Public Finance Management: Essence, Problems, and Development Prospects

Abstract

The chapter justifies the increased interest in public sector financial management (PFM) through its scaling up in the economy. The paper reveals the essence of the PFM system, through an analysis of the definitions of the PFM, the role of the public sector in the economy, the key elements of the PFM system, and a comparative analysis of financial management systems in the public and the private sectors of the economy. The problematic issues of the functioning of the PFM system, which include the issues of assessing the quality of the PFM, are analyzed. The quality of the PFM is understood as its effectiveness, efficiency, and achievement of the goals of the PFM, the main of which is the growth of the well-being of society. The statement proved that the amount of public spending is not evidence of the effectiveness of the PFM system. The factors influencing the efficiency of the PFM system functioning are revealed. The importance of financial information formed in the system of state accounting on an accrual basis on the basis of IPSAS for making government decisions is revealed. An alternative point of view on the formation of financial information is given.

1. Introduction

Effective public financial management, known as public financial management (PFM), is fundamental to the development and growth of the economies of individual countries. As populations grow, resources shrink, or economies become more complex, the importance of PFM increases.

One of the reasons PFM is so important is that taxpaying citizens in any country expects their public finances to be well-managed. They expect them to be distributed efficiently, used to deliver quality services, and provide a safe and stable environment in which society can exist and thrive. They also expect finances to be collected and spent fairly and in accordance with the law, surpluses, deficits, and debt levels understandable and manageable.

In addition, the private and public sectors are largely interdependent and must trust each other if they are working together to develop cities and countries. Such confidence requires government accountability and transparency in both decision-making and reporting. When such expectations are not met—when trust is lost—there can be serious consequences.

Governments have a responsibility to their citizens and taxpayers to put in place effective public financial management systems and to use those systems to protect and ultimately enhance the country’s economic sovereignty [1].

The growth of the general public sector has been one of the key features of contemporary economic history. The scale of the general public sector is expounded on how a society’s reliance on markets and private institutions has evolved, which successively may be driven by differences across economic philosophies concerning the role of the state.

Actually, measuring government size is complex as there is no single quantitative measure that conveniently summarizes the whole impact of the state on the economy. The government in the economy operates as a producer of products and a consumer of resources, further as an employer of labor and an investor of capital.

Governments also transfer resources via subsidies and entitlement payments. In addition, the government has an important impact on the economy via its regulatory activities in terms of both corporate and individual activity. The tax revenues raised to finance these activities even have an economic impact through incentives and distortions. The economic indicators of the size of the public sector are trying to be associated with the influence of the government and its control over economic resources.

A particular definition of state spending, such as government expenditures on goods and services, has the advantage of reflecting the policy choices of the state. However, such a measure omits transfers and only provides information about the role of the government as a consumer or spender within the economy. As a result, when studying the expansion of the public sector more general measures of total government revenues and expenditures are preferable. Since most measures of public sector growth have demonstrated an upward trend over time and try to account for changes within the scale of the general public sector need not be too preoccupied with which measure is utilized, provided it focuses on resource use.

Two of the foremost common measures are government spending as a share of national output (GDP) and government revenues as a share of GDP. Other measures may include government spending per capita, the number of public sector employees, or public sector employment as a share of total employment. Government spending as a share of GDP is a relatively simple view of the effect of government on the economy given the effects, not only of spending, but also of regulation, income redistribution, and indirect spending via tax expenditures [2].

This trend continues to the present, as shown in Table 1. To analyze the growth in the scale of the public sector, the top 20 countries in terms of public expenditures were selected as % of GDP in 2000 and compared with them similar indicators for 2020 (the duration of the analyzed period is 20 years).

Countries	Government spending, 2000, billion U.S. dollars	Government spending, 2020, billion U.S. dollars	Absolute growth, billions of US dollars	Relative growth, %
USA	1437.59	3077.99	1640.4	114.11%
Japan	822.22	1066.45	244.23	29.70%
China	203.97	2460.73	2256.76	1106.42%
Germany	370.98	861.87	490.89	132.32%
France	304.89	659.41	354.52	116.28%
Great Britain	278.43	616.74	338.31	121.51%
Italy	203.37	394.48	191.11	93.97%
Canada	142.3	372.72	230.42	161.93%
Brazil	123.01	296.07	173.06	140.69%
Spain	99.91	280.13	180.22	180.38%
Netherlands	85.81	237.16	151.35	176.38%
Australia	74.45	277.01	202.56	272.08%
Mexico	67.36	137.93	70.57	104.77%
Sweden	64.48	144.75	80.27	124.49%
South Korea	62.8	295.8	233	371.02%
India	55.96	332.42	276.46	494.03%
Belgium	49.82	129.2	79.38	159.33%
Saudi Arabia	49.01	199.76	150.75	307.59%
Denmark	39.19	87.81	48.62	124.06%
Russia	39.19	307.17	267.98	683.80%
Total	4574.74	12235.6	7660.86	167.46%

Table 1.

Analysis of the dynamics of the public spending over 20 years, billion U.S. dollars. Data source: World Bank.

The change in the scale of public spending over 20 years is presented in the form of a diagram in Figure 1 below.

Figure 1.

Change in scale of government spending over 20 years, billions of U.S. dollars. Data source: Table 1.

The concentration in one sector of the economy, managed by a relatively small group of persons with a significant amount of financial and other economic resources, will certainly be of interest. There are many actors involved in making financial decisions about the allocation of public resources. These include political parties, presidential administration, local governments, civil society, Ministry of Finance, central bank, and others. The goals pursued by the participants in this process may not coincide. For example, political parties pursue the goal of securing funding for an election campaign. Civil society will insist on increasing transparency and accountability of the spending of budgetary funds in the form of taxes paid by them. Local governments are focused on achieving results in accordance with the approved budget. In short, a significant part of the economically active population is interested in the quality and effective functioning of the financial management system in the public sector.

The public sector of the economy, as a rule, occupies a leading position in the economy of developed countries. The efficiency of the functioning of this sector largely depends on the qualified management that makes management decisions in relation to such organizations.

It should be noted that the most modern management technologies have been developed and confirmed their success in practice in relation to commercial organizations. Commercial organizations have as their goal the extraction of profit and the growth of the welfare of their shareholders. These goals are quite easily measurable and formalized into a sufficient number of indicators, indicating that the commercial organization has achieved its goals.

Organizations in the public sector of the economy differ significantly from commercial organizations. The purpose of the creation of budgetary organizations is to provide public goods, such as services in the field of law enforcement, health care, education, and others, and not to increase the welfare of shareholders. It is quite difficult to assess the economic effect of the provision of such services. Measuring the impact of providing these services cannot be approached by relating costs to benefits because the benefits of providing such services are difficult or impossible to quantify in monetary terms. For example, the benefit of providing health care services is to increase the public health of the nation.

In all our societies, citizens expect higher standards of service from government and public services, just as they expect better services from the private sector. But, at the same time, the desire to increase taxes to pay for these services is absent to the same extent. The only way to resolve this dilemma is to ensure that whatever governments can afford to spend gives the highest possible return and meets the needs of citizens. In other words, the efficiency or productivity of public spending should increase over time.

As a result of this desire to meet societal expectations, governments are subject to increasing demands for accountability. But, at the same time, citizens, taxpayers, and users of public services—significantly overlapping groups—have a legitimate claim to accountability for the use of tax revenues that governments spend on the needs of their citizens’ behalf. Has the money been put to good use to achieve the results that society wants, or, on the other hand, has the money been wasted?

2. An essence of the public financial management

Any scientific study requires clarity of the key definitions that are utilized in it. It should be noted that there is a dearth of an unambiguous approach to the definition of public financial management to date.

The essence of financial management in the public sector is expressed through its definition. At the same time, its essence is also revealed through the goals and objectives it solves.

2.1 The PFM definitions

The analysis of PFM definitions was in the following works [3, 4, 5]. Of course, this is not a complete list of works where one can find definitions of PFM. At the same time, it is necessary to emphasize the lack of a unified approach to the definition of PFM at the current moment, and hence the lack of a common understanding of its essence. As a rule, existing definitions contain information that PFM is a set of established rules, tools, and processes. Existing definitions of PFM do not contain the objectives of financial resource management and do not take into account the risks associated with this process. Therefore, based on the analysis of existing definitions of PFM, the author proposed his own definition, which eliminated the above disadvantages [6].

“PFM might be a system of principles and methods to improve and adopt management decisions by public authorities and non-profit organizations on the formation, distribution and efficient use of economic resources so as to enhance the welfare of the country’s population, which involves systematic monitoring of these decisions, additionally because the identification of emerging risks and also the development of measures to prevent them.”

Despite the analysis of the definitions of PFM, I would prefer to draw attention to one more of them.

“PFM deals with the laws, institutions, systems, and procedures available to governments seeking to protect and use resources effectively, efficiently, and transparently. While PFM encompasses taxes and other income, borrowing, and debt management, its main focus is expenditure management, especially in the context of public budgeting.” [7].

This is done to emphasize and justify the essence of the PFM in the context of this chapter as public expenditure management.

In particular, continuing to penetrate into the essence of the PFM and in general, the public sector of any country, it should be noted that it is shaped by its current economic conditions, history, policies, resources, and the demands placed on it by its public. However, any government in any country faces some common problems. These include:

• The need for sound and stable public finances.

• The need to build public confidence that tax revenues are being used effectively.

• The need to achieve goals at a minimal cost.

• The presence of a high degree of responsibility of any government for the efficient use of resources for the current and future generations.

2.2 The role of the public sector in the economy

The essence of financial management in the public sector is also indicated by the role of this sector in the economy. There are several views on the role of the public sector in the economy. But, one way or another, they are all limited to two polar points of view, which can be described as minimalist and maximalist. Given the economic complexity of the modern world, one would expect most governments today to be somewhere between these two extremes, and also the direction within which they lean “inevitably depends on the prevailing intellectual winds.”

The minimalist role of PFM, which is usually associated with the work of Adam Smith, “the responsibilities of the government or the state are limited because the citizens themselves, through supposedly well-functioning markets and using their own efforts and incomes, must take care of their needs, both personal and social.” As a result, the public sector provides the government’s main legal mechanism and assumes the role of “night watchman.” An alternative and polar opposite role, usually associated with the writings of Karl Marx, is that “most economic decisions are made primarily by the political representatives of the people or the working class, who supposedly act on behalf of the state” and economic decisions are made through central planning [8].

2.3 PFM system: key elements

Describing the essence of the PFM, one cannot avoid describing it as a system that is usually described in terms of an annual budget cycle, as shown below in Figure 2. This annual cycle is aimed at ensuring that public spending is well planned, executed, accounted for, and carefully checked.

Figure 2.

Typical key elements of a PFM system. Source: Ref. [9].

The key elements of the annual budget cycle of the PFM system are:

1. The budget is prepared with due regard to government fiscal policies, strategic plans, and adequate macroeconomic and fiscal projections.

2. The budget is executed within a system of effective standards, processes, and internal controls, ensuring that resources are obtained and used as intended.

3. Accurate and reliable records are maintained, and information is produced and disseminated at appropriate times to meet decision-making, management, and reporting needs.

4. Public finances are independently reviewed, and there is an external follow-up on whether the executive has implemented the recommendations for improvement.

2.4 PFM system & FM system

To a first approximation, the financial management system in the public sector is similar to that in the private sector. That is, the financial management system in the private sector also includes an element of planning (budgeting and approval), budget execution and monitoring, an accounting and reporting system, and an internal control and audit system.

However, the PFM system is much more complex, if only because of the larger number of participants involved in the process. So, among the participants in the financial management system in the corporate sector can be attributed—the company’s management, shareholders, employees, accountants, and auditors. In the process of financial management in the public sector, the listed actors should include political parties, parliament, civil society represented by citizens, Ministry of Finance, local governments, and presidential administrations. And this is not a complete list. This greatly complicates the functioning of the PFM system at each stage. At the same time, each of the actors has its own interests in the results of the functioning of this system, which may differ. For example, residents of a small town are interested in the construction of a medical center, and the local government gives priority to the construction of roads in the region. Which solution is to be preferred? How much funding will be provided? These and other issues are resolved through lengthy coordination, approval, accounting, monitoring, and control systems.

Compared to the private sector, the functioning of public administration differs in several important respects. The main difference lies in the dichotomy of customer perception. For public administration, the client is both a citizen and a recipient of certain public services [10].

Therefore, the actions taken should be differentiated depending on whom they are addressed. The needs of a recipient of public service and citizen may differ. The former relies primarily on high-quality public services, while the latter relies mainly on the opportunity to participate in democratic decision-making processes, as well as on the implementation of public strategy and mission by the authorities.

It should be noted that it is the fundamental complexity of the concept of “client” that makes it difficult to implement unambiguous measures to study the results of the activities of government bodies. H. G. Rainey highlighted the distinctive features of community organizations [11].

An analysis of the characteristics of organizations related to the public sector made it possible to identify factors that affect the efficiency of the PFM system:

1. Lack of typical market behavior of organizations due to the fact that their activities are funded by the state.

2. Low level of motivation to reduce operating costs and the lack of clear indicators for measuring their effectiveness, which managers could use in decision-making processes. On the other hand, these organizations provide important services, the use of which is often mandatory or unavoidable for citizens.

3. Foreign policy influence, which limits the independence of managers in decision-making, and the presence of various connections within the external environment, which can affect the functioning of organizations.

4. High staff turnover due to the lifelong work system. This often causes difficulties in implementing plans and making changes, and bureaucratic structures limit the innovation and creativity of employees.

5. The functioning of state bodies is noncommercial in nature, which excludes the assessment of organizations of this kind in terms of profitability. However, the added value they create can be greater than that of the private sector, since it is not limited to the criterion of profit, and the public interest is crucial [12, 13].

All of the above differences between the public and private PFM systems have a practical aspect.

In theoretical terms, financial management in different sectors of the economy (public and corporate) is based on different basic concepts, as illustrated in Figure 3.

Figure 3.

Basic concepts in private and public finance management systems. Source: Compiled by the author.

Each of the concepts presented in Figure 3 deserves separate attention. However, presenting a detailed analysis of them in this chapter is beyond the scope of this publication. Nevertheless, brief conclusions from the results of such an analysis should be provided. This is important since it is the concepts that determine the principles of functioning of each of the financial management systems (private and public), determine their goals, and the mechanism for implementing the principles and achieving goals.

From this follows the need to improve and develop both the basic concepts of financial management in the public sector and, as a result, the methods arising from these concepts.

In addition to the above, the complexity of financial management in the public sector is due to the specifics of this sector of the economy, which consists of deferred economic benefits and benefits to society. These benefits, moreover, are difficult to measure or not to be measured at all.

A detailed analysis of the concepts, presented in Figure 3, allowed us to briefly draw the following conclusions.

Management concepts in the private sector:

1. Aimed at managing resources (assets, risks, people, time, and information);

2. Pursue the main goal—optimization of the financial condition in such a way as to maximize the capitalization or profit of the company;

3. The market is the most efficient distributor of goods and incomes;

4. Economic efficiency in the private sector is the ratio of benefits and costs of the system.

Management concepts in the public sector:

1. Consider the issues of optimizing management mechanisms (formation of a jurisdictional structure, distribution of income sources by levels of government, etc.);

2. Priority in goal setting—maximization of the public good;

3. Preference in the distributive function is given to the public sector, but taking into account the strength of the market;

4. Efficiency is considered as social efficiency—the ratio of a socially significant effect (results in social, environmental, and other socially significant areas) to costs.

Completing the comparative analysis of financial management in various sectors of the economy (PFM systems and FM systems), it is obvious that the main differences that do not allow developing uniform approaches to management in various systems are:

• The ultimate goal of the functioning of each of the systems (maximization of profits and capitalization of the company—in the private sector and maximization of public goods in the public sector);

• Measuring the efficiency of systems functioning. Despite the similarities in the benefit-cost formula, public sector benefits are public goods and services that are extremely difficult to quantify in monetary terms.

It is worth noting that, of course, the financial management system is a kind of universal mechanism. Therefore, it is still possible to use common tools in financial management systems in various sectors of the economy.

For example, PFM uses the principle of program-targeted management and expenditure financing borrowed from the corporate sector. Performance budgeting is a tool that has come into the financial management system in the public sector as well as from the corporate sector.

The complication of the conditions for conducting financial activities due to the constantly changing economic environment, and the lack of financial resources due to increasing factors of uncertainty, make financial management the most difficult and responsible function of the state, municipalities, and any economic entities, regardless of the form of ownership.

3. PFM: problematic issues and prospects for their solution

Strong and effective public financial management (PFM) is a vital component of good governance. The PFM strategy supports fiscal and macroeconomic stability, steers the allocation of public resources in line with national priorities, supports the efficient delivery of poverty reduction and economic development services, and ensures transparency and control of public funds.

Efficient and efficient public financial management is essential to address the challenges of the current global financial crisis and the fiscal adjustment process.

3.1 The challenge of measuring the effectiveness and efficiency of a PFM system

As already emphasized above, the goal of public sector financial management is to manage scarce resources to ensure the economy and efficiency in achieving the results necessary to achieve the desired results that will serve the needs of society. A sound public financial management system enables governments to make the best use of their resources to improve the quality of life in society.

In essence, this means that effective management of public finances should lead to an increase in the welfare of society. In other words, those public expenditures that the governments of various countries bear should lead to an increase in the quality of life and the welfare of society. Is it so? Various indicators are proposed to measure well-being in society, including the social progress index. The social progress index is a composite indicator of the international research project social progress imperative, which measures the achievements of the countries of the world in terms of social well-being and social progress. This index was created in 2013 under the direction of Michael E. Porter, Chairman of social progress imperative, Harvard University professor of strategic management and international competitiveness. The index’s editorial board includes representatives from a number of leading universities and research centers, including Harvard Business School and the Massachusetts Institute of Technology.

The index [14] does not include indicators of the economic development of the countries of the world (such as the level of GDP and GNI) but is intended to assess public well-being in a particular country. It is worth noting that the GDP indicator is often used to measure the economic well-being of a society, for example, GDP per capita.

As has been repeatedly emphasized in the literature, the generally accepted definition of GDP differs in many ways from welfare. This distinction was well known to the economists who developed the modern concept of GDP. For example, GDP does not include important social characteristics, such as discrimination and crime. In addition, as a general economic concept, GDP does not provide information about the distribution of income, which is important for the well-being of individuals in the economy. For example, GDP excludes most household production and other “non-market” activities, such as recreation, even though most of these activities actually increase households’ true consumption; thus, increase welfare. GDP also does not reflect environmental characteristics, such as climate change and the availability of natural resources.

Despite these well-known differences, GDP is often used—by politicians, reporters, the general public, and even economists—as a measure of wealth, or at least economic well-being.

To test the hypothesis about the correspondence of the level of public spending to the level of public welfare, the ratings of the top 10 countries according to the social progress index for 2020 and the corresponding public expenditures for the same period were analyzed. The results of the analysis are presented in Table 2. It should be emphasized that at the time of writing this chapter, the ranking of countries on the social progress index for 2021 had already been published. However, data on the level of government spending as a percentage of GDP for the same period has not yet been found. Therefore, the ratings were compared for 2020. According to the author, the trend will continue in 2021 and over the next few years.

Country	Social Progress Index (SPI), 2020	Global rank by SPI	Government spending as a percentage of GDP, 2020	Global rank by GS as a % of GD	Rank gap
Norway	92.73	1	26.55	11	10
Denmark	92.11	2	24.66	17	15
Finland	91.89	3	24.48	18	15
New Zealand	91.64	4	20.1	53	49
Sweden	91.62	5	26.75	9	4
Switzerland	91.42	6	11.87	122	116
Canada	91.4	7	22.65	25	18
Australia	91.29	8	20.86	43	35
Iceland	91.09	9	27.84	6	−3
Netherlands	90.06	10	25.95	12	2

Table 2.

Comparative analysis of the ratings of the top 10 countries on the social Progress index and their corresponding ratings on the level of public spending, as a percentage of GDP, 2020. Data source: Social progress index, 2020- https://www.socialprogress.org/search/?q=Social%20Progress%20Index%202020. Government spending as a percentage of GDP, 2020 - https://ru.theglobaleconomy.com/rankings/government_size/MENA/.

Without deep analysis, a simple visual comparison of the various rankings shows that the level of public spending does not correspond to the achievement of a high level of the social progress index. For example, Switzerland deserves attention, which when compared with other countries, has one of the lowest scores in terms of public spending (122 points). At the same time, this fact is not decisive for achieving a high value of the social progress index (6 points). Small gaps in the ratings are shown by the Netherlands, Iceland, and Sweden, which may indicate the prudent use of public resources and the achievement of government goals in the field of public financial management. Although, it is obvious that this indicator is not the only measure of the success of the PFM system.

Another and most popular indicator that measures the level of well-being of a society is GDP per capita. This indicator has also been tested against the level of government spending. The top 15 countries in terms of GDP per capita were taken for analysis. The analysis was carried out for 2020. The results of the analysis are presented in Figure 4.

Figure 4.

Top 15 countries by GDP per capita, PPP, 2020.Data source: International Monetary Fund https://data.imf.org/, https://our_worldindata.org/government-spending#total-government-spending.

Figure 4 shows the discrepancy between GDP per capita and government spending in the top 15 countries in the ranking. This fact can be interpreted as follows. The amount of public spending directly does not allow achieving the goal of the PFM—the growth of the welfare of society. Again, this statement is not true for all countries, as can be seen from the analysis. For example, the United Arab Emirates (UAE) and Norway show significantly different levels of government spending, 4.27% and 26.55%, respectively (Appendix 1.) However, GDP per capita in these countries in 2020 was almost at the same level as 63299.42 U.S. dollars in the UAE and 63,548 U.S. dollars in Norway.

Of course, one should not draw unambiguous conclusions from the results of such a simple analysis. But the findings lead to the following reflections: “Is it that the financial management system in some countries functions so inefficiently? What is the measure of the effectiveness of the functioning of the PFM system?”

There is one more conclusion. The amount of money that governments in various countries spend on public services is not a measure of the effectiveness of government spending.

A significant number of works have been devoted to the problem of measuring the effectiveness and efficiency of the PFM [15, 16, 17, 18, 19, 20, 21, 22, 23, 24].

It is preferable to measure performance in terms of outputs, outcomes, or the impact of the policy objectives. Thus, performance can be measured by various indicators, including corruption, red tape, or wastage; the size of any shadow economy (i.e., untaxed income); the strength of the rule of law; the health and life expectancy of its population; the educational achievement of its population; and the quality of its communications and transport infrastructure. Such “macro” indicators can help chart the effectiveness of public sector reforms in different countries. In addition, there are several global frameworks that specifically assess countries’ public sectors on various measures, such as service delivery, strength of financial systems, accountability, and quality of the regulatory environment.

At the end of the analysis of approaches to measuring the effectiveness of the PFM system, it is necessary to draw the reader’s attention to the fact that the criteria for measuring efficiency (quality PFM system) are classified in accordance with the models (concepts) of government management.

Figure 5 presents three main models (concepts) and indicators that are consistent with these models (concepts).

Figure 5.

The main models of public administration and indicators correspond to these models. Source: Compiled by the author.

So, by the model of the service state, an indicator of the success of PFM is an indicator of the satisfaction of citizens with public services. The measurement of this indicator relates more to the field of sociology since it involves a survey of citizens in the format (satisfied/not satisfied/find it difficult to answer).

By the model of an effective state and the concept of sustainable development, the main indicators are indicators of the effectiveness and stability of public finances. The performance category is key to financial management.

The most difficult thing in managing finances in the public sector is measuring the effectiveness of their use, and hence the quality of financial management, as a result of the efforts of all entities involved in the management cycle of public financial resources.

A significant role in providing significant support in measuring the quality of financial management to governments of all countries of the world and organizations belonging to the public sector of the economy is assigned to the public expenditures and financial accountability (PEFA) program.

The PEFA framework has become the “gold standard” when it comes to measuring the performance of PFM systems.

This program has been implemented since 2001 within the framework of the activities of a number of international organizations, such as World Bank, European Commission, International Monetary Fund, and representatives of the strategic partnership with Africa, and is also used by the governments of countries, such as Norway, Switzerland, France, and the United Kingdom.

The purpose of the functioning of this program is to strengthen the capacity to assess the state of national public financial management systems and develop the necessary management decisions. This methodology includes the best practices for assessing the quality of public sector financial management.

The program “public expenditure and financial accountability” (PEFA—public expenditure and financial accountability) defines 31 performance indicators, grouped into seven groups, which are key elements of the public financial management system. The seven groups of performance indicators under the PEFA program are presented in Table 3.

№	The groups of performance indicators	Comment
1	Budget credibility	The government’s budget is realistic and is being implemented as intended. This is measured by comparing actual income and expenditure against the original approved budget.
2	Transparency of public finances	Public financial management information is comprehensive, consistent, and accessible to users. This is achieved through a comprehensive budget classification, transparency of all public revenues and expenditures, including intergovernmental and intergovernmental transfers, published information on the effectiveness of service delivery, and open access to budget documentation.
3	Asset and liability management	Effective asset and liability management ensure that public investment is value for money, assets are registered and managed, fiscal risks are identified, and debt and guarantees are prudently planned, approved, and controlled.
4	Fiscal strategy and budgeting	The fiscal strategy and budgets have been prepared to take into account the government’s fiscal policy, strategic plans, and adequate macroeconomic and fiscal forecasts.
5	Predictability and control of budget execution	The budget is carried out within the framework of a system of effective standards, processes, and internal controls, ensuring that resources are received and used for their intended purpose.
6	Accounting and reporting	Accurate and reliable records are maintained and information is created and disseminated at the appropriate time to meet decision-making, management, and reporting needs.
7	External control and audit	Public finances are independently reviewed and there is external oversight of the implementation of recommendations for improvement by the executive.

Table 3.

The groups of performance indicators under the PEFA program [25].

A feature of this system for assessing the quality of financial management is that each indicator changes on a scale from A to D, where A is the highest, that is, this indicator meets all criteria, and D is the worst. At the same time, the assessment of indicators on a scale from A to D is carried out by two developed methods: M1 and M2. The PEFA guidelines indicate which method should be used for each indicator.

The main advantage of using this method of assessing the quality of financial management is the availability of a convenient assessment system that allows you to use various methods of assessing M1 or M2, depending on the significance of the indicator and its impact on the final result. This technique allows them to achieve more accurate and correct evaluation results, while it is also worth noting the simplicity of its application.

To date, there are other generally recognized tools for measuring the effectiveness of the PFM system. These include:

• The global integrity report—reports on national governance and anti-corruption mechanisms, combining qualitative reporting from a network of in-country contributors and a quantitative integrity indicators scorecard.

• World Bank’s worldwide governance indicators—reports individually and in aggregate, indicators of governance supported dimensions, including accountability, political stability, and quality of regulatory environment.

• OECD’s government at a look 2011—a dashboard of virtually 60 indicators, including revenue received, government expenditure as an entire and by services, such as education and health; and a few output and outcome data.

• International Organization of supreme audit institutions (INTOSAI)—a worldwide organization for the community of external auditors of governments (known as SAIs), whose goals include assessment of SAIs and capacity building.

• Country financial accountability assessment (CFAA)—a World Bank diagnostic tool to assess a country’s overall financial systems (in both public and private sectors) and specify a thought to deal with weaknesses in accountability in the public sector.

• Public sector integrity assessment framework—developed in 2005 by the OECD. This framework allows countries to measure their effectiveness at promoting integrity and preventing corruption, including how they demonstrate evidence-based political opinions.

• Fiscal responsibility index—a global comparison of the sustainability of public finances supported on a government’s current level of debt, the sustainability of government debt levels over time, and the level of transparency and accountability for fiscal decisions.

3.2 Why do we need to measure the effectiveness of the PFM system?

Effective performance management demonstrates that timely and accurate information significantly improves decision-making and that the right measures encourage the desired behavior. Out-of-date or irrelevant information leads to poor decision-making and measuring the wrong things may lead to unplanned consequences.

The results of the PFM quality assessment are used to solve the following tasks, which are presented below in Figure 6.

Figure 6.

Tasks for which the results of financial management quality assessment are used. Source: Compiled by the author.

Public financial management is totally critical to improve the standard of public service outcomes. It affects how funding is employed to deal with national and regional priorities, the provision of resources for investment, and also the cost-effectiveness of public services. Also, it is quite likely that the general public will have greater trust in public organizations if there is strong financial stewardship, accountability, and transparency in the use of public funds [26].

It is important for governments to get it right because it impacts a broad range of areas, including aggregate financial management (fiscal sustainability, resource mobilization, and allocation), operational management (performance, value-for-money, and budget management), governance (transparency and accountability) and fiduciary risk management (controls, compliance, and oversight) [27]. In addition, effective public financial management is important for decision-making.

3.3 Accurate and reliable financial information generated in the accounting system is the basis for making informed decisions in the PFM system

Accurate financial information is typically used as a decision-support mechanism and to ensure efficient resource allocation. Public financial management is a complex area with many new initiatives and relatively little success to date. Implementing public financial management reform is a challenging task for all countries. Therefore, for the successful deployment and implementation of public financial management projects, the applied methods of public financial management must be effective and efficient.

Better financial information in the public sector is being encouraged by the global drive to encourage the adoption of (IPSAS) international public sector financial reporting standards.

This drive to improve external reporting and will also improve the quality of internal management information, as it should be the same information used for setting budgets, monitoring, and forecasting throughout the year that will be used for the statutory financial reporting.

These standards are developed and issued by the IFAC international public sector accounting standards board (IPSASB). The council encourages the adoption of accrual accounting, although it recognizes that only a minority of countries currently use it.

The IFAC promotes quality information that contributes to the development of public financial management.

The IFAC prefers accrual accounting because cash accounting does not account for long-term issues, such as pension liabilities and large infrastructure investments. However, with regard to the application of accrual accounting in the public sector, as well as the application of IFRS, which implements the idea of ​​corporate accounting and reporting, there is a special point of view.

Thus, despite claims that the introduction of business-style accounting based on IFRS will improve governance in the public sector, these standards were developed for companies with financial liabilities that limit shareholder risk and encourage management to take risks with shareholder funds in order to obtain more high profits. These standards were not designed to take into account the unlimited liability of taxpayers and citizens for public debt. This unlimited liability makes it necessary to maintain constitutional control over the main government and its access to public money. Controlling cash expenditures is not a feature of business-style accounting. In addition, this unlimited liability makes the accountability requirements associated with integrity particularly important. As New Zealand examples show, business-style financial statements involve business logic that is inconsistent with, and apparently inappropriate for, the overall public purpose and context of government finance. The transition to business-style financial management and reporting meant cutting off and removing key parliamentary guarantees and thus reducing the power of parliament to scrutinize and exercise financial control over the current government. Obviously, these changes transfer power to the executive branch [28].

A well-functioning accounting and financial management system are fundamental to a government’s ability to allocate and use resources efficiently and effectively. In the absence of automation, countries rely on manual systems to process, record, manage, and report government financial transactions. Manual processes and systems can work well if they are supported by trained and disciplined staff. In the 1860s, long before automation, the German states were able to keep timely and accurate accounting records and reconcile cash balances on a daily basis, backed by a disciplined, skilled bureaucracy and clear procedures. Automation promises to improve the accounting, reporting, and management of public finances, but it does not in itself guarantee more inclusive, transparent, accountable, and legitimate public finances. Automation is a means to an end, not an end in itself [29].

Effective performance management demonstrates that timely and accurate information significantly improves decision-making and that the right actions stimulate desired behavior. Outdated or irrelevant information leads to bad decisions, and wrong measurements can lead to unintended consequences.

An assessment of the financial condition of organizations belonging to the public sector is also necessary, as is done in the corporate (commercial) sector. It is essential to monitor the activities that contribute to the achievement of strategic goals and the results that demonstrate the achievement of these goals. It is important to keep track of a reasonable number of things—the more measures users require, the less attention they pay to each and the less they understand the big picture.

Focusing on a limited number of key indicators gives more weight to individual performance.

Public sector workers are often motivated by different values ​​than private sector workers. Performance management systems can be designed to take advantage of the higher level of innate motivation that exists in many public sector workers.

4. Conclusion

Summing up the study, it is necessary to state the fact that the growth of public spending, which has been observed in recent decades, entails an increase in the accountability of the governments of all states without exception, an increase in their responsibility to citizens who pay taxes, and an increase in the efficiency of the use of public financial resources.

Specialists in the field of public finance management are looking for tools to improve the efficiency of their use. These searches have led to the necessity and possibility of using approaches and methods that have proven themselves in the corporate sector (e.g., program-based management and performance-based budgeting).

However, the public sector financial management system is a much more complex system, which involves more actors than in the private sector. Measuring the performance of such a complex system is a challenge for virtually all governments.

Of course, the complexity of financial management in the public sector is predetermined by its essence. The essence of the PFM can be briefly expressed through its definition, which includes the principles, methods, and main elements of the public financial management system, the effective formation and use of public finances in order to improve the well-being of society and the mandatory identification and reduction of risks that impede the achievement of the goal.

Any process and public financial management is a process that requires measuring its quality and achieving the goal of its functioning. Most economists agree that the quality of financial management in the public sector can be measured by indicators, such as efficiency, effectiveness, and the welfare of society. The big challenge at the moment is to measure these indicators.

Thus, the most common and widely used indicators of the growth of the welfare of society; hence, the effectiveness of financial management in this society are gross domestic income (GDP) and GDP per capita, which show the amount of government spending per capita in the country. However, some indicators that measure the well-being of society are in conflict with traditional indicators, which is an occasion to think about what and how we measure.

To date, a sufficient number of systems for measuring the effectiveness of financial management in the public sector have been developed, including the PEFA system, which is also being improved from year to year.

Any performance measurement system is based on indicators that are extracted from the accounting and reporting system. A reliable, transparent public sector accounting system is the basis for obtaining truthful and correct indicators for measuring the effectiveness and efficiency of the public financial management system, on the basis of which reasonable and balanced decisions are made in the field of public financial management.

A. Data and sources for Figure 4

Countries	GDP per capita, PPP, 2020, U.S. dollars	Global rank	Government spending as a percentage of GDP, 2020	Global rank	Source/link
Luxembourg	112557.31	1	18.33	67	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Singapore	93397.05	2	12.42	119	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Ireland	90789.22	3	12.65	115	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Qatar	85290.45	4	21.96	31	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Bermuda	76626.52	5	13.12	106	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Switzerland	68755.44	6	11.87	122	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Norway	63,548	7	26.55	11	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
UAE	63299.42	8	4.27	—	https://ourworldindata.org/government-spending#spending-per-person
Brunei Daras.	62200.88	9	25.43	14	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
USA	59919.82	10	16.69	101	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Macau	57728.99	11	25.58	13	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Hong Kong	56153.97	12	12.71	114	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Denmark	55819.91	13	24.66	17	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Netherlands	54324.38	14	25.95	12	https://ru.theglobaleconomy.com/rankings/government_size/MENA/
Iceland	52375.68	15	30.85	—	https://ourworldindata.org/government-spending#spending-per-person