Public

Public Management
Management

Lecture no. 6

Aleksandra Torbica
 Block 2. Strategy, financial and performance management
in public sector organizations

 L05: Public management reforms. Strategic

management in the public sector
 L06: Financial management in the public
sector
 L07: Accountability and performance
management in the public sector
 L08:Measuring performance in the public
sector: opportunities and challenges
 L09: In-class case discussion and exercise on
performance measurement
 L10: Performance measurement of public
programs: cost-benefit analysis

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Financial management in the public sector:
budget and accounting reforms

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 What is financial management?
Financial management:

Application of a set of techniques that institution use to manage their

financial affairs, particularly the gap between income and expenditure in the
short and long term.

Arguably the most important function of

the government (at all levels)

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 Financial management in the public sector

1. Financial management – the most important management

activity in the public sector at any level of government
2. Increasing pressures to produce results while cutting costs
3. Financial management closely linked to performance and
personnel management
4. Subject to dramatic reform in the past decade in almost
every country in the world

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Financial management in the public sector: why
different?
Private firms Public sector

Initial endowment of capital Coercive power to collect funds

through taxation

Procurement of labor and capital Procurement of labor and capital

(production factors) on the market (production factors) on the market

Provision of goods/services in the Provision of goods/services without

market (price) market rules (no price)

Political decision making process –

Budget is public!

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 The government budget

 The pivotal element: BUDGET

 By allocating financial resources in different directions, the
government change the shape of the society

 Why is a Budget required?

– Accountability: Public is not taxed any more than that required for appropriate
government functions
– Prioritization: Identify those public functions to which scarce resources
should be allocated

 What are the major components of a Public Budget?

– Revenues: Funds that are raised through various means.
– Expenditure: Funds used for spending on specific programs or capital projects
Public Management
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Example:
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The government budget: main functions

1. Political

2. Economic (allocation, distribution, stabilization)

3. Financial (external accountability)

4. Managerial

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The Budget Cycle (national gov)

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 The Budget Principles
Budgets are generally required to comply with a number of principles:

1. Transparency (information on the budget and its implementation must be publicly

available)
2. Unit of account (budget must be drawn up and implemented in one currency)
3. Annual (budget generally refers to one financial year)
4. Universality (ALL revenues and expenditures are included in the budget)
5. Equilibrium (budget should balance revenues to expenditure or that budgeted
deficits should not exceed a given threshold).

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Main decisions in budget definition

Q1: What mix between government (public) and market (private) in the
economy?
Q2: Which mix for generating revenues?
Q3: How to allocate operating revenues? Which mix of services with
positive and negative return on investement?
Q4: How much debt is sustainable?
Q5: How to manage public properties?
Q6: Which long-term investments to pursue?

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Government revenue and expenditure, 2015 (¹)
(% of GDP)

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Government in figures
 Financial management in the public sector: major reforms

Increasing need to manage effectively (scarce) financial resources:

1. considerable resource constrains at macro and micro economic

level;
2. request of provision of new (quality) and more (quantity) “goods
and services”, due to innovation of technology and changes in
public needs;
3. greater pressure on accountability with citizens (both as service
users and payers) and, more general, with the public and non
profit sector.

Examples: Budget Australia (http://budget.gov.au/)

Participatory budgeting
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Budget reforms
Main elements of budget reforms the public sector:

1. Accounting reforms

2. Fiscal Decentralization

3. Budget balancing: contracting out

4. Output and Outcome Budgeting

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1. Accounting reforms

Traditional model: Cash accounting

All phases are usually recorded, but
o In the budget, revenues & expenditures are expressed as cash inflows & outflows
o The year-end report is a statement of recoveries & payments
o No assets & liabilities

New model: Accrual accounting

o Cash flow statements are used in addition to income statement and balance sheet
o Assets and liabilities considered - development of fully costed public asset registry

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2. Fiscal decentralization

1. Fiscal decentralization: granting taxing powers to local or

regional governments, giving them untied grants to run
their own services, or a combination of both
2. Logical concomitant to political decentralization
3. Arguments for: democracy + efficient distribution of
revenues
4. Challenges: risk of uncontrolled spending + need for
national subventions to poor regions

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 3. Contracting out
a process in which “the state enters into agreements with private
sector firms, for profit or nonprofit, to provide goods or manage
services.”

1. Reducing the size of government activity

2. A form of financial reform aimed to decrease public spending
3. Contracts must define what is to be achieved and mechanism
of monitoring
4. Delivery is in the hands of the private sector, but the
responsibility of the function remains public

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4. Outcome and output budgeting
1. The most dramatic reform: shift the basis of budgetary control from
detailed line-items (inputs) to measurable goals for output and
outcomes

2. Introduction of “performance contracts” that set either the results

(outcome) or the amount of services (outputs) to be provided

3. Accountability and performance measurement & performance

management
4. Introducing elements of rational decision making : cost benefit
analysis for prioritization process

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Take home messages
 Financial management – the most important function of the internal
management of the government – has been a subject of significant
reforms in all countries in the last decade

 Traditionally, budgeting has been the process through which

governments decide how much to spend on what, limiting expenditures
to the revenues available and preventing overspending.

 Over time, budgeting gained different roles and functions:

– becoming an important political medium
– a tool for providing impulses to the economy and the society,
– a fundamental governance and management device,
– and a central accountability channel.
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 A bit of home-work..

1. Find one example of public budget in your country (at any

level of government: local, regional, national)

2. Identify main sources of revenues and areas of expenditure

3. Is participatory budgeting envisaged?

4. Briefly discuss what you can learn from the budget regarding
the government priorities, economic stability, responsiveness
to the citizens

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