March 31, 2010Doug Hadden
Recent financial shocks have led to accelerated adoption of Government Resource Planning (GRP) and Public Financial Management (PFM) reform in emerging countries. What about more developed countries? There has been some examples of fiscal reforms in countries like Korea, and changes in regulations for the financial sector in OECD countries. Yet, governments in Iceland, Greece and Ireland are experiencing significant fiscal shortfalls.
How can GRP help governments to adapt more effectively to unexpected financial crisis? Freezing spending and public sector wages is a typical approach. How can emerging country governments expect to better manage budget shortfalls if the budget management software in use in developing countries appears so ineffective?
Financial Stress and the ‘Budget Problem‘
Government financial management is budget driven, unlike the private sector. Government budgets are complex. And, constrained:
- Capital expenditures often span multiple years and generate multi-year commitments. Slowing in-progress capital expenditures can result in half completed bridges, buildings, internet infrastructures.
- Recurrent expenditures often have minimum costs that provide little room for reduced spending. Hospitals need electricity and medical supplies.
- Public Private Partnerships (PPP) bring expenses off the government balance sheet. However, governments are often liable to pick up on these projects when the private sector partner encounters financial difficulty.
- Legal constraints often mandate expenditures, such as the results of ‘propositions’ in the the American State of California. These expenditures cannot be reduced. Many governments are unable to reduce the size of the public service even when jobs are identified as redundant, as in the case of India.
- Donor projects executed by the government or outside organizations often require a legal commitment for the government. Governments may need to contribute funds to projects or provide specific deliverables. Cutting back on the government expenditure can cancel donor funded programs.
- Wages often represent a significant portion of government expenditures. Governments are often the largest employer in countries. This is why salaries are often reduced or frozen when governments encounter budget deficits. Yet, this method often demoralizes public servants and reduces the quality of government services.
- Government objectives and priorities are difficult to manage during financial crisis. New priorities such as stimulus packages are introduced. Medium and long-term objectives often take a “back seat”.
Effective Budget Management for Governments Under Financial Stress
Many budget preparation software applications used by governments are ineffective in handling financial crisis. Applications developed for the private sector do not have necessary features for modeling multi-year budgets. Custom applications typically manage the ceremony of budget proposals. Spreadsheet applications are not able to handle whole-of-government budget analysis. These solutions are often unable to forecast budget surpluses or deficits during the fiscal year.
Governments can use effective budget preparation and budget execution software components of GRP to more effectively deal with financial crisis. These applications, like the FreeBalance Accountability Suite, can support the following:
- Scenario planning and what-if analysis during budget preparation and execution. Financial crisis can be modeled in budget preparation software. Governments can leverage these models should a crisis occur. Governments can also update these scenarios with actual figures to enable more effective reaction to problems.
- Forecasting provides early warning on revenue shortfalls. Governments can react quicker and more effectively.
- Wage forecasting is particularly important when managing deficit situations. Wages include salaries, benefits, training, travel, bonuses and other civil services expenses. So, wages can vary significantly from plans. Human Resources applications rarely have budget visibility. Wage forecasting and variance is critical. Elements of salary costs other than wages could be reduced.
- Multiple year visibility to budgets, budget types and budget constraints to enable decision-makers to find more effective methods of expenditure management.
- Objectives management for budgets enable governments to link expenditures with objectives and priorities. Every expenditure is linked with one or more objectives. Priorities change during a financial crisis. Objectives management enables governments to recast budget plans during the fiscal year to focus on priorities.
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