Information about Asia and the Pacific Asia y el Pacífico

5 Budget Laws, Control, Review, and Management in China

Ehtisham Ahmad, Vito Tanzi, and Qiang Gao
Published Date:
September 1995
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Information about Asia and the Pacific Asia y el Pacífico
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Ehtisham Ahmad, Maurice Kennedy and Ingrid Klering* 

The development of a framework of budget laws in China is important in clarifying and managing the financial resources of the government and is crucial in establishing levers of macroeconomic control. A framework of laws that contain or have an impact on the development of the budget, its approval by the National People’s Congress (NPC) and the corresponding arrangements at local levels of government, the management of its execution and adjustment, and the processes for the accountability of those responsible for the administration of government programs will affect almost everyone who has a role in government. Of themselves, laws cannot ensure effective financial management. It requires both political will and an awareness of policymakers and managers at each link in the chain from the highest level of government to those delivering the services. But laws are the levers of change.

China had no organic budget law until 1994.1 Although interim regulations were issued in October 1991, they are inadequate in dealing with the relationship between the NPC and the government, and between the central and local governments (defined here to include all subnational levels).

Major Principles of Public Expenditure Management

The budget should be seen as an instrument of macroeconomic management and a mechanism to ensure the efficiency of government resource allocation. Macroeconomic management can be greatly influenced by budget laws: in the way powers are distributed among the executive and legislative branches, and between different levels of government; limitations on activities funded through extrabudgetary funds; and whether constraints on borrowing or deficit are included in the legislation.

Different approaches to budget management have been taken by different countries, with varying degrees of emphasis on the powers of the ministry of finance within the executive, and between the executive branch and parliament. The legal aspect is a requirement that there should be an adequate machinery to ensure allocation of resources and payment of monies for specified purposes and their accounting. A key consideration in each stage is that specific responsibilities be allocated to designated officers to execute tasks according to defined procedures. In addition, the law should specify that budget execution shall be subject to audit by an independent auditor reporting directly to parliament. A primary task of the audit is to ensure that the designated officers perform the tasks according to the defined procedures. Such a function is designed to give parliament an assurance that the executive is using appropriated funds properly.

Legal Framework of Budgeting

Budget legislation can be viewed at several levels: constitutional, organic budget law, annual appropriation and special appropriation budget laws, and financial regulations and executive instructions issued by the Minister of Finance. Countries differ greatly in the extent to which their laws in this area are formally codified. Common law countries, such as the United Kingdom and countries of the British Commonwealth, rely heavily on established administrative practice and the procedures of parliament as a basis for budgeting rules. By contrast, civil law countries, such as Germany, Italy, and France, have extensively codified their budgetary law.2

The constitutional provisions for budgeting present the highest level in the legal hierarchy and, compared with ordinary legislation, have the greatest binding force due to the special requirements regarding procedures for amendment. A constitution would deal usually only with the broadest matter of principle, such as the requirement that all public funds should be paid into designated accounts and that these accounts can only be spent under the authority of a law, and provisions relating to the relative powers of the executive and legislative branches with respect to public finance legislation. The definition of the financial relations between national and subnational levels of government is explicitly stated in the constitutions of some countries, such as Germany, Australia, and India.

The organic budget law, which may take the form of a single law, or several general laws, is drafted, like any other law, to be in force for an indefinite period of time. It provides binding principles for budget management and auditing. It provides, in greater detail, the framework of control that governs the processes of the annual appropriation of funds, as well as accounting for use of the funds by the legislature. As an integral element of the process, the responsibilities of each organization are also specified.

Annual appropriation laws, which are enacted under the provisions of the constitution or organic budget law, primarily serve the purpose of obtaining authorizations from the legislature for public funds to carry out government programs. Other laws may also have budgetary implications over an indefinite period, such as, inter alia, for social security payments, government borrowing, and debt. To cover such open-ended expenditures, there are often special or standing appropriations (see below on budget “lock-ins”).

To ensure uniform application of the budget legislation and the government financial operations between different ministries and spending agencies, the minister of finance generally issues more detailed budget regulations and instructions on behalf of the government.

Structure of a New Budget Law for China

In addition to an organic budget law, there should be a provision for supporting rules and regulations to facilitate day-to-day administration. These could be at two levels: (1) regulations issued by the Ministry of Finance under the authority of the State Council that could deal with matters subject to a degree of variability, and (2) instructions issued by the Ministry of Finance concerning matters of procedure to be binding on agencies and enterprises. It is important to note here that the budget law should provide that the regulations be consistent with it, and the instructions with the regulations. In this way, all three tiers of laws and rules would, between them, form a comprehensive and cohesive framework for budgetary and financial control and management.

General Principles and Objectives

A budget law should deal clearly with objectives and matters of principle. It would be beneficial if the objectives were also to include a reference to “the achievement of efficient, effective, economical and moral (ethical) performance in the management of the state’s financial resources.” By including these particular matters as part of the budget law’s objectives, the sections in the law relating to legal responsibilities and obligations can, and should, then include a complementary requirement that the heads of agencies must manage the resources made available to their organizations through the budget in ways that ensure that the law’s objectives are met. This would expressly strengthen the process of calling them to account for their performance as financial resource managers and, in turn, the performance of their employees who are accountable to them. This would be a key concept in raising the awareness for better financial management by all in the chain of control over budget resource use. Key technical definitions should be stated explicitly in the budget law. It should in its introductory section identify the main actors responsible for implementing the budget law and then state specific responsibilities in following sections. Any breach of these responsibilities should incur a penalty. The very central role of the minister of finance should be highlighted. Moreover, to ensure that both government and the legislature focus on a clear analytical definition of the budget deficit, the definition of the deficit should be included in the budget law.

Table 1 shows that, from a sample of the countries of the Organization for Economic Cooperation and Development, the budget law identifies the main actors, and especially the Ministry of Finance, responsible for the administration of the law. A technical definition of the budget deficit, however, is not always included in the budget law. For example, France, Portugal, and the United Kingdom do not include any explicit provisions on the deficit.

Table 1.Examples of Technical Definitions in Organic Budget Laws
CountryTechnical Definition of Budget Deficit Comparable with Fund Accounting1Administrative Agencies Administrating the Budget LawExtrabudgetary Funds
AustraliaBudget deficit defined in accordance with Fund accounting. No explicit provisions on definitions on revenue and expenditure (AA).The Executive Council; Department of the Prime Minister and the Cabinet Officer; Minister of Finance and his Secretary of State; Treasury Department; and the Auditor General (CFMH par.2.25).There are funds that do not go through the annual appropriation process (needs a special instruction).

All funds are presented in the annual estimates (C par.81,83, FMAB 38).
FranceOrganic budget law contains no explicit provision on technical definitions.The Council of Minister; Minister of Finance and the Secretary of the Budget;

Planning Commission; The National Institute of Statistics; and, the Office of Regional Development (LDF).
There are no funds that do not go through the annual appropriation process (needs a special instruction).

All funds are presented in the annual estimates (LDB sec.4).
GermanyBudget deficit defined in accordance with Fund accounting. The law includes provisions defining revenue and expenditure (LBP par.38, FBC par.25, 81).The Federal Council; Financial Planning Council; Budget Committees; Federal Minister of Finance; The Federal Revenue (LBP, FBC).There are funds that do not go through the annual appropriation process.

All funds are presented in the annual estimates (C par.12, FBC par.37–39).
New ZealandThe law contains no explicit provision on technical definitions on budget deficit. Revenue and expenditure is defined (PFA par.2).The Executive Council; Minister of Finance; and the Treasury (PFA).There are funds that do not go through the annual appropriation process.

All funds are presented in the annual estimates (PFA par.8, 9–12).
PortugalOrganic budget law contains no explicit provision on technical definitions.The Plenary of the Republic; Minister of Finance and ministers of departments; and the Audit Court (AL par.21,22).There are funds that do not go through the annual appropriation process.

All funds are presented in the annual estimates (AL par.3).
SwedenBudget deficit defined in accordance with Fund accounting. No explicit provisions on definitions on revenue and expenditure (GAC).The Minister of Finance; Secretary of the Budget and the Budget Department; National Debt Authority (Treasury); and the National Audit Office (C Chapter 9).There are no funds that do not go through the annual appropriation process.

All funds are presented in the annual estimates (C chapter 9).
United KingdomThe law contains no explicit provision on technical definitions.The Treasury and Chief Secretary to the Treasurer; Treasury Officer of Accounts; Management and Personnel Office; Paymaster General’s Office; Principal Finance Officer; and the National Audit Office (GAG section D, E).There are no funds that do not go through the annual appropriation process.

Not all funds are presented in the annual estimates (GAG section A, B).
United StatesBudget deficit defined in accordance with Fund accounting. The law includes provisions defining revenue and expenditure (BSC page 32–34, CBP section 3).The Congressional Budget Office; Treasury and its Secretary; Office of Management and Budget; heads of departments and agencies; and the Comptroller General (BSC page 2–4).There are no funds that do not go through the annual appropriation process.

All funds are presented in the annual estimates (BSC page 3—4).
Note: See appendix for sources, p.73.

In principal an analytical definition of the budget deficit that excludes borrowing and use of bank balances from receipts and repayment of principal from expenditure and is equal to net financing.

Note: See appendix for sources, p.73.

In principal an analytical definition of the budget deficit that excludes borrowing and use of bank balances from receipts and repayment of principal from expenditure and is equal to net financing.

A central feature of a budget law, as a control mechanism, is its specification of the way in which the use of public money is to be authorized.

The budget law should stipulate that no money is to be spent unless there is an appropriation (an authorization to spend moneys received in the public account, specifying both the amount and the purpose of the spending). Such provision will be the basis for ensuring control over all money and limiting the possibility of establishing funds not subject to budget laws or any misuse of funds. Thus, a budget revision is needed to authorize expenditures in excess of the initial appropriation.

The budget law should in this area also include provisions that appropriations under any law, other than the annual appropriation law, shall be included in the budget estimates presented to Parliament and accounted for in the same manner. Any earmarking should be clearly specified. The law should also specify the basis on which transactions are recorded—for example, on a cash or accruals basis.

The government’s legal rights to collect revenues (taxes, fines, various levies, and so on) should be authorized by various laws intended to apply equally to all persons and enterprises. The budget law should contain a provision to ensure that such obligations to the government shall not be waived or forgiven by officials without the express, or delegated, authority of the minister of finance, and in accordance with conditions that the minister may impose.

The budget law should legally define the difference between those bodies that carry out the functions of government (also known as agencies), and those that function in their own right (defined as entities)—even if they are government controlled or owned. The above distinction relates to the scope of the budget, which would deal with the receipts and appropriations only for the functions of government. The establishment of this distinction is particularly important for China because of the blurred delimitations between enterprises and “state functions” particularly at the subnational level and the banking system. In most market-oriented countries, entities, such as state-owned enterprises, pay dividends to the government, as well as taxes, which are both included in the budget. The budget also includes appropriations for the working capital and subsidies paid to the state-owned enterprises by the government. The day-to-day receipts and payments of the enterprises as they undertake their business operations are not included in the state budget.

In developing or refining a system of budget law, the ability to classify each government body properly and consistently according to its status as well as the correct classification of budget receipts and payments and their consequent control and management is an issue of the greatest importance.3 Under the conventions of Government Finance Statistics, cash operating surpluses of state-owned enterprises are shown as nontax revenues, whereas losses are treated as subsidies.

Power Over Budget Management

The way in which power over the budget is shared between the executive and legislative branches and within the executive branch is a reflection of political forces. Thus, a fundamental requirement of a budget law is to define the rights, powers, obligations, and responsibilities of those to whom the law applies. In budget law, there are normally five distinct functions, within each tier of government forming the bounds of “fiscal legality,” which are performed by the following different players: the political body (NPC or subnational congress), the executive or administrative arm (committees or individual ministries), the Ministry of Finance or treasury, heads of agencies, and, the Auditor-General.

Paramount Political Body

The role of the NPC or subnational congresses (as specified in the Constitution) is to formally enact the principal matters (and matters of principle) that it wishes to permit or compel the executive government or administrative arm to undertake. In most countries, proposals for budget legislation emanate from the executive arm for the consideration of the paramount political body. As indicated in Table 2, the power of the legislature to amend the budget prepared by the executive varies substantially among countries. In Germany, Sweden, and the United States, the legislature has unlimited powers to amend the budget, whereas the powers of the legislature are relatively limited in this regard in the United Kingdom, and most of the countries of the British Commonwealth, and France. The powers of the legislature over the budget are most extensive in the United States, and this situation has given rise to a series of attempts to establish legislative limits on the budget deficit (e.g., the Balanced Budget and Emergency Deficit Control Act, 1985 and the “Gramm-Rudman-Hollings Act”) and the establishment of the Congressional Budget Office to assist Congress to review the President’s budget proposals and initiate its own proposals.

Table 2.Examples of Power Over Budget Management
CountryPower of Legislative BranchPower of Minister of Finance or TreasurySubnational Financing
AustraliaThe legislature has no power to come up with new proposals. It may amend in executive proposals as long as the Parliament does not increase the burden on the people (CFMH par.1.3, 1.4).To be responsible for economic, fiscal, and monetary policy; draft and propose the budget; evaluate and review government programs, expenditure, and proposals.

Be in charge of financial administration and control accounts, including the Public Account (AAO); to give warrants; and, to require all necessary information (CFMH).
The law does not cover such provision. However, the Australian Loan Council determines the total public borrowing, which is then shared between different tiers of government.
FranceThe legislature has no power to come up with new proposals.

Although Parliament may raise expenditures if other expenditures are reduced (LDF par.67, 68, 82, 83).
As above but more emphasis on the overall control of public expenditure (C, LDF par.84–89).There is a binding balanced budget requirement for subnational levels (LDF par.36, 37).
GermanyThe legislature has unlimited power to come up with new proposals or propose amendments to the executive proposals (FBC par.28–33).As above (LBP, FBC).There is a binding balanced budget requirement (C par.109–110).
New ZealandThe legislature has no power to come up with new proposals.

Although proposals may be amended as long as the Parliament does not increase the burden on the people (C).
As above but also to provide for such other matters as are necessary for giving full effect to the proposals and for due administration thereof (PFA par.79–81).The law does not cover such provision.
PortugalThe legislature has no power to come up with new proposals, but proposals can be amended without limit (AL).As above and emphasis on the ongoing system of budget management (PAL par.1).The law does not cover such provision. However, there is in practice a balanced budget requirement, and all tiers of government may contract loans only within limits set by the Assembly (AL).
SwedenThe legislature has power to add new proposals and amend executive proposals without restrictions (C chapter 9).As above (C chapter 9, CD 1992).There is a balanced budget requirement. Subnational levels borrow on their own behalf (in any bank) (GD 1992).
United KingdomThe legislature has no power to come up with new proposals.

Taxes and expenditure may be reduced by the legislature but not increased.1
As above (GAG)The law does not cover such provision. However, there is a general balanced budget requirement: total deficit may not exceed investment expenditure or more than 10 percent over their total allocation.

Borrowing (by any bank) must be authorized from higher level.
United StatesThe legislature has power to come up with new proposals an d amend executive proposals without restrictions (CBP Title I, II).As above, mainly performed by the Treasury and the Office of Management and Budget (CBP par.502).The law does not cover such provisions.

However there is a state balanced budget requirement (GRHA).
Note: See appendix for sources, p.73.

From “Summary and Guide to the Estimates”; Chapter 5, Parliamentary Procedures.

Note: See appendix for sources, p.73.

From “Summary and Guide to the Estimates”; Chapter 5, Parliamentary Procedures.

Executive or Administrative Arm

The role of the executive or administrative arm is to propose budget legislation and to carry out and implement the laws enacted by the supreme legislature. The formal authority is exercised by individual ministers (or heads of executive committees) but is normally passed to individual officials, to undertake the financial functions that the paramount body has sanctioned. Desirably, such authority should be expressed in formal instruments of delegation or authorization to the officials concerned.

Ministry of Finance or Treasury

The role of the Ministry of Finance or treasury should include the right and obligation to issue binding rules to officials in all other agencies, concerning the policies and procedures for financial management, controls, and reporting. This role should be based on powers expressly conferred on it by the paramount body or under delegated authority. Organizational patterns vary, and in a few countries the treasury is separate from the Ministry of Finance. In China, it may be appropriate for the Minister of Finance to exercise the treasury functions, as opposed to the banking functions that need to be specified (see below).

Heads of Agencies

The role of the heads of agencies reflects their responsibility for the overall management of their agency—including, inherently, the conduct of its financial affairs. In this role, they will be required to issue detailed operating instructions to their own personnel on financial procedures and practices that provide a local context to support rules issued from the ministry of finance or treasury. Their powers (whether ceded or inherent) to issue financial instructions and undertake financial management activities within their agency should be expressly limited so as to give no scope for conduct inconsistent with ministry of finance or treasury rules.

The Auditor

In most countries the auditor-general’s task is to supervise the performance of the budget. Since the audit is, in effect, of the government’s performance (see also below), the auditor-general should play a crucial part in making government accountable to the National People’s Congress in China. The budget law should require that the accounts are audited properly. A separate law may be desirable to define the powers and responsibilities of the auditor-general. He should be compelled to report on the financial activities of each agency periodically (e.g., annually). To that end, the auditor should have a mandate and access powers, conferred by law, to examine and report on whatever aspect of an agency’s operations he considers desirable, in order to facilitate evaluation and ensure efficiency.

Consideration should be given to make the auditor-general more independent, than at present, by making him formally responsible solely to the NPC rather than to the State Council (of which he is a member). Under such an arrangement, the auditor-general would furnish reports directly to the NPC, or a committee of the NPC. The government would remain responsible for rectifying any shortcomings in management or administration that have been identified by the auditor. Indeed, how well and how quickly the government responds to such reports or recommendations of the auditor is a significant strand in the accountability framework of the government to the NPC.

Subnational Levels

The division of responsibilities between the central and local level of governments, and the level of autonomy that local governments exercise, varies between countries. In China, under Article 99 of the Constitution, local people’s congresses at and above the county level have the power to examine and approve the plans and budgets of their respective administrative areas. Under the current arrangements, the state budget, which consolidates the budgets of central and local governments, is considered by the NPC. This greatly complicates budgetary practices, since not all local congresses meet before the NPC considers the state budget.

An alternative, that might be feasible in China, is for the NPC to consider only central government revenues and expenditures, along with grants and transfers to local level governments; local people’s congresses would then be responsible for the expenditures at their level, subject to their own resources plus centrally determined grants and transfers. This would greatly simplify the budget making and control processes, and permit decentralized expenditure decisions provided that borrowing by local governments is effectively controlled.

It has been recognized that the stipulation concerning zero net borrowing by subnational levels of government has been somewhat unrealistic, and that loopholes have permitted considerable indirect borrowing by local governments. Tightening the loopholes, involving a clearer distinction between the agencies of government and entities, such as enterprises owned by local governments, would be important. However, legitimate borrowing requirements of local governments should be recognized. Thus the budget law should permit borrowing by subnational levels of government, but restrict this to resources made available by the next higher level of government, or instruments approved by the central government. All forms of borrowing must be reported. Annual limits on overall borrowing would need to be specified by the central government in consultation with the relevant local governments, facilitating central control over aggregate borrowing and credit.

In many countries, the subnational levels of government are required by the budget law to submit their budget estimates to the Ministry of Finance—not for incorporation into a consolidated budget, but for the purpose of determining revenue shares and distribution of grants—and also to report outcomes periodically to the Ministry of Finance.

The Treasury

The budget law should define the role of the treasury. As indicated in Table 2, the role and power of the ministry of finance or treasury, in most OECD countries is well defined in the budget law. However, emphases vary—France, for instance, places greater weight on the overall control of public expenditure, while New Zealand emphasizes all matters necessary for providing full effect to the budget and for its administration.

The treasury should be responsible for all the assets and liabilities of the agencies of the government, including inter alia amounts of receipts that have not yet been banked, amounts held in bank accounts operated by agencies, and cash advances (amounts not yet spent). These amounts deemed to be in the treasury cannot be spent without an appropriation to ensure financial discipline. The treasury, within the ministry of finance, becomes the center of the government’s system of budget implementation and collection of revenues, execution and control of expenditures, as well as maintenance of internal and external debt. While the exact institutional form differs markedly between countries,4 the treasury’s functions typically include the closely interconnected areas:

• budget execution (in terms of tax revenues, expenditure needs, and the financing of any deficit);

• the control of budget execution, and information flows for this purpose;

• the management of cash, assets and liabilities; and

• the accounting for all government operations according to standard rules; maintenance of central accounts.

A treasury could incorporate purely cash management and accounting functions. Maintaining the accounting of government transactions in the treasury, rather than the banking system, could speed up and improve the quality of information available to the Ministry of Finance for policy purposes. In some countries, a treasury plays a more “active” role in enforcing expenditure control through regular monitoring or cash limits on commitments and expenditures made possible by the recording of all stages of the payment process in the system. All extrabudgetary accounts should be brought into the treasury system, and local governments could also utilize the system to carry out and control the execution of their budgets. This would facilitate speedy information flows to the ministry of finance, even with decentralized decision making on expenditures and some revenue bases.

The budget law should specify that all the monies legally owned by the government must be paid as soon as practicable into a treasury bank account. This requirement would facilitate the introduction of active cash management and control functions by the Ministry of Finance or treasury.

The budget law should declare the minister of finance to be nominal custodian of the treasury and require him to safeguard, manage, and account for the treasury. All bank accounts opened and operated by agencies for dealing with monies of the treasury should be on the minister’s behalf. Thus the budget law should give the Minister of Finance the exclusive power to arrange for the banking of treasury monies.

The maintenance of all government accounts by the treasury, and the consolidation of these transactions in the treasury account with the People’s Bank of China (PBC) would minimize the level of unused cash balances, and put any such balances to the most effective use as determined by the treasury. While the main bank account of the treasury would still remain with the PBC, the relationship between the government (through the Minister of Finance) and the PBC would be changed to one between a client and a banker. The PBC would pay market interest rates on deposits, but charge the government for the services provided.

The budget law should also provide the Minister of Finance (treasury) with the power to require reports on any public account set up outside the budget framework and to control expenditure and use of credit within deficit limit, specified in the appropriation law.

Preparation and Approval of the Budget

The budget law should specify the principles and outline the processes whereby the expenditure plans of the budget are prepared, presented to parliament for review and approval, and appropriated by parliament. In this area, the law should specifically cover the proposed macroeconomic strategy for the budget period and periods in the future. Estimates should be prepared for each annual appropriation law, providing details of the amounts to be drafted to each head of expenditure, the purpose of each head and performance to be achieved during the budget year.

A feature common to most of the OECD countries is that the budget is prepared within a multi-annual planning framework (see Table 3). Thus the budget is considered in the context of a detailed analysis and statement of the government’s medium-term economic policy. In some cases, the multiannual planning requirements are included in the law. In others, such as Australia and the United Kingdom, multiannual planning is a central feature of the budget process, even though there is no explicit legal requirement for this.

Table 3.Examples of Preparation and Approval of the Budget
CountryProvisions on Budget Period and Multiannual PlanningGeneral Budget ConstraintsContingency Funds
AustraliaBudget year is July 1- June 30. There is no provision on multiannual planning, and no plan is approved by Parliament although the budget bill includes three-year estimates.No constraints defined by law, but by political strategy described in the budget speech (e.g., the federal government shall have a budget surplus in 1996).The Appropriation and Supply Acts include provisions for contingency funds to cover expenditure in advance for unforeseen or urgent need. The Parliament gets monthly reports (CFMH par.1.16).
FranceBudget year is the calendar year. Multiannual planning (three-year) is requested but not approved by Parliament (LDF par.23–25, 61–62).No constraints defined by law. Although there have been two major principles as a base for the political strategy; the central deficit must not exceed 3 percent of GDP and the tax burden shall be lowered by 1 percent a year.The Finance Act includes provisions for the use of contingency funds to cover expenditure in advance for unforeseen and urgent need (LDF par.49–51, 71).
GermanyBudget year is the calendar year. Multiannual planning (five-year) is requested but not approved by Parliament (LBP par.51, 52).Medium-term financial plans have restricted the growth of federal government expenditure to 3 percent a year in current prices.Excess and extrabudgetary expenditure may be given by the Ministry of Finance only in the event of unforeseen and unavoidable need. Bundestag and Bundesrat shall be informed every three months (FBC par.37).
New ZealandBudget year is July 1 - June 30. No provision on multiannual planning (PFA par.46).The law does not cover such provision.The government has the power to meet the need of unappropriated expenditure and emergency expenditure and costs (PFA par.37).
PortugalBudget year is the calendar year. Multiannual planning is performed occasionally and is not approved by Parliament (AL par.2).The law does not cover such provision.The law does not cover such provision.
SwedenBudget year is July 1 - June 30. Multiannual planning (five-year) is requested but not approved by Parliament. The “plan” is more of a scenario, including all government obligations and commitments (PD 1974).No constraints defined by law but by political statement; medium-term plans to cut expenditure by 10 percent over a period of three years, ending 1995.The Ministry of Finance has power to make money available for expenditure during the year in the event of unforeseen and unavoidable need. Parliament gets reports every six months (C chap. 9).
United KingdomBudget year is April 1 - March 31. The law does not cover provisions on multiannual planning, however, a three-year plan is prepared and presented to Parliament but does not require Parliament’s approval.No constraints defined by law, but by medium-term political financial strategy to keep the deficit within the plan.The treasury has power to make unappropriated expenditure in case of unforseen and urgent needs (GAG section A).
United StatesBudget year is October 1-September 30. The budget covers the four years following the budget year; however, these estimates are not approved (BSC page 1, CBP par.501).Budget deficit reduction target is set out in the GRH Act that sets an annual reduction target until the budget is balanced. An automatic process takes over that cuts expenditure across the entire budget, although this law has been modified several times (GRHA).The law does not cover such provision.

While some countries, such as France and the United States have specified limits to the budget deficit, such a target may not be appropriate to include in a budget law for China, given the difficulty of defining a sustainable deficit,5 which may vary over time. However, each annual budget law should specify a target deficit for the year, and set the maximum level of domestic credit to be allowed during this period. These targets should be consistent with the desired macroeconomic strategy, for the current year and the medium term.6

The need to ensure flexibility in budgeting can present a problem unless there is discipline in the way the estimates are prepared. The procedures for preparing sound budget estimates are not matters for inclusion in the budget law. However, the timing is. Since the NPC does not meet to approve the budget until after the commencement of China’s financial year, it is asked to retrospectively approve appropriations that have already been acted upon from the beginning of the financial year. It is not good law to validate past actions—rather, the law should approve future actions. Consequently, the budget law should contain a provision that creates a “standing appropriation” that appropriates, say, four-twelfths of the previous year’s budget for ongoing expenditures to lawfully continue until the current year’s budget is approved. The current year’s budget submitted to the NPC should indicate how much is already authorized under the standing appropriation and how much extra the NPC is being asked to approve to make up the total of the current year’s budget.

Execution and Adjustment of the Budget

The powers of the executive and the Ministry of Finance to control budget execution are crucial to enabling the government to adjust quickly to changing economic circumstances. To ensure such powers, the budget law should specify that no expenditure shall be undertaken by any spending ministry without a warrant (i.e., an authority issued by the minister to commit funds for certain purposes in a specified time) from the Ministry of Finance. Other means to enable control in this area are to require that the Minister of Finance shall ensure that funds are authorized by law before issuing a warrant; that transfers between budget heads shall require supplementary appropriation laws; but that the minister of finance may approve transfer of funds between chapters within the same head and may issue regulations in this area; and, that the Minister of Finance shall report back to the NPC if major changes have been implemented.

Adjustment of a budget during the course of a year is a problem that occurs in most countries. The budget law may permit the budget of each year to contain an appropriation line item that permits up to an identifiable amount (possibly set in terms of a small percentage, for example, 2 percent, of the previous year’s estimate of budget appropriations) to be spent on urgent and unforeseen expenditures, on the authority of the Minister of Finance. Such expenditures would be reported to the NPC and should be subject to audit by the independent auditor-general.

As indicated by Table 4, the European systems, as a rule, give implicit authority to the executive, through the Ministry of Finance, to limit outlays below the level authorized by parliament if economic circumstances so dictate. In the United States, however, the budget is prepared on an obligation basis and requires an explicit impoundment to be approved by Congress before the expenditure authority can be withdrawn. In the United States, it is thus difficult to adjust expenditures during the year.

Table 4.Examples of Execution and Adjustment of the Budget
CountryWarrant Necessary Before DisbursementPower for Ministry of Finance to Withhold ExpenditureRules for VirementRules for Carry-Over to Next YearExpenditure Controlled by
AustraliaA drawing right must be issued by the Ministry of Finance before disbursement (FMAB par.46).The Executive is authorized to give warrants up to the appropriated amount but is no t obliged to (FMAB par.46).Virement is possible between subheads and within running costs, however, this is not regulated by the law.Capital expenditure may be carried over, however, this is not regulated by the law.The Ministry of Finance, treasury, and officials appointed by the Ministry of Finance (FMAB par.26).
FranceIssued by the Ministry of Finance, any decree or bill of any ministry must bear the countersignature of the Minister of Finance (LDF par.71, 108).The law does not cover such provision.Virement is possible within a limit of 10 percent of the appropriated amount (LDF par.90).The law does not include such provision.Minister of Finance; Finance Comptroller, of the Ministry of Finance represented at each of the various ministries. The treasury and official of Ministry of Finance sit in all committees to ensure due attention to financial matters and enjoy the power of veto (LDF, DB).
GermanyApproval by the Ministry of Finance is required before disbursement (FBC par.36–37).Power is delegated to the Minister of Finance to be used if the development of revenue and expenditure so requires (LBP par.25, FBC par.41).Virement is possible within the same chapter, between salaries and wages and from expenditures on civil servants to salaries. 1 Must be approved by the Minister of Finance (LBP par.15, FBC par.20, 46).Investment expenditure and expenditure from earmarked revenue may be carried over2 (LBP par.15, FBC par.19).Minister of finance; head of departments and agencies (FBC, LBP).
New ZealandThe law does not explicitly require a warrant before disbursement. However, the law gives the Ministry of Finance or treasury a possibility to require any information, which is used as a base for a warrant system (PFA par.81).Appropriated amount constitutes the maximum amount to be used (PFA).Money may be transferred if (1) the amount does not increase an appropriation by more than 5 percent, (2) no other transfer has been made during the year to the same appropriation, and (3) the total amount is unaltered (PFA par.5).The law does not cover such provision.The Ministry of Finance; the treasury; Chief Executives; and heads of departments (PFA).
PortugalAuthority to authorize expenditure is assigned to th e officials of agencies and departments to the extent of the powers of current management that they hold (AL par.23, 24).Appropriations constitute the maximum amount to be used in making expenditure (AL par.18).The law does not include such provision,The law does not include such provision.The Ministry of Finance; heads of departments and agencies (DL par.53).
SwedenIssued by the Minister of Finance, all bills must bear the countersignature of the Minister of Finance or officials appointed by the minister (GD 1974).Appropriations other than for mandatory expenditure, constitute the maximum amount to be used. The government is not obliged to use the maximum amount (GD 1986).Virement permitted within and betwee n votes. Needs approval by the Ministry of Finance. Parliament is informed twice a year (GD 1992).About 10 percent of all appropriations are accepted to be carried over. In principle, all appropriations to governmental authorities can be carried forward until the end of the third year (GD 1981).Ministry of Finance; head of spending ministries; the National Debt Authority; and, the National Audit Office (C, PDs, GDs).
United KingdomIssued by the Minister of Finance (GAG section D).Appropriations other than for mandatory expenditure constitute the maximum amount to be used. The government is not obliged to use the maximum amount (GAG section D).Virement between subheads is possible but needs approval by the treasury. The treasury has no power to authorize virement between votes or to meet additional expenditure with virement (GAG section B).Appropriated funds are in principle made available for one financial year only. If the money is not required to meet expenditure chargeble to that year, it cannot be carried forward into the next. Exemptions can be made for capital expenditure that can be carried forward to the next financial year.3 (GAG section A, B).The treasury; accounting officers within departments and agencies; the Comptroller and Auditor General (GAG section C, D, E).
United StatesIssued by the treasury (BSC page 6).The president cannot impound or delay the use of appropriated funds without approval from the Congress (BSC page 4–6).The law covers no such provision.The law covers no such provision.Office of Management and Budget, the treasury, and heads of departments (BSC, CBP).

Expenditure budgeted without detailed purpose may not be transferred to another chapter nor carried forward.

Transfer is accepted within department; between departments needs consent of minister of finance. Only investment expenditure and expenditure from earmarked revenue may be carried over.

With approval by Parliament only for transfers between votes. About 5 percent of capital expenditure and defense expenditure are carried over.

Expenditure budgeted without detailed purpose may not be transferred to another chapter nor carried forward.

Transfer is accepted within department; between departments needs consent of minister of finance. Only investment expenditure and expenditure from earmarked revenue may be carried over.

With approval by Parliament only for transfers between votes. About 5 percent of capital expenditure and defense expenditure are carried over.

The Ministry of Finance also exercises varying levels of authority over the rights of ministries to move funds from one type of expenditure to another (virement) and to shift spending from one budget period to another. In general, OECD countries have streamlined controls in this area with a view to giving maximum flexibility to managers to allocate resources to achieve the required results. As also shown in Table 4, Australia, Sweden, and the United Kingdom, for instance, give departments substantial freedom to reallocate resources for departmental running costs. In New Zealand, departments and agencies have freedom to reallocate resources within the amounts appropriated to produce a certain class of outputs; other movement needs approval of the Governor-General or the Parliament. Some provision to shift resources between budget years is given in most of the countries shown.

“Budget Lock-In”

The legal effect of the NPC’s approval of the budget is to authorize the government to proceed to finance its spending proposals. The basis on which the government proceeds will depend on whether it is being compelled or merely permitted to implement particular programs.

The explanation of this distinction lies in the fact that it is common practice for the framework of appropriations to reflect the policies contained in other nonbudgetary laws (e.g., laws that specify the conditions under which a person qualifies for an entitlement to some benefit; or a statutory commitment of a particular level of expenditure to a project). If there is no discretion for the government but to pay such a benefit or finance the project at that level, it can be said that the appropriation for the payment is a “compulsory” appropriation. On the other hand, an appropriation covering, say, hiring more staff or purchasing some asset can be said to be “permissive” or discretionary—as the government can make choices about whether to proceed, how fast, to what standard, and so on—and it is up to the government to decide not to spend any or all of the amount appropriated.

Governments that are burdened with budgets containing a high proportion of compulsory appropriations experience what can be described as “budget lock-in”—the loss of fiscal policy flexibility. It may assist the NPC’s deliberations of the budget and heighten its awareness of that problem if the supporting documentation submitted with the annual budget were to include a table of total proposed receipts and payments showing the compulsory payments separately from the discretionary expenditures (Table 5).

Table 5.Sample Table of Total Receipts and Payments
Taxes imposed under lawXCompulsory payments to existing statutesX
Other receipts from the operation of law (e.g., fines)XObligated payments to existing contractsX
Receipts from the sale of goods and servicesXAdditional payments proposed to be undertaken this yearX
Receipts from borrowings*X

Balancing item.

Balancing item.


The budget law would require that accounts are prepared and audited. The form of accounting should be prescribed by regulations under the authority of the Minister of Finance. These would ensure that each and every operation is recorded in an accurate manner, to provide a continuously updated picture of government operations, with clear advantages for management. Hence, proper definition and implementation of the government accounting framework and methods are essential for budget management. Some of the main principles of government accounting methods include universality (all transactions should be subject to an accounting operation) and double entry accounting, to ensure better control. The accounting plan must be structured to ensure the availability of an appropriate account (or subaccount) for each and every operation. The lack of accounts for recording operations, such as the setting of limits on commitments or payments, would hinder the monitoring and control of the operations. A proper definition of accounting schemes is important to ensure that each stage, in any given operation, is recorded in the appropriate account of the accounting plan. Inadequate definitions of accounting schemes may result in lack of information needed for monitoring and control of government operations.


In most countries, the budget law includes provisions that ministries should prepare appropriate reports and submit financial documents to an external auditor. As can be seen in Table 6, the budget law typically includes provisions on the reporting of the auditor-general to parliament (e.g., as in Australia, France, the United Kingdom, and the United States). The auditor-general, appointed with the approval of parliament as head of the audit office, is responsible for audit of all public moneys and assets, and all books of account of other funds or records relating thereto. The audit office establishes accepted accounting practice for preparation of government financial statements in consultation with the treasury department or ministry of finance.

Table 6.Examples of External Auditing of Accounts
CountryProvisions on External Auditing
AustraliaExternal auditing is performed by the Auditor-General, Director of the National Audit office
The Auditor-General shall prepare audited financial statements on accounts and records of all departments and agencies’ business and report to Parliament annually (CMFH).
FranceExternal auditing is performed by the L’lnspection général des finances and La Cour des comptes.
They audit government transactions and report frequently to Parliament (LDF par.19–124).
GermanyThe Federal Audit Office is responsible for all external auditing. The Auditor General reports to the Parliament and informs the Minister of Finance and Heads of Ministers once every year.
Provisions on external auditing specify what shall be audited, functions of audit officers, subjects of audit, and time and form of audit (FBC par.91–94).
New ZealandThe Audit Office is responsible for external auditing and shall each year prepare a report on the public accounts with comments to the parliament (PFA par.30, 38, 43).
PortugalThe law does not cover such provision.
SwedenThe National Audit Office and the parliamentary auditors are responsible for all external auditing (C). The law does not cover provisions on how audits shall be performed.
United KingdomThe National Audit Office ensures that the sums guaranteed by Parliament have been used for the purpose intended. NAO also examines the effectiveness of expenditures. It is completely independent and responsible to Parliament. NAO prepares auditing reports and values for money reports for the Parliament (GAG section c, F-M).
United StatesOffices of Inspectors General perform auditing in all major departments and agencies. Heads of department are responsible for performing annual evaluation and reporting the results to Congress. The General Accounting Office is responsible for assisting Congress in its oversight of the executive branch in carrying out enacted programs. The Comptroller General works independently under the Congress (BA).

The Chinese Constitution of 1982 established a system of audit.7 As noted above, the auditor derives his authority and is responsible to the administration, acting under the direction of the premier of the State Council (Art. 91). Auditing bodies are established by local governments at local levels and are responsible to the auditing bodies at the next higher level. The nature of the audit in China is reflected in the 1991 “Regulations on Budget Management,” under Art. 54, which states:

Auditing departments at all levels shall take charge of auditing and supervising the execution of budgets of corresponding departments and People’s Governments one level below

and Article 69, which states that

[a]uditing departments at all levels have the right to audit the final accounts of all corresponding departments and those of People’s Governments of a lower level.

The emphasis of the Chinese audit laws and regulations is on auditing the implementation and final accounts at lower levels of government. Local governments are responsible to local people’s congresses. However, because of the administrative structure of the Audit Administration, problems with the implementation of local budgets (or their final accounts) must be reported by the auditor-general to the prime minister first before referring problems, through the local people’s congress to take corrective actions.8 There is thus relatively limited scope for the auditors at local levels to suggest corrections. Consideration should thus be given to making the local auditors report directly on the operations of local governments to local congresses, to circumvent the current lengthy procedures for suggesting and implementing corrective actions. This change should introduce greater accountability at the local levels.

An additional issue regarding audits in China stems from the limited ability of the auditor-general to supervise the central budget.9 Since the auditor-general is of the same level as other ministers and is a member of the State Council (Cabinet), which proposes and approves the budget, there is limited leverage over particular ministries. The auditor-general needs a request from the Prime Minister to audit such ministries and special funds.

Main Legal Provisions Relating to the Budget in OECD Countries
CountryLegal Framework
AustraliaThe Constitution (C)
The Audit Act, 1907, including amendments 1989 (AA)
The Commonwealth Financial Management Handbook, 1992 (CFMH)
Financial Management and Accountability Bill, 1993 (FMAB)
FranceThe Constitution (C)
Les Lois de Finances (LDF)
Les Droit Budgétaire (LDB)
Le Comptabilité publique, 1989
GermanyThe Constitution (C)
The Law on Budgetary Principles for Federation and Löander, 1969 (LBP)
The Federal Budget Code (FBC)
The Law to Promote Economic Stability and Growth, 1969 (LES)
The Law on Federal Audit Office, 1985 (LFA)
New ZealandThe Public Finance Act, 1989 (PFA)
PortugalThe Constitution (C)
The Assembly of the Republic Law on Framework of the Budget, 1991 (AL)
Ministry of Finance Decree Law, 1992 (DL)
SwedenThe Constitution (C)
The Government Budget Decree, 174, 1989, 1981, etc. (GBD)
Parliament Decrees (PD)
National Audit Office General Accounting Guidelines (GAG)
United KingdomThe Public Revenue and Consolidated Fund Charges Act (CFA)
The National Audit Act (NAA)
The Government Accounting Guidelines, 1986 (GAG)
National Audit Office Framework for Value for Money Audits
United StatesThe Constitution (C)
The Congressional Budget and Impoundment Control Act, “The Budget Act” 1974 and amendments (BA)
The Balanced Budget and Emergency Deficit Control Act, 1985 “Gramm-Rudman-Hollings Act” (GRHA)
The Budget System and Concepts of the United States Government, 1993 (BSC)
The Congressional Budget Process, 1986 (CBP)

Ahmad and Klering, International Monetary Fund, and Kennedy, Ministry of Finance, Australia.


This paper was written before the budget law was considered by the National People’s Congress in 1994. However, principles in this paper could be used to guide future amendments. Ed.


In France, the relevant legislation is given in a few documents: (1) the Constitution, (2) the Organic Budget Law, and (3) the Public Accounting Act, 1989. By contrast, in the United Kingdom, in addition to common law and administrative precedents, relevant legislation includes: (1) the Public Revenue and Consolidated Fund Charges Act, (2) the National Audit Act, (3) the Local Government Planning and Land Act. By far the most important document is the “Government Accounting Guidelines,” which is, however, not an act. For the United States, the relevant legislation includes: (1) the Constitution, (2) the Act of Congress and the Treasury Act, 1789, (3) the Budget and Accounting Procedures Act, 1921 and 1950, (4) the Congressional Budget and Impoundment Act (the Budget Act), (5) the Balanced Budget and Emergency Deficit Control Act, (6) the Budget Enforcement Act, 1990, and (7) the Chief Financial Officers Act.


See International Monetary Fund, A Manual on Government Finance Statistics (Washington: IMF, 1986), Chapter III, pp.93–108.


The British Treasury carries out most of the functions of the Ministry of Finance. In France, the Treasury is one of the most important Directorates of the Ministry of Finance, again providing a mechanism of tight control. Control functions are more dispersed in the United States, where the Treasury shares responsibilities with many other influential players in the executive branch and Congress.


The question of the appropriate definition and concept of the budget deficit is an issue of considerable importance (see, e.g., M. Blejer and A. Cheasty, “The Measurement of Fiscal Deficits: Analytical and Methodological Issues,” Journal of Economic Literature, Vol.29 (December 1991), pp.1644–78).


Multi-annual financial planning is required in several countries such as Germany (five years), France (three years), and Australia (three years), but is generally not subject to parliamentary approval.


Under Sections 91 and 109.


Under Art. 68 of the Regulations on State Budget Management.


The central government budget is nominally supervised by the Public Finance Committee of the NPC, but this body has very limited personnel to ensure effective supervision.

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