Accounting and Budgeting: Sub-National Level

Question 1

National Budgets to Operational Budgets

Answer 1

The budgeted funds for public services are used to deliver services either through an operational unit of the state (such as a ministry, an agency, a sub-national government) or subcontracted to other providers of services, whether companies or non-governmental organisations. The lower down the hierarchy and the greater the emphasis is on control of the actions of staff, the more likely that line item budgeting will be appropriate.

Department of Health—programme budgets

Trust/Hospital level—programme budgets

At the ward level the main purpose of the budget is control. There is very little discretion at hospital ward level over how programmes are constructed.

Question 2

Structure, Performance, Discretion, Block Grants and Contracts (1)

Answer 2

Most modern budget reform aims to increase the discretion of managers, whether through a process of devolution, where responsibility is devolved as an entitlement, or through deconcentration or delegation measures that hand discretion to department managers or sub-national authorities, without embodying that discretion within a legal or statutory framework. Such moves to increase discretion apply to public sector managers as, for example, within fiscal decentralisation arrangements. The way this is normally accomplished is through giving block grants. A block grant is a sum of money given as one sum, and not specified by line item.

Question 3

Structure, Performance, Discretion, Block Grants and Contracts (2)

Answer 3

Many countries are also increasing the share of public sector activities undertaken by non-government actors. Contracting out (often considered a form of delegation), where governments enter into contract relationships with private sector firms, involves procuring the services of contractors to implement specific tasks, and they are given finance to achieve the stated objectives. Where discretion is pushed down to operational levels, the nature of control of each operational level changes to one more oriented to what the expenditures produce, rather than the details of what they are spent on. This is the essence of performance budgeting.

Question 4

Structure, Performance, Discretion, Block Grants and Contracts (3)

Answer 4

Programme budgeting about accountablility wheras LIB is about control. To ensure that resources are used in accordance with that use authorised by the budget, public servants need to keep track not only of the money spent but also of what has been committed by them by, for example, giving orders for services that will involve payment. This is known as commitment accounting, a part of budgetary control where there is a cash limit that has been set. The purpose of commitment accounting is to ensure that a budget is not overspent. It therefore tends to be linked with LIB and cash accounting.

Question 5

Structure, Performance, Discretion, Block Grants and Contracts (4)

Answer 5

If an NPM approach is adopted, units will be set up where the concentration is on the outputs achieved from the inputs into the process. This requires a measuring not only of the inputs but also the outputs and outcome. The question then is whether line item budgeting and cash accounting are fit for the purpose. The answer is clearly no, as they do not measure the cost of providing the service. ABC is used to costs should be attributed to the outputs achieved within the programme.

N.B. Programme budgeting assumes a set of corporate objectives, defined at a high level, that are carefully coordinated and controlled. This requires a highly centralised approach. NPM assumes a decentralised approach with local managerial autonomy over functional activities.

Question 6

Fund Accounting

Answer 6

Where activities can be separated, especially where they generate revenues from service users, fund accounting is used to account for a particular activity. The common example is the trading fund, which is often used to account for entities such as Post Offices that are collecting cash from customers and providing a service in exchange.

Question 7

Resource Accounting and Budgeting

Answer 7

RAB’s primary function is to link the Resource planning (budgeting) and the reporting of actual performance to the outputs achieved.

A key aspect in this change was the clear identification and separation of capital and revenue accounts. Capital Accounting is concerned with the accounting for fixed assets or long-term assets. Revenue accounting is concerned with the annual income and expenditure. Under a Cash Accounting system, there is no separate treatment of capital items. There is, however, a separate budget that looks at long-term assets for the state.

This can lead to capital rationing where states may choose cheaper or poorly designed projects in order to save capital costs, at the expense of future revenue costs being incurred. This results in the lifecycle costs being ignored in favour of very short-term budgetary considerations.

Question 8

Which techniques at which stage?

Answer 8

At central government level you saw that the primary function was for economic, public policy, and social policy planning with an emphasis on
priorities. Once political and policy decisions are made, the sub-national organisations are then required to put policy into practice.

If the primary purpose is control, then line item budgeting is most appropriate. If the primary concern is accountability for outputs, then programme budgeting is most appropriate. However, if the programme budgeting is to be effective it must be matched to output measurement.

Question 9

Accounting for services provided by third parties (1)

Answer 9

As part of NPM the move of service provision from the state to the private sector by way of privatisation of services or of Public Private Partnerships (PPP).

1. The introduction of private sector ownership into state-owned businesses with sales of either a majority or a minority stake.
2. The Private Finance Initiative (PFI) and other arrangements where the partner takes on the responsibility for providing a public service including concessions and franchises.
3. Selling government services into wider markets and other partnership arrangements to exploit the commercial potential of government assets

Question 10

Accouting for services provided by third parties (2)

Answer 10

Accounting for PFIs and the benefits in broad terms relates to how risk is
managed and the timings of the cash flows. However, the areas that are unclear are numerous.