INTRODUCTION TO
PUBLIC FINANCE
MANAGEMENT (PFM)
Module 1.1
Definitions , objectives of PFM and its
context
Module map
Why is PFM important?
New EU Budget Support Guidelines 2012
Continued importance of budget support instrument
Stronger link with fundamental values of the EU
Greater differentiation of budget support operations,
Strengthened eligibility criteria
More rigorous assessment
Module outline
• Some definitions
• Implementing public policies
• The specific objectives of PFM
• The limits of technical approaches to PFM
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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
The scope of this course
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.“
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What is the Government?
• 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
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Source: Government Finance Statistics (GFS). IMF
Module outline
• Some definitions
• Implementing public policies
• The specific objectives of PFM
• The limits of technical approaches to PFM
9
Outputs/
Efficiency
Aggregate fiscal
Three objectives
discipline
of PFM
Allocative Operational
efficiency efficiency
Outcomes/
Effectiveness
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Specific objectives of PFM
• 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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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
Operational Efficiency
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 players
Treasury, Line ministries, service delivery units
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As defined in the recent budget literature -Cf. for example PEFA
1/Aggregate 2/Allocation of 3/Efficient
fiscal resource in public service
discipline conformity delivery and
with policy resource
objectives management
•Ensuring •Importance of •Importance of
macro-economic political aspects management
stability •Requires systems (e.g. HR
•Control of
appropriate management
totals mechanisms for systems)
revealing policy
choices and for
policy dialogue
Defence Justice
Health
Agriculture
18 Education
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Completing the 3 PFM objectives
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
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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
Parliament Parliament
budget
investigates scrutinizes and
executive's formulation votes the
audited reports budget bill
PFM objectives
External Audit Budget
& evaluation execution
Cross-cutting
issues, legal and
technological
Monitoring, infrastructure
Accounting,
Reporting
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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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Module outline
• Some definitions
• The specific objectives of PFM
• Implementing public policies
• The limits of technical approaches to PFM
25
Public policies and PFM
• 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
26 • Sector plans, etc
Module outline
• Some definitions
• Implementing public policies
• The specific objectives of PFM
• The limits of technical approaches to PFM
27
The limits of technical approaches
• 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.
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Rakner, 2004 29
The limits of technical approaches
• 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
30 involves powerful politicians is largely a political
and societal matter
The limits of technical approaches
• 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
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Key messages
• 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.
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Completing the figure
Planning
Parliament Budget Parliament
investigates formulation scrutinizes and
Executive's votes the
audited reports budget bill
PFMobjectives
Political factors,
informal rules
External Audit Budget
execution
Cross-cutting
features, legal and
technological
Monitoring, infrastructure
Accounting,
Reporting
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