Applying Accrual Concepts for Budgeting

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Applying Accrual Concepts for Budgeting

• March 2008
• Pål Ulla
• Deputy Director General
• Budget Department

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Topics

• The government-appointed commissions
  recommendation for accrual budgeting
• Are accruals used for some agencies today?
• Long-term liabilities
• Budgeting and financial statements

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What are we talking about?

• Norway has well established National Accounts for
  macroeconomic analytical purposes. The public
  government statistics are given both in cash and
  accrual bases (GFSM2001).
• All the revenue estimates used in the budget
  formulation are first calculated in accrual terms
  and then transformed to cash flows. This is
  mainly for tax estimates.
• Norway has however chosen that the parliaments
  approval of the budget shall be on cash base.
• It is the budget approved by the parliament that
  I discuss in this presentation.

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The government appointed commissions
recommendation for accrual budgeting

• The choice of cash and accrual depends on how the
  government wants to control the individual
  agency.
• The impressions in the Ministry of Finance are
• Cash is best when the control of the budget
  execution is based on input control
  (transactions)
• Approval of the largest investment programs are
  important for formulation of some of the policies
  approved by the parliament (infrastructure,
  weapons programs)
• Accrual is best on performance based budgeting
  where the responsibility for the most efficient
  executions are decentralised to the individual
  agencies (in a total individual spending limit
  including reinvestments)

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The discussion concluded that the main principle
still should be cash based budgeting.

• Why
• The principle was chosen because most of the
  agencies are and will be regulated through
  control of inputs.
• New programs and agencies depend on approval of
  investment appropriations from the parliament.
  (Including appropriations for the largest
  projects which are policy related
  infrastructure, weapon systems.)
• It is the line-ministries that decide what to
  perform with little influence over output or
  outcome by the Ministry of Finance.
• There was/is little trust in the possibility to
  create a accurate performance based budgeting
  because outputs and outcomes are difficult to
  measure.

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Value for money

• To introduce accrual budgeting is costly. There
  is a need to measure all fixed capital in both
  central and local government.
• One conclusion was that introducing accrual
  accounting will not produce Value for money.

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Are accruals used for some agencies today?

• Formula based budgeting is used for universities
  and high schools. They use accrual budgeting
  internally. However they want more resources for
  research still they have large amount in the TSA.
• Appropriations for hospitals are based on
  performance targets. However actual spending each
  year exceeds targeted appropriations.
• Use of accruals is not the problem but neither
  has it been the solution.
• A project where 10 institutions are allowed to
  have their internal budgets on accrual base but
  report to the fiscal budget on cash base

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Long-term liabilities

• In Norway we use long-term projections to check
  for fiscal sustainability
• In a pay-as-you-go pension system you must
  include the contributions from taxes to pay for
  the future pensions to see if the system is
  sustainable.
• The future sustainability problem can not be
  solved only with earmarked pension savings today.
  There must also be pension reform.
• Because of the uncertainties accrual budgeting
  based on the present pension regulations will not
  give the right answer.

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Budgeting and financial statements

• One argument for having financial statement in a
  different accounting base than the budget is that
  this will create more (better?) background
  information for the prioritizing in the budget
  process
• In the Ministry of Finance in Norway it is seen
  to be most important to control budget
  appropriations as set by the parliament.
• In addition two different principles will be
  confusing when formulating fiscal rules