Posted by Michel Lazare
A few days ago, our FAD colleague and PFM Blog author Marc Robinson published a short article in IMFSurvey Magazine titled "Major Reforms for German Budget System." Here is a summary of the key points; the full text of the article is accessible by clicking here.
The German Ministry of Finance's Budget and Accounting Reform Task Force, who was assisted by staff of FAD, recently recommended "the introduction of product budgets--often known elsewhere as programs. The intention is to focus greater attention in the budget formulation stage on choices about how much money is allocated to" various outputs.
"Under the task force's proposals, the product budgets would not in the first instance be used for parliamentary budget appropriations. The idea is that they would initially be used [...] in formulating the budget. The logical next step would, however, be to shift the annual budget law also onto programmatic basis."
The task force also recommended to move to accrual accounting. "Germany recognizes that, as the IMF has argued since the promulgation of the accruals-based Government Finance Statistics manual in 2001, accrual accounting gives fuller information about fiscal sustainability than does traditional cash accounting." (on this issue, see also Abdul Khan's previous PFM Blog post on Transition to Accrual Accounting).
" In Germany's case, there is an important additional fiscal policy consideration for the adoption of accruals. This relates to the golden rule. [...] The interpretation placed to date on the golden rule in Germany is that it permits the financing of all capital expenditure--in other words, gross investment--by debt. However, as the German Council of Economic experts pointed out, using debt to finance gross investment means that debt is financing not only new public capital formation, but the consumption of existing assets."
"To address this problem, the Council recommended that the interpretation of the golden rule should be tightened up to restrict borrowing to net investment--in other words, to capital expenditure minus depreciation. This requires a measure of depreciation, for which accrual accounting is required."
