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FEDERAL BUDGET
The development objective of the Ministry of Finance and Industry (MoFI) is to assist the Federal Government of the United Arab Emirates (UAE) in maximizing the country’s potential for rapid, sustainable and equitable development through strengthening its capacity for efficient and effective management of public resources at the federal level, paying particular attention to the role of the Federal Government in sustaining economic growth.
The federal budget should be a financial mirror of society’s economic and social choices. To perform the roles assigned to it by its people, the Federal Government needs, among other things, to: i) collect sufficient resources from the economy in an appropriate manner; and ii) allocate and use those resources responsively, efficiently, and effectively. Public Expenditure Management (PEM) pertains only to (ii), and is thus only one of the two key instruments of fiscal policy.
As a central instrument of policy, Public Expenditure Management (PEM) must pursue all three overall economic policy goals. Financial stability calls for fiscal discipline; economic growth and equity are pursued partly through allocation of public money to the various sectors; and, most obviously, all three goals require the efficient and effective use of resources in practice. Hence, the three goals of overall policy translate into three key objectives of good public expenditure management: i) Fiscal discipline (expenditure control); ii) Allocation of resources consistent with policy priorities (strategic allocation); and iii) Good operational management. In turn, good operational management calls for economy (acquiring quality inputs at the lowest cost), efficiency (minimizing cost per unit of output), and effectiveness (achieving the outcome for which the input is intended).
1.1 Federal Organic Budget law
The new OBL reforms the Law No14 of 1973 on the rules of State Budget Preparation and Final Accounts and will be implemented as of 1st January 2005. The main aim of the new law is to significantly improve the public expenditure management framework making it results-and-performance oriented. It is a quest for a vision of federal government action in an increasingly demanding and fast-changing environment. This vision needs to be shared by all members of the federal civil service and guided by the resolve to preserve, improve and make public service more efficient.
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2- MACROECONOMIC FRAMEWORK AND FISCAL TARGETS
The capacity to translate policy priorities into the federal budget, and then to ensure conformity of actual expenditures with the federal budget, depends in large part on the soundness of macroeconomic projections and revenue forecasts. Overestimating revenue leads to poor federal budget formulation and therefore poor budget execution.
The preparation of a macroeconomic framework is to become an essential element in the federal budget preparation process. Preparing a macroeconomic framework is always an iterative exercise. A set of initial objectives must be defined to establish a preliminary baseline scenario, but the final framework requires a progressive reconciliation and convergence of all objectives and targets. Macroeconomic projections are not simple forecasts of trends of macroeconomic variables. Projections are based on a definition of targets and instruments in areas such as monetary policy, fiscal policy, exchange rate and trade policy, regulation and promotion of private-sector activities, and reform of autonomous agencies. Projections should cover the current year and a forward period of two to four years.
The establishment of explicit fiscal targets gives a framework for federal budget formulation, allows the federal government to state clearly its fiscal policy and the Cabinet and the public to monitor the implementation of federal government policy. Fiscal targets and indicators should cover three areas: current fiscal position (e.g. fiscal deficit), fiscal sustainability (e.g. tax or expenditure-to-GDP ratios), and vulnerability (e.g. analysis of the composition of the foreign debt, if any).
The preparation of a macroeconomic framework should become a permanent activity. It needs to be prepared at the start of each federal budget cycle to give adequate guidelines to the federal ministries and autonomous agencies. As noted, it must then be updated throughout the further stages of federal budget preparation, also to take into account intervening changes in the economic environment. During federal budget execution, too, macroeconomic projections require frequent updating to assess the impact of exogenous changes or of a possible slippage in federal budget execution. In addition to the baseline framework, it is important to formulate variants under different assumptions, e.g. changes in oil prices. The risks related to unexpected changes in macroeconomic parameters must be assessed and policy responses identified in advance.
A MTEF can also be defined as a whole-of-government strategic policy and expenditure framework within which ministers and line ministries are provided with greater responsibility for resource allocation decisions and resource use. The key to a successful MTEF is that institutional mechanisms assist and require relevant decision-makers to balance what is affordable in aggregate against the policy priorities of the country. The MTEF consists of a top-down resource envelope, a bottom-up estimation of the current and medium term costs of existing policy and, ultimately, the matching of these costs with available resources.
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Medium Term Fiscal Framework (MTFF): a MTFF is the first, necessary step towards an MTEF. It typically contains a statement of fiscal policy objectives and a set of integrated medium-term macroeconomic and fiscal targets and projections.
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Medium Term Budget Framework (MTBF): A MTBF builds on this first step by developing medium term budget estimates for individual spending agencies. The objective of a MTBF is to allocate resources to the nation’s strategic priorities and ensure that these allocations are consistent with overall fiscal objectives. This gives some degree of budget predictability to spending agencies, while ensuring overall fiscal discipline. In fact, a MTBF is the most basic type of MTEF.
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Medium Term Expenditure Framework (MTEF): A MTEF develops the approach further by adding elements of activity and output based budgeting to the MTBF. These methods seek to improve the value for money of public spending, in addition to reinforcing fiscal discipline and strategic prioritization.
It is fundamental not to confuse “performance orientation” in the budget system, which can be fostered in a number of appropriate ways, with the specific system known as “Performance-based Budgeting”. In performance-based budgeting, the budget shows the purposes of the expenditure, the cost of programs and sub-programs and measurements and results under each program and sub-program.
Performance-based budgeting includes two main features:
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Federal Government activities are now divided into programs, sub-programs, activities and cost elements. A program is a set of activities that meet a same overall goal. A sub-program is a set of activities that meet the same specific objective. An activity is a subdivision of a program or sub-program into homogenous categories. Cost elements are the inputs, and costs are measured on an accrual basis. A criterion use to delimit the activity category is the level at which efficiency indicators can be elaborated and costs measured. The operational aims of each program, sub-programs and activities are identified for each year.
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Efficiency/effectiveness indicators and costs are established, measured and reported.
There is no systematic relationship between the structure of programs and sub-programs of activities and the organizational structure of the Federal Government.
4.1 Performance Budgeting
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4.2 Methodology
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4.3 2006-2008 Program Agreements
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4.4 Budget Monitoring
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2006 - 2008 Performance-Based Budgeting: Quarterly Monitoring Report Template
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2006 - 2008 Budget Guidelines For Quarterly Monitoring Reports
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4.5 Glossary
4.6 Autonomous Agencies
The UAE Federal Government has recognized the usefulness of periodically taking a critical look at structural expenditure issues as well as at the public expenditure management process as a means to improving the use of public resources. PERs are today customized and flexible products designed to match the country’s needs, the resource availability and the priorities. Each review has three elements of analysis: 1) Resource framework: Analysis of the macroeconomic situation and the resulting resources expected to be available for allocation; 2) Budgetary process: analysis of the budget preparation process, expenditure management and control, accounting & auditing systems, and measures to enhance transparency; and 3) Expenditure patterns: budget allocations on a functional and economic basis; inter-sectoral and intra-sectoral priorities in allocation; corresponding with allocations and policy objectives; impact of expenditures on poverty alleviation and growth; and efficiency of expenditures in term of outcomes and input use.
PER Methodology:
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Defining and Implementing a Strategy for Public Expenditure Analysis: Given the multiple purposes of public expenditure work, the variety of instruments, and the tensions created by the numerous clients and stakeholders, it is essential that the work be guided by a coherent strategy. Defining a strategy for public expenditure analysis begins with a series of questions aimed at assessing the state of public expenditures in the country.
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Evaluating the Federal Budget: Even if we could determine the optimal allocation of spending across sectors, the existing budgetary institutions may not permit its realization. Even if these expenditures were actually budgeted, they may not lead to desired outputs and outcomes because of institutional weaknesses. Conversely, when attempting to improve institutions, we still need to evaluate public-expenditure allocations to measure progress. Therefore, this approach combines the analysis of expenditure allocations with that of budgetary institutions.
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Strengthening the budgetary process: Budget management can be defined as consisting of two parts: i) The executive functions of budget formulation and execution; and ii) The external functions of authorizing, monitoring, auditing, assessing, and lobbying for change
The challenge of Performance Management is to motivate civil servants so that they give the best of themselves to implement the strategy of the federal ministry or autonomous agency they belong to. To this end, the first leverage is to provide to each staff a precise definition of his/her responsibilities that he/she must handle and the expected objectives of his/her position. More exactly, the objectives should not be considered as an arbitrary assignation imposed by the hierarchy, but rather explained, discussed, eventually negotiated, and at least accepted by all concerned staff. They have to be quantified and measurable in order to verify without major difficulty, a posteriori, if they have been reached.
The evaluation of achieved results in comparison to announced objectives is a sensitive subject. The objectives will never be evidently credible if no sanction is ever decided when they are not reached. On the other hands, if sanctions are systematically decided in case of failure, independently of the circumstances that are at the origin of this failure, there will be a strong dissuasion in taking risks and a pressure to put objectives on more ambitious levels. The search for the golden mean between these two stumbling blocks is not that easy, but it takes on crucial importance so that the device can really become a rallying cause and not disheartening.
The other sensitive point is the nature of the objectives to adopt. The results of public actions cannot generally be numbered, unlike those of enterprises in sales’ volumes, in margin rates or in benefit amounts. They are often qualitative, and influenced by multiple variables unknown of the action (input) of the federal administration. It ensues from this a doctrinal debate and numerous significant hesitations on this matter, in particular between the upholders for measuring the activity (output) and those for measuring the impact (outcome).
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A modern comprehensive and integrated financial management information system (FMIS) is a system that is: i) Capable of meeting immediate financial accounting and management needs; ii) Capable of being enhanced to accommodate future developments in financial management; and iii) Capable of taking full advantage of sophisticated communications infrastructures and internet and intranet interoperability.
Such a system is comprised of the following accounting modules:
- Budget preparation
- Budget execution and management
- Commitment Accounting
- Accounts Payable and Procurement management
- Accounts Receivable
- Human Resource Management
- Payroll processing and management
- Cash management
- General Ledger
- Assets management
- Inventory Management
7.1 2006 Chart of Accounts
A new and more comprehensive Chart of Accounts is being introduced for the fiscal year 2006 and the major components of this Chart of Accounts are outlined below.
A Funding classification provides a means to track the source of funding for expenditures. This code is particularly important in the UAE as the Government reports information from direct funding to local budgets within a consolidated reporting scheme. Expenditures are assigned against the appropriate funding code, independent from the organizational or program structure.
An organizational classification provides the basis for establishing the responsibilities for the day-to-day administration of government business. The structure of the organizational hierarchy is reflected in the series of codes for ministries and departments reporting under these ministries.
A sector and sub sector classification provides a strategic overview of the allocation of budget resources between different sectors of the UAE economy.
A Program and sub-program classification provides the basis for recording transactions associated with a specific program or sub-program that is operating under an organizational unit.
An economic classification provides the basis for recording specific activity by the kind of transactions by which the Government performs its functions, and the impact outside of Government in the market for goods and services, in financial markets, and in the distribution of income.
The precise definition of items and sub-items and economic groupings within the economic classification structure are of vital importance to the costing and analysis of budget preparations, particularly under a program classification, where cost of services being provided is an important performance measure. The item classification is, for the most part, consistent with definitions in the analytical framework of the Government Financial Statistics Manual.
A Functional Classification of expense is to provide a strategic overview of the allocation of budget resources between different sectors of the economy. The system is based on the United Nations Classification of Functions of Government (COFOG), which is a detailed classification of the functions, or socioeconomic objectives, that general government units aim to achieve through various kinds of outlays.
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7.2 Accounting
In accrual accounting, revenue is counted when the sale occurs and expenditure is counted when the goods or services are received. In cash accounting revenue is counted when the cash is actually received and expenditure is counted when actually paid. In addition, accrual accounting entails recording non-cash transactions such as depreciation provisions, bad debts, etc. Non-cash transactions have a monetary value and contribute to the Federal Government’s financial position
The key elements involved in accrual accounting
Expenditure
When expenditure is recorded on an accrual basis unpaid expenses are recorded as sundry creditors and brought forward to the balance sheet.
Revenue
When revenue is recorded on an accrual basis income not received is recorded as sundry debtors on the balance sheet with provisions for bad debts.
Assets and Liabilities
Simple rules of cost and longevity determine whether an asset is written off as expenditure in the year of purchase or capitalized and recorded in a fixed assets ledger. Depreciation is usually either by straight line or reducing balance over the life of the asset.
Assets and liabilities are brought forward to the balance sheet and depreciation is netted off.
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As part of the institutional reform of treasury operations in the Ministry of Finance and Industry (MoFI), the Oracle Cash Management enterprise solution has recently been acquired as a specific accounting module in the new Financial Management Information System (FMIS) to help the Federal Government to effectively manage and control its cash cycle.
The module provides comprehensive bank reconciliation and flexible cash forecasting. The module allows for the automatic loading of bank statements electronically, automatic bank reconciliation, results analysis, summarization and transfer of information to subsidiary ledgers and general ledger reconciliation.
Cash inflow information is accessible to the cash forecast process in the cash management module from the receivables, order entry and general ledger modules. Cash outflow information comes from the payables, purchasing, payroll and general ledger modules.
The use of these functions give the MoFI the cash planning tools that will assist the anticipation of the flows of cash in and out of the Federal Government, allowing the MoFI to project cash needs and evaluate the Federal Government’s liquidity position.
In line with improvements in treasury management the streamlining of bank accounts and consolidation into a single “fund” account at the central bank are also being examined.
There are three basic audit types:
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Financial audits, covering the examination and reporting on financial statements, and the examination of the accounting systems upon which those statements are based;
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Compliance (or Regularity) audits, which examine legal and administrative compliance, the probity and propriety of administration, financial systems and systems of management control; and
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Performance (or Value for Money) audits, which assess the management and operational performance (economy, efficiency and effectiveness) of public programs, and of ministries and agencies in using resources in meeting specified objectives.
9.1 Internal Auditing
Expert examination of financial compliance or performance, carried out to satisfy the requirements of management. A particular task of internal audit is to monitor management control systems and report to senior management on weaknesses and recommend improvements.
The internal audit function contributes to the effectiveness of controls that management is responsible for establishing and maintaining. While particular responsibilities and activities vary among federal agencies, the fundamental purpose of internal auditing is to provide an independent, objective assurance and consulting activity designed to add value and improve the federal agency’s operations.
9.2 External Auditing
An audit carried out by an independent / outside party (e.g. a professional accounting or auditing firm). Contrasts with an internal audit, which is carried out by staff employed in the federal agency. An external audit is usually carried out for regulatory reasons. Internal audits, in contrast, are usually carried out for reasons of sound management.
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Since a great deal of the cutting edge analytical and practical work in these areas is currently being done in the Ministry of Finance and Industry (MoFI), Ministry of Planning (MoP) and selected key line ministries (Education and Youth, Health, etc.), the training program draws heavily on UAE officials as presenters and discussants. Many of the presentations are accompanied by mini-case studies and there is a substantial allocation of time for discussion.
In Education, for example, public expenditures represent a high percentage of total expenditures. The allocation of such resources has up to now not always produced the best results. Therefore, MoFI and the Ministry of Education and Youth (MoEY) training sessions are a good opportunity to discuss the public rationale for education expenditures, the finance and provision mix, and recent evidence on education outcomes. They also present innovative mechanisms for analyzing education expenditures.
Another example is given by MoFI and the Ministry of Health (MoH) using these training sessions to apply the principles of public expenditure analysis to the Health sector. This identifies the characteristic market failures of the sector and the use of data and other analytic techniques in the context of public expenditure reviews are also discussed.
