Amara Waheed

Assistant Accounts Officer

Pakistan Audit & Accounts Academy
PUBLIC FINANCIAL MANAGEMENT
 Public Financial Management is the system
by which financial aspects of public services’
business are directly controlled and
influenced to support of the sectors’ goal.

 Public Financial Management refers to the set

of laws, rules, systems and processes used
by sovereign nations, to mobilize revenue,
allocate public funds, undertake public
spending, account for funds and audit
results.
PUBLIC FINANCIAL MANAGEMENT
 Effective systems of public financial
management (PFM) play a crucial role in the
implementation of national policies
concerning development and poverty
reduction.
 Good PFM is the linchpin that ties together

available resources, delivery of services, and

achievement of government policy
objectives. If it is done well, PFM ensures that
revenue is collected efficiently and used
appropriately and sustainably.
PUBLIC FINANCIAL MANAGEMENT
 It encompasses a broader set of functions
than financial management and is commonly
conceived as a cycle of six phases, beginning
with policy design and ending with external
audit and evaluation.
PFM CYCLE AND KEY ACTORS
INVOLVED

POLICY

EXTERNAL BUDGET
AUDIT FORMULATION

ACCOUNTING BUDGET
APPROVAL

BUDGET
EXECUTION
WHY IS PFM IMPORTANT
 A strong PFM system is an essential aspect of
the institutional framework for an effective
state.
 Effective delivery of public services is closely
associated with poverty reduction and growth.
 Countries with strong, transparent, accountable
PFM systems tend to deliver services more
effectively and equitably.
 Regulate markets more efficiently and fairly.
 In this sense, good PFM is a necessary, if not
sufficient, condition for most development
outcomes.
WHAT ARE THE OBJECTIVES OF THE
PFM SYSTEM?
 It is generally accepted that a PFM system
should achieve four objectives:
 The maintenance of aggregate fiscal discipline is
the first objective of PFM system: it should
ensure that aggregate levels of tax collection
and public spending are consistent with targets
and do not generate unsustainable levels of
public borrowings.
 Secondly, PFM system should ensure that
operational efficiency is achieved, in the sense of
achieving maximum value of money in the
delivery of services.
WHAT ARE THE OBJECTIVES OF THE
PFM SYSTEM?
 Thirdly, Fiduciary Risk Management. A fiduciary
is a person who holds a legal or ethical
relationship of trust with one or more other
parties. Typically, a fiduciary prudently takes
care of money or other assets for another
person.
 Finally, the PFM system should follow due
process and should be seen to do so, by being
transparent, with information publicly accessible,
and by applying democratic checks and balances
to ensure accountability.
DIMENSION 1: FISCAL
SUSTAINABILITY
 Structural Fiscal Deficit:
 Current level of revenues are inadequate to
sustain level of government expenditure, and
choices have to made between borrowings,
increasing taxation or reducing expenditure.
 Fiscal Risk:
 Fiscal outturns owing to shocks such as deviations
of economic growth from expectations, terms of
trade shocks, natural disasters, calls on
government guarantees, or unexpected legal
claims on the state. In many instances, failure to
disclose and prepare for such risks has caused
additional government obligations, larger public
debts, and, occasionally, refinancing difficulties
and crises.
DIMENSION 2: OPERATIONAL
MANAGEMENT
 Effective Performance Management:
A major constraint of PFM is that the accounting
model of “Not for profit”. So public sector has to
develop non-financial measures of performance.
 PFM should ensure effective performance
management system which links useful
performance measures to the resources used to
achieve performance objectives.
VALUE FOR MONEY
 The UK Department for International
Development (DFID) defines Value for Money
(VFM) as “maximising the impact of each
pound spent to improve poor people’s lives.”
(DFID, 2011).
 UK National Audit Office’s define VFM: “the

optimal use of resources to achieve intended

actual outcomes”. A key element in both
definitions is to make the best use of
available resources to achieve sustainable
development outcomes.
VALUE FOR MONEY (VFM)
 Achieving value for money can be described
as using public resources in a way that
maximizes public value.
 The use of public resources is defined as

public sector capital, expenditure,

stewardship of assets.
 Public value is defined as the total well-being

of the public as a whole . In a transport

context, this covers all the economic (e.g.
travel time, vehicle costs, tax revenues);
social (e.g. health, safety, accessibility); and
environmental (e.g. noise, air quality,
landscape) impacts of a proposal.
VFM ANALYSIS
 On the basis of a set of standard indicators,
which can help programme implementers and
funders assess whether or not their programmes
are making the best use of available resources
and whether the use of resources for these
programmes are most beneficial from the public
purse’s point of view.
 Answering those questions is neither an easy nor

an immediate task: it requires conducting a “VFM

analysis”, i.e. collecting and analysing data on
the costs and results of the particular programme
and interpreting the VFM indicators generated in
such a way by comparing them with those of
other programmes.
VFM ANALYSIS
 Interpreting the results of a VFM analysis
requires putting VFM indicators into context.
Indeed, costs and results are context-
specific: Construction of railway track on hilly
areas will be more expensive as compared to
orange train. So in this case, high input costs
do not necessarily mean that the programme
could be run in a more cost-efficient manner:
they would simply reflect different operating
conditions.
VFM ANALYSIS
 It results that a VFM analysis should consider
all contextual elements for the programme: it
is essential to gather as much information as
possible on the operating conditions for the
programme, its operating modalities and
approaches.
LOGIC MAP OF A PROPOSAL WITH
EXAMPLE
CONTEXT INPUT OUTPUT OUTCOME IMPACT

Context Refers to the problems the proposal aims to address.

Input Refers to the resources required to deliver the proposal. It

typically includes thing such as staff, engineers,
consultants, materials, land.
Output Refers to the tangible deliverables of the proposal. It
typically includes things such as roads, railways, stations
built or maintained.
Outcom Refers to the short- and medium-term results of the
e proposal which may affect public value.
Impact Refers to the longer term effects of the proposal on the
well-being of the public. It is the wider public value
attributable to the proposal
LOGIC MAP OF A PROPOSAL WITH
EXAMPLE
 From this logic map, it follows that value for
money is primarily driven by how
economical the purchase of inputs is; how
efficiently those inputs are converted into
outputs; and how effectively those outputs
achieve outcomes.
DRIVERS OF VALUE FOR MONEY

EFFECTIVENES
ECONOMY EFFICIENCY S

• Are inputs • How well • How well

of are inputs these
appropriate converted outputs
quality into outputs achieved
bought at a outcomes
minimized
price
MANAGING WITHIN BUDGET
 Public sector is budget driven. Without
budget government lack legal authority to
raise revenues or to make expenditures.
 Over spending is a regulatory issue.

 Under spending represents a failure to utilize

allocated resources.
 Operating within the budget is a constant

challenge.
DIMENSION 3: FIDUCIARY RISK
MANAGEMENT
 Fiduciary Risk: the risk of public money being
stolen, used for purposes other than those
intended, or used corruptly.
 Effective Financial Control:
 Internal controls within an organization, e.g
payment authorization process, managing
against budgets, reconciliation process, and so
on.
 The oversight system established by the
management of an organization in accordance
with international standards of internal audit.
FINANCIAL CONTROLS
 Financial controls are the means by which an
organization’s resources are directed,
monitored, and measured.
 Financial controls play an important role in

ensuring the accuracy of reporting,

eliminating fraud and protecting the
organization’s resources, both physical and
intangible.
 Class activity

Write down Financial/Internal Controls over

Purchases/Pay & Allowances/Inventory
FIDUCIARY RISK MANAGEMENT

 Compliance with constitutional legal and

regulatory requirements:
 Typically govt. operate within a rule bound
environment. The hierarchy of regulation starts
from constitution and moving down through
laws, detailed financial rules, instructions and
procedures. This bureaucratic structure is
another element of fiduciary risk management to
minimize the scope of activities which are not in
accordance with public policy.
PROPER OVERSIGHT OF PUBLIC
FINANCES
 Typically a committee of legislature, e.g. a
public Accounts Committee” will review
financial and audit reports of individual units
within government.
DIMENSION 4- GOVERNANCE
 Public sector governance has to meet the
needs of all stakeholders e.g. civil society,
lenders, multilateral organizations.
 Governance structure must reflect the
interest of stakeholders. This can be
addressed through a number of different
approaches:
 Participation by stakeholder representatives,
particularly in the management of unelected
agencies.
 Ex-ante involvement in resource allocation
decisions
 Ex post involvement in scrutiny and oversight.
DIMENSION 4- GOVERNANCE
 Transparency:
Transparent information includes all
published budgets, financial statements and
audit reports as well as other financial
statements published by government.

 However transparency is more than data, but

the messages within data must be made
explicit.
DIMENSION 4- GOVERNANCE
 Accountability:
Accountability goes beyond
transparency and involves identifying
individuals responsible for actions.
Accountability can be seen as the end point
of a participative and transparent process.
PERFORMANCE OF PFM SYSTEM
 Ideally one would assess the PFM system by
measuring performance against these four
objectives.
 The achievement of fiscal discipline is
straightforward to measure at international
level,
 and open budget index provides a reasonable

proxy for transparency.

 However the allocative and operational
efficiency requires special studies.
PUBLIC EXPENDITURE & FINANCIAL
ACCOUNTABILITY
 The PEFA framework is a methodology for
assessing and reporting on the strengths and
weaknesses of public financial management
(PFM). It identifies 94 characteristics
(dimensions) across 31 key components of
public financial management (indicators) in 7
broad areas of activity (pillars).
PFM REFORMS
 Medium-term expenditure frameworks
(MTEFs): MTEFs are multi-year strategic
budgeting exercises that are often seen as a
way of reconciling aggregate fiscal discipline
and public spending plans.
 Fiscal rules: Many governments have
introduced rules to limit spending (or debt
and deficits).
 Budget classification systems: The more

detailed the budget classification system

used, the more it will provide a
comprehensive and useful picture of
government operations.
PFM REFORMS
 Independent revenue collection agencies:
Revenue reforms in the past few decades
commonly focus on improving the efficiency
and transparency of revenue policy making
and collections. Reforms aim to create
independent revenue and customs bureaus,
and to streamline and simplify tax and
customs policies and processes.
 Treasury Single Accounts (TSAs.

Centralize financial stocks and flows in

governments, ensuring that revenue is stored
in one place and payments are consolidated
as well.
PFM REFORMS
 Public procurement: Many countries have
undergone procurement reforms that create
independent bureaus that determine and
oversee rules governing public procurement. The
rules typically promote transparent bidding
processes and competitive procurement (where
multiple bids are provided and a process ensures
competition between bids).
 Internal control, internal audit, and monitoring:

Many countries have introduced or strengthened

internal controls in the past decades, intending
to improve the formality of the PFM process and
enhance compliance with formal process
requirements.
PFM REFORMS
 Accounting and reporting reforms: Reforms
involve standardizing charts of accounts and
professionalizing the accounting function
across government.
 External audit and external accountability

reforms: It is common to find countries

creating or strengthening the role of
independent entities charged with doing
assurance exercises.
 Budget and spending transparency:
Transparency and accountability reforms have
more recently become the focus of increased
attention and activity in the PFM reform arena.
PUBLIC FINANCE MANAGEMENT ACT, 2019
CHAPTERS OF PUBLIC FINANCE
MANAGEMENT ACT, 2019
 Chapter1- Preliminary
 Chapter 2- Budget Management

 Chapter 3- Development Projects and

maintenance and use of public assets

 Chapter 4- Control of Public Finance

 Chapter 5- treasury Management

 Chapter 6- Special purpose funds

 Chapter 7- Accounting and Reporting

 Chapter 8- Public Entities

 Chapter 9- Removal of difficulty and power to

make rules
CONTROL OF PUBLIC FINANCE
CONSOLIDATED FUND AND PUBLIC ACCOUNT
 All remittances should be submitted without
any delay
 Controller General of Accounts (CGA) shall be

responsible for its proper accounting.

 Proper sanction of expenditure from competent

authority is required.
 Provision of expenditure through
 Schedule of authorized expenditure
 Supplementary grant and technical supplementary
grant
 Re-appropriation
 No authority can transfer public money from
one account to other without proper approval.
CONTROL OF PUBLIC FINANCE
CONSOLIDATED FUND AND PUBLIC ACCOUNT
 Every grant shall lapse at the end of financial
year.
 Finance division can approve delegation of

financial powers based on following

principals.
 Powers balance financial authority with
responsibility
 Powers accorded to enhance public service
delivery
 Delegation of powers to sub-ordinate officials.
 Appointment of Chief Finance and Accounts
Officer
 Appointment of Chief internal auditor.
TREASURY MANAGEMENT
 Treasury
management (or treasury operations)
includes management of an enterprise's
holdings, with the ultimate goal
of managing the firm's liquidity and
mitigating its operational, financial and
reputational risk.
TREASURY MANAGEMENT AT PUBLIC
SECTOR
Objective of Govt. Treasury Management:
 To ensure both efficient implementation of

their budgets and good management of their

financial resources.
 Spending agencies must be provided with

the funds needed to implement the budget in

a timely manner, and the cost of government
borrowing must be minimized.
 Sound management of financial assets and

liabilities is also required.

ACTIVITIES OF GOVT. TREASURY
MANAGEMENT
 Cash management.
 Management of government bank accounts.

 Accounting and reporting.

 Financial planning and forecasting of cash

flows.
 Management of government debt and

guarantees.
 Administration of foreign grants and

counterpart funds from international aid.

 Financial assets management.
CASH MANAGEMENT
Cash management has the following
purposes:
 Controlling spending in the aggregate

 Implementing the budget efficiently

 Minimizing the cost of government

borrowing,
 Maximizing the opportunity cost of resources.
ISSUES OF CASH MANAGEMENT IN
PAST
 In past, governments did not pay sufficient
attention to issues related to efficient cash
management.
 Budget execution procedures and the
management of cash flows focused on issues
of legal regularity and compliance, while
daily cash needs were met by the central
bank.
 Spending units were not concerned with

borrowing costs since their interest payments

were already taken account of in the budget
prepared by the ministry of finance.
ISSUES OF CASH MANAGEMENT IN
PAST
 Release of funds through an imprest system,
spending agencies sometimes accumulate
idle balances in their bank accounts. These
idle balances increase the borrowing needs
of the government, which must borrow to
finance the payments of some agencies,
even if other agencies have excess cash.
 loosen constraints on credit.
TREASURY SINGLE ACCOUNT
 Cash balances are efficiently centralized
through a “treasury single account” (TSA).
 This is an account or set of linked accounts

through which the government transacts all

payments.
CASH MANAGEMENT & TREASURY
SINGLE ACCOUNT POLICY 2019-20
 Policy Objectives:
 T o ensure availability of cash when it is required
 To manage cash balance in the government bank
accounts effectively by:
 Borrowing to cover expected cash short falls, and
avoid “idle” balances
 Investing during period of surplus
 Minimizing borrowing cost
 To neutralize impact of the government’s cash
flows on the domestic banking sector ensuring
that:
 There are no large and unexpected change in
liquidity in the banking system
 Overall monetary policy is not under-mined
PUBLIC FINANCIAL MANAGEMENT IN
PAKISTAN
HISTORICAL BACKGROUND
 The existing structure of public financial
management (PFM) is continuation of the system
that Pakistan inherited from the British colonial
rulers, who designed it, mainly, for effective control
on taxes collected from the local populace.
 The colonial government had to control a
population of over 600 million with a meagre staff
of less than fifty thousand expatriates.
 The key instrument was centralized administration

through a dominant role for Ministry of Finance

(MoF) with minimal delegation of powers.
 Except for routine operations, MoF approved all

expenditures.
PUBLIC FINANCIAL MANAGEMENT IN
PAKISTAN
 During the last seven decades, except for
cosmetic changes, the basic philosophy of
the PFM remains intact.
 It is still being managed dominantly by MoF.

Public managers in line ministries and

departments (LMs) seek MoF approvals even
for many budgeted expenditures.
PILLARS OF PUBLIC FINANCIAL
MANAGEMENT IN PAKISTAN
Ministry of Finance (MoF)
 MoF is responsible, mainly, for preparing

budget, collecting taxes, arranging funds

through public debt and controlling
expenditure of line ministries and
departments (LMs).
 Control over expenditure is a remnant of the

colonial days, when the PFM was centralized

and LMs had minimal authority to spend
even the budgeted funds.
 Besides, MoF is responsible for providing

additional funds by re-allocating resources

among LMs.
PILLARS OF PUBLIC FINANCIAL
MANAGEMENT IN PAKISTAN
Line Ministries And Departments
LMs propose annual budget under guidance of
Financial Advisors’ organization. The expenditure
budget has two main segments:
(i) Current expenses like salaries, maintenance of
assets, travel and communications;
(ii) Development expenses for new programs.

(iii) After approval of the budget, LMs can spend

money on routine expenses but, in many cases,
development expenses require approval of MoF.
The Accountants General’s (AGs) offices make
payments and maintain accounts. LMs have a
minimal role in payments and accounts.
PILLARS OF PUBLIC FINANCIAL
MANAGEMENT IN PAKISTAN
Controller General of Accounts (CGA)
 CGA is, mainly, responsible for arranging payments
and consolidating accounts prepared by district
account offices (DAOs) as well provincial accounts
generals (AGs). CGA prepares two sets of accounts:
i. Appropriation Accounts, which compare the
budget with the actual in respect of revenue and
expenditure;
ii. Finance Accounts, which consolidate data on
assets, liabilities and public funds such as general
provident fund, public deposits, pension funds,
zakah, etc.
 CGA is the controlling officer for all account offices
in federal, provincial and district governments.
PILLARS OF PUBLIC FINANCIAL
MANAGEMENT IN PAKISTAN
Auditor General Of Pakistan (AGP)
 AGP is responsible for auditing accounts of

federal, provincial, district governments and

public sector enterprises. The audit consists
of:
i. Certification of financial statements
ii. Compliance with rules
iii. Performance of projects.
 Reports of AGP are placed before Public
Accounts Committees.
PILLARS OF PUBLIC FINANCIAL
MANAGEMENT IN PAKISTAN
Public Accounts Committees (PACs)
 Federal and provincial legislatures select

members to act as PACs.

 AGP presents his or her reports to respective

PACs.
 Federal or provincial secretaries of LMs

respond to AGPs audit reports.

 PACs have the authority to recommend

corrective action or order recoveries but have

no executive powers. AGP also presents
compliance report on directives of PACs in
subsequent meetings.
ACCOUNTABILITY FRAMEWORK
NATIONAL FINANCE COMMISSION
As per article 160(1) of Constitution of Pakistan for
distribution of Revenues between the Federation and
the Provinces, National Finance Commission was
established.
 Duty of the National Finance Commission to make

recommendations to the President as to—

i. The distribution between the Federation and the
Provinces of the net proceeds of the taxes
ii. The making of grants-in-aid by the federal
government to the provincial governments;
iii. The exercise by the federal government and the
provincial governments of the borrowing powers
conferred by the constitution; and
iv. Any other matter relating to finance referred to the
commission by the president
NATIONAL FINANCE
COMMISSION(NFC)
 These resource transfers can be broadly
categorized as systematic (formula based) method
of resource transfer and the other being random
method (grants etc.).
 Under the systematic basis there are four stages

i. Firstly, revenue sharing occurs at federal and

provincial government through national finance
commission (NFC),
ii. Secondly, from provincial government to local
government through provincial finance
commission (PFC);
iii. Thirdly, from federal to local government

iv. Local to local government (e.g. District

government to tehsil municipal administration).
NATIONAL FINANCE
COMMISSION(NFC)
 On the other hand random transfers include:
development/special grants, executive’s discretionary
funds and parliamentarian funds, etc.
 The resources transfer includes revenue shares, grants,
straight transfers and loans.
 Among the revenues that are shared come from income
tax, sales tax, custom duties, and excise duties.
 In addition there are other types of revenues, called
straight transfers, are collected by federal government
but paid to provinces, e.g. royalties etc.
 On the other hand from revenue consideration
provinces are also assigned collection of minor tax
assignments such as agricultural tax, stamp duties,
motor vehicle tax etc and others which are levied and
retained by provincial govt.
CRITERIA FOR RESOURCE
DISTRIBUTION
 Population had remained the sole criteria for
resource distribution the whole time, which is not
the best practice around the world.
 Throughout the period, smaller provinces have

asked for adoption of a judicious formula with the

inclusion of factors such as revenue generation,
poverty, backwardness, area etc. in the revenue
distribution criterion but nothing concrete have
taken place.
 The Ministry of Inter-Provincial Coordination on

3rd March, 2007 has also suggested for the

inclusion of two additional factors (backwardness
and poverty) as revenue sharing elements while
announcing NFC award.
STANDARDS OF FINANCIAL
PROPRIETY
Every officer incurring or authorizing
expenditure from public funds should be
guided by high standards of financial
propriety.
 Every public officer is expected to exercise

the same vigilance in respect of expenditure

incurred from public moneys as a person of
ordinary prudence would exercise in respect
of expenditure of his own money.
 The expenditure should not be prima facie

more than the occasion demands.

STANDARDS OF FINANCIAL
PROPRIETY
No authority should exercise its powers of
sanctioning expenditure to pass an order
which will be directly or indirectly to its own
advantage.
 Public moneys should not be utilized for the

benefit of a particular person or section of

the community unless.
 1. the amount of expenditure involved is
insignificant or
 a claim for the amount could be enforced in a
court of law or
 the expenditure is in pursuance of a recognized
policy or custom
WHAT IS THE MEANING OF FINANCE?
In General:
Finance is the management of money and
other valuables which can easily be
converted into cash
 According to experts:

Finance is a simple task of providing

necessary funds (money) required by the
business
WHAT IS PUBLIC FINANCE?
 Public Finance is the study of the income and
expenditures of a governmental entity. It
deals solely with the finances of the
government.

 Scope of Public Finance consists in the study

of the collection of funds and their allocation
between various branches of government
activities which are regarded as essential
duties or function of that particular
government.
WHAT ARE SOME DIFFERENCES IN
PUBLIC VS. PRIVATE ENTITIES?
Public Entity Private Entity
Motive to satisfy collective Motive to satisfy personal
wants of the people wants of owners

Income is adjusted to the Income is adjusted to gain an

public expenditure amount of income
Government can make drastic Deliberate changes in income
fluctuations in its budget or expenses in large amounts
are not easy
During times of war or During times of war or
depression the government will depression the private entity
have a deficit budget can adjust expenses to predict
a surplus
Managers are elected for a Managers are hired and
duration and for a particular compensated for profit and
service performance
WHAT ARE THE 3 PARTS OF PUBLIC
FINANCE?
 Public Expenditures
 Public Revenues

 Public Debt
WHAT ARE PUBLIC EXPENDITURES?
 The term Public Expenditure refers to the
expenses incurred by the government for its
own maintenance and also for the
preservation and welfare of the society and
economy as a whole. It refers to the
expenses of the public authorities, for
protecting the citizens and for promoting
their economic and social welfare.
SEVERAL RESONS FOR INCRESING
GOVT. EXPENDITURES
o Intensification of traditional functions:
 Need has arisen to manage the entire
government machinery by professional experts
supported by expensive equipment, etc. All this
has added to the budgetary needs of the
government.
 Extended coverage of government
activities
 Governments aim at maximizing aggregate
social welfare like subsidies and age pensions.
 Ensuring adequate provision of merit goods and
infrastructure facilities
ADDITIONAL FACTORS

 Growing populations is becoming a major

contributory factor in the growth of public
expenditure.
 Growing urbanization entails a much larger per
capita expenditure.
 Prices have a secular tendency to go up. This also
adds public expenditure even if the scale of
activities remain unchanged.
 Tendency to run into debt leads to substantial
increase in public expenditure
CLASSIFICATION OF PUBLIC
EXPENDITURE
 Accounting Classification:
 It may be departmental and according to heads
of expenditure.
 This classification provides effective control and
check over public expenditure.
 Such classification is helpful in auditing and
safeguarding against misappropriation, but it
does not help in understanding its effect and
productive usefulness.
CLASSIFICATION OF PUBLIC
EXPENDITURE
 Obligatory and optional expenditures:
Only highlight the constraints under which
government’s budget policy has to work and
cannot bring out fully the possible effects of
different expenditure policies
CLASSIFICATION OF PUBLIC
EXPENDITURE
 Productive and unproductive
expenditure: This distinction emphasizes
that while some expenditure are in the
nature of consumption, others are in the
nature of investment and help the economy
in improving its productive capacity.
CLASSIFICATION OF PUBLIC
EXPENDITURE
 Transfer and non transfer expenditure:
A transfer expenditure is a payment without
corresponding receipt of goods and services
by the state. Examples are interest
payments, old age pensions and
unemployment benefits.
 Non- transfer expenditure is that by which

the state pays for its purchases or use of

goods and services.
CANONS OF EXPENDITURE
 Canon of economy:
 Resources are insufficient for its need. No
wastage should be permitted.
 Public expenditure is the financial counterpart of
the resources which the government uses up
directly.
 So the public expenditure should not involve the
use of resources more than what are just
necessary.
CANONS OF EXPENDITURE
 Canon of Sanction:
 No public funds should be used without proper
authorization and further that funds must be
used only for the purpose for which they have
been sanctioned.
 Such restriction avoid unwanted expenditure and
will also be a check against misappropriation of
funds.
CANONS OF EXPENDITURE
 Canon of Benefit:
 Every item of expenditure ought to be viewed in
context of its expected benefits which can take
several forms.
 In practical this canon poses several hurdles in
form of subjective concepts, data and
information, administrative service and like.
CANONS OF EXPENDITURE
 Canons of Surplus:
 Government should avoid deficit budgeting, at
least a persistent one. It should always try to be
prudent and should aim at meeting its current
expenditure needs out of its current revenue. It
should not over spend and run into a debt.
PUBLIC RECEIPTS
 Every government needs funds to finance its
activities. They may raised from various sources,
important of them are:
 Taxation
 Government borrowing/Debt
 International Aid
 Public Private Partnership
 Sale of public assets
 Interest receipts
 Income from currency
PUBLIC RECEIPTS AND REVENUE
 As Professor Dalton describes public receipts
includes receipts of government from all
sources while public revenue is narrow
concept and excludes public borrowing,
income from sale of public assets or receipts
from use of printing press.
CLASSIFICATION OF RECEIPTS
 Revenue Receipts: Include routine and earned
ones. They do not include borrowings and
recovery of loans from other parties, but they do
include tax receipts, dividends, interest receipts,
grants, donations, fees and fines.
 Capital Receipts: Cover those items which are

basically of non repetitive in nature and have the

effect of altering government’s financial
assts/liabilities.
TAXATION
 Tax is mandatory financial charge imposed
upon a taxpayer by the governmental
organization in order to fund various public
expenditure.
MEANING OF CANONS OF
TAXATION:
 By canons of taxation we simply mean the
characteristics or qualities which a good tax
system should possess. In fact, canons of
taxation are related to the administrative
part of a tax. Adam Smith first devised the
principles or canons of taxation in 1776.
TYPES OF CANONS OF TAXATION:
 Canon of Equality
 Canon of Certainty
 Canon of Convenience
 Canon of Economy
 Canon of Productivity
 Canon of Diversity
 Canon of Elasticity
CANON OF EQUALITY:
 The word equality here does not mean that
everyone should pay the exact, equal
amount of tax. What equality really means
here is that the rich people should pay more
taxes and the poor pay less. This is because
the amount of tax should be in proportion to
the abilities of the taxpayer. It is one of the
fundamental concepts to bring social equality
in the country.
CANON OF CERTAINTY:
 The tax payers should be well-aware of the
purpose, amount and manner of the tax
payment. Everything should be made clear,
simple and absolutely certain for the benefit
of the taxpayer.
 It is believed that if the canon of certainty is

not present, it leads to tax evasion.

CANON OF CONVENIENCE:
 Canon of convenience can be understood as
an extension of canon of certainty.
 Where canon of certainty states that the

taxpayer should be well-aware of the

amount, manner and mode of paying taxes,
the canon of convenience states that all this
should easy, convenient and taxpayer-
friendly. The time and manner of payment
must be convenient for the tax payer so that
he is able to pay his taxes in due time.
CANON OF ECONOMY:
 The canon of economy states that the cost of
collecting taxes should be as minimum as
possible. There should not be any leakage in
the way.
 In this way, a large amount of the collections

will go directly to the treasury, and therefore,

will be spent in the government projects for
the welfare of the economy, country and the
people.
CANON OF PRODUCTIVITY:
 By virtue of the canon of productivity, it is
better to have fewer taxes with large
revenues, rather than more taxes with lesser
amounts of revenue. It is always considered
better to impose the only taxes that are able
to produce larger returns. More taxes tend to
create panic, chaos and confusion among the
taxpayers and it is also against the canon of
certainty and convenience to some extent.
CANON OF ELASTICITY:
 An ideal system of taxation should consist of
those types of taxes that can easily be
adjusted.
 Taxes, which can be increased or decreased,

according to the demand of the revenue, are

considered ideal for the system.
 An example of such a tax can be the income

tax, which is considered very much ideal in

accordance with the canon of elasticity.
CANON OF DIVERSITY:
 Diversification in a tax structure will demand
involvement of the majority of the sectors of
the population.
TYPES OF TAXATION
 Direct Tax:
Burden of taxation is on the person on whom levied.
e.g. income tax
 Indirect Tax:
Burden of tax is shifted by the person on whom levied
to other persons. e.g. sale tax
 Proportional Tax:
Levied with the same percentage. e. g. sales tax
 Progressive Tax:
Rate of tax increases as the income increases. e.g.
income tax
 Value Added Tax:
Levied at each stage of value addition. e.g. sales tax
GOVERNMENT
DEBT/BORROWINGS
 Public debt includes all financial liabilities of
the government.
 Public debt is a loan raised by the
government and is a source of public finance
which carries the obligation of repayment
along with interest.
WHY PUBLIC DEBT
 Government revenues and expenditures may
not match during any given time period, such
imbalances create self erasing short term
loans.
 In the event of war or natural calamity, etc,

the government may be forced to suddenly

increase its expenditure and finance it by
borrowing.
WHY PUBLIC DEBT
 Some times government may adopt deficit budget
to achieve a variety of objectives including
economic growth and stabilization.
 The government of underdeveloped countries

have to play an active role in accelerating the

process of capital accumulation, this may be done
through borrowing and investing funds in
development projects.
TYPES OF PUBLIC DEBT
 Short term debt: It comprises debt
obligations like treasury bills of a maturity of
less than one year at the time of issue.
 Floating debt: These debt items do not

have any pre determined maturity.

 Permanent/dated/funded debt: These
loans have a maturity of more than one year.
in practice their maturity is between three to
thirty years.
TYPES OF PUBLIC DEBT
 External debt: obligations owed to foreigners-
government, institutions, firms and individuals are
called external loans. More precisely, they are
loans raised from outside the country.
 Internal debt: It is that part of government debt

which is owned or held by the residents of a

country.
TYPES OF PUBLIC DEBT
 Marketable and Non marketable loans:
 loans are called marketable if existing holders
can sell them to others.
 Non marketable loans are those which have been
issued in favour of specified debt holders only
and cannot be transferred to others.
TYPES OF PUBLIC DEBT
 Interest bearing and interest free loans:
 An interest bearing loan may carry a fixed
coupon, i.e., a fixed periodic interest entitlement,
or the coupon may be a variable one.
 A loan may be issued at a discount through bids.
Such loans are termed zero coupon bonds.
LIMITS OF RAISING PUBLIC DEBT
 In most countries public debt has registered
a continuous upward trend during the last
few decades.
 Question arises as to whether there are any

definite limits beyond which government

cannot raise loans?
 We shall distinguish between the will and

capacity of the government to raise loans

both in short run and long run.
LIMITS OF RAISING PUBLIC DEBT
 It is expected that modern government will
not borrow to satisfy the whims of individual
running the government. Instead it is
expected to borrow only for meeting real
needs of the society.
 In some cases there may also be specific

legal restrictions on the public borrowings.

LIMITS OF RAISING PUBLIC DEBT
 Given loanable funds, govt. borrowings add to
their demand and cause an upward pressure on
interest rates. Thus higher interest cost can act as
deterrent against borrowing program of the
authorities.
 In long run total volume of public debt can

increase gradually in line with growth in national

income. No definite limit may be stated to exist
for the nominal volume of public debt.
LIMITS OF RAISING PUBLIC DEBT
 However a government may resort to excessive
borrowing and get into a debt trap.
 It is a situation in which government has to borrow

afresh to service its existing debt.

 This state of affairs may eventually raise interest

cost to unmanageable proportions to its revenue

receipts.
 In case foreign debt country resources also get

drained.
PUBLIC DEBT AND INFLATION
 Public debt and inflation:
Public borrowings from the market only divert
funds into the hands of the government.
As result there is no net addition in
aggregate demand.
However this reasoning is quite misleading.
PUBLIC DEBT AND INFLATION
 Firstly, economic productive resources get
diverted from production of consumption
goods to capital goods. Investment goods
industries have longer gestation period
therefore during the intervening period, the
demand for consumption goods tends to
exceed their supply.
PUBLIC DEBT AND INFLATION
 Borrowing used for war activities, to meet
natural calamities and other relief measures
are most likely to be inflationary in their
impact because they are basically
consumption oriented.
 When the government borrow from central

bank, there is an addition in supply of legal

tender money which in turn adds to demand
and pushes up prices.
PUBLIC DEBT AND INFLATION
 Holding of public debt by commercial banks
can also leads to an addition in demand and
inflationary pressure. Banks rates
government securities as highly liquid and
increase their loans and advances.
PUBLIC DEBT VS. TAXATION
 The choice of dept financing and tax
financing is under debate.
 Under some circumstances debt financing

become unavoidable or preferable like during

war and emergencies.
PUBLIC DEBT VS. TAXATION
 For some projects, debt financing meets the
test of cost-benefit analysis. Such project are
benefited to some specific areas or section of
people who are expected to bear the cost of
project out of benefits they would receive.
Such projects are financed through public
borrowings, and than recovered from the
beneficiaries through a levy or some other
means.
PUBLIC DEBT VS. TAXATION
 Debt financing when compared to tax financing
has its own limitations.
 Public debt by definition has to serviced. And adds

to future budgetary committeemen's of the

authorities.
 It is the richer section only which can subscribe to

the public debt, debt servicing becomes a

medium for redistributing national income in favor
on rich.
DEBT REDEMPTION
 The traditional thinking prescribed a policy of
paying off debt as soon as possible, however
the current thinking places debt retirement in
context of overall debt and fiscal policies of
govt. under normal condition.
 One simple way of ending debt obligation is

to repudiate the debt.

DEBT REDEMPTION
 Two systematic approaches for retiring public
debt:
 Sinking Fund: In which government regularly put
aside some money and uses the accumulated
fund for periodic and partial retirement of the
debt.
 This method can succeed in retiring the debt
only if the government has a substantial
budgetary saving every year.
DEBT REDEMPTION
 Second approach is regularly retiring small portion
of debt every year. This approach may be effected
in two ways:
 The public debt may be in form of serial bonds.
 The second method adopted is earmarking a portion of
the budget for the debt retirement, purchasing the
bonds in market and cancelling them.
DEBT REDEMPTION
 When government does not want to reduce
its outstanding debt obligations, it may fund
the maturing loan.
 This means that existing debt is converted

into a new one of longer maturity.

RECEIPT OF PUBLIC MONEY
 All monies received as revenue of the
Government, must be banked in the name of
the Government without delay and included
in the Consolidated Fund of the respective
Federal or Provincial Government.
 Public Account receipts, other than revenue,

must be banked in the name of the

Government without delay and included in
the Public Account of the respective Federal
or Provincial Government.
 All receipts should be identified in
accordance with the Chart of Accounts
specification.
RECEIPT OF PUBLIC MONEY
 Amounts due to the Government should only
be tendered at branches of the State Bank of
Pakistan or at branches of the National Bank
of Pakistan, acting as an agent for the State
Bank of Pakistan, unless otherwise
authorized by the Government.
 Officers receiving public money will be held

accountable for all public monies received by

them and must maintain a proper record of
receipts.
 All amounts to be deposited into the
Government’s bank account must be
accompanied by a receipt voucher.
RECEIPT OF PUBLIC MONEY
 Any person making a payment to the
Government is entitled to receive proof of
payment, through the issue of an official
receipt drawn and signed by the receiving
officer.
 Collection of public monies must not be

mixed with collection of private monies. For

example, no private monies should be kept in
official safes or bank accounts.
 Public monies may be collected at a post

office for specified classes of receipt, as

determined by the Government.
RECEIPT OF PUBLIC MONEY
 Public monies received in cash, cheque or
any other form of payment will not be
accepted by Government entities at their
own offices, unless specifically authorized by
the Government. In cases where receipting at
Government offices is permitted, the
Principal Accounting Officer of the concerned
entity must ensure proper control and that
record of receipts is maintained and public
monies are promptly deposited into the
Government’s bank account.
RECEIPT OF PUBLIC MONEY
 Any public monies received by a Government
office, where permitted under the above
direction are not revenues on the part of the
collecting entity. No public monies received
by a Government office will be retained to
meet departmental or other forms of
expenditure unless otherwise permitted by
the Government
SYSTEM OF PAYMENT OUT OF PUBLIC
MONEY

 Sanction of expenditure
 Preparation of claim voucher

 Approval of expenditure

 Registration of purchase order/claim voucher

 Certification (pre-audit) of claims

 Authorization of payment

 Issue of payment

 Recording of expenditure in the accounting

records.
SANCTION OF EXPENDITURE

 Every expenditure must be sanctioned by an

officer of the Government who has the authority to
approve proposals to incur expenditures.
 Must exercise due care and diligence, and should
not incur expenditure (or enter into commitment)
in excess of the amount appropriated by the
National or Provincial Assembly.
 The sanction process comprises two functions;
namely a Budget Availability Review and the
raising of a Purchase Order. The Budget Availability
Review will be performed for all expenditures,
whereas Purchase Orders will be raised for
contingent expenditures only.
VOUCHER PREPARATION
o A prescribed claim voucher form (bill) (form
4B) must be prepared by the incurring officer
for supplies, services rendered and work done
under a contract or other arrangement over
the specified limit.
o A duplicate claim voucher must not be issued
except where the original has been lost or
destroyed. Also refer to FTR 145 (chapter I of
Part V) for detailed instructions on this matter.
o Travelling expense claims should be
accompanied by all prescribed receipts.
Travelling claims should be submitted within
one month of the completion of journey
APPROVAL OF EXPENDITURE
 Every claim voucher (bill) must be approved by
an officer (other than the sanctioning officer and
who shall be different from the DDO) within the
entity incurring the expenditure, in accordance
with procedures set out in section 4.5.4.
 The approving officer will be held personally

responsible for the correctness of all claim

vouchers bearing his/her signature.
 The approving officer must ensure that for the

expenditure being claimed, an approved

purchase order (where applicable) was
previously raised and a copy is attached to the
claim voucher.
CERTIFICATION (PRE -AUDIT) OF
EXPENDITURE
 Every claim voucher (bill) must be certified
by an officer in the relevant District Account
Office/Accountant General Office/Accountant
General Pakistan Revenue Office and who
shall be deemed to be the certifying officer.
 The certification (pre-audit) process
comprises two functions; namely a
verification function and an audit function.
 The verification function involves: · the

certifying officer ensuring that the claim

voucher has been duly approved by a
delegated approving officer in the entity
CERTIFICATION (PRE -AUDIT) OF
EXPENDITURE
 The certifying officer verifying the validity of
the claim voucher, in accordance with
procedures set out in section 4.5.5, and
ensure it correctly identifies the account
head to which payment will be charged
 the certifying officer initially checking that

the funds are available to make the relevant

payment.
 The audit function involves: scrutinising of

the claim voucher to identify possible fraud

and irregularities that a reasonable person
would be expected to discover.
AUTHORIZATION OF PAYMENT
 Once certified (pre-audited), the claim
voucher (bill) may then be authorized for
payment, by an officer in the District Account
office/Accountant General office/Accountant
General Pakistan Revenue office and who
shall be deemed to be the certifying officer.
 The authorizing officer must not authorize a

claim unless it has been duly certified and

sufficient funds are available in the
concerned budget head to make the
payment.
ISSUE OF PAYMENT
 Payment must only be made for those claims that have been
duly approved, certified and authorised.
 All expenditures must be classified in accordance with the Chart
of Account, under the appropriate expenditure head. No
transaction exceeding the value of available funds can be
passed for payment.
 Payment of approved claims must be made only to the claimant
as indicated on the claim voucher.
 Only Government cheque books should be used when making
payments by cheque.
 All cheques must be signed by two delegated officers. The
cheque signing officers should be independent of officers
involved in voucher certification, voucher authorisation and
cheque preparation,
 Every officer authorised to draw cheques or sign or countersign
cheques, must send a specimen of his/her signature to the
designated bank branch through the Accountant General (or his
delegated officer)
THANK YOU