Question

Public financial management is critical in achieving aggregate fiscal discipline, strategic allocation of resources and efficient service

Answer 1

ANSWER

YES PUBLIC FINANCIAL MANAGEMENT (PEM) is critical in achieving aggregate fiscal discipline, strategic allocation of resources and efficient service

What is Public Financial Management (PFM)?

PFM refers to the set of laws, rules, systems and processes used by sovereign nations (and sub-national governments), to mobilise revenue, allocate public funds, undertake public spending, account for funds and audit results. 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 (Figure 1). A large number of actors engage in this “PFM cycle” to ensure it operates effectively and transparently, whilst preserving accountability.

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, and countries with strong, transparent, accountable PFM systems tend to deliver services more effectively and equitably and regulate markets more efficiently and fairly. In this sense, good PFM is a necessary, if not sufficient, condition for most development outcomes.
• A key element of statehood is the ability to tax fairly and efficiently and to spend responsibly. These are fundamental characteristics of ‘inclusive’ state institutions, which generate trust, promote innovative energies and allow societies to flourish.

What are the objectives of the PFM system?

To assess a PFM system, we first need to define its end objectives – the final outcomes, by which performance can be measured. It is generally accepted that a PFM system should achieve three objectives, to which we here add a fourth, namely the promotion of accountability and transparency, which is increasingly seen as an objective in itself, because of its close relationship to the notion of inclusive institutions:

• The maintenance of aggregate fiscal discipline is the first objective of a PFM system: it should ensure that aggregate levels of tax collection and public spending are consistent with targets for the fiscal deficit, and do not generate unsustainable levels of public borrowing
• Secondly, a PFM system should ensure that public resources are allocated to agreed strategic priorities, in other words that allocative efficiency is achieved
• Thirdly, the PFM system should ensure that operational efficiency is achieved, in the sense of achieving maximum value for money in the delivery of services
• 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.

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