This study focuses on the implications of East Timor's transitions from United Nations administration to Independence, from reconstruction to development and from aid dependence to fiscal independence for public expenditure policy and management. Following an assessment of the existing systems and their constraints, it makes recommendations for improvements in the public expenditure management system as a tool for achieving: 1) Macro-Economic Stability and Growth, by delivering a sustainable and productive application of resources; 2) Poverty Reduction, by allocating resources to programs that benefit and meet the needs of the poor; 3) Value-for-Money in the application of public funds, by focusing on economy, efficiency and effectiveness in public spending; 4) Good Governance, by ensuring transparency in decision-making and expenditure management, and accountability within the public sector, to the legislature and ultimately to the public. 2. The note is intended first as a contribution to the Government's on-going reform strategy. Summary recommendations are presented at the end of this report. The note is also intended as a contribution to independent assessments of the Government's financial management system undertaken by external partners. Six Chapters, including the Introduction, comprise the report: Chapter 2 reviews public expenditure trends over the past two years, covering aggregate expenditure, structural and execution issues, and ending with an assessment of the distribution of the benefits of public spending in three sectors, power, health and education. Chapter 3 examines the institutional framework and process of planning and budgeting in core government, autonomous agencies and the arrangements for oil fund management. Chapter 4 assesses budget execution and control systems, including supporting systems for personnel, supply and procurement, and asset management. Chapter 5 examines the relationship between the core public expenditure management system and external partners, including donors and NGOs, and oversight institutions. Chapter 6 presents a brief overview of the capacity building challenges in the area of public expenditure management and proposes a prioritization of actions to address issues identified in the body of the report.