What's wrong with public sector finance?

A recent report from the Public Expenditure and Financial Accountability (PEFA) programme is shining a spotlight on the urgent need for reform of public sector budgeting and spending if governments around the world are to improve financial management and transparency.

The 2020 Global Report on Public Financial Management raises concerns over internal and external audit, the management of financial risks and scrutiny by both supreme audit institutions and legislative bodies. The impact of public spending and budgeting policies on gender challenges are also not widely understood.

Using a framework that identifies nearly 100 characteristics of public financial management (PFM), the report provides a snapshot at a specific point in time, but can be used to identify ongoing strengths and weaknesses. It acknowledges the importance of PFM in broader development objectives, such as macroeconomic stability, efficient resource allocation and delivery of public services.

Poor implementation

According to Srinivas Gurazada, head of the PEFA secretariat, analysis of the budget cycle – preparation, execution and evaluation – reveals that governments on the whole are better at preparing their budgets than executing them. Gurazada adds that the report also reveals significant regional variations – the results for Europe and Central Asia, for example, are much better than Sub-Sahara Africa and South Asia.

‘Progress over the last 20 years has been significant in preparing budgets, where processes have been put in place,’ he says. ‘But there is more subjectivity in terms of implementation, where decisions have to be taken. Indicators in this area were lagging behind.’

Such indicators – the report identifies 31 in all – include procurement, revenue administration and public asset management. These indicators are then rolled into seven ‘pillars’ (see panel), from which the report draws broad conclusions on how individual countries are managing their public finances.

Key challenges

Gurazada also observes that many developing countries have significant problems with expenditure, whether it is the oversight of procurement, internal controls or poor record-keeping. ‘Often, you will see governments struggling to know how large their arrears are and whether there are overdue payments,’ he says.

A key issue is that the accounting systems used by many governments are cash-based. Budget cycles can typically run over a year, where public money is allocated and used or it lapses, with a new cycle beginning the following year. ‘This structure inherently constrains PFM,’ Gurazada says.

Accountability is another weakness identified in the report, with significant weaknesses throughout the chain, including parliamentary scrutiny. Gurazada believes this is partly because finance and financial reporting is seen as ‘the most technocratic and the least political’ area of government.

‘Weak accounting systems lead to weak audit systems,’ he says. ‘Delays in the timelines of financial reports will lead to delays in audit reports.’ Such a backlog creates a log jam in the parliamentary scrutiny process.

There may be basic laws and requirements that govern such processes, but there can be significant gaps. Examples include inadequate resources for ‘supreme audit institutions’, such as national audit offices and the lack of political support given to such bodies.

Pandemic effect

The PEFA assessments were, however, based on financial data produced prior to the global Covid-19 pandemic. As such, Gurazada believes there could be problems lying in wait ahead. While accepting that emergency action – with necessary expenditure – is important, future problems will arise if the correct procedures were not in place, or not adhered to. ‘There could be missing audit trails, which might lead to the risk of inefficiencies or even corruption,’ he says.

Alex Metcalfe, ACCA’s head of public sector, believes the reform agenda highlighted by the report could be delayed as a result of the pandemic.

‘It is an open question about the extent to which government officials and public sector finance professionals have been able to prioritise transitions to an accruals form of public finance management as well as other reforms,’ he says. ‘Some countries have made commitments to move to an accruals basis, but when they made those commitments, they were not thinking about Covid-19.’

The Covid-19 crisis could allow for experiments in budget and debt management, but this will not happen if the correct information is not captured, analysed or managed.

Gender responsiveness

The PEFA report also introduces supplementary guidance on the gender responsiveness of PFM systems. This is in response to the growing recognition that public budgeting decisions and the PFM systems that underpin them can affect the economic and social outcomes of men and women differently.

As a result, gender-responsive PFM, also known as gender-responsive budgeting (GRB), has been developed as an approach to budgeting that explicitly considers the impact of fiscal policy, PFM, and public administration on gender equality, girls’ and women’s development, and specific groups of people, such as those with disabilities or from an ethnic minority group.

The UN’s Sustainable Development Goals (SDG) clearly highlight the importance of linking gender equality with financing for development. Therefore, UN Women, together with the Organisation for Economic Co-operation and Development (OECD) and the United Nations Development Programme, developed an SDG indicator that measures government efforts to publish and track budget allocations for gender equality throughout the budget cycle.

In response to this the PEFA secretariat developed a supplementary framework for assessing gender-responsive PFM. But while governments integrate gender in PFM in various ways, mainstreaming gender across the budget cycle is currently relatively limited.