INTRODUCTION TO PUBLIC FINANCE MANAGEMENT (PFM)

Module 1.1Definitions , objectives of PFM and its context

Module map

Why is PFM important?

New EU Budget Support Guidelines 2012Continued importance of budget support instrumentStronger link with fundamental values of the EUGreater differentiation of budget support operations, Strengthened eligibility criteria More rigorous assessment

• Some definitions

• Implementing public policies

• The specific objectives of PFM

• The limits of technical approaches to PFM

Module outline

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What is PFM?Public Financial Management deals with

management of public resources: the

allocation and use of resources collected

from the economy

3 basic elements of public finance:•Public expenditure•Revenues•Government debt

OECD DAC 2009 Definition:

“ It includes all components of a country’s budget process… including strategic planning, medium-term expenditure framework, annual budgeting and also revenue management, procurement, control, accounting, reporting, monitoring and evaluation, audit and oversight.“

The scope of this course

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• General government comprises all government units• Central government• State government, in federal countries• Local government

Social security funds are sometimes combined into a separate subsector

• Public sector also includes,• corporations and quasi-corporations controlled by

the government units

What is the Government?

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8Source: Government Finance Statistics (GFS). IMF

• Some definitions

• Implementing public policies

• The specific objectives of PFM

• The limits of technical approaches to PFM

Module outline

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Three objectives of PFM

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Aggregate fiscal discipline

Operational efficiency

Allocative efficiency

Outcomes/Effectiveness

Outputs/Efficiency

• PFM is only one of the instruments to implement public policies, but it is probably the more important

• As instrument, PFM has specific objectives to implement properly policies, which should not be confused with policy objectives

• “ Good Plans” • “ Good hands”

• “ Money” • “ Good tools”

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Specific objectives of PFM

Aggregrate fiscal discipline

Fiscal discipline refers to:

• maintaining a sustainable balance between revenues, expenditures and the level of public debts

• respecting the expenditures ceilings at all levels and by all actors of the Government administration

New York times

Allocative Efficiency Definition

Allocate and spend public resources in such a way that that attainment of the government objectives is maximised

Preconditions for optimising allocative efficiency:• Clearly defined national objectives and priorities• Existence of effective sector programmes • Capacity and willingness to re-allocate if needed• Information on programme outcomes

Definition

Ability to make efficient and effective use of resources in the implementation of strategic priorities

Key elements•Use of liquidity (loans, cash management)•Support to service delivery units•Reduce leakage

Key playersTreasury, Line ministries, service delivery units

Operational Efficiency

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1/Aggregate fiscal discipline

•Ensuring macro-economic stability•Control of totals

2/Allocation of resource in conformity with policy objectives

•Importance of political aspects•Requires appropriate mechanisms for revealing policy choices and for policy dialogue

3/Efficient public service delivery and resource management

•Importance of management systems (e.g. HR management systems)

Health

Education

Agriculture

Defence Justice

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As defined in the recent budget literature -Cf. for example PEFA

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A societal dimension of PFM must be taken into account

“Traditional” PFM values: regularity, compliance, etc. remain very important

Role of Parliament in democratic society

Accountability (Be Answerable and held responsible)

Transparency

Completing the 3 PFM objectives

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Accountability

• The budget as key accountability instrument • Plans expenditures and revenues• Operationalizes the policies • Voted by Parliament• Scrutiny by parliament

The budget cycle

Planning and budget

formulation

Budgetexecution

Monitoring, Accounting, Reporting

External Audit & evaluation

Cross-cutting issues, legal and

technological infrastructure

Parliament scrutinizes and

votes the budget bill

Parliament investigates executive's

audited reports

PFM

obje

ctive

s

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Accountability ‘versus’ PFM objectives?

• The challenges

• Constraints may be required for fiscal discipline but some degree of flexibility is required for performance

• The role of Parliament is crucial in democratic society.

Assessing the 3 PFM objectives?

PEFA

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• Some definitions

• The specific objectives of PFM

• Implementing public policies

• The limits of technical approaches to PFM

Module outline

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• PFM is an instrument to implement public policies;

• Public finance policies • Tax policy• Public expenditure policy• Debt policy

National and sector policies• Poverty Reduction Strategy• Sector plans, etc

Public policies and PFM

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• Some definitions

• Implementing public policies

• The specific objectives of PFM

• The limits of technical approaches to PFM

Module outline

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• PFM compliance was high in the 50s/60s. Performance dropped in late 70s/80s, when salaries plummeted.

• Gap between the fiction of formal systems and the reality of informal processes.

The limits of technical approaches

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Rakner, 2004 29

• Can PFM reform fight Corruption?

• NO • but it helps in identifying where there are

failings

• Strengthening PFM systems in an adequate manner will help in curbing administrative corruption

• However, fighting grand corruption, which involves powerful politicians is largely a political and societal matter

The limits of technical approaches

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• Lessons learned?• Modest; realistic expectations• PFM in its political context• PFM processes should be aimed at making

informal rules visible• Transparency is crucial• Attention should be paid to external (to the

executive) control

The limits of technical approaches

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• PFM is an important instrument to implement government policies

• The main tasks of PFM are to ensure aggregate fiscal discipline, resource allocation in conformity with policy objectives and efficient public service delivery

• Budget management is a core component of PFM• Political aspects of PFM must be taken into

account and informalities must be made visible.

Key messages

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Completing the figure

PlanningBudget

formulation

Budgetexecution

Monitoring, Accounting, Reporting

External Audit

Cross-cutting features, legal and

technological infrastructure

Parliament scrutinizes and

votes the budget bill

Parliament investigates Executive's

audited reports

PFM

obje

ctive

s Political factors,

informal rules

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