PUBLIC FINANCIAL MANAGEMENT SYSTEM…..
UNDERSTANDING THE PUBLIC FINANCIAL MANAGEMENT,THEN AND NOW…..
Earlier in developing countries like India, Public Financial Management was viewed as a controlling and regulating process over the spending agencies
Defined narrowly and confined to budgeting, accounting, monitoring and evaluation
Now, viewed as an essential part of the governance process involving resource mobilization, prioritization of programmes,budgetory process, efficient management of resources and exercising controls.
Defined broadly to include taxation and other resource mobilisation,debt and cash management, accounting systems, information systems and internal and external audit.
Old concept New concept
THUS, REFORMING THE PUBLIC FINANCIAL MANAGEMENT WOULD INVOLVE:-
Improving the collection of revenue Efficient management of debt and cash Develop and institutionalize planning process
at all levels of govt leading to effective planning and allocation of resources
Effective oversight and monitoring
WEAKNESS IN BUDGETARY PROCESS RESOURCE ALLOCATION AND USE…
Poor planning No link between policy making, planning and
budgeting Poor expenditure control Inadequate funding of operations and maintenance Little relationship between budget a formulated
and budget as executed. Inadequate accounting system Poor management of external aid Poor cash management Inadequate reporting of financial performance Poorly motivated staff.
CORE PRINCIPLES FOR REFORMING THE PUBLIC FINANCIAL MANAGEMENT Reforms in financial management system should be
perceived of as part of overall governance reforms Sound financial management should be the
responsibility of all govt departments/agencies Prudent economic assumptions-tendency to be overly
optimistic has to be avoided. Need to shift from the traditional bottom up approach
to a top down framework Transparency and simplicity,availabilty in the public
domain Relaxing central input controls Focus on results Adopting modern financial management practices like
Accrual accounting,IT,Financial Information Systems etc.
Budgeting to be realistic.
RECOMMENDATIONS MADE BY THE GROUP-
Reforms in budgetary system Plan and non plan distinction should be removed Accountability for programme implementation should
be incorporated in the canons of financial propriety. There should be a separate wing of financial
management comprising of staff and officers who are financial experts and professionals having requisite experience
Provision for an independent and professionally competent internal audit
Accrual accounting should be taken up in project mode and implemented in specific timeframe.
Standing committee attached to each department while discussing the demand for grants must also discuss the internal control framework of each ministry as well as outstanding audit paras.
CONTD…
FRBM may be amended suitably to incorporate provisions relating to control over savings/excess expenditure and avoidable supplementary grants and costing and concept of programme budgeting.
In the flow of funds to centrally sponsored schemes, one size fits all approach wont work anymore rather there should be enough flexibility for state specific variations
State should be involved in scheme formulation. Expenditure tracking should include all funds of the
local bodies including their own resources Major lacunae found in proper expenditure
tracking/auditing is non-maintenance of accounts and non closing of accounts on time by local bodies.
