“Public sector financial management
Over the years the public sector financial management system has been changed a lot as per an area of considerable and constant development but many of these changes have disappeared as quickly as they have emerged, while the rest persisted for longer time but were limited to a few countries influenced by its cultures.
There are main key terms in this field we have to know to be able to understand the mechanism of the whole system and to connect all aspects of the public sector, such as (accounting, assurance, auditing, budget and treasury) in addition to some areas of studying like(general government, government financial system and internal control) Recently, the applying of the said practices has brought some consolidation to the development of those systems aimed at setting international standards to improve core domains of this field, on one hand.
On the other hand, during the eighties and nineties the private sector has witnessed sharper changes in its core concept but the sector absorbed it all easily.
In terms of the strong wave of privatization that presents a great hit to the core of the private sector idea which leads to many changes in the bigger image of it, but during time the main idea had been accepted and shed the light on the need of improved management system of the private sector including its financial resources.
• The system of the Umbrella for the matter of finance in public sector entities considers a holistic approach deals with specific matter with defining its role in a wider system that called ”public sector financial management” basically the public sector divides to two main branches ( general government sector and public sector corporations).
• The entire public sector is controlled by country’s citizens and the government that means the majority of their shares held by the government however more than 50% of its revenues from market activities conducted by citizens themselves.
• Opening the umbrella means applying financial management to public sector departments. Some countries have controlling offices include budget office liable to split responsibilities in respect of public finance between various entities.
• Here we can clearly note the main system depends on two main ideas:
1- emphasizing the limit of power, checks and balance.
2- advocating difference in the relevant qualification.
• The practical evidence shows substantial and permanent frictions at the borders of such systems, the examples assure the lake of corporation in between controlling unites along with misperception and errors made the GFS vulnerable.
• The above stress the need to a great reform in the controlling systems that lead to adopt the brilliant idea called “New Public Management” (NPM) that aims at bringing finance and management together in the context of the public sector.
• There are changes in the way that the public sector ‘does its business’.
• Bureaucracies with strict hierarchies of public employees carrying out their duties according to a fixed set of rules are giving way to different ways of working.
• Programmers of decentralization and delegation of authority enable professionals at relatively junior levels to make decisions based on the best information, including financial information, available to them.
• In professions across the public sector
• whether medical, educational, legal, engineering or custodial
• people are making choices about investments, about how to achieve efficiency, how to stay within budget and how to improve performance.
• People have to understand costs, budgets, financial statements about cash flows and expenditures, even when they are not in accountancy.
• When the emphasis of budgets is on deficit reduction and spending cuts, using money effectively becomes paramount.
• These trends and tendencies are by no means universal. While some governments have embraced commercial-style accounting and financial management, others have resisted. Some countries have been forced to change by lenders or donors who have made financial management reform a condition for further lending
• To cope with these and other changes, the ways in which public finances are managed have also changed.
• The days have gone of accounts consisting only of the recording of cash spent. Management accounts now commonly include a record of money that has been committed. In many countries budgets and accounts are no longer concerned just with the cash spent and allocated but also with the resources used in providing services –capital resources, assets, people and materials
• Some of these tendencies have led to a narrowing of the differences between private sector and public sector budgeting and accounting: The public sector is now also interested in performance, in the use of assets in service provision and in performance defined as efficiency and effectiveness.
• Some parts of the public sector now operate on very commercial lines – with revenue and profit targets, competition for customers or contracts – requiring approaches to costing, budgeting and financial reporting that are similar to those of the private sector.
• If a public entity operates on commercial lines it needs a commercial-style set of financial procedures. An airport, for example, that is financed by landing charges and franchise sales needs a management accounting system to track revenues and forecast profits or losses.
• On the other hand, a school whose sole income comes from a government grant needs to track expenditures against budget but would not need a sophisticated system for recording revenues.
• Both may be operating in the same jurisdiction. “Public sector financial management is any activity in order to analyze, structure, set objectives and implement measures in the field of finance, if the entity addressed is a government of any level, a corporation controlled by the government or an international organization set up by various nations
• Budgets at national level are mostly written by the executive in a process that involves varying degrees of consultation with legislatures and the citizens. Below national government level, there is a wide variety of processes, from very centralized systems in which sub-national governments simply carry out the instructions of national government to decentralized systems in which sub-national governments make their own spending choices (and to some degree raise their own taxes
• How much ‘market failure’ to correct depends on government’s political perspective?
• Socialists may prefer Keynesian theory since it can be used to justify very detailed intervention in the economy and society.
• Non-socialists may prefer monetarist theory since it can be used to justify little government intervention (laissez faire ), allowing people to keep what they earn (e.g. the theory that taxation causes disincentive-to-work effects).
• Different jurisdictions sustain very different polices towards the role of government, the functions and services on which governments spend money and the overall level of public spending.
• Expenditures on transfer payments, including welfare payments, state pensions and subsidies are based on decisions about entitlements. Once a law has been passed that says that all unemployed, disabled or elderly people are entitled to receive benefits then the expenditures on those benefits are predetermined. The budget process can only decide on expenditures on the purchase and provision of goods and services
• Determines how much can be spent in any period.
• Spending can be financed out of the money raised from taxation and other revenues, such as the sale of oil or licenses, and out of borrowed money.
• The degree to which a government wants to balance its spending with the amount raised in tax and other receipts is its fiscal stance.
• A government’s fiscal stance will most likely vary over the economic cycle. During recessions government is more willing to run deficits. During economic boom times governments are more able to run surpluses.
• Borrow for capital investment but not for current expenditures?
• If governments continue to run deficits, they accumulate a stock of debt, on which interest payments have to be paid each year.
• Primary balance: The difference between spending
• excluding interest payments – and tax and other revenues collected in any year. Overall balance: Interest payments are included in the expenditure calculation
• Countries joining the Euro area entered a treaty to ensure currency stability. The Stability and Growth Pact of July 1997 set out the maximum acceptable level of deficit for Euro countries at 3% of GDP and accumulated debt at 60% of GDP.
• During economic difficulties after 2000, first Ireland and Italy and then both Germany and France breached those conditions. After the financial crisis of 2008, almost all countries incurred deficits greater than they planned.
• A liability is a present obligation to pay for past events.
• The cash basis of the conventional deficit definition over a fiscal year does not take into account future obligations arising from present policies.
• A contingent liability is a possible future obligation to pay. Examples:
• If a government announces a policy of increased education spending, they are signalling a possible further requirement for additional government revenues.
• Demographic trends will make liabilities to older people an increasingly important constraint on budget decisions..