Amhara Management Institution School of Leadership and Political Economy

Department of MA in public policy and leadership

Course Title:- Public finance and budgeting
Individual Assignment Term paper
Prepared By: Animut Adugnaw
Id:-Number AMI-140148ps
Email: [email protected]
Submitted To:- Getaneh Mihret (PHD)

June, 2023
BahirDar, Ethiopia
Abstract
Finances are government finances. Finance studies the way governments manage revenues, expenditures, and debt.
Finance provides a holistic view of government revenues, expenditures and debt management. Aimed at economic
development and financial stability, the government announces fiscal policies related to revenue, expenditure and debt.
The government manages finances according to fiscal policy. Finances are managed with national progress in mind.
Developing countries like India use public funds to eradicate poverty and unemployment regulate financial turmoil and
commodity prices, thereby creating financial stability. A budget is an estimate of income and expenditure for a year
prepared by the government. A document that shows government revenues and expenditures. Central and state
governments submit their own budgets. Every year, the government announces the budget for the fiscal year. 

Kay words:- budget, public expenditure, public revenue, Financing fiscal deficit, financial management
Table of Contents
1. Introduction............................................................................................................................................................................................ ii
2. Budget preparation process both federal and regional level.............................................................................................. ii
2.1 Budget preparation process federal level............................................................................................................................ iii
2.2 Budget preparation process regional level.......................................................................................................................... iv
3. Structure of public expenditure and public revenue and means of financing deficit.................................................v
3.1 Structure of public expenditure................................................................................................................................................ v
3.2 Structure of public revenue....................................................................................................................................................... vi
3.3 Financing fiscal deficit................................................................................................................................................................ vii
Deficit finance is borrowing from the central bank or the public sector to fill the gap between government revenues and
government spending in the government budget. Deficit finance is conducted so that total government spending equals
total government revenue. Fiscal deficits are closely related to spending and revenues. Governments generate revenue
through tax revenues and federal taxes. The government borrows money for household budgets, but income does not
include borrowed money. The definition of household debt is the income deficit compared to government spending. A
government in debt means it is spending more than it can afford. Household debt usually points to weak economic
growth and a possible need for a review of fiscal policy. This is an example of a budget deficit. The purpose is to
generate funds to cover the deficit resulting from spending in excess of revenue. When there is a budget deficit, the state
can finance itself through taxes, borrowing money, and printing money. Deficit spending is when the government
borrows from the central bank or prints money to fill the gap between revenue and expenditure. The definition of
household debt is the income deficit compared to government spending. A government in debt means it is spending
more than it can afford. A state runs a budget deficit when spending exceeds tax revenue in a fiscal year. A budget
deficit occurs when spending (expenditure) exceeds income (income). A budget surplus is the opposite of a budget
deficit. This occurs when income exceeds expenses. Individuals, organizations and governments can run budget deficits.
In most cases, a country cannot do without some form of budget deficit. The fiscal deficit will be covered by additional
borrowings from the central bank. This prevents government shutdowns. It's important to understand that budget deficits
and fiscal debt are not the same thing. A fiscal deficit only refers to the amount of money the government is short of in a
fiscal year. Public debt is the cumulative amount of debt accumulated over many years of deficit spending......................vii
4. Criteria for revenue-sharing and expenditure allocation between the central (federal) and regional level.....vii
5. Recent Ethiopian financial management reform........................................................................................................................... ix
5.1 Principles financial management reform.................................................................................................................................. x
5.2 Implementation of Public Financial reform Programmed............................................................................................... x
6 Fiscal decentralization practices in Ethiopia................................................................................................................................ xi
6.1 Definition of fiscal decentralization:....................................................................................................................................... xi
6.2 Fiscal Decentralization in Ethiopia......................................................................................................................................... xii
7. Conclusion............................................................................................................................................................................................. xiv
8. References.............................................................................................................................................................................................. xv
1. Introduction
Finances refer to the management of money and other valuables that are easily convertible into cash.
Finance, on the other hand, is the branch of economics that deals with alternatives to government activity and
government spending. Public financial management is the set of principles and methods for formulating and
adopting administrative decisions by government agencies and non-profit organizations regarding the
formation, allocation, and effective use of financial resources with the aim of improving the welfare of the
nation's citizens. This includes systematic monitoring of these decisions, identifying emerging risks and
developing countermeasures to avoid them.
There have been many attempts to update financial management systems in terms of their overall design,
operational techniques and procedures. Further changes were also required in the institutions and
organizations entrusted with public financial management. However, these changes have not been
consistently implemented across countries and public institutions, nor do they always represent a consistent
strategy when they do occur. Financial management in its broadest sense includes financial planning, budget
preparation and implementation, payments with public authorities, bookkeeping, financial reporting and
internal evaluation. The narrow definition of financial management is interpreted as being limited to records,
accounting, financial reporting, internal audits and evaluations. 

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2. Budget preparation process both federal and regional level
The term "budget" may have different meanings in other contexts. These are often complete income and
expense proposals rather than volumes whose amounts are published. Some people collectively refer to the
Budget Act and the Revenue and Appropriation Act passed by Congress as the "Parliamentary Budget."
Ultimately, Congress and the President enact a number of laws (sometimes collectively called the budget,
such as the "budget enactment") that govern government revenues and expenditures. ."

2.1 Budget preparation process federal level

The Budget preparation process federal level occurs in three main phases:
1. Formulation:- Preparation of the presidential budget usually begins each spring (or earlier), at least nine
months before the budget is submitted to Congress. The first stage of budgeting takes place in federal
agencies. When government agencies begin to develop budgets for a fiscal year, they have already executed
the budget for the current fiscal year and are awaiting final budgeting and other legislative decisions for the
next fiscal year. The long lead time and the fact that next year's budget has not yet been allocated means that
the budget is being prepared with great uncertainty about the state of the economy, the president's policies,
and the actions of Congress. As government agencies prepare their budgets, they are in constant
communication with their assigned budget managers for administrative purposes. These contacts will provide
agencies with guidance in preparing budgets and allow budget managers to alert office managers of
upcoming needs and issues. In addition, the Cabinet Office budget rules provide for the confidentiality of all
budget proposals and recommendations before the president's budget is submitted to Congress. However, it is
quite possible that internal budget documents have already been published during budgeting. Over the years,
the types of information and descriptions included in budget documents have increased. During this phase,
the Executive Branch prepares the President's Budget. The Federal agencies begin preparing the next budget
almost as soon as the President has sent the last one to the Congress. Office management budget officially
starts the process by sending planning guidance to Executive Branch agencies in the spring. The President
completes this phase by sending the budget to the Congress on the first Monday in February, as specified in
law, although occasionally Presidents have sent it later for various reasons.
2. Congressional:- The Parliamentary Budget and Forfeiture Control Act of 1974 establishes the
Parliamentary Budget Process as a means of coordinating various budget-related activities that Parliament
conducts throughout the year, such as auditing expenditure and revenue activities. Central to this process is a
concurrent annual budget decision that sets overall budget guidelines and functional priorities for at least the
next five fiscal years. Contemporaneous resolutions are not laws and cannot be signed or vetoed by the
President. Budget decisions have no legal effect. After that, no money can be collected or spent. The primary
purpose of the Budget Act is to set up a framework for Congress to separately consider revenues,
expenditures, and other budget-related legislation.
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The amounts of revenues and expenditures specified in budget resolutions form the basis for enforcing
Congress' budgetary policy through the Order. The budget pass also initiates the adjustment process to align
existing revenue and expenditure laws with Congress' budget policy.
This phase begins in late January or February, when Congress receives the president's budget. Congress does
not vote on the president's budget itself, nor does it pass its own budget. Considers the President's budget,
adopts a general plan of revenues and expenditures known as the "Budget Act," and enacts regular budget
acts and other laws governing expenditures and revenues. 
3. Execution:- The President and the Budget Office play an important role when the budget is submitted to
Congress. Office management budget officials and other presidential advisers appear before congressional
committees to discuss a wide range of political and economic issues. However, formal discussion of specific
programs is usually left to the relevant authorities. Government agencies, therefore, have primary
responsibility for defending the President's program recommendations in congressional hearings. Agencies
should justify the president's recommendations, not their own. Later in the session, the president can formally
state his position on his pending legislation by issuing his policy statement. These statements are maintained
on the Office Management Budget website and may be used to express the threat of a veto against legislation
that the President believes requires changes to gain Presidential approval.
This phase lasts for at least five fiscal years and includes two parts. The apportionment part pertains to funds
appropriated for that fiscal year and to balances of appropriations made in prior years that remain available
for obligation. At the beginning of the fiscal year, and at such other times as necessary, office management
budget apportions funds that is, specifies the amount of funds that an agency may use by time period,
program, project, or activity to Executive Branch agencies. Throughout the year, agencies hire people, enter
into contracts, and enter into grant agreements, etc., in order to carry out their programs, projects, and
activities. These actions use up the available funds by obligating the Federal Government to make outlays,
immediately or in the future.

2.2 Budget preparation process regional level

1. Identify strategic goals and collect inquiries about the department's operating budget. Strategic budgeting
gives you the flexibility to forecast complex spending and revenue targets. Its purpose is to shift the focus
from the big picture to the detailed data. Businesses use budgeting tools to better allocate funds to meet
specific long-term goals. A budget describes a country's income and expenditures. In India, before the first
puja of each year, the government presents the budget, outlining the estimated income and expenses for the
upcoming financial year.
2. The director meets with the department head to review the request. The Chief Executive Officer provides
leadership in all aspects of company operations, with a focus on long-term goals, growth, profits and return on
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investment. As chief executive office, you are responsible for developing and executing strategy and the board
is responsible for approving and advising on it. Day-to-day operations are the responsibility of the chief
executive office, and the board of directors provides a broader perspective. Today's chief executive office has
more control than ever before. Leaders guide the organization and execute the plans and policies that help the
organization succeed.
3. Finalize the budget and send it to Congress. Congress and the Council must decide within six weeks from
the date of adoption of the joint document. Resulting document:
Congress adopts legislative resolutions on joint instruments approved by the Arbitration Committee and
approves or rejects the joint instruments. Budget execution is the process of monitoring, adjusting, and
reporting on the current year's budget. The accountability phase is the final phase of the budget process.
Government agencies report their actual physical and financial performance. A bill is a bill that is submitted to
Parliament. Once a bill has been debated and approved in all chambers of Parliament and has received royal
approval, it becomes a law and is known as a law. Any Member of Parliament can introduce a bill.
 4. The budget office monitors expenditures. The primary purpose when monitoring expenditure against
income is to ensure that expenditure does not exceed the available income. As when monitoring expenditure
against budget, the first problem is how to identify which sources of funds are showing significant surpluses
or deficits. Expenditure Budget shows the revenue and capital disbursements of various
ministries/departments and presents the estimates in respect of each under 'Plan' and 'Non-Plan'. Description:
It gives a detailed analysis of various types of expenditure and broad reasons for the variations in estimates.
The budget monitoring system is web-based application software to automate the process of budget
monitoring, expenditure monitoring, and money allocation for different projects in an organization. It is a
budget expenditure monitoring soft ware, which looks after the finance-related needs of an organization.

3. Structure of public expenditure and public revenue and means of financing

deficit
3.1 Structure of public expenditure
Estimates of the impact of fiscal size and structure on average per capita production vary widely across
countries. Quantitatively, the size of government has a large impact, with small governments producing
higher per capita output than large governments, unless they demonstrate a high level of effectiveness. The
quality of public education is also an important factor in estimating the total contribution of public finances
to long-term output levels (eg South Korea). Estimates of the impact of fiscal size and structure on per capita
output vary widely across countries. The long-term impact of government size, effectiveness, spending and
revenue patterns on output per capita differs from the average. Expenditure and revenue structures,
government size and perceived effectiveness influence long-term per capita output. Countries with the
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highest above-average simulated effects of fiscal structure, size, and effectiveness on per capita production
are scaled to 1. Countries with high social transfers impact poor people far more positively than average
output. Despite these distributional differences, the absolute fiscal impact on each conferment’s disposable
income is very closely related to its impact on per capita production. For example, if the fiscal contribution to
per capita output is much more positive than average, then the fiscal contribution to disposable income for
low-, middle-, and high-income earners is also much higher than average. This is because a particular change
in the fiscal framework usually changes the level of output per capita by a larger amount than a change in the
income distribution.

3.2 Structure of public revenue

A country's revenue structure determines who pays for public services and goods. By allocating revenues
across different instruments, countries can distribute the burden to specific groups of citizens and sectors of
the economy. Taxes, excluding social security contributions, make up the largest share of government
revenue in all Member States, and this share has increased over the past decade. Since tax reform and the
introduction of new taxes have increased the member's total tax revenue, state, subsidy, and other income
(such as dues and sales of natural resources) are the least significant sources of income, and he usually makes
10%-15%. Occupy out of total revenue. Economic research suggests that the cumulative effect of taxes on
economic growth is moderate, but recent research (OECD, 2008b) found no association between the type of
tax imposed and economic growth. It is suggested that there is In general, property taxes (especially property
taxes) are considered the most growth-friendly, followed by consumption tax and income tax. Corporate
taxes are likely to have the most negative impact on growth. Public finance is the study of national financial
problems. Finance deals with public sector revenues, expenditures, and their reconciliation with each other.
Fiscal subjects include government revenues, government spending, government debt, and their impact on
the economy. Fiscal policy is implemented through the budget. Public revenue is an important concept in
finance. This refers to government revenues from various sources. Dalton, in his Fiscal Principles, mentioned
two kinds of public revenue. Public revenues include revenues from taxes and public sector goods and
services, and revenues from administrative activities such as fees and fines. And gifts and grants. Public
revenue, on the other hand, includes all formally raised government revenue. Public funds can be broadly
divided into:  
 Tax Revenue
 Non-Tax Revenue
 Tax Revenue Taxes are the first and foremost sources of public revenue.
Taxes are compulsory payments to government without expecting direct benefit or return by the
taxpayer. Taxes collected by Government are used to provide common benefits to all. Taxes do not
guarantee any direct benefit for person who pays the tax. It is not based on “quid pro quo principle.” The
 Tax has been divided into two types such as Direct Taxes and Indirect Taxes.

3.3 Financing fiscal deficit

Deficit finance is borrowing from the central bank or the public sector to fill the gap between government
revenues and government spending in the government budget. Deficit finance is conducted so that total
government spending equals total government revenue. Fiscal deficits are closely related to spending and
revenues. Governments generate revenue through tax revenues and federal taxes. The government borrows
money for household budgets, but income does not include borrowed money. The definition of household debt
is the income deficit compared to government spending. A government in debt means it is spending more than
it can afford. Household debt usually points to weak economic growth and a possible need for a review of
fiscal policy. This is an example of a budget deficit. The purpose is to generate funds to cover the deficit
resulting from spending in excess of revenue. When there is a budget deficit, the state can finance itself
through taxes, borrowing money, and printing money. Deficit spending is when the government borrows from
the central bank or prints money to fill the gap between revenue and expenditure. The definition of household
debt is the income deficit compared to government spending. A government in debt means it is spending more
than it can afford. A state runs a budget deficit when spending exceeds tax revenue in a fiscal year. A budget
deficit occurs when spending (expenditure) exceeds income (income). A budget surplus is the opposite of a
budget deficit. This occurs when income exceeds expenses. Individuals, organizations and governments can
run budget deficits. In most cases, a country cannot do without some form of budget deficit. The fiscal deficit
will be covered by additional borrowings from the central bank. This prevents government shutdowns. It's
important to understand that budget deficits and fiscal debt are not the same thing. A fiscal deficit only refers
to the amount of money the government is short of in a fiscal year. Public debt is the cumulative amount of
debt accumulated over many years of deficit spending.  

4. Criteria for revenue-sharing and expenditure allocation between the central

(federal) and regional level
“Few recent proposals for government funding have garnered more public support from a diverse range of
philosophies and prominent leaders of political parties than the idea of revenue sharing.” Public interest in
federal revenue sharing has grown significantly in recent years. is rising to Over 100 bills have been
introduced to Congress in the last four years alone. He is a strong supporter of Congress passing a revenue
sharing bill, and his proposal has been incorporated into another major piece of legislation recently tabled. In
this article, we'll use Maryland as an example to discuss revenue sharing, explain how it works in each state,
and focus specifically on the issue of "pass-through" to local governments. It draws attention to legislative
trends and proposals that should be made. It's in units. At the national level, it is the ratio of the sum of all
state self-sourced tax revenues to the sum of adjusted gross income of all state residents. In most bills, this
ratio applies only to basic subsidies available to all states and not to the equalization portion. A study of the
impact of each proposed measure and the Non-Congressional Revenue Share Survey using the income-to-
expenditure ratio shows that Maryland is below the national average. States with above-average income-to-
expenditure ratios have bonuses. Ironically, while the "poor" states benefited from equal distribution, many
had lower income-to-cost ratios than the national average, thus experiencing a dilution of the total distribution
and As a result, the total amount allocated has decreased. Of course, the smaller the difference between the
state's income-to-cost ratio and the national average, the less the uncompensated portion of the subsidy total
and the higher the subsidy total. There are some criticisms of the government-to-government compensation
proposal. First, it is argued that this offset tends to widen the existing large gap between what richer countries
contribute and receive and what poorer countries contribute and receive. The crux of the argument seems to be
that wealthy states are already giving poorer states a lot of money through commensurate forms of federal
subsidies. The Commission for Economic Development argues that some of the worst areas of poverty lie in
the metropolitan centers of the wealthier states. Compensation would cause these states to "lose" tax revenue,
thereby reducing their own ability to address these issues. “This impact raises serious questions about whether
the best way to address the problem of poverty is to help the poor.” In some cases, how the bill defines the
income-to-expense ratio can make a big difference. Define the “national income-to-expenditure” ratio as the
ratio of the total revenue generated by all states from their own resources to the total adjusted gross income of
all state residents. The difference in definition produces remarkably diverse results. The question of the goals
of revenue sharing becomes even more difficult in light of bills requiring pass-through to local governmental
units and bills allocating funds to specific purposes. Thus, it seems that revenue sharing can be cast in
whatever mold a person wants. It can be a tool to help poor persons, poor states or poor cities. Ironically, this
ambivalence may be the key to the political acceptability of the entire concept. Revenue sharing may be all
things to all men, and only minor political accommodation may be necessary to secure federal revenue-sharing
legislation. The revenue-effort ratio also fails to take into consideration the fact that a state may decide that a
greater portion of its economy should or has to be managed within the public sphere. In this circumstance, a
state with a heavy fiscal commitment to public action probably will obtain a higher standing with respect to its
revenue-effort ratio than a state, which declines to undertake substantial financial responsibilities. Although
the tax-effort ratio may indicate a greater real tax effort, it also may indicate that what is carried on as a public
function in one state is paid for by private funds in another. Garbage collection is one notable area of such
interstate diversity. The extent of use of private or parochial schools is probably a financially more significant
example. Finally, as a criterion for federal aid, the revenue-effort index neglects the expenditure pattern of the
states. It looks only to how and where revenues are raised, not to how or where they are spent. It can be
argued that the expenditure pattern may be a more reliable criterion for such aid than a revenue-raising one, at
least if even the minimal equalization in per capita distribution is to be fairly effected. Only in the case of bills
providing revenue-sharing funds restricted for use in financing particular government functions has the
expenditure pattern been considered, and then only in terms of law enforcement effort or education effort.

5. Recent Ethiopian financial management reform

After the dawn fall of the Derg regime and replaced by the Ethiopian Federal Democratic Republic of
Ethiopia (EPRDF), the new system which was under taken by the change of government in 1991 required
new orientation of the civil service with change in the management structure and system, as well as in
attitude. EPRDF introduced the Civil Service Reform Program (CSRP) in 1996. The CSRP was also part of a
wider attempt to affect a policy of transition from the old practice of single party hegemony to a multiparty
system, and changing the centrally planned economic model to a market variant (Getachew H. and Richard
C. 2006). The CSR attempts to address the complex and interrelated problems relating to accountability,
transparency, effectiveness, and efficiency, and to reverse declining productivity and restore public
confidence.
Ethiopia is pursuing a comprehensive reform of its public financial management systems under the umbrella
of the Civil Service Reform Project. Enhancing administrative capacity is essential to improve the efficiency
of public spending and to effectively absorb scaled-up donor assistance.
A public sector reform has the following attributes: ownership, purpose and approach. When we consider
ownership, Ethiopian Public Financial Management Reform was located within a broader civil service
reform designed and driven by the government. The Ethiopian government pursued an explicit strategy of
limiting the influence of foreign aid agencies to ensure that it owned the reform. The sources and form of
financing were important because the financial reform was not tied to burdensome and unrealistic conditional
ties reform could proceed at an appropriate speed.
The purpose of Ethiopian Public financial reform was to rapidly upgrade the country’s financial system
because of its deterioration caused by a long civil war and the urgent need to support the agenda of
decentralization. The approach was to comprehensively upgrade the civil service generally and expenditure
management specifically. The approach to expenditure management was to evolve rather than replace
existing systems because of the overriding government policy to rapidly decentralize.
Ethiopia’s reform strategy was to evolve its legal framework and financial procedures using automation in a
supportive role. Its reform started with a hard budget constraint and strong manual systems effective control
existed, and sought to improve the efficiency of the control of existing systems before changing them.
Ethiopian public financial management reform: evolve existing systems hybrid approach focus on legal
framework, budget, accounts, reporting, automation, replicates, strong manual, controls over commitments,
procurement, disbursement and Sequencing.
5.1 Principles financial management reform
The principles that should be applied during the process of reform are:
a. Reform must be implemented as part of an overall strategy, which should be homegrown and country-led.
Donors may contribute funds, ideas and technical skills and can develop strategies to support reform, but the
reform strategy itself must be country-owned.
b. Reform must start with sound policy formation at macroeconomic level, including defining the purview of
the state, the framework of government, key institutional arrangements, and macroeconomic policy.
c. Reform must be backed up with political commitment at the highest level and The Ministry of Finance or
equivalent department should be imbued with the strongest possible political authority to oversee public
financial management.
d. Key institutions need to be empowered to operate autonomously from government.
e. Reform needs to be managed. Government needs to make use of all available skills.
f. The progress of reform must be effectively measured and monitored by setting performance related
benchmarks and indicators vis-à-vis agreed objectives, empirical measurement of these benchmarks, and
analysis thereof by oversight bodies (ibid).

5.2 Implementation of Public Financial reform Programmed

Initially, the public financial management reform consists of the following nine-sub program. These were:
Legal framework: - the objective of this sub program is drafting & implementing various financial
proclamation, regulation, & directives that will have disciplined and well controlled public finance
management in the country. In legal public finance the following activities were implemented Federal public
financial management law (act) No.57/1996 is proclaimed by Negarit Gazeta on 19th day of December 1996
E.C in the above proclamation; Collection and deposit of money, Budget function and management public
disbursement, procurement and control, public debt management are included. public finance regulation No
17/1997 is issued by the council of ministers on 1st day of July 1997 E.C different financial guidelines are
prepared Trainings are given at Federal & regional level
Budget reform:- The objectives of these sub-programs are to improve the integration of capital & recurrent
budget, to change the previous Line Item Budgeting by Performance budgeting, to strengthen Budget
activities. Most of these sub-programs are completed in 1994 E.C and starting from in 1994 budget year it is
practically works on federal public body. Ethiopia has under gone a major Budget reform involves to
changes: namely, changes of process and change of structure.
Public Expenditure planning reform: - the objective of theses reform is to improve the coordination of
budgets with in different polices. A new indicative financial calendar was introduced in 1994. It includes a
planning and a budgeting cycle.
Accounts reform:- the objective of theses reform is to introduce modern government accounting system that
is supported by modern technology, to design government accounting system, which could contain &
produce the necessary &appropriate information & provide timely financial reports. These parts of the
reform have introduced a modified- cash accounting system in place of the provisions cash accounting
system. A new Chart of account has been prepared & implemented for the accounting system. Single entry
accounting system was changed by double entry accounting system which is the central requirements for
improving financial control and for keeping accounts current. The reform assists the government in clearing
a six years backlog to less than one year & reducing monthly expenditure reporting in regions to two months.
Trainings are given at Federal, regional, sub- regional level on the new system
Internal audit reform:- the objective of theses reform is to introduce an effective and successful audit
functions to the civil service at the federal and regional level to ensure transparent and responsible internal
audit system in the country. The achievement of these reforms is in federal budget institution and all regions
pre-audit functions are replaced by post-audit. An Internal audit manual and training module are prepared
and implemented at both federal budget institution and regions or city administrations.
External audit reform:- the aim of these reform is to check and balance the amount of finance, which has
been managed by the Office of the Federal Auditor General (OFAG)
Cash management reform:- to manage the cash amount of the country budget.
Integrated Financial Information Management:- the objective of theses reform is to improve the quality,
accuracy & timeliness of financial information for quick & reliable decision making.
Accounting & audit Profession:- is currently put under the Ethiopian Civil Service University (ECSU) by the
Ministry of capacity building.

6 Fiscal decentralization practices in Ethiopia

6.1 Definition of fiscal decentralization:
The 1st generation of fiscal decentralization: sets forth an active and positive role for the government in terms
of correcting various forms of market failure, establishing equitable distribution of income and stabilizing the
macro-economy at high levels of employment with stable prices. According to Oates (2005), the implicit
assumption is that government agencies, as “custodians of the public interest”, will seek to maximize social
welfare, either because of some kind of benevolence or because of electoral pressures in a democratic system.
In short, where market failure prevails, there is a presumed need for public intervention. Another implicit
assumption is the political stability of a sustainable nation-state, which provides the context for the theory.
Based on these premises, Litvack and Seddon (1999) define fiscal decentralization as follows:
“Decentralization is the transfer of authority and responsibility for public functions from the central
government to subordinate or quasi-independent organizations or the private sector.”
 The 2nd generation of fiscal decentralization: It is often history and politics not economics that determine the
sub-national structure of government and drive fiscal decentralization reforms. Many fiscal decentralization
reforms have shifted financial resources to the local government level but failed to decentralize the discretion
to manage these resources.
As described by Oates (2005), second-generation fiscal federalism examines the workings of different
political and fiscal institutions in a setting of imperfect information and control. It builds on first-generation
fiscal federalism but assumes that public officials have goals induced by political institutions that often
systematically diverge from maximizing the welfare of the citizenry. This new perspective implies that fiscal
decentralization requires more than just a “pushing down” of financial resources: control over these financial
resources matters just as much. Additionally, if you look at things through this new lens, decentralization is
tied much more closely to governance and poverty reduction.
The specific goal of fiscal decentralization is to confer on local governments greater responsibilities for
taxation and for resource allocation. A local government, with the autonomy to make independent fiscal
decisions, should be considered as a necessary pre-condition for fiscal decentralization. This autonomy
involves the power to levy taxation, explore independent revenue sources, and to decide on expenditure
priorities. The alternative is to prolong the dependence on the center for grants, subventions, and other forms
of transfers, and by so doing, striking at the heart of local self-government. Local governments may be
helped to assume responsibilities for their fiscal operations and for the improvement of their performance.
Specifically, they need assistance in:
• Assessing current, and identifying potential, resources;
• Clarifying the fiscal responsibilities and obligations of local governments;
• Improving the management of transfers from the central government and improving the management of
internally generated resources;
• Optimizing revenue collection methods and processes;
• Allocating resources among different levels and/or sectors of local development;
• Developing appropriate accounting systems;
• Designing information, management and auditing systems;
• Training managers and leaders.
Fiscal Decentralization is a broad term encompassing distinct intergovernmental arrangements. Devolution is
the most complete form of fiscal decentralization: independently established sub national governments are
given the responsibility for the delivery of a set of public services along with the authority to impose taxes and
fees to finance the services.

6.2 Fiscal Decentralization in Ethiopia

Another concept is fiscal decentralization. Fiscal decentralization is the empowerment of people by the fiscal
empowerment of their local governments Bahl’s (2005). The inherent mismatch between the optimal
decentralization of public expenditures and the optimal decentralization of public revenue collection is at the
heart of the fiscal decentralization policy challenge. It is now generally agreed that few local governments
outside large cities can finance their expenditures from their own resources and that they need central
support.
Fiscal decentralization in Ethiopia is substantial by African standards if one takes into account
intergovernmental transfers such as block grants and conditional special purpose grants as well as own-source
revenues. Grants from the federal government to the regional states are reported as being based on four
indicators,in declining order of importance-population (accounting for about half of the formula),
development indicators, regional tax effort, and poverty indicators (Kassahun and Tegegne, 2007: 21). The
use of gross indicators for a formula has changed recently. The recent budget allocation is based on
assessment of expenditure needs and revenue potential of each region. From the regional state to woredas
level, the formula used differs, but some regions employ the expenditure need approach.
The central problem for Ethiopia’s fiscal federalism is that expenditures are decentralized while revenue
collection is centralized (Meheret, 2007). This in turn gives the central government leverage over subnational
expenditures. Transfers from the federal level to the regional states cover from 45 percent to 80 percent of
regions’ expenditure assignments (Tegegne, 2009). Such high dependency of regional governments on the
federal government reduces the autonomy of the states and compromises their decision-making capability. At
the woredas level, the situation is even worse. Woredas rely heavily on regional governments, with the level
of dependence on transfers from regions rising to over 80– 90 percent (Tegegne, 2009). Finance from the
regional state is insufficient to meet woredas expenditure requirements and they may seek revenues from other
sources, including foreign assistance or earmarked central government funds. The reliance on regional state
and external funding compromises local autonomy as the financing arrangement makes woredas dependent on
regional government transfers.
Most capital activities at the woredas level are financed from donors and aid agencies or from specific purpose
grants from the federal government, such as food security finance. Reliance on donors and aid agencies to
undertake capital activities raises issues of sustainability, and reliance on specific purpose grants to undertake
specific development activities limits the woredas’ abilities to address overall development outcomes; specific
purpose grants reduce power to make discretionary expenditure decisions as result of budget guidelines
required by regional governments (Tegegne, 2009).
7. Conclusion
The term "budget" can mean other things in other contexts. It often refers to the full receipt and outlay
proposals rather than the volumes in which these amounts are published. Some people refer collectively to the
budget resolution and revenue and spending bills that the Congress passes, which we describe below, as the
"congressional budget." Few recent proposals concerning Government finance have captured the public
support of so many prominent leaders of different philosophic bent and party affiliation as has the revenue-
sharing idea.' Over the past several years, national interest in federal revenue sharing has increased
remarkably. During the past four years alone, more than a hundred bills have been introduced in Congress.
Strongly advocates that Congress enact revenue-sharing legislation, and its proposal has been embodied in
another significant bill recently introduced. The estimated effects of the public finance size and structure on
average output per capita vary considerably across countries. Quantitatively, government size has a substantial
influence, so that smaller governments are associated with higher levels of output per capita than larger ones,
except when these record high levels of effectiveness. The quality of public education is also an important
driver of the overall estimated contribution of the public finances to long-term output levels (e.g. Korea). The
estimated effects of public finance size and structure on output per capita vary considerably across countries
of long-term effect of government size, effectiveness and structure of spending and revenue on output per
capita, deviation from average. Ethiopia is pursuing a comprehensive reform of its public financial
management systems under the umbrella of the Civil Service Reform Project (CSRP). Enhancing
administrative capacity is essential to improve the efficiency of public spending and to effectively absorb
scaled-up donor assistance. A public sector reform has the following attributes: ownership, purpose and
approach. When we consider ownership, Ethiopian Public Financial Management Reform was located within
a broader civil service reform designed and driven by the government. The Ethiopian government pursued an
explicit strategy of limiting the influence of foreign aid agencies to ensure that it owned the reform. The
sources and form of financing were important because the financial reform was not tied to burdensome and
unrealistic conditional ties reform could proceed at an appropriate speed. The specific goal of fiscal
decentralization is to confer on local governments greater responsibilities for taxation and for resource
allocation. A local government, with the autonomy to make independent fiscal decisions, should be considered
as a necessary pre-condition for fiscal decentralization.
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