Budget and financial management

overview
Owoicho Omachi
 Agenda and learning
outcome
1. The Budget a) Identify public Budget
2. Deficit budget b) Reasons for Deficit budget
3. Nigeria Budget c) Illustration of Nigeria Budget
4. Nigeria Budget revenue d) Nigeria Budget revenue sources
5. PFM e) Understand the concept of PFM
6. Sequencing of fiscal planning f) Illustrate fiscal planning sequence
7. MTSS, FSP and MTEF g) Explore MTSS, FSP and MTEF
 The Budget
The size and composition of the budget and the
difference between outlays and revenues
measure the budget’s fiscal impact
When outlays exceed revenues, the budget is in
deficit
Stimulates aggregate demand in the short run, but
reduces national saving that in the long run could
impede economic growth
When revenues exceed outlays, the budget is in
surplus
Dampens aggregate demand in the short run, but
enhances domestic saving that in the long run could
promote economic growth

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 Why Have Deficits Persisted?
One widely accepted model of the public sector
assumes that elected officials try to maximize
their political support, including votes and
campaign contributions

Voters like public spending programs but hate

paying taxes, so spending programs win support
and taxes lose it

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 National Debt
The national debt is a stock variable measuring
the net accumulation of past deficits, the total
amount owed by the federal government
Interest on the debt
Prospect of paying off the debt

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The Nigeria budget is made up of
four components:
 Part A – Statutory Transfers
 Part B – Debts Service
 Part C – Recurrent Expenditure (non-debt)
 Part D – Capital Expenditure
MDA Expenditure

Statutory Recurrent Capital

Debt Service
Transfer Expenditure Expenditure

Consolidated Revenue Fund of the Federation

 Sale Surplus Dividend
Of From From
OIL REVENUE Customs Assets SOE SOE

(MARKET PRICE) &Excise

CIT VAT
7% Cost of Collection

NCS INDEPENDENT
96% 96% REVENUE
93%
EXCESS CRUDE BUDGETED OIL REVENUE FIRS
4% Cost of Collection
35% of VAT Pool
LOCAL GOVT
FEDERATION VAT
13% POOL
DERIVATION ACCOUNT STATE GOVT

50% of VAT Pool

20.60% 26.72% 52.68%

15% of VAT
LOCAL GOVT STATE GOVT FGN
Pool

CONSOLIDATED REVENUE
FUND OF THE FEDERATION
14% of VAT
Pool
4.18% of Federation Account
48.5% of Federation 2% of CRF
Account
SPECIAL FUNDS UBE
1% FEDERAL BUDGET NDDC
1.68% 1%
0.5% 1%
NAT. RESOURCES STABILIZATION ECOLOGICAL FCT Debt Service MDAs Stat Transfers NJC 10
What are the ‘basic elements of public sector
financial management’?
• Budgets and fiscal policy
• Government as an economic actor
• Budgetary and planning processes in
government
• Public sector accounting practice,
standards and rules
• Managing budgets
What makes government financial
management different
• The principal source of government revenue is taxation
• Implications: the captive nature of taxpayers as involuntary contributors
means that they will want access to simple and understandable information
about what has been done with their money
 Public financial management

• Public financial management is about ensuring

that public money is well-spent and it is made
to stretch as far as possible.

• It provides leaders and public-sector managers

with information to make decisions and to
know if they are using resources effectively
PFM system
• Public financial management system comprises
• the legal (e.g., public finance laws)
• Organisational framework for supervising all phases of the budget
cycle
• preparation of plans and strategies,
• fiscal projections and costing (budget preparation, budget execution and
implementation, budget monitoring and reporting, internal controls and
internal audit, external scrutiny and oversight including external audit),
• legislative follow-up on audit findings and post-implementation project
evaluation.
Organisational/Institutional framework

• Such institutions at the federal level include but not limited to:
• Federal Ministry of Finance (FMF);
• Budget Office of the Federation (BoF);
• Office of the Accountant General of the Federation (OAGF);
• Debt Management Office (DMO);
• Federal Inland Revenue Service (FIRS);
• Nigeria Customs Service (NCS);
• National Planning Commission (NPC);
• Revenue Mobilisation Allocation and Fiscal Commission (RMAFC);
• Bureau of Public Procurement (BPP);
• Office of the Auditor General for the Federation, and
• the National Assembly.
 Key ideas in PFM reforms
• Fiscal planning is a key component of PFM reforms.
• Fiscal planning must evolve in stages.
• Sequencing of the introduction of the different MTFs must be aligned
with the sequencing of PFM Reforms.
• The fist batch of reforms must aim at establishing budget credibility,
using MTFF among other tools.
 Characteristics of a
performing PFM system
Realism
Realismof ofthe
the
budget:
budget:
execution
executionininaa
timely Accountability
Accountability
timelyand
and and
predictable
predictable and
manner
manner??
The six transparency
transparency
characteristics
Budget
of well
Budget
exhaustively
exhaustivelyandand
performing PFM Expenditure
Expenditure
linkage with
linkage with Control
Control::Is
Isthe
the
economic
economic Systems expenditure
expenditure
objectives
objectives:: control
controlreliable?
reliable?
Does
Doesthe
thebudget
budget Does
Does thesystem
the system
records
records allstate
all identifies
transactions
state identifiesall
all
transactions?? arrears
arrears

Fiscal
Fiscalrisk
risk
management
management:: Exhaustive
Exhaustiveand andtimely
timely
Are
Areall
allfiscal
fiscalrisked
risked information:
information:
identified and
identified and IsIsaasystem
monitored systemofofinformation
information
monitored dissemination
dissemination alreadyininplace
already place??
 Sequencing of Fiscal Planning
10 years National Development Plan
- Macroeconomic
Medium Term Macro Economic sustainability
5 years Framework - Debt strategy

- Fiscal discipline
3-4 years Medium Term Fiscal Framework - Fiscal envelopes

Medium Term Budget - Budget Credibility

- Program Budgeting
Framework

Medium Term Expenditure - Strategic Allocation

Framework of funds

-Value for money

Medium Term Performance - Performance
Framework management
- Accountability
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MTFF main issues
• Realism of revenue forecasts
• Extra-budgetary funds
• Unplanned expenditure
• Unrecorded arrears
• Contingent liabilities
• Para-fiscal activities of the central bank
MTEF Objectives
• Ensure budget alignment with economic priorities
• Ensure budget ceiling realism by better knowledge of sector funding
needs
• Move away from political bargaining to rational decisions based on
sector needs and value for money
Linking Annual Budget with MTEF
The Medium Term Expenditure Framework (MTEF) is
an “annual, rolling three year-expenditure planning”.
• The MTEF aims at facilitating a number of important
outcomes :
 Sound fiscal balance
 Improved inter- and intra-sectoral resource allocation
 Greater budgetary predictability for spending units
 More efficient use of public fund

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 Medium Term Sector Strategy
• Strategic plan in public sector is a deliberate efforts of government to
improve the welfare of citizens through social- economic advancement.

• To do this there is need to link development plan with medium term plan
and annual budget.

• It is the annual budget that is used to procure and maintain the needed
socio- economic infrastructure.

• In this regard medium term sector strategy is applied to provide a link

between development plan and annual budget. 23
Medium Term Sector Strategy

The Medium-Term sector is an

integrated top-down & bottom-
up system that provides link
between development plan
and annual budget .

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Understanding MTSS
• MTSS is a three stage process comprising:
 A Medium Term Fiscal Framework (MTFF) which documents fiscal
policy objectives, a set of integrated medium-term fiscal policy objectives
plus fiscal targets & projections (including resource availability).
 A Medium Term Expenditure Framework (MTEF), which consolidates
the MTBF of spending agencies and adds programme and output based
budgeting.
 A Medium Term Budget Framework (MTBF) which documents medium
term budget estimates for individual spending agencies based on the
nation’s strategic priorities & in a manner consistent with overall fiscal
objectives

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 Sector Strategy Paper
• Agreeing Goals and Objectives
• Goals should be clearly defined –

• Different Sub-sectors, agencies and parastatals can have their own

goals defined but they must be in the context of the overall Goals
and Objectives for the sector

• Objectives represent the next stage in the planning process -

breaking down broad goals into more detailed components

• Objectives should wherever possible be couched in terms of clear

measurable targets - ideally specific numbers rather than
percentages or qualitative statements 26
Sector Strategy Paper
• Identifying Initiatives
• What do we mean by initiatives?
• Any activity that allows the Sector to achieve the objectives
that have been set
• Programmes - any set of personnel costs, overheads and capital
expenditure aimed at achieving a particular output or outcome
• Projects - capital expenditure designed to deliver a specific outcome
or output in the form of an asset that will last for more than one year

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Strategy Sessions
• Identifying Initiatives
• Later in the MTSS process, each priority initiative will be
costed - an initiative must therefore be sufficiently distinct as
a piece of spending such that it can be costed:
• Build and equip 1000 additional classrooms and supply teachers for
those classes
• Train 50 new Forestry Research Officers and provide them with 25
new vehicles

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Sector Strategy Paper
• Establishing Outputs and Outcomes
• Once all initiatives (new and existing) have been listed,
outputs and outcomes must be identified
• Outputs - Mirror the initiatives. Should commit to a specific
quantitative target, location specific where possible
• Outcomes - Mirror objectives. Should be the result of achieving one
or a set of initiatives - broader positive impact for Nigeria.

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Strategy Sessions
• Capturing Key Performance Indicators (KPIs)
• Linking spending to delivery in the Budget process requires
that Performance Indicators are identified ex ante
• These are measures or indices for monitoring the performance
of particular initiative
• KPIs should:
• Specifiy how the indicator will be monitored
• When the indicator will register the impact of the initiative

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Sector Strategy Paper
• Prioritization of Initiatives
• At the heart of the MTEF is the idea of matching
government activities to resources limited by
macroeconomic constraints
• In order to deliver within those constraints, the
prioritization of initiatives is crucial

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Cost of Projects and Initiatives in Annual Budget
• Costing of Initiatives
• Without rigorous costing of all initiatives/spending within
each Sector, it is not possible to effectively reconcile policy
with resource availability
• Costing should be based on credible information
• Past experience of expenditure
• Recent estimates/quotes
• Survey based research
• Bureau for Public Procurement (BPP) may provide support
in pricing certain items

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Cost of Projects and Initiatives in Annual Budget

• Costing of Initiatives - Key Rules

• ‘Reasonable Minimum’ - Budget Estimates must be
conservative
• Minimum reasonable estimate of unit costs
• Minimum reasonable estimate of number of units required - in
particular in relation to staffing levels and overheads
• Costing should always be over 3 year time frame
• Costing must capture ALL components of an initiative:
• If the objective is to increase enrolment in school by 10000 students,
classroom, teachers and materials must captured.

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Final Outcome of MTSS
• Detailed expenditure plan over 3 year horizon
• Expenditure plans linked to High Level Policy
Framework for Sector
• Plans realistic - fitted within indicative envelopes
• Financing options
• Performance Measures (Goals, Objectives, KPIs) clearly
documented - we will return to Performance Budgeting
later in the course

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