ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1)

ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Linking Strategic Plans with Budgets January 26, 2010

Session 2: Day 2Contents of Presentation Royal Government of Cambodia budget structure • Meaning of budget and its rationale • Government budget • External budget • Private budget ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia MEANING OF BUDGET & ITS RATIONALE • Definition: A budget is a financial document used to project future income and expenses. The budgeting process is carried out by the government to estimate whether it can continue to operate service delivery and investment with its projected income and expenses. ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia MEANING OF BUDGET & ITS RATIONALE • Rationale: A balanced budget is a basic budgetary constraint intended to ensure that a government does not spend beyond its means. At a minimum, balance should be defined to ensure that a government’s use of resources for operating purposes does not exceed available resources over a defined budget period. A more stringent definition requires that a government maintain a balance between operating expenditures and operating revenues over the long term, not just during the current operating period. This latter definition of balance is referred to as structural balance. ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia CAMBODIA BUDGET & ITS RATIONALE • Principle of balance: • Article 46 of 1993 Law states: • “During a session of the Council of Minister’s on the report of the Minister of Economy and Finance, additional appropriations may be made available by a decree authorizing advances exceeding the budget allocations included in the chapter of unforeseen expenditure in the event of disaster or of imperative need effecting national interests” • Law July 19, 1994 – Article 16 states: • “In exceptional circumstances or in the case of force majeure, The Prime Minister may, in order to settle necessary and urgent matters, order expenditures larger than those granted in the national budget; he shall immediately submit a report to the National Assembly” ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia GOVERNMENT BUDGET 2010 • The overall budget of $1.99 billion • Defense and security received 14% • Ministry of Health 7.2% • Ministry of Education 9.9% • Ministry of Agriculture 1.1% • Ministry of Water Resources 1.3% • Ministry of Rural Development 2.1% 2008 GDP of Cambodia = Agriculture 32% employing 85% of the people ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia GOVERNMENT BUDGET • The fiscal year for all government ministries and public institutions starts with the first day of January until December 31st of each calendar year. • The budgeting process starts in March in order to provide more time for the budget preparation and deliberation. • The general budgeting process is described in the following stages [Refer slide 9 onwards] • Macroeconomic framework development (Mar-May) • Budget Preparation (Jun-Sep) • Approval the National Budget (Oct-Dec) ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia EXTERNAL BUDGET • Central government budget (2008): Revenues--$1.3 billion; expenditures--$1.6 billion; foreign financing--$606 million {38%} • 35 multilateral & bilateral aid partners • ADB • AusAID • FAO • World Bank ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia PRIVATE BUDGET • NGO – 33 operating in Agriculture Sector • Private Sector 22% of GDP {2008} ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET PREPARATION • Step 1: Develop National Macroeconomic & Public Financial Policy for submission to the Council of Ministers for review and approval. • Step 2: Allocation of the global total among line ministries, leaving room for reserves (a separate planning and a contingency reserve as explained below) to be managed by the ministry of finance. • Step 3: The next step should be for the budget department to prepare a budget circular to give instructions to line ministries, public institutions and sub-national administration on the preparation of the Budget Strategic Plan with the indicative aggregate spending ceiling for each ministry, on how to prepare their estimates in a way that will be consistent with macro objectives. This circular will include information on the economic assumptions to be adopted on wage levels, the exchange rate and price levels ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET PREPARATION • Step 4: Step four is the submission of strategic budget plan by line ministries to the budget department. Once received there needs to be an effective "challenge" capacity within the budget department to test the costing of existing and any new policy proposals. • Step 5: Draft Circular on the budget preparation technique with the formats and procedures and other related documents for submission to the Council of Ministers for review and approval. • Step 6: Review and approve the Circular on the budget preparation technique • Step 7: Send the Circular to the ministries and public institutions for preparation revenue, expenditure budget plan. • Step 8: Submit budget plan and priority policy to the MEF ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET PREPARATION • Step 9: The next step comprises the negotiations, usually at official and then bilateral or collective ministerial level, leading finally to agreement. • Step 10: Add up the government revenue-expenditure budget for rebalancing the government budget. • Step 11: Draft Financial Law and prepare the memo of them. • Finally, step 12 is Cabinet endorsement of the proposals for inclusion in the budget that will go to parliament. ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET CYCLE ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia STRUCTURE OF THE GOVERNMENT BUDGET - generic • The principle of comprehensiveness requires that the budget cover all government entities and institutions undertaking government operations, and present a consolidated and complete view of these operations. • The principle of unity requires that the budget include all revenues and expenditures of all government entities undertaking government operations. This principle is important to ensure that the budget is effective in constraining total and sectoral government expenditure, and in promoting greater efficiency in the allocation of resources. • The principle of internal consistency between different components of the budget requires, in particular, that the current expenditure needed for the operations and maintenance of past investment projects be fully reflected in the budget. Moreover, this principle implies that there should be a unitary budget system in which responsibilities for preparing and executing the budgets for current and capital (or development) spending are consolidated within a single central fiscal agency, usually the Ministry of Economy and Finance. ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia STRUCTURE OF THE GOVERNMENT BUDGET • Administrative Classification: The budget signifies this classification by ministry but not lower. For example MAFF is code 17, MRD: 20, MOWRAM: 29 • Economic Classification: Expenses, allowances for staff, staff salaries • Period: One year ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING • CAMBODIAN TAX SYSTEM • Self-assessment • Estimated • Self Assessment: taxable persons determine their own tax and pay without the intervention of tax authorities • Liable persons are responsible for their tax return and information therein • Admin expense reduced as they prepare and submit returns themselves • Minimum annual taxable turnover: • 500 million Riel for companies providing goods (US$122,000) • 250 million Riel for service sector companies (US$61,000) • 125 million Riel for companies bound by contract with Government (US$31,500) ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING • CAMBODIAN TAX SYSTEM • Self-assessment • Estimated • Estimated: Small Economic Activities • 39,086 enterprises – lower income than Self-assessment classification ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING • Description & types of tax • Income tax • Profit tax • Tax on rental of houses and land • VAT • Excise duties • Specific tax on certain goods and services • Slaughter tax • Stamp duties ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING • Description & types of provincial tax • Tax on unused land • Registration tax • Trade license tax • Tax on motor vehicles • Tax on tobacco and alcohol • Slaughter tax ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING • Pros and Cons of Extrabudgetary Funds • Pros • Can increase efficiency by simulating private market conditions where levels and standards of service are linked directly to fees or charges. • Can provide more consistent source of funds for expenditures that yield high benefits yet do not get much recognition (road maintenance expenditures are a primary example). • Cons • Can result in a loss of aggregate expenditure control; such expenditure may be outside the control of ministry of finance. • Can distort allocation of resources by circumventing the budget process and review of priorities. • Earmarked revenues can become entrenched so funding is no longer based on priority needs. • Less transparency may lead to inefficiency and/or misuse of funds. • Can facilitate rent-seeking and abuse of monopoly power. • Leads to less flexibility at the margin to reallocate when budget is under stress. • Is incompatible with good cash management practices. ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET FUNDING {Article 13 of the Law on Public Finance System} • Current Revenue • Group 1: Real Revenue • Category 1: Tax Revenue • Category 2: Non-tax revenue • Group 2: Revenue by Order • Category 3: Revenue by order • Capital Revenue • Group 1: Real Revenue • Category 1: Revenue from own sources • Category 2: Revenue from external sources • Group 2: Revenue by order • Category 3: Revenue by order ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET EXPENDITURE 2007 • Current Expenditure • Group 1: Real Expenditure • Category 1: Operations & Maintenance • Category 2: Financial expenses • Category 3: Public intervention • Category 4: Miscellaneous expenditure • Group 2: Expenditure for order and unforeseen expenditure • Category 5: Expenditure by order • Category 6: Unforeseen Expenditure ADB Grant 0133-CAM: Component 1

Budget Structure of the Royal Government of Cambodia BUDGET EXPENDITURE 2007 • Capital Expenditure • Group 1: Real Expenditure • Category 1: Repayment of borrowings • Category 2: Fixed assets • Group 2: Expenditure by order • Category 3: Expenditure by order ADB Grant 0133-CAM: Component 1

ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1)