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The reform of the Romanian budget system--a new step.

1. Introduction

Our paper analyses the role of the budget system reforms of the emerging economies (which includes Romania) in terms of budget performance. Moreover, we believe that if we take into consideration the costs of adopting the accrual accounting, at the expense of the cash accounting, then such a transition is useful in the context of the adoption of broader reforms in the public sector.

The public administration reforms from the early 90s in the Anglo-Saxon countries, through which the public sector receives better transparency and governance, were named "New Public Management" (NPM) by Christopher Hood. Subsequently, this concept, through which the traditional public management is replaced by one based on results, was supported by the International Monetary Fund, the World Bank, the European Bank, and the Organization for Economic Co-operation and Development (OECD). NPM leads to a higher demand for useful information for the decision making process and responsibilities beyond budgetary control (Cortes and Marti, 2012). These changes are aimed at blurring the boundaries between the public and the private sectors. Among the NPM provisions we find the introduction of the accrual accounting in the public sector at the expense of the cash accounting.

Champoux (2006) states that by using the accrual accounting only for the financial reports, they may not be taken seriously and risk becomes a purely technical exercise. Furthermore, "one of the major goals that justified the introduction of the accrual accounting in the public budget was to make the latter more transparent and to improve the efficiency of the public expenditures and of accountability" (Monteiro and Gomes, 2013).

In these circumstances, the budget becomes a fundamental tool in the management of the public institutions. For some authors, the budget is the main tool used in planning ahead and in describing what the institution wants to achieve (Hoek, 2005). For other authors, the budget is a mandatory forecast document which compares the revenue and expenditure for the period to which it relates (Dascalu et al., 2006). Most of the reforms applicable to the field of budgeting in the public sector represented a step towards changing the traditional model of the public management with one based on results (Cortes and Marti, 2012).

Internationally, the public management models use two types of budgets: the budgets prepared according to the cash accounting and the budgets prepared according to the accrual accounting.

The difference between the two methods consists in the moment where the transactions occur. The budget prepared under the accrual accounting norms will estimate the revenues and expenses of a given period in order to determine the profit that is to be achieved. At the macro level, the adoption of the accrual budgeting is a new framework for the planning, management and control of the public expenditure (Cortes and Marti, 2012)

Instead, a budget prepared under the cash accounting norms will relate only to the items received or paid for. The purpose of this type of budget is to determine whether there is sufficient cash. The budget prepared under the accrual accounting norms presents long-term events while the budget prepared under the cash accounting norms present short-term ones.

Besides these two types of budgets, United States Government Accountability Office (GAO) mentions other models as well (GAO, 2000). The bond-based model, a variant of the cash accounting model, can be included here. This budget type is used in the United States and admits the expenses when the purchase contract is assigned.

Both bases, cash and accrual, are required in order to obtain a complete image of the Government's financial statement (GAO, 2007). The introduction of the cash budget model or of the accrual budget model raises controversy, being correlated with the two accounting models applied to the public domain.

Besides all these, the financial crisis, faced by most public entities, has made the traditional approaches become out-dated. Moreover, the shift to the accrual budgeting means that the budget stops being an authorization tool for public expenditure and becomes a planning and management tool (Sterck et al, 2004).

When referring to the accrual budget, Steger (2013) lists the following benefits: it improves the transparency of the public finances, reduces the phenomenon of the fiscal illusion, helps align the public finances with the economic reality, increases the responsibility of the policy-makers and makes it harder for the interested parties to ignore the challenges imposed by the future budget.

The accrual accounting initially focused only on the preparation of the financial statements. Gradually, it became the basis for budgeting. Khan and Mayes (2009) consider that the accounting and budgetary regimes should be closely monitored so that a clear and transparent basis for the comparison of the planned financial results and the actual ones and that without a change in the budget regime, a simple move towards the accrual accounting would not be able to achieve the necessary change. However, governments may decide to adopt the accrual accounting as a first step before starting the much more complex task of introducing the accrual budget. In this case, Khan and Mayes (2009) believe that this can give rise to a temporary mismatch between the ex-ante information and the ex-post one. In the case of the purchases of goods and services, the cash budget does not show the debt levels long as they are not paid. This creates fiscal illusions as in the case of the assets sold. The income is reflected in the budget, but the reduction in the number of the assets is not. Another example refers to bad debt, which is not recorded in the cash budget and which ignores the financial risk. Moreover, the cash budget does not provide an answer to the question of whether a country is richer or not than a year ago. On the other hand, the accrual budget does that. However, we can say that the cash budget is the basis of the accrual one (Blond, 2013).

The first country to adopt both the accrual accounting, for the drafting the financial statements, and the accrual budget is New Zealand. This happened in the early 90s because, later on, this example was taken up by Australia, Great Britain, Sweden, Canada and the United States. In Austria, 2013 was the year in which the implementation of the accrual budget took place. Steger (2013), the Director of the General Budget and Public Finance, talking about Austria's experience in implementing the cash budget, considers that although the cash model is important, it does not provide complete information while strengthening this statement with examples.

Because Austria is the latest example in adopting the accrual budget, we will touch upon its efforts in this area. By the mid-1990s, in Austria's public sector, the budget was prepared according to the traditional method, meaning according to the cash budgeting terms, which led to complaints from the federal government (Steger, 2010). Since the mid-1990s, a series of reforms were made, which include the introduction of the top-down budget, and since 2000, reforms were made for the pilot projects of 20 administrative offices, in order to experience new forms of budget flexibility and information performance.

According to Steger, the results of these pilot projects were encouraging, the administrative and budgetary culture in these administrative offices improved considerably. It proved that the new rules could lead to better fiscal outcomes simultaneous with a better performance.

The Austrian budget reform was carried out in two stages: 2009 and 2013. The first stage began in 2007, when the Ministry of Finance initiated a reform package with the implementation starting with 2009, consisting of the introduction of a medium term expenditure framework (MTEF) and of a greater flexibility for the line ministries.

MTEF includes the mandatory expenditure ceilings for four years in advance which is applicable to groups of chapters: laws and security, employment together with social services, health and family, education together with research, arts and culture, economic affairs together with businesses related to infrastructure and the environment, financial and interest management (Steger, 2010).

Also, the Austrian system distinguishes between two different expenses ceilings: a fixed nominal ceiling, expressed in euros, which applies to more than 75% of the expenditure and a variable ceiling, which refers to the costs of the business cycle, expenses related to E.U. refunds), guarantee expenditures. Therefore, the variable ceilings apply to the expenditures which cannot be calculated in advance in a satisfying manner. It is noteworthy that the project was voted in 2007 and implemented in 2009 when the global financial crisis created a lot of uncertainty. Steger believes that in these circumstances, the Austrian Ministry of Finance has successfully defended the financial discipline, which proves that the budget reform in Austria can be considered a success.

The second stage of the Austrian budget reform began in 2013 and includes: a long-term improvement in the financial planning processes, a new budget structure based on the "global budgets," the accrual accounting, performance-based budgeting, performance and budget discipline promotion mechanisms (Steger, 2010).

2. Budgeting in the Case of the Romanian Public Institutions

Based on the statement of Philippe Peusch Lestrade, Deputy Chief Officer from the International Integrated Reporting Council at Association of Chartered Certified Accountants (ACCA)'s fifth international public sector conference held at the end of the last year, that "transparency is crucial in the informational age we live in" and that "governments need to be fully transparent in all decisions they make and concise in their communication if they wish to be seen as trustworthy", we believe that we must adopt the best practices to improve the accountability and transparency in the public sector, namely, in budgeting.

The political decision regarding the allocation of the budgetary funds should always be represented in the budget (Monteiro and Gomes, 2013), but as in the case of Brazil, although the accrual accounting is used for about ten years in the public sector, the accrual budgeting remains to this moment a foreign subject. The professional accounts working in the Romanian public institutions are not yet acquainted with the accrual budget.

The same way the Romanian accounting system is inspired from the continent, the budget system is created after the French and Italian one. Thus, the Romanian budget process is organized on three levels: the main credit release authorities, the secondary credit release authorities and the tertiary credit release authorities and includes: the existence of the financial resources, as well as the allocating of these resources in order to provide the citizens with public goods and services (Vacarel et al., 1999).

In the category of the main credit release authority we find the ministers and the leaders of the central bodies, the presidents of the county councils and the mayors, which allocate the approved budget credits for both their own budget as well as for the budgets of the lower-ranking public institutions. The secondary credit release authorities are the leaders of the public institutions which are subordinated to the main credit release authorities and which coordinate other public institutions for which they allocate budget credits. The secondary credit release authorities use the budget credits they have received solely for the needs of the unit they lead (Tiron et al., 2013).

As previously stated, currently, the budget is used to control the receipts and payments and ensures the comparison between the revenues collected and the expenses incurred. The revenues and expenses are grouped in the budget according to the budget classification: the revenues are divided into chapters and subchapters, while the expenses are divided into parts, chapters, subchapters, titles, articles as well as paragraphs where appropriate. The capital expenditures are included in each budget chapter, in accordance with the commitment appropriations and the achievement of the investment durations (Tiron et al., 2013).

The financial statements comply with the international standards, which means, that in addition to International Public Sector Accounting Standards (IPSAS) 1 "Presentation of Financial Statements", the Romanian public institutions prepare the budget execution account.

This is because the budget is developed based on the cash principles while the financial statements are based on the accrual principles and, according to IPSAS 24 "Presentation of budget information in financial statements", when the budget and the financial statements are not prepared in the same system, a separate financial statement must be prepared.

The budget execution account is drawn up separately for income and separately for expenses. The budget execution account of a public institution-income includes information about: the initial budgetary provisions, the final budgetary provisions, the established entitlements, the receipts realized, the receivable accrued rights.

The information related to the initial budgetary provisions, final budgetary provisions and receipts are taken from the budget prepared under the cash principles. Instead, the information related to the accrued rights, both from the previous years and for the current year, as well as the receivable accrued rights are provided by the accrual accounting.

The budget execution account of the public institutions-expenditure includes information about the commitment appropriations, budget credits (initial and final), budgetary commitments, legal commitments, payments, payable legal commitments, actual expenditures.

The cash budget provides information on the commitment appropriations, budget credits and payments. The accrual accounting provides information on the budgetary commitments, legal commitments, payable legal commitments, actual expenditures.

The Ministry of Public Finance, the Romanian accounting standardizer, benefited between 2012 and 2013 from the resources provided by the E.U. to implement an electronic system for the financial statements reported in the public sector (FOREXEBUG). In this project, the approval and the electronic signing of the revenues and expenses budgets recorded by the credit release authority is taken into account, providing information on the degree of the achievement of the revenue and on the expenditure incurred, the automatic check in the budget classification system of payments, the collection of budgets according to the COFOG 2 standard. In this respect, until December 31st, 2014, the public institutions must implement the national verification, monitoring, reporting and control system of the financial statements, legal commitments and budgets. Thus, they have the obligation to report the aggregate budget and the individual budget according to the system's operating procedure.

Starting with January 1, 2015, the public institutions, in accordance with the law of the public finances, will have to employ the budget expenditures only to the extent of the commitment appropriations, compared to the current regulations which specify that the employment of the budget expenditures is done only within the limit of the approved budget credits. Thus, we believe that the premises for the drawing up of the budget in terms of commitments are created. In these circumstances, a part of the income should cover the accrued rights and the budgetary provisions.

3. Conclusion, Limitations and Future Research

The change of the accounting system should generate a general reform of the budget system, given that the benefits of the accrual accounting are extensive: politicians can increase their control over all the public resources, the government agencies which develop the public policies will hold more comprehensive and significant information for the development of policies.

In the public sector, the public expenditures become more transparent, which make the budget, become increasingly complex. Romania is no exception. Although OECD considers that the Romanian budget transparency is good enough (Ruffner et al., 2005), Romania must continue the reform of the public sector. Attila (2010) believes that the transition from the cash budget to the accrual budget is done gradually; by completing the information provided by the cash-based budgets with the specific information for the accrual budget (what we can already see to be happening).

Starting with January 1, 2014, the public accounting reform is undergoing a new phase, as a consequence of the request from IMF and the World Bank for information on the accrual budgeting and the legal commitments, the budget execution in the functional and economic profiles. We believe that these changes, although taxing for the professional accountant in the public field, will have a positive effect on the transparency and budgetary efficiency.


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*** Government of Romania (2013), Emergency Ordinance no. 88/18.09.2013 on regulation of some fiscal-budgetary measures to fulfill the commitments agreed with international bodies, as well as for amending and supplementing certain acts, published in Official Gazette no. 593/20.09.2013.

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*** Romanian Parliament, Law no.500/2002 on public finances as amended and supplemented, published in Official Gazette no. 597/13.08.2002.

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Stefan cel Mare University of Suceava


Stefan cel Mare University of Suceava
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Author:Maciuca, Geanina; Socoliuc, Marian
Publication:Economics, Management, and Financial Markets
Article Type:Report
Geographic Code:4EXRO
Date:Dec 1, 2014
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