Budget Classification

Basic PFM Training Program

The World Bank Group

June 13-15, 2011

Nataliya Biletska, PRMPS
 Overview
• Why is Budget Classification Important?
• Defining Budget Classification
• Types of Budget Classification
• Economic, Functional and Program Classification of
Expenditures
• Differences Between GFS 1986 and GFS 2001
Budget Classifications
• Key Issues in Implementing GFS 2001 Budget
Classification System
• Bank’s Project Reporting and GFS 1986 and
GFS 2001 Budget Classifications Systems
 Why is Budget Classification
Important?
• At the core of the functions of a budget:
– Strategic planning, policy formulation and
performance analysis
– Efficient resource allocation across sectors
– Compliance with budgetary resources appropriated
by parliament
• Thus
One of the fundamentals of a budget
management system
Normative framework for policy
decision-making and accountability
 Defining Budget Classification
• Systemic way of categorizing and structuring budgetary
information which is provided to government managers,
policymakers, the legislature, and the general public
• Format for the budget preparation, presentation and
reporting which thus determines the coherence and
transparency of the budget
• Coding system aimed to produce meaningful and
accurate information

• A sound budget classification system should contain:

Classification of revenues into various categories
(tax and other than tax revenue; taxes by tax base)
Administrative, economic and functional classifications
of expenditures
 Types of Budget Classifications
International Standards
• Main:
– Economic IMF’S Government Finance Statistics
Manual (GFSM) 2001
• Accrual basis
– Functional • Replaced cash-basis GFSM 1986
(incorporating UN’S COFOG)
• Consistent with SNA 1993
– Administrative
• organized by a government
entity responsible for
managing the allocated funds

• Other:
– Program — indicates a set of specific policy objectives to be achieved
with the provided resources
– Source of fund (on-budget, extra-budgetary, counterpart funds)
– Geographical location (administrative units, taxpayers, recipients of
government transfers) etc.
 Economic Classification
(GFSM 2001)
• Determined by the type of expenditure incurred
• “Expense” replaces “expenditure” because of
accrual basis
• All line items are equally applicable to accrual- Main Categories:
basis GFS 2001 and cash-basis GFS 1986, with 21 - Compensation of
one exception—consumption of capital employees
• Includes current expenditure and capital 22 - Use of goods &
services
transfers but excludes capital expenditure as in 23 - Consumption of
GFS 1986 fixed capital
– Acquisition of fixed capital assets, purchases of stocks, land and, 24 - Interest
intangible assets are recorded as transactions in nonfinancial 25 - Subsidies
assets 26 - Grants
– Capital transfer when ownership of a capital asset is given up 27 - Social benefits
without any compensation
28 - Other expense
– O&M spending is an expense, while major improvements are
acquisitions and added to the existing value of an asset
• Independent of the administrative classification,
but can be incorporated for each government
organization and its subdivisions
 Functional Classification
(GFSM 2001)
• Categorizes government activities based
on their broad objectives
Main Categories:
• Facilitates the analysis of resource
allocation among sectors and the impact 701 - General public services
702 - Defense
of fiscal policies 703 - Public order & safety
704 - Economic affairs
• Distinct from the administrative structure 705 - Environmental
of the government protection
706 - Housing & community
• Fully consistent with COFOG and amenities
707 - Health
comprises 10 major government 708 - Recreation, culture &
functions, further divided into groups and religion
709 - Education
subgroups 710 - Social protection

• COFOG system often adapted to a

country’s particular policy needs (mapping
tables between COFOG and classification used)
 Program Classification
• Groups expenditure by common policy objective
• Key purposes: (1) establish specific goals for budgetary
spending and (2) improve operational performance by
adopting performance measures
• Basic information tool for many performance budgeting
systems
• Thus serves not only for budgetary planning and reporting
but mainly for promoting budgetary decision-making –
better aligning government activities with policy priorities
• Economic classification still needed in programmatic
structure
– Capture cost information to link economic inputs to program results
– Incorporate current and capital inputs of a particular program
 Program Classification Combined
with Functional and Economic
• Program classification inherently disconnected from
government’s organizational structure
• Contemporary approach: to place each program under a
single ministry and align it with the functional classification
– Ensures clear assignment of responsibility for a program and
accountability for results

Function Program Economic

Main Function Economic Affairs Ministry Ministry of Main classification Expenses

Agriculture and (Section)
Forestry

Function Agriculture, Program Assisting the Subclassification Use of goods

Forestry Fishing & breeding (Article) & services
Hunting

Sub-function Agriculture Program General Director Other Information Training of

Manager for Agriculture (Paragraph) staff

Managing Unit Human

Resources
Division

Subprogram Training of
poultry farmers

Source: Budget Classification, IMF FAD Technical Note by Davina Jacobs, Jean-Luc Helis, and Dominique Bouley, 2009.
 Differences Between
GFS 2001 and GFS 1986
• Pertain to coverage, recording basis,
definitions, classifications and balancing
items
• Three fundamental changes:
– General government sector
– Accrual basis of recording
– The analytic framework
Difference 1:
General Government Sector
• GFSM 2001 is based on general General Government
government sector which consists of
all resident government units and all
Central Government
resident nonprofit institutions that are
controlled and financed by government
(consistent with SNA 1993) Provincial
Governments
• GFSM 1986 is defined on functional
basis and thus excludes transactions
Local Governments
that do not involve the implementation
of fiscal policy (e.g. monetary authority)
Difference 2:
Accrual basis of recording
• Accrual-basis GFSM 2001 – revenues are recognized
when earned and expenses are recognized when incurred
• Cash-basis GFSM 1986 – transactions are recorded when
cash is received or paid
• Changes ensuing from accrual principles:
– Broader coverage of economic events – all transactions affecting assets,
liabilities, revenue, or expense rather than just cash transactions
– Introduction of net worth and balance sheet to government operations
– Integration of flows and stocks – allows reconciliation of differences
between the opening and closing balance sheets
– Valuation – assets and liabilities are valued at current market prices rather
than nominal value, including debt securities
– Definition of revenue and expense – correspondingly an increase or
decrease in net worth resulting from a transaction and thus excludes
proceeds from or purchases of nonfinancial assets
– Classification – revenue categories are revised and include taxes, social
insurance contributions, grants, and other revenue while, in GFSM 1986,
they are comprised of tax, nontax, or capital revenue, and grants
Difference 3:
The Analytic Framework
• GFSM 1986 is focused on a single balancing item (overall
deficit/surplus)
• GFSM 2001 includes several balancing items which
provide a variety of considerations for analysis of general
government’s financial position
– Most important:
• Net operating balance – the difference between revenue and expense
that measures the change in net worth resulting from transactions
• Overall balance which is net lending/borrowing with an adjustment in
treating transactions in assets/liabilities designated for policy purposes
(=overall deficit/surplus in GFSM 1986 but based on accrual basis)
• Cash surplus/deficit – the balance of cash flows from the government
operations and the net acquisition of nonfinancial assets
• Change in net worth related to Balance Sheet is the preferred measure
for assessing fiscal sustainability
 Key Issues in Implementing
GFS 2001 Budget Classification System
• Political commitment at a high level is critical for ensuring approval
of changes to the budget legal framework, sustainability of the reform,
and effective utilization of the adopted budget classification and
financial reporting
• Technical capacity at MoF, budget departments in line ministries,
and other budgetary institutions is key for maintaining the system and
adapting it to the future needs
• IT System assists reclassification of entries and strengthens
functionality of budget administration and reporting (IFMIS)
• Migrating to GFS 2001 system is a lengthy process (over 50 countries
report their data using the GFSM 2001 framework)
• Possible approaches to transition:
– simply reclassify the cash-based data into the GFSM 2001 framework
and make a best effort to complete the balance sheet
– adjustments to the cash data (e.g. recognition of in-kind transactions)
– accrual accounting for the source data
 Budget Classification and
Chart of Accounts (COAs)
• Budget classification comprises a coding system used for
revenue and expenditure transactions at all stages of the
budget process—preparation, approval, and execution
• COAs is a basis of recording accounting transactions and
balances (flows and stocks) in the general ledger and thus
is used for administrating and reporting on financial
transactions of government entities
• Good practice: integrated COAs and budget classification
to meet various reporting requirements
• Possible solutions for partially integrated (e.g. Francophone
countries) or separate (e.g. Mexico):
– Central database: allows for one data entry (for each entry in the budget
classification, there is a corresponding entry in the accounting classification)
– Separate presentation: a specific class of operations in the accounting
classification
– Bridge tables to align the structure and coverage of both classifications
 Bank’s Project Reporting and
GFS 1986 and GFS 2001 Systems
• Key issue: Is a country’s budget classification system
(GFS 2001 or GFS 1986) sufficient?
• Requirements:
– Reporting on the whole project, including Bank funding,
counterpart government funding, and other donor funding
– Reporting by functions/sub-functions of the budget
(for a large project covering several functions/sub- functions)
– Tracking individual project expenditures (both capital and recurrent,
captured by the economic classification at a project level)
• Challenge: Flexibility of the classification system to create
a line-item in the budget for a Bank financed project
– Easy collation of data is important for monitoring project
expenditures
• Accrual-basis is desirable but both the cash-based
1986 GFS and the accrual-based 2001 GFS suffice
Bank’s requirements