PUBLIC SECTOR FINANCIAL MANAGEMENT
The French Perspective
1 Given the French centralizing tradition, there is often a tendency in France to regard public finances as involving only the finances of the State. In actual fact, however, the public finances cover four major sectors :
The State, financed by tax revenues and, when there is a deficit, by borrowing (the State sector); Local authorities (regions, départements, municipalities, and groups of municipalities) and financially autonomous public institutions whose expenditure is funded by a wider range of resources: local revenue, taxes, State financial aid (subsidies), borrowing, and own resources (the decentralized sector); Industrial or commercial enterprises that have their own resources but are under State control and are often subsidized, particularly where financing of their investment expenditure is concerned (the public industrial and commercial sector); The social welfare sector, where expenditure is normally financed by mandatory contributions but some resources are funded by taxation.
However, the time given for this talk will not allow us to examine all four sectors. We will therefore concentrate on the State budget, but after pointing out first that the rules of public accounting in France also apply, although with some easing of regulations which we will mention from time to time, to the decentralized sector and to public State institutions endowed with a public accountant. We will try to emphasize those points that appear to us to be specific to the French system of governmental accounting.
Our first topic will be preparation of the State budget. After defining the concept of the Budget Act, we will look at the preparation sequence itself : choice of budget strategy, negotiation and arbitration phases, and finalization of the Budget Bill. We will then go on to explain the budget voting procedure.
Our second topic will be execution of the budget. The first chapter will describe budget execution conditions, the most important budget principles, execution procedures, and government control over the execution process. The second chapter will deal with the auditing of budget execution : ex-ante audit, audit during the execution phase, and ex-post audit. The third chapter will discuss the process leading up to the final annual budget document, the Budget Review Act, dealing with the management of budget execution (the accounting procedures followed, the centralization and the summary documents) and the significance of the Act itself.
The concluding section will contain a statement of possible areas of reform in the French public finances management system.
The basic legislative texts governing this whole matter, which will be referred to frequently, are the Constitution of 1958, the constitutional bylaw of January 2, 1959, and the Decree of December 29, 1962 enacting Governmental Accounting Regulations.
2 PART ONE : PREPARING THE BUDGET
1. CHAPTER I : THE CONCEPT OF THE BUDGET ACT
2. I. SPHERE OF THE BUDGET ACT
3. A. Mandatory Sphere of the Budget Act
Article 31 of the constitutional bylaw of 1959 list the following provisions :
In the first part of the budget act : Annual tax collection authorization for local governments and public establishments; Estimation of tax revenue allocated to the State and revenue from fines, service fees, revenue from the public domain, income from financial interests, profits of nationalized companies, loan or advance reimbursements and miscellaneous government revenue; Determination of general expense ceilings and general information on the budget balance; Borrowings necessary to cover treasury liabilities.
In part two the following provisions are concerned : Determination of total current service appropriations and new expenditure items by class and by department; Determination of transactions involving specific budgets and special Treasury accounts; Arrangement of multiyear allocations and their timetables; Authorization to collect parafiscal taxes after 31st December.
4. B. Exclusive Sphere of the Budget Act
The following provisions are assigned to its exclusive sphere:
Information for Parliament and control by Parliament of the way public finance is managed; Financial liabilities for civil servants; New jobs and jobs conversions
The constitutional bylaw further governs appropriations, which may only “result from a budget act provision at the initiative of the government”. Moreover, “specific budgets are created or cancelled under the budget act”, while special appropriation accounts provide a record of “transactions which, under a budget act provision approved at government initiative, are financed by means of special resources”. The constitutional bylaw moreover stipulates that “The provisions of the annual budget act may only be amended during the year by so-called supplementary budget acts”.
3 5. C. Shared Sphere of the Budget Act
The constitutional bylaw of 1959 grants the option to add other types of provision to the budget act, notably under general tax law. In fact, “budget acts may also contain all provisions connected with the assessment base, rates and collection procedures for all types of taxes”.
6. II. THE ANNUAL BUDGET ACT
The budget bill is a paper of about 300 pages made up of two parts divided in titles.
The first part, known as the “General conditions of the budget balance”, breaks down into two titles. The first title contains taxation articles having an impact on the budget of the year concerned. The second title contains the article which determines the general balance of the budget and which authorizes the Minister of Finance to borrow funds in order to cover the State’s cash requirements.
The second part of the budget act consists of two titles :
In the first title, various articles and tables appended to the law bill specify the ceiling for each category of expenditure, distinguishing between current service appropriations and new expenditures items. Current service appropriations are only shown in aggregate. Parliament casts only one vote for this article, all departments combined. The second title contains two types of permanent provisions : first, tax provisions without a financial impact on the year, whether provisions dealing with subsequent years or with tax procedures and, secondly, budgetary provisions with a direct impact on annual appropriations.
The budget bill is accompanied by :
The economic and financial report which contains, first, an analysis of the grounds for the budget bill in the light of the economic environment and government policy, and secondly a much more technical analysis of the economic environment during the current year and the year ahead. Each ministerial budget is laid out in a blue annex entitled Current service appropriations – New expenditure items; Other, general annexes, notably the Ways and Means paper; The blue annex for the special accounts; About twenty “yellow volumes” in order to specify the budget contents from a specific angle; Multiyear allocations budgets Once the budget has been adopted by Parliament and promulgated, the government publishes green papers of the same size as the blue annexes, which itemize the budgets approved for each ministerial department.
4 7. III SUPPLEMENTARY BUDGETS ACTS
The constitutional bylaw of 1959 defines supplementary budget acts as follows : “The provisions of the annual budget act may be amended during the year by so-called supplementary budget acts.” The treatment of supplementary budget acts is directly grafted on that of initial budget acts.
1. The rules applicable to the initial budgets also apply to supplementary budget acts. In practice, however, supplementary budget acts discussed much more rapidly than initial budget acts.
2. Supplementary budget acts serve various objectives which can be grouped by fives types :
To ratify supplemental appropriation decrees; With a specific objective, expressing the financial aspects of a reform already proposed in Parliament; To provide appropriations reflecting the State’s commitments in a given sector; To reflect a change in the focus of government policy. At the end of the year, to reflect the impact of changes in economic assumptions on the appropriations of the current year and make the traditional year-end adjustments.
8. IV. MODERNIZATION OF BUDGETARY INSTRUMENTS
Since 1995, the French government undertook a major overhaul of budgetary documents with three objectives :
Improving the legibility of budgetary documents; Enriching financial information in certain respects by adding descriptions and indicators of resources and activity; Supporting the printed documents supplied to Parliament with a computerized budgetary database in order to facilitate examination of the budget bill by the finance committees.
5 9. CHAPTER II PREPARING THE STATE BUDGET
10. I. CHOICE OF BUDGETARY STRATEGY
During the first months, the Minister of the Budget is chiefly briefed by the Budget Directorate and the Budget Director. From January to March of year n-1, the Minister needs to gather sufficient information on the probable economic environment in year n, the needs of the administrations and the aims of the spending ministers to be able to submit a survey of expenditure, tax policy, and the deficit to the Prime Minister. During the following weeks, the Budget Director will use the information at his disposal to prepare the budgetary strategy which he will propose to the Minister of the Budget. He will hold a series of bilateral meetings with each division in order to examine and rate the proposals contained in the Survey papers and to approve general objectives. Then, the Prime Minister organizes a series of interdepartmental committee meetings during which the Minister of the Budget reports on the budgetary surveys of year n+1. The Prime Minister verifies that key government decisions regarding expenditure and taxation are in fact included in the outline and validates the general objectives of fiscal policy. These objectives are laid out in a policy letter sent by him to all ministers.
The framework of budgetary choices is based on : the situation of French Public Finance; external budgetary constrainsts : . Economic constrainsts : foreign trade, household savings rate, financial market; . Financial constrainsts : The European Union : harmonization of the economic policy of Member States, notably as regards debt and public deficit; Trend of social security spending Factors underlying the budgetary dynamic : the internal mechanisms of the budget, notably as regards public expenditure, must necessary be factored into fiscal policy. The most significant factors can be exmined under four headings : . Budgetary parameters; . The dynamic of public debt; . The weight of “current service appropriations”; . The underlying budgetary trends. 11.
12. II. BUDGET PREPARATION PHASES
13. A. Negotiation and Arbitration (May – July)
The first phase is an occasion for heated debate between the “spending” departments and the budget Directorate. Each department prepares its proposals, including renewal of the funds necessary to maintain public services, new expenditure items the minister wants to execute and for which additional funds are necessary and sometimes even savings proposals. In conducting the
6 discussions, the Budget Directorate refers to the policy letter signed by the Prime Minister and to its own “Surveys”. On termination, the parties draw up a list of agreements and disagreements, which are recorded in an arbitration file. The Minister of the Budget receives each minister in early July to discuss and generally solve subjects of disagreement. Only the most strategic points are submitted to the Prime Minister for settlement.
The Prime Minister then informs each member of government of the funds allotted to the departments in so-called “ceiling letters”. This detailed documents, which list the main agreements and arbitration, are used to inform the ministers of all decisions adopted on conclusion of this six-month process
14. B. Finalization of the Budget Bill (August – September)
15.
To this end, representatives of the Budget Directorate and the different departments will meet again for a second series of bilateral. Now preparation can begin on the document submitted to Parliament which gives a subhead-by-subhead breakdown of budgetary authorizations and is used as a reference during the parliamentary debates.
16. CHAPTER III DEBATE AND VOTE ON BUDGET BY PARLIAMENT
The budget bill must first be discussed by the National Assembly, then by the Senate. It must be adopted before 1st January of the year to which it applies. Adoption of the budget is an occasion for in-depth dialogue between the government and Parliament, and follows precise rules aimed at effectiveness. Each year, the discussion of the budget bill by Parliament takes up most of the autumn session.
17. I. VOTING PROCEDURE
18. A. Deadlines
The budget act needs to be adopted before 1st January of the year to which it applies. Parliament has a total of seventy days to adopt the budget. If it does not accept or reject the bill within seventy days, the government may remove the bill from Parliament and execute the budget bill by constitutional bylaw. The period of seventy days has always been respected. In practice, the debates begin toward 15 October and end around 20 December.
19. B. Pre-eminence of the National Assembly
7 Budget bills must first be submitted to the National Assembly. This priority is part of democratic tradition, which holds that the house elected by direct vote plays an essential role in approving taxes and therefore in examining the budget. 20.
21. C. Examination of Both Parts of the Budget Act
The bill consists of two parts. The first concerns the “general conditions of the financial balance”. It authorizes collection of public resources, stipulates and determines the general characteristics of the balance. The purpose of the second part is to allocate appropriations. It is used to determine expenditure by class and by department, and authorizes transactions involving special Treasury accounts and specific budgets. This second part of the budget act may not be debated by an Assembly before the first part has been adopted. This provision limits the powers of Parliament. It ensures that the expenditure in the second part is not approved in violation of the initial balance and worsens the deficit.
22. D. Reduction of the Number of Vote-headings.
Like all law bills, the budget bill is voted by article. Articles in which new expenditures items are approved are voted by department and by class (contrary to the literal wording of the constitutional bylaw of 1959, which stipulates that voting must be by class and by department) However, Article 41 of the constitutional bylaw reduces and rationalizes the number of vote- headings to about 200, a reasonable figure compared with the 3000 vote-headings under the IIIrd Republic and the 5000 at the end of the IVth Republic.
23. E. The role of the Finance Committees
Assisted by the services of the Assemblies, the finance committees conduct in-depth technical examinations of the budget bill. The general reporter responsible for overall analysis of the government bill is seconded by special reporters who study the budget of the different departments, the specific budgets and the special treasury accounts. The reporters are also engaged in an in-depth dialogue with the ministers. Before each autumn session, the Budget Directorate further answers hundred of questions from members of Parliament. These questionnaires are a key source of information for Parliament.
24. F. Public Reading of the Budget.
The public debate starts with examination of the articles on revenue, traditionally rousing great interest among members of Parliament. The debate of the first part winds up with a vote on the budget article. For the debate of the first part, the government is represented by the Minister of the Budget. For the second part, the ministers defend their own budgets. Examination of the budget is the foremost
8 opportunity for members of Parliament to bring up and hold a detailed discussion on budget policy. After the different ministers have been heard, the Minister of the Budget attends the closure of the debate on the budget bill, including examination of articles approving current service appropriations, other articles which summarize credit approvals and articles containing permanent provisions not discussed under a specific budget, notably fiscal articles, and, lastly, approval of their overall law bill. The same procedure is followed in the Senate.
25.
26. II. FINANCIAL INITIATIVE OF MEMBERS OF PARLIAMENT
The Constitution and the constitutional bylaw of 1959 forbid any amendment to a budget bill, “except if designed to cancel or reduce an expense, to create or increase revenue or to ensure control of public expenditure”.
27. A. Restrictions on Voting Public Resources
By agreement between government and Parliament, it has actually been decided that only Article 40 of the Constitution, where the word “resources” is used in the plural, will be applied. Thus, members of Parliament may suggest reducing a resource if they propose to offset it with another resource for the same government units or organizations.
28. B. Restrictions on Voting Public Charges
Amendments designed to create or increase a public charge are forbidden, even with compensation. However, the rule is interpreted differently according to whether the text under discussion proposes the cancellation or decrease of a public charge or the increase of a charge. In the first case, existing law is the reference, meaning that Parliament is entitled to propose a cut in savings. In the second case, the text under discussion is the reference, meaning that Parliament cannot propose increasing the charge. However, the government customarily leaves to the discretion of the president of the finance committee certain appropriations, “the parliamentary reserve”, of a few hundreds of millions of francs, in order to enable members of the committee to propose higher appropriations. Such proposals are then forwarded by the government in the form of amendments to the budget bill.
29. C. Parliamentary Control in Practice.
The committees receive extensive information which is processed by staff of the assemblies, who are familiar with the State Budget and do not hesitate to turn to the administrations concerned, especially the Budget Directorate, in order to obtain missing information on highly precise topics. Their expertise and critical spirit are worth underscoring, and reflected in the parliamentary reports and speeches of finance committee members. Moreover, the role of Parliament is not just limited to examine amendments of parliamentary origin. The right of amendment, even if it does not always result in adoption, enables deputies and
9 senators to obtain complementary information or to draw the government’s attention to a subject they consider important.
10 PART TWO - EXECUTING THE STATE BUDGET
The transactions in the budget passed by Parliament are executed during the calendar year by a number of players in accordance with strict rules. These transactions are audited to guarantee the proper management of public monies. Two categories of public officials conduct the tasks involved in executing the State Budget : the authorizing officers and the accountants. Their functions are completely separate from each other. Budget execution is audited at different levels : ex ante, ongoing and ex post. The aim of auditing is not merely to prevent any mismanagement of funds. It is also to compel the Government to respect the expenditure authority granted by Parliament.
30. CHAPTER I - EXECUTION OF THE ANNUAL BUDGET ACT
31. I. BUDGET EXECUTION CONDITIONS
32. A. The separation of authorizing officers’ (ordonnateurs) and accountants’ functions.
Budget execution is based on task-sharing governed by the principle of the separation of authorizing officers and accountants. This rule dictates the division of tasks needed to execute expenditure and collect revenue. This type of functional distribution is not exclusive to government bodies and is found in the organization of companies in France and worldwide. The unique feature of French law is that it has introduced an audit coupled with the personal and financial liability of the accountant. The budget execution transactions are therefore divided into two distinct stages assigned to two mutually independent categories of public official : the authorizing officers and the accountants.
1. The authorizing officers (“ordonnateurs”)
Under the terms of the provisions of the decree of 29 December 1962, the authorizing officers “prescribe the execution of revenue and expenditure. In this regard, they establish the entitlements of the government bodies, liquidate the revenue, and obligate and liquidate the expenditure”. The authorizing officers’ role is therefore to prepare the execution of budgetary transactions, for both revenue and expenditure, and to draw up the order giving the accountant the legal authority to carry out the following duties :
Collection, following the issue of the collection order; Payment, following the issue of the order to pay.
11 The authorizing officers’ jurisdiction is defined according to whether the State appropriations are decentralized or not.
The Chief Authorizing Officers : These are the authorities at the top of the government hierarchy. They are the Prime Minister, the ministers and the directors of agencies with specific budget appropriations. These authorities may delegate their signatory power to their subordinates – their cabinet staff, central government directors or Grade A civil servants in agencies under them – who thus become deputy chief authorizing officers.
The secondary Authorizing Officers : at regional and département levels, the sole secondary authorizing officers for non-defense services are the regional prefect and the département prefect respectively. Each prefect is entitled to delegate his signatory power to the heads of the decentralized agencies, who thus become deputy secondary authorizing officers. Specific provisions govern administrative and judicial court expenditure.
In the execution of their powers, the ministers, as the Government’s chief authorizing officers, are subject to the liabilities laid down by the Constitution. The other authorizing officers are subject to disciplinary, penal or civil liability without prejudice to the penalties that may be imposed on them by the Budgetary and Financial Disciplinary Court.
2. The accountants
By virtue of the principle of the separation of authorizing officers’ and accountants’ functions and the consequent incompatibility of the two functions, the accountants are exclusively responsible for the following transactions : Collection of revenue; Audit and payment of expenditure; Custody of funds and securities belonging to or entrusted to government bodies; Handling of funds and cash account movements; Book-keeping; Conservation of documentary evidence of transactions and accounting records.
The Treasury accountants audit the regulatory of the procedures with regard to the budgetary and accounting rules. They judge neither the advisability nor the legality of the operations. These accountants form the only example of personal and financial liability under French law. This liability can be brought to bear when breaches of regulations are found, which could be discovered either during audits or when the accounts are scrutinized by the State Audit Office.
At local level, the basic unit is the tax office. The tax office district is usually the canton in rural areas, but may be limited to neighborhoods in highly built-up areas. In the field, the accounting task is carried out by almost 4 000 treasury offices.
In principle, this is a multi-purpose unit : it normally ensures tax collection, financial services for authorities under its jurisdiction, debt management and portfolio transaction (savings collection). However, in urban areas, some accountings units specialize in specific activities : municipal, and hospital receiver offices and collection of fines.
At département level, the General Tax Receiving Officer centralizes the transactions carried out by all the Treasury accountants under his authority, as well as those of the chief tax and customs
12 duty collectors. He centralizes those transactions at the Central Treasury Accounting Office. He also ensures the payment of government expenditure obligated, liquidated and passed for payment by the secondary authorizing officers, the prefects or by the heads of the local agencies of Departments once he has audited its regularity. In accordance with a simplified procedure extended to all civil servants and non-defense government officials, he may also pay wages and allowances without needing an order to pay. He is responsible for auditing the accounts and management of public and other bodies placed under his authority by law (savings banks, social security and family allowance bodies, state and private educational establishments, bookmakers, casinos, etc.). There are 109 General Tax Receiving Officers.
In some districts (arrondissements), a special tax collector (receiver’s officer) works as an intermediary in the linear management, integrates the transactions of his subordinate accountants and centralizes them at the Central Treasury Accounting Office. A recent reform has largely reduced the number of them.
In the regional chief town, the General Tax Receiving Officer is assigned special tasks which require specific structures in three fields : on-the-spot audit coordination, carrying out economic and financial studies and managing large data processing facilities. Furthemore, he has special authority over economic matters by virtue of his seat at the regional administrative council.
3. Exceptions to the Principle of Separation
To make user procedures easier and the execution of budgetary transactions more flexible, the principle of the separation of authorizing officers and accountants functions can be modified by setting up imprest or receipt account. This special organization consists of authorizing the authorizing officer to pay a limited amount of operating expenditure or collect certain items of revenue. These missions are assigned to the “régisseurs” (administrators).
33. B. Principles of Budgetary Law
1. The principle of the one-year budgetary cycle
Article 2 of the constitutional bylaw of January 2, 1959 reminds us that: “The annual Budget Act forecasts and authorizes, for each calendar year, the State’s total resources and expenditure.” What this rule means is that the budget is voted for a period of one year, and that it is executed over this same period of one year. In France, the fiscal year coincides with the calendar year. There are three classes of exception to this rule, however:
Commitments funded under estimated appropriations may involve expenditure beyond the appropriation shown in the relevant chapters of the budget. Budget debt generates a permanent budget liability. Consequently, acceptance of a budgetary deficit constitutes a multi-year commitment. Similarly, State guarantees (in the foreign trade, for instance) are treated as authorizations of expenditure that may materialize many years later.
Pluriannual allocations, by definition, extend beyond the one-year budget cycle: they set the ceiling on expenditures that ministers are authorized to commit to in executing investments provided for under the Budget Act. Not subject to limits on duration, they remain valid until canceled. Cash appropriations for capital transactions set the ceiling on expenditures that may
13 be authorized or paid during the year in respect of commitments incurred in the context of the corresponding program appropriations.
Unused appropriations carried over from one year to the next: carryovers are possible only in the case of specific categories of appropriation clearly defined in the law.
2. The principle of unity
This principle means that all State revenues and expenditures must be reflected in a single document. In other words, there is a requirement that the budget bill submitted to Parliament bring together all State financial transactions, and that all these transactions appear in a single Budget Act.
There are exceptions to this principle, too:
Specific budgets: These reflect the financial operations of State agencies which the law does not vest with corporate status and which are mainly engaged in producing goods or providing services for a price. They are always balanced budgets. At present, there are six of these agencies, although some of them do not meet the given description exactly (Coins and Medals, Legion of Honour, Order of the Liberation, etc.) Special Treasury accounts: These are accounts opened in the books of the Treasury to record the non-general-budget expenditures and revenues of State agencies not vested with either corporate status or financial autonomy, and to itemize specific expenditures and revenues. Such agencies are to be distinguished from public institutions which are bodies corporate separate from the State, and also, although to a lesser degree, from agencies that operate under specific budgets and are vested with financial autonomy but not with corporate status. Autonomous budgets: Those of local authorities, for example. Private entities performing governmental activities: For instance, AFPA (Adults Training Agency), an association governed by private law. Policies on removal from budget: The aim here is to remove a certain number of expenditures from the State budget by entrusting particular missions to other entities (for example, highway administration).
14 3. The principle of universality
This principle requires that all public revenues and expenditures be entered in the State budget without possibility of set-offs or reductions between them. This necessitates the application of two rules:
The rule of non-reduction, or the gross product rule, meaning that revenues and expenditures are shown in the budget as separate, independent totals. Set-offs between revenues and expenditures are prohibited; The corollary to that, namely the rule of non-allocation, which forbids the earmarking of specific revenues to cover specific expenditures.
There are exceptions to this principle, however:
Cost-sharing contributions: These are funds made available by bodies corporate or individuals to be used together with State funds for expenditures in the public interest; Grant and legacies: In these cases, the sums flowing to the State are not treated as general funds but must be used for the specific ends for which they were intended; Restoration of funds : This technique makes it possible, in cases where the State has disbursed sums in error or on a provisional basis and recovers them, to restore the budgetary appropriation to the government department or agency which initially executed the expenditure; Specific budgets and special Treasury accounts; Certain parafiscal taxes: audiovisual royalties, for instance.
4. The principle of budget specialization
This principle is applicable exclusively to the budget appropriations made to ministers to enable them to execute the expenditures of their departments. An appropriation, which is an expenditure authorization, is made available to cover a specific item of expenditure for a known total amount. The resulting “specialization” is indicative of the degree of precision that must accompany the authorization of expenditures. Budget specialization at the subhead level has been a part of French law for a very long time.
This principle, too, has its exceptions:
National Assembly and Senate budgets: These are the focus of a single subhead of the common services budget, so specialization is totally absent. Block subheads : Certain budget subheads consist of block appropriation, which make it possible, in the course of the fiscal year, to increase the resources available for certain insufficiently funded subheads. By definition, the precise object of the expenditure, and the identity of the government department or agency responsible for executing it, are not determined for these budget subheads funded by multi-purpose appropriations. Special funds: Available to the Prime Minister, these appropriations enable this official to fund expenditures at his/her own discretion; Transfers and reallocations of appropriations: Transfers do not alter the nature of the expenditure but change the government department or agency responsible for executing it
15 (e.g. transfer from one ministry to another). Reallocations alter the nature of the expenditure, which it is executed as part of the same budget class or by the same ministry.
5. The principle of budgetary balance
This principle does not apply to the State and to other authorities in the same way.
In the case of the State, the constitutional bylaw of 1959 puts forward two different concepts :
Economic and financial balance: Formulation of the Government’s objectives and exposition of the key data or economic projections on which the hypotheses underlying the budget are based; Financial balance: This is the accounting equilibrium that is the result of comparing resources and liabilities.
Appraisal of budgetary balance in the case of the State is distorted, however, by the fact that transactions tied to borrowing operations (disbursement then repayment of capital) are regarded as cash transactions and are not included in the budget; only interest payments are treated as budget transactions and included in it. This leaves the budget in deficit, giving rise to a corresponding borrowing requirement.
In the case of local authorities and public institutions, the budget reflects the various transactions involved in the borrowing process: receipt of capital, repayment of capital, interest payments. Here, budgetary balance has a quite different meaning: it is a matter of real acounting equilibrium, with total borrowings offsetting the financing deficit.
34. C. Mandatory deposit of cash holdings of official entities in the Treasury general account with the Bank of France
In addition to its function of cashier, the Treasury, as manager of the cash ressources of the State, has deposit accounts on its books for those entities funded under specific budgets, the national public institutions, the local authorities and their public institutions, and other public corporate bodies. These accounts may not have overdraft coverage. The total number of such accounts is not known with any certainty. They are not governed by any general policy. The reasons for their creation were often the outcome of the historical necessities of the given moment and do not lend themselves to systematic examination. Nevertheless, the sums held on deposit in them are far from negligible.
The requirement that official entities deposit their funds with the Bank of France is one of the basic principles on which the Treasury is organized. The key arguments justifying the requirement are:
Originally, better protection of public funds by keeping their administration out of the hands of the financial powers, always suspected of seeking exhorbitant interest rates; The very strict rules governing Treasury deposits ensure that they are very rigorously managed;
16 Since the majority of the depositing entities are public service agencies without any particular competence in financial matters, the quest for high earnings on their cash surpluses could expose them to risk. In the particular case of the local authorities, numerous criticisms are voiced by local officials: Reference is made to the standardization of financial channels and to decentralization. With regard to decentralization, 1982 legislation expressly provided that local authorities should be free to run their own affairs and not be subject any longer to central government supervision. Other critics also point to the cost of the system: the mandatory deposit rule does not encourage rational cash management practices on the part of the local authorities. Moreover, the rule would prove costly to certain authorities. Those municipal districts in possession of significant assets, forests, for instance, would probably benefit financially from the elimination of unremunerated advances and the mandatory deposit rule. Major cities estimate that despite the advantages of the system of advances they lose financial earnings by placing their cash surpluses with the Treasury without remuneration.
It is not easy to arrive at an opinion on this set of arrangements. Listening only to its critics tends to make the observer forget that the mandatory deposit rule applicable to local authorities, and more generally to other official entities and public institutions, is the foundation for the existence of a public sector financial channel that provides a powerful and inexpensive means of:
. Keeping local authority finances under control; . Fostering solidarity among local authorities; . Managing public sector liquidity.
35. II. BUDGET EXECUTION PROCEDURES
36. A. Execution of Expenditure
The initial or annual budget act is published in the Journal Officiel at the end of the preceding December. The allocations of department appropriations to subheads are published at the same time. Each chief authorizing officer, in the form of the minister of each of the ministerial departments, has separate appropriations for the activities for which he is responsible. This apportionment of appropriations is made by a decree issued by the Prime Minister and drawn up by the Finance Minister. It must be strictly in accordance with Parliament’s vote; the Finance Minister is unable to modify it or hold appropriations in reserve from this point on.
Appropriations are allocated by ministry. In other words, each minister is responsible for the execution of his own budget. Appropriations management is thus not centralized in the Finance Ministry.
Part of these appropriations are expended at central level. Another part of these appropriations - in particular the decentralized agencies’ current operating expenditure allocations and the intervention and capital appropriations - are expended at local level.
17 A Decree of July 1992 instituted the Decentralization Charter. This charter stipulates that decentralization should be the general rule in the allocation of tasks and resources to the different levels of the Government’s non-defense agencies. Thus, the regional district becomes the local level under ordinary law for the implementation of national and Community economic and social development policies. In addition, the regional prefects have more power over multiyear sectorial estimates and the allocation of public investment appropriations.
Half of the current operating expenditure appropriations for government agencies are now assigned to local level. By the same token, 52% of the investment appropriations are managed at local level.
Appropriations are apportioned by budget subhead. There are approximately 1,100 chapters. They identify either the nature of the expenditure (interest on debt, civil servants’ salaries, administrative expenditure), or the use to which it will be put (social or cultural subsidies, for example, or capital spending by type of investment [roads, schools, etc.]). Although the allocation prescribed in the particular budget subhead cannot be changed by the spending minister, the Finance Minister can introduce minor modifications. Major changes are matters for Parliament, following proposals by the government.
The budgetary nomenclature used is based on levels of greater detail: “articles,” which identify the governmental department or agency that will execute the expenditure; and “paragraphs,” which identifies the nature of the expenditure in greater detail. It is useful to look at an example that illustrates this budget format: A subhead focused on the day-to-day operations of a ministry is subdivided into as many articles as there are ministerial departments with responsibility for managing these expenditures. Each article is subdivided in turn into paragraphs, which enumerate expenditures on equipment, heating, travel, etc.
The allocation between articles and paragraphs can be modified at the discretion of the spending ministries themselves, within the resource envelope of the subhead.
As far as execution of the budget is concerned, appropriations are of three types:
Estimated appropriations: These can be exceeded in the course of execution, since the expenditures funded are mandatory and their payment cannot be postponed. A good example of such expenditures is interest on the public debt, which must be paid even if the budget allocation is exceeded. Where this class of appropriations is concerned, the government does not need the authorization of Parliament to expend amounts in excess of the original allotment. Provisional appropriations: These fund disbursements are mandated by law: civil service salaries or social security benefits, for instance. Where insufficient funds have been voted, and apart from cases of emergency, the government is obliged to obtain the authorization of Parliament before they can be increased, but in practice Parliament cannot refuse, since it is a matter of compliance with the law. Capped appropriations: Execution of these appropriations may not exceed the original allotment.
The stages of public expenditure:
The governmental expenditure process takes place in three phases :
18 Commitment: This is the legal act which creates the binding legal obligation to pay: for example, signature of a contract, hiring of a civil servant. It is the most important act, since all the other phases of the expenditure flow from it. Obviously, commitment falls within the area of competence of the authorizing officer. Special accounting arrangements are used to record commitments. Liquidation: This is the calculation of what the State must pay out in respect of each commitment. For example, after placing an order (commitment), the authorizing officer receives the invoice from the supplier. He verifies that what has been supplied corresponds with the order, and checks the invoice to determine the amount payable. This amount may be less than the amount of the commitment, but it may never be higher; if it is higher, a supplementary commitment is needed. Authorization to pay : This is the order to pay issued by the authorizing officer to the accountant. In issuing it, he relies on the commitment file, which contains the details of liquidation and all supporting documentation.
These three phases ─ commitment, liquidation, and authorization ─ are the responsibility of the authorizing officer. In the case of repetitive expenditures (for example, the monthly payment of civil service salaries), there is no formal authorization; instead, payroll details are simply remitted to the paying accountant. It is at this point that the government accountant intervenes. He is the sole official able to effect payment of governmental expenditures.
37. B. Fiscal Year Appropriation Movements
In practice, the minister rarely expends exactly the sum of appropriations made in the initial budget act. There are various reasons why the final subhead-by-subhead expenditure might differ from this sum of appropriations :
Transfer of appropriations : change to revise the fiscal-year allocation of departmental appropriations to subheads. A transfer consists of deducting appropriations from one subhead to add them to the sums in another subhead, while respecting the nature of the expenditure provided for in the budget documents. The transfer merely changes the agency responsible for the expenditure. Reallocation of funds : Strictly regulated procedure (the “one-tenth” rule) changing the nature of the appropriations. It consists of reallocating appropriations from one subhead to another within the same budget and the same class. Allotment of appropriations : Movement of appropriations to allot, during a year, general- purpose appropriations made for certain budgets to subheads under other budgets by way of exception to the one-purpose appropriation rule. Cost-sharing contributions : they come under a specific procedure for apportioning revenue within the general budget or a specific budget. This apportionment procedure departs from the rule of no direct allocation of specific revenue to specific expenditure as provided for by Article 18 of the Constitutional bylaw of 2 January 1959. Supplemental appropriations : Regulatory procedure enabling the Government to make appropriations during the budget year and in accordance with basic conditions (emergency in particular) and formal requirements governed by the Constitutional bylaw regarding budget procedures.
19 Rescission : procedure by order of the minister responsible for the Budget to rescind those appropriations adopted by the initial budget act that are “no longer pertinent”. Restoration : Procedure whose purpose is to make appropriations available to an authorizing officer who has already used them. Reappropriation : procedure enabling, by order of the minister responsible for the budget and by way of an exception to the one-year parliamentary rule, the unused appropriations from the preceding fiscal year to be reappropriated to the following fiscal year in accordance with strict rules.
38. III. GOVERNMENT CONTROL OVER BUDGET EXECUTION
In order to anticipate a drift as accurately as possible, a certain number of execution tracking and forecasting tolls have been set up by the Ministry of the Economy and Finance. The mainstay of these tools is a swift and reliable system, which tracks the budget-execution accounting data. This is the exclusive domain of the accounting networks headed by the Directorate for Public Accounting. In addition, quantitative techniques are needed to anticipate the eventual amount of the annual execution deficit. These techniques are the responsibility of the budget Directorate.
39. A. The Value of the Execution Tracking and Forecasting Tools
The accounting information provided to the Minister of the Economy is also used by the Budget Directorate to draw up its execution forecasts. The main information tools are : Weekly information (the “situation hebdomadaire” or “SH”), which provides aggregate information on the level of expenditure (broken down into budget categories) and revenue (the main tax and non-tax revenue line items are presented). Although this document is a general overview, it provides extremely up-to-date (weekly) information on the level of public expenditure and revenue grouped into the main significant aggregates and presented within a coherent accounting framework. Highly detailed monthly information (ancillary expenditure and revenue accounts). Expenditure is presented by paragraph (covering tens of thousands of line items) and revenue is informed at the most detailed accounting level (covering dozens of revenue line items). These documents provide the Budget Directorate with the information it needs to make an in- depth analysis of budget execution and, from this, draw up a forecast of expenditure and revenue and thus deficits.
An execution forecast is drawn up using two main methods :
An exhaustive summary of all the exogenous factors likely to affect the execution forecast. For expenditure, this covers everything from taking into account a recently signed wage award, to recalculating the debt burden in consideration of an interest rate increase, to the valued interpretation of all the measures announced by the different ministers. The factors relating to revenue generally concern economic activity, but may also be more technical in the form, for example, of tax collection network data or estimated schedules for the issue of assessment lists; The construction of monthly expenditure and revenue profiles based on the forecast resulting from the above-mentioned analysis. These profiles target the finest level of detail allowed by
20 the resources available in view of the advantages of a high level of detail (approximately 600 expenditure line items and some one hundred revenue line items).
Once a month, the accounting data (the budget realizations) are compared with the projected profiles used. Discrepancies are analyzed in depth (with all the Ministry of the Economy and Finance divisions concerned as regard revenue) and form the basis of execution forecast revisions, which are immediately communicated to the minister responsible for the Budget and the Prime Minister.
These continually updated execution forecast can then be used to take the measures needed to meet the budget balance and rate of growth of public expenditure objectives set by the Government. If a deficit is unduly greater than anticipated, budget regulation may be envisaged. Such regulation has come in a number of forms over the years and, still today, many different methods may be used.
40. B. The Medium-Term Uses of the Execution Forecast
The execution forecast is also one of the most useful tools for preparing the supplementary budget acts. It is used in particular for the traditional end-of-year supplementary budget, which revises the year’s estimated revenue on the basis of collections recorded in the early months of the year. More importantly, this supplementary budget adjusts the appropriations to the needs observed and balances the corrective actions (such as appropriation rescissions) taken throughout the year to control the budget execution. The supplementary budget also provides an opportunity to ratify by law emergency decisions, which are officially within the remit of the budget act (supplemental appropriations).
41.
42.
21 43. CHAPTER II - THE BUDGET EXECUTION AUDIT
The budget execution audit is an inherent stage of the budget execution itself. This auditing task consists of more than just uncovering any fraudulent transactions by public officials. It is also a way of constraining the Government to respect the expenditure and revenue authority accorded it by Parliament. The budget execution audit can be broken down into three stages : ex-ante audits, audits during the execution phase and ex-post audits. These procedure are the responsibility of the government agencies themselves, independent judiciary bodies and Parliament.
44. 1. THE EX-ANTE AUDITS
Ex ante audits are carried out to guarantee compliance with Parliament’s budget decisions and to prevent any irregular use of public monies. However, acts obligating expenditure without budget appropriations cannot be nullified for this reason alone and the item of expenditure must still be paid. Therefore, in order to be efficient, audits must be carried out before acts are signed by authorizing officers. This type of audit has thus been introduced at both central and decentralized level.
45. A. The Central Financial Audit
The law of 10 August 1922 lays down the procedures for this audit. A financial comptroller appointed by the minister responsible for the Budget is assigned to each spending minister. Submitted to the comptroller :
For prior approval are the draft orders, decrees, memoranda and all acts that financially obligate the State; For opinion are the bills, orders, decrees and acts subject to the counter-signature or opinion of the minister responsible for Finance. He therefore intervenes upstream of expenditure by signing or advising on the texts that form the public expenditure framework.
He is involved in the main :
In budgetary concerns : he is responsible for averting appropriation overruns, i.e. preventing expenditure from exceeding the sums authorized by Parliament. To this end, he keeps obligated expenditure accounts in liaison with the authorizing officer. He must ensure that the item of expenditure has been correctly evaluated and used for its intended budgetary purpose (e.g. investment appropriations may not be used to finance operating expenditure). He also signs the orders to pay and the authorizations to assign appropriations to the secondary authorizing officers (prefects), which authorize them to obligate and then pay expenditure at the decentralized level; In regulatory concerns : he guarantees the application of the financial provisions laid down in the legislation and regulations in force. For example, he ensures that the recruitment of civil servants complies with the civil service regulations for permanent employees and that contracts are put up for tender as stipulated by the code on government procurement. His actions therefore prevent any disputes;
22 In an advisory capacity : he draws the attention of the public finance managers to the financial consequences of their projects.
If he finds any irregularities, he refuses to give his approval. In such cases, the item of expenditure may only be obligated with the assent of the minister responsible for the budget, although this procedure is rare. In practice, the public finance managers generally make the changes requested by the financial comptroller to the dossiers they have presented.
When carrying out his audit, the financial comptroller also acts as financial consultant to the financial management agencies while maintaining a constant liaison with the Department of the Economy and Finance and more importantly with the Budget Directorate. He also works closely with the State Audit Office.
The financial comptroller’s essential duties must be carried out in perfect accordance with the speed and responsibility objectives imposed on the State services.
46. B. The Local Financial Audit
The Decentralization of the Financial Audit on State Expenditure at Local Level : Decree # 70-1049 of 13 November 1970 has strengthened the decentralization policy by satisfying the dual need to decentralize and improve the auditing of expenditure obligated locally.
A Decentralized Audit : Acts likely to financially obligate the State and multiyear allocations are submitted, when instigated by secondary officers, for the opinion of a financial comptroller. The local comptroller is the general tax receiving officer, who is more often than not the accountant committed to the expenditure. This is a simple audit of regularity and in non way examines advisability. Covered are : Charging of expenditure against the budget; Appropriation availability; Evaluation accuracy; Regulatory of the item of expenditure with respect to the financial provisions in the laws and regulations; Potential public finance consequences of the proposed measures.
An Adapted Audit : In a great many cases, the audit provided for by the decree of 13 November 1970 is not carried out prior to the expenditure. Provided that the financial comptroller in charge of keeping their accounts is informed immediately, the secondary authorizing officers may obligate the limited number of items of expenditure stipulated by order of the minister responsible for the Budget (amended order of 13 January 1975). This concerns, for example, contracts under a certain threshold, financial assistance, grants and subsidies whose beneficiaries, awarding terms and rates are defined by a decision of the minister responsible for the Budget. Ex-ante audits result in an opinion rather than approval. This opinion must be given within two weeks of receipt of the request made with supporting documents, the list of which is drawn up by the minister responsible for the Budget. When the ex-ante opinion is favorable, the relevant authority may obligate the item of expenditure. Secondary authorizing officers may override unfavorable ex-ante opinions, except when based on appropriation unavailability, by means of a duly substantiated decision notified to the financial comptroller. 23 The decision to override may lead to sanctions in the event of serious or repeated irregularities. The minister responsible for the Budget may decide, as a precautionary measure and for a maximum period of thirty days, that the authorizing officer’s act should all receive a favorable opinion from the financial comptroller before any expenditure is obligated. The fact that such a sanction has almost never been imposed is indicative of the quality of relations between authorizing officers and comptrollers and the co-ordination of their efforts to improve the regularity of public spending.
On 1 January 1995, an experimental reform of the financial auditing of decentralized expenditure was launched in two regions (Aquitaine and Champagne-Ardenne). This reform gives more flexibility the prefects and the authorizing officers for expenditures with strong budget issue and for the job management. It spread over the whole country in 1997.
47. 2. AUDITS DURING THE EXECUTION PHASE
48. A. The Accountant’s Audit
The accountants check that the basic public accounting rules are respected when revenue is collected and expenditure paid. This is essentially an audit of regularity and liquidation. Specific audits are made of expenditure, in particular to ensure the compliance of the expenditure with the budget authority and authorize payment by the various legal methods to the real creditor (“discharge”).
49. B. The General Inspectorate of Finance’s Audit
The General Inspectorate of Finance, under the authority of the Minister of the Economy and Finance, carries out a three-way auditing, information and evaluation task. The general finance inspectors may check the financial management of the Ministry of the Economy and Finance’s decentralized agencies, public accountants, secondary authorizing officers, public corporations and enterprises and, more generally, bodies managing public funds. Moreover, the Inspectorate may make any inquiries that the minister responsible for the Budget sees fit to assign to it. In recent years, the Inspectorate of Finance has been empowered to audit and evaluate government bodies and policies. Observations are notified to the audited parties, who respond to them in writing. The responses are inserted in the final report. The Inspectorate thus draws on its wide-ranging investigative powers to contribute towards the sound, efficient and dynamic financial management of public monies.
C. The Parliament
24 The Parliament has extremely important prerogatives concerning control of the public expenditure, but they are little used. These prerogatives can be analyzed under three distinct angles :
The members of Parliament have real attributions : authorities of control, by special reporters, of documents and on the spot, participation of deputies and senators to organisations outside the Parliament, questions to the government, investigating committees;
They receive a mass of important information : The members of Parliament are addressees of a long list of documents : the report written by each financial comptroller on the execution of the department budget of which he assumes the control, information on the budget execution and retracing the receipts and expenditures level, specific information forms for the special reporters of the finances committee;
They can benefit from the assistance of the State Audit Office : exhaustive and relevant report dispatches, replies to request of inquiry by members of Parliament, transmission of some observations of the State Audit office.
In reality, the Parliament uses only very partially its control authorities. Reasons currently given are both of political and cultural nature :
Contrary to other countries, notably Anglo-Saxon ones, the public expenditures were long the subject, in its principle, of a possibly tacit approval of the public opinion. The launching of a project which generates public expenses is not the opportunity to lead large debates.
The functioning of 5th Republic institutions does not favor a such evolution. Indeed, as Mr. Pierre Joxe, President of the State Audit Office, said : "our institutions make that the opposition can not, and that the majority does not, dare to control".
50. 3. THE EX-POST AUDITS
51. A. The State Audit Office
The State Audit Office audits the accounts of the State and its general government entities. Regional audit chambers have been responsible for this task as regard the local general government since 1982. The Office’s jurisdiction therefore encompasses the different State services, the public corporations under the supervision of the ministries and the majority-owned government enterprises. In addition to the general government in the strictest sense, its jurisdiction extends to social security bodies, private entities receiving public financial assistance and, since a law in 1991, entities petitioning public philanthropy.
The Office’s audits may be mandatory, every four to five years, or optional depending on the case. Optional audits concern subsidiaries of government-owned enterprises, entities receiving public financial assistance and those that petition public philanthropy. When an organization has a public accountant, the State Audit Office scrutinizes its accounts. Mandatory audits consist of scrutinizing accounts to check their regulatory pursuant to the accounting rules; ensuring that the
25 transactions described therein and accompanied by supporting documents, organized into bundles, have been properly carried out by the public accountant; and ensuring that this accountant has made the appropriate regulatory audits. If no cause is found for criticism, the State Audit office issues a discharge order for the account. Otherwise, it applies a written procedure carried out with the public accountant. In effect, it passes a provisional order containing injunctions on specific points for the attention of the accountant. If the accountant meets with these requirements, if need be by paying into the entity’s fund from his own pocket the sums that he is responsible for paying in excess or not collecting, the Office passes a second order to lift the injunctions and give him discharge. Otherwise, it issues an order to enforce restitution of the monies. The State Audit Office serve as appeal judge for regional chamber of accounts rulings.
In addition to auditing the accounts, which does not result in a judgment if the entity has no public accountant, the Office audits the financial management of the authorizing officers and the managers of the entities outside the public accounting field. It does not have the same coercive powers in this case as it does with the public accountants. However, it may make critical observations in emergency interim rulings by the Presiding Judge, in letters from the public prosecutor of the chamber chairmen, and in special reports in the case of public enterprises. The addressees of such correspondence are bound to respond.
The public report presented to the President of the Republic each year is the most formal method used by the State Audit office to communicate its criticisms. However, this report contains but a small proportion of the observations made each year. Since 1991, the public report has no longer been the sole annual document produced. This report, which appears in June, is now accompanied by separate appendices addressing specific issues. Once the State Audit Office has audited the financial management of an entity, it may decide, in serious cases, to refer the authors of irregularities to the Budgetary and Financial Disciplinary Court.
Certain particularities are to be found in the State Audit Office’s ex-post audit of government revenue and expenditure. The first is the separate auditing of the chief accountant’s accounts and the authorizing officer’s accounts. Supporting documents for accountants’ transactions are produced in support of their accounts not each year, but each quarter. This brings the audit more into line time-wise with the financial management of the departments.
A second particularity is found in the role conferred on the State Audit Office by the Constitution, Article 47 of which stipulates that, “the State Audit office shall assist Parliament and the Government in the audit of the execution of budget acts”. The office may present observations to the financial commissions of the two assemblies, which may ask it to make inquiries. Moreover, the State Audit office drafts a detailed report on the execution of the year’s budget acts – initial budget act and supplementary budget act. This report is submitted to the parliamentary assemblies to provide clear background information to the vote on the budget review act by highlighting the successive budget allocation revisions.
The State Audit Office is a court made up of irremovable magistrates. It is presided over by a Presiding Judge and consists of seven chambers with sectorial jurisdiction. For example, the seventh chamber has jurisdiction over the departments of defense and transport and over the public corporations and government-owned enterprises placed under their supervision. The State Audit Office has a prosecutor’s office placed under the authority of a public prosecutor.
26 52. B. The Budgetary and Financial Disciplinary Court
Created by a 1948 law, the Budgetary and Financial Disciplinary Court rounds out the State Audit Office’s activities. It is an administrative tribunal in charge of taking action against breaches of budgetary rules commuted by administrators. It is made of members of the Council of State and the State Audit Office appointed by decree of the Council of Ministers for a term of five years. It is presided over by the Presiding Judge of the State Audit Office. Only a limited number of authorities may bring cases before the Budgetary and Financial Disciplinary Court : the presidents of the two assemblies, the Prime Minister, the Minister of Economy and Finance, the minister responsible for the budget, the minister responsible for the civil servant summoned, and the State Audit Office and its public prosecutor.
Those subject to Budgetary and Financial Disciplinary Court proceedings are civil and defense government officials and entities and enterprises under the jurisdiction of the State Audit Office, with the exception of ministers and local representatives .
The Budgetary and Financial Disciplinary Court only rules on breaches defined by the law of 1948. These breaches include unauthorized expenditure obligations, non-compliance with the financial audit rules, the payment of irregular remuneration, and infringement of the Code on Government Procurement. Cases must be brought before the Court within five years of the day on which the offence is committed.
The penalties handed down are fines, which may be as much as double the annual wage of the person charged. This does not exclude any sentences delivered by the criminal courts. The Court may moreover order the publication of the judgment in the Journal officiel. An average of fifteen cases are referred to the Budgetary and Financial Disciplinary Court every year.
53. C. Parliament’s Vote on the Budget Review Act
Although the budget review bills used to be simple formalities under the III and IV Republics, since 1958, they have had to comply with strict rules. Article 38 of the 2 January 1959 Constitutional bylaw regarding budget procedures stipulates that the Government is obliged to table the bill no later than the end of the year following the budget execution year.
The budget review act presents the final revenue and expenditure sums and determines the resulting deficit or surplus. If need be, it also ratifies the appropriations budgeted by supplemental appropriations. The Members of Parliament are therefore able to check that budget execution complies with the authority they granted the Government. In practice, the debates center on the conclusions of the budget execution report drafted by State Audit Office and appended to the bill.
54. CHAPTER III - THE BUDGET REVIEW ACT
The budget review act is a legislative text defining the final settlement of the budget. It must be presented to the National Assembly by 31 December of the year following budget execution. This 27 act is the last stage in a long budgetary process, which starts two years previously with the preparation and presentation to Parliament of the initial budget bill. In practice, a fairly large proportion of the budget review bill is prepared virtually in parallel with the drawing up of the different accounts reporting on the daily tracking of the budget’s execution.
55. I. MANAGING BUDGET EXECUTION
56. 1. The accounting instruments
Why two nomenclatures ?
Governmental accounting takes place within a budgetary setting. In other words, it involves a two-pronged approach: authorization, and control by Parliament. The concept of control is fundamental in public sector accounting. This situation is in no way comparable with what occurs under the rules applicable to the private sector.
The result is that a number of specific features can be identified. They take the form of accounting requirements prescribed by the legislature, and which the regulations governing public sector accounting must ensure are put into effect. Here, the accountant is not the master of the definitions and classifications by which he works. It is the legislature that has decided the types of transactions to be recorded as costs and resources for Budget Act purposes, methods of posting to budget categories, execution periods, methods of calculating annual results, etc.
The constitutional bylaw of January 2, 1959 lays down the principle of a system of recording budgetary transactions that reflects the execution of the Budget Act. These transactions are to be distinguished from non-budget transactions, or treasury operations, which consist essentially of:
Cash management activities; Transactions associated with borrowing operations; Transactions associated with Treasury deposit accounts.
The same bylaw is the source of the rule that revenues and expenditures must be posted in the accounts according to their date of receipt in the case of revenues and their date of disbursement in the case of expenditures.
This receipt/disbursement approach to accounting, a budgetary approach, makes it possible at the end of the fiscal year to calculate the budget balance, which is the difference between fiscal revenue received over the course of the year and expenditures paid. It is also designed to enable Parliament to monitor compliance with the authorizations it extended to the government when the budget was voted. This requires the use of a budget transactions classification and description system, or nomenclature, exactly the same as that used when the budget was voted.
The 1962 decree specifies that the public sector accounting system should be modeled on the Chart of Accounts, and accordingly generate an accrual result. This necessitates:
Accrual-basis accounting ─ in other words, recording of liabilities and receivables as soon as debts or claims are created;
28 A classification and description system similar to the Chart of Accounts, which promotes the classification of transactions in economical terms.
The public sector accounting system thus needs to simultaneously comply with the imperatives of the constitutional bylaw and adopt the accounting methods underlying the Chart of Accounts. In theory, it would be possible to achieve this through either one of two organizational choices:
Either uniqueness of nomenclatures through merging of budget nomenclature and accounting nomenclature; Or preservation of dual nomenclatures by superimposing a budget-oriented accounting system on the corpus of general accounting principles.
The French State opted for keeping the two nomenclatures. But they are linked together in a system where one nomenclature is converted into the other: the transactions through which the Budget Act is executed are classified and described throughout the fiscal year in a manner absolutely in keeping with the provisions of the constitutional bylaw, in a category of specialized accounts (Group 9), then converted at the end of the year into the accrual basis accounting specific to the Chart of Accounts.
Cash basis or accrual basis accounting?
Accounting technique affords two possible solutions to the problem of temporary allocation of budget transactions:
Either revenues collected and expenditures executed between January 1 and December 31 are posted in the accounts for the particular year, regardless of which budget provided for or authorized them : this is cash basis accounting; Or all financial transactions executed as part of the budget for a particular year are posted in the accounts for that year, regardless of their actual time of execution : this is accrual basis accounting. This gives a combined picture of receivables and payables for a particular budget.
Although the French system is one of cash basis accounting, the system currently in use is not restricted to the posting of cash transactions executed only during the calendar year proper. The fiscal year is extended by supplementary period up to January 15. This supplementary period was shortened out of 5 weeks during the last 5 years, in order to know the results more and more quickly.
Operation of the accounting system
The accounts are designed in such a way as to be easily reconciled with the budget authority and its execution. The information corresponding to the different operations in the progression of budget act transactions are entered in various accounts :
Obligations, liquidation and authorizations of payment are recorded in the administrative accounts kept by the financial management agencies (authorizing officers) and the financial comptrollers; Payments are made by the accountants and recorded in the State account;
29 All expenditure and revenue transactions (execution of the budget act) result in two movements :
One to a budget account, as a budget act transaction has to be recorded; The other to a balance sheet account, which records the change to the national net worth as a result of the payment of the debt or the collection of item of revenue.
In order to do this, general public accounting uses an accounts classification adapted from the chart of accounts used in the private sector :
Group 9, “Analytic Budget Accounts”, is reserved for the description of budget transactions. The transactions are entered in accordance with the rules defined by the Constitutional bylaw of 1959 regarding budget procedures. Groups 1 to 5 (balance sheet accounts) describe the cash flows and changes in the national net worth. Groups 6 and 7 are the revenue and expenditure statements which describe by type the receivables and payables resulting from both budget and non-budget transactions.
However, general public accounting merely provides an overview of budget execution. Ancillary accounts are available to track budget execution acts at the most detailed level. These accounts present the development of transactions recorded in Group 9 :
Expenditure transactions appear in an ancillary account called the Expenditure Ancillary Account, kept in line with a classification identical to the budget classification by class, subclass, subhead, article and paragraph; Revenue transactions bear a special identification code, called specification, which refers to the budget classification provides for by Account A of the budget act.
57. 2. The Centralization
Under the comprehensive budget rule, the large decentralized book-keeping has to be regularly centralized. The density and distribution of public accountants throughout the French territory (mainland France and the overseas départements and territories) necessitates a centralization of the book-entries made daily. This fulfils a dual purpose :
To swiftly and reliably inform the government authorities and financial managers to help them make future budget choices; To enable a transparent and accurate audit of the institutional authorities : the State Audit Office and Parliament.
These in-year centralization provide the financial managers with regular information. Every day, the information is centralized by the centralizing units (the general tax offices and the receiver’s offices) and uploaded to the Central Treasury Accounting office, which keeps the national accounts files. This information is therefore directly accessible for consultation by Directorate for Public Accounting agencies. The Expenditures Ancillary Account information is checked and audited and regularly supplied to the departments. It is worth noting that the information uploaded to the Central Treasury Accounting Office covers all the transactions carried out daily by the network of treasury accountants. However, only the
30 cash movements of the network of financial agencies (General Tax Directorate and Customs) are centralized daily. Its budgetary movements are centralized but once a month. The national files containing this information and managed by the Central Treasury Accounting Office form the raw material used by the Directorate for Public Accounting to produce analytic statements. The main such statements are :
The weekly statement (‘situation hebdomadaire” or “SH”, which is fairly confidential; The monthly treasury statement (MTS). This monthly document presents the budget’s execution by analyzing assets and liabilities and budgetary and treasury transactions. It is published in the Journal Officiel.
The end-of-year centralization satisfy the auditing requirement. The transactions carried out by the public accountants are audited to check their compliance with budget authority and the public accounting rules :
A hierarchical audit is made by the Directorate for Public Accounting’s agencies; A jurisdictional and administrative audit is made by the State Audit Office; A political audit is made by Parliament via the budget review act.
The end-of-year centralization are particularly important in this as they result in the publication of the summary documents needed to audit the public finances and prepare the budget review act.
58. 3. The Summary Documents
The revenue and expenditure account is the summary document presented to the audit office by each chief accountant at the close of the fiscal year. It is the main document used by the State Audit Office in a jurisdictional audit, which may implicate the accountant’s personal and financial liability.
The financial administration’s general account is a first-rate summary document of the public accounts for a given year. It is a cornerstone document in the preparation of the budget review act. It is made up of :
The public accounts general balance; The development of the budget revenue; The development of the budget expenditure; The development of the transactions recorded in the Treasury special accounts; The development of the final accounts
59. II. THE BUDGET REVIEW ACT
Although the budget review act is a budget act, it is a particular breed of budget act. Whereas the others are forward-looking, granting spending authority to the departments, the budget review act is a report based on the ex-post audit of the execution of this authority.
31 The current legal arrangements for the budget review act are defined in Constitutional bylaw of 1959:
To inform outturn detailed in the accounts and adjust the final appropriations to the sum of expenditure observed; The deadline for tabling the bills as no later than the end of the year following the budget execution year.
The budget review act is the last step in the budgetary and accounting procedure. It takes the assessment of Government action further than the previous lone comparison against forecasts to make an assessment against actual outturn. With the elucidation provided by the State Audit Office magistrates in their annual report on the execution of budget acts and all the above- mentioned documents, Parliament thus has the tools it needs to properly exercise its powers.
However, Parliament’s audit in this regard is essentially a legal audit to ensure compliance with the authority he has given. The advisability of this authority is assessed when the initial budget act is voted.
Parliament’s political auditing power is exercised via the vote on the budget review act and transcends the “budgetary audit” aspect. Although the consequences of a positive vote are evident and purely technical, the consequences of a negative are less so. If the budget review act is rejected, the Government is obliged to either present a new text to Parliament or to make revisions to propose supplementary budgets or obligations for the future.
The reduction of the supplementary period and of the date for the production of the Financial Administration’s General Account allows us hope that, in the future, the Parliament will be able to examine the draft of the Budget Review Act before undertaking the review of the next year’s budget. Such a perspective would reinforce the interest of the control exerted by the Parliament on the execution of the Budget Act.
60. CONCLUSION
As noted, the French public sector financial management system has numerous specific features not seen in the systems of other countries:
The separation of authorizing officers and accountants (the latter personally and financially liable), although challenged in the case of tax revenues, remains one of the pillars of the system; The requirement that the majority of public entities deposit their cash holdings in a single account maintained by the Bank of France (the principle of consolidated cash management) leads to efficient administration of public sector cash resources; The existence of a vast network of tax offices throughout the nation ensures that taxpayers have access to good service in their own immediate districts; The real-time centralization of budgetary and accounting data means that information on execution of the Budget Act becomes available very rapidly.
This system is not one that is set in stone. There is currently active debate on the following proposals:
32 The public sector accounting system should move toward greater reliance on the concept of accruals. Receivables and payables would then be reflected earlier in the process, giving a clearer picture of public sector commitments. This change of direction would lead to adoption of the principles of accrual-basis accounting, eliminating the need for the supplementary budget period, which in any case is shrinking from year to year. This reform is strongly recommended by the National Audit Office which includes, in its report on the execution of the Budget Act of 1988, many proposals for improvements of the State accounting framework :
1. For pass from a cash basis accounting to an accrual basis one, it is necessary : - to adopt the principle of specialization of the exercise, consisting in fastening to each exercise its running costs and products that concern it effectively, and only them; - and to revise, at the same time, modes of recording in order to take them into account on accrual basis (products to receive, costs to pay) and no more mainly on collections and payments basis. Accounts will improve their coherence and reality. They will be more rapidly available, the mechanism of the supplementary period becoming useless.
2. The building up of provisions is necessary in some cases. It would have to be normalized. Detailed information about risks and provisioned costs, as well as on modes of provision’s calculation, is necessary.
3. The census of State’s commitments would have to be more complete and systematic.
4. The counting of assets, notably financial, has to be rapidly improved.
The present accounting classification and description system, or nomenclature, should be simplified by the elimination of Group 9, “Analytic Budget Accounts,” which provide day-to- day aggregate data on public sector budget revenue and expenditure positions in terms of receipts and payments. This technique of obtaining an immediate aggregate picture of a situation is no longer justified today, since information technology allows monitoring of daily operational details and, consequently, if desired, of the aggregate budget execution situation.
Efforts are made every year to reduce the time it takes to close the budget accounts, and thereby ensure that the results of the preceding fiscal year are available earlier. As noted already, the supplementary period is shorter each year. Along the same lines, it has been decided that from now on the Financial Administration’s General Accounts will be finalized by June 30 of the following year.
It is thus to be expected that the French public sector financial management system will see numerous changes that could sooner or later benefit other countries whose own systems are based on French techniques: for instance, the francophone African countries, which have inherited the French system, and countries in Central and Eastern Europe now in the process of setting up their governments.
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