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February 2008

February 29, 2008

Intergovernmental Finance System Reform in Germany

Posted by Christian Schiller

1848andpresent_germany A two stage reform of the intergovernmental system is underway in Germany. The German model of intergovernmental relations is based on the principle of uniform spending standards financed by horizontal transfers across Laender, together with vertical redistribution by the federal government Although the Laender have no control over tax policy, they actually administer the main shared taxes.

The first stage focused on clarifying spending responsibilities across different levels of government. Financing and revenue aspects were put aside by the first federalism commission. A compromise was reached to clarify legislative authority across levels of government. The compromise reflected the differences of interest across the Laender. However, the compromise did not significantly alter the overlapping functional responsibilities. One such area of overlap in Germany is primary education.

The second stage, which is currently under way, will focus on revenue and financing issues. On the administrative side, a fundamental reform is the proposal to centralize the tax administration. Another proposal of the second federalism commission is to provide Laender with some access to own-resources revenue. Measures are also suggested to control sub-national debt.

"Reforming Intergovernmental Fiscal Relations" is the main topic of the latest Newsletter of GTZ , which was sent out in December 2007 (No. 10). It includes, inter alia, an interview with the German emeritus professor and FAD panel expert Bernd-Paul Spahn on the topic against the background of the reforms already undertaken and still under discussion in Germany, but also touches on what role technical assistance can play in the reform of intergovernmental relations in developing countries. To subscribe to the GTZ newsletter, you have to send a short e-mail to public-finance@gtz.de.

Finally, the concluding statement of the most recent IMF mission contains some discussion of the German efforts to improve the system of intergovernmental relations (see www.imf.org Germany: Article IV Consultation, concluding statement of the IMF mission), with probably more to come in the forthcoming IMF Board papers. The IMF mission encouraged the government to use the second stage of reforms to improve incentives for increased efficiency and to contain long-term risks to the budget. It also reminded the German authorities that timely and consistent data on Laender finances are needed for transparency and monitoring.

February 28, 2008

Central and Eastern European Parliaments:

Budgeting, Oversight, and Paths of Change

By Mario Pessoa

The IMF’s Fiscal Affairs Department promoted a seminar last February 13, 2008, with Prof. Dr. David Olson  to discuss parliamentary oversight particularly in relation to the budget process. The emergence of new democracies in Central and Eastern Europe have created an unrivaled opportunity to examine the transition of legislatures from non-democratic to democratic regimes. The seminar explored the parliament oversight in relation to budget approval and execution in some Central and Eastern European countries (Poland, Czech Republic, Hungary, Slovenia, Russia, and Moldova). 

While some parliaments, mainly in Central Europe, became stable democracies at the end of the initial decade, others in Eastern Europe became dominated by a single presidential party.  These contrasting results can be traced through four paths of change (constitution and party system, members, internal organization, and executive relations), with major consequences for parliamentary oversight and budgeting capability. 

Continue reading "Central and Eastern European Parliaments:" »

February 27, 2008

Linking Performance and Budgeting—A Framework and Current Update for the U.S. National Government

By Philip Joyce

Governments exist to provide needed services as effectively as possible, given scarce resources.  It is hardly surprising that so called “performance-based budgeting”—a reform designed to better inform the allocation and management of resources with considerations of policy results—is in vogue all over the world.  It is usually presented as an alternative to traditional budget models, many of which tend to focus solely on the input side of the ledger, and where allocations are driven primarily by making marginal adjustments to last year’s input level. 

It is perhaps surprising that, in spite of all of this attention, there is still considerable controversy concerning whether such budget reforms are either desirable or possible.  Both of these objections stem from the same basic argument—that budgeting is political and therefore resistant to—perhaps antithetical to—efforts to make the process more “rational”.

Continue reading "Linking Performance and Budgeting—A Framework and Current Update for the U.S. National Government" »

February 25, 2008

Automating financial management systems -- it's not just the hardware

Posted by Bill Dorotinsky

As donors and governments spend enormous sums of money on automating financial management information systems in countries around the world, a great deal of attention is paid to the hardware and computer software. Debates over off-the-shelf or customized software, getting the right hardware, and setting up the right procurement arrangements, would fill volumes. But some recent cases illus rate the importance of paying attention to the 'soft' systems that surround the automated system -- the human systems that both serve and are served by the FMIS, the rules and controls embedded in and surrounding the systems.

On February 17, 2007, the Ugandan Daily Monitor broke a story ("Exposed: money racket in government") on an alleged scam being run from the Ministry of Finance and Ministry of Public Works, where fictitious suppliers where created in the computerized database, and payments were made to these suppliers for fictitious goods and services delivered. The article describes some of the means used to skirt what controls did exist, and but also illustrated that there were other controls missing.

A continent away, in Washington, D.C., a similar story unfolded in the District of Columbia tax office, where sham corporations were recorded in the automated information system, and tax refunds approved for these corporations. In some cases, the properties did not even exist, indicating absence of automated data-matching with property records or tax records to help control for such abuses. (See , for example, the November 14, 2007, Washington Post article, "D.C. Tax Scam Could Total $32 million".)

Continue reading "Automating financial management systems -- it's not just the hardware" »

February 22, 2008

A primer on Public-Private Partnerships

Posted by Francois Michel

If experts still argue about the proper definition of Public-Private Partnerships (PPPs), their microeconomic foundations, or their possible role as an antidote to the worldwide downturn in infrastructure investment, there is one fact that garners universal agreement: PPPs are one of the most popular reforms of the last decade in public financial management. A growing number of countries show interest in following the most advanced administrations on the topic, including Australia (Partnership Victoria) and the U.K. (Private Finance Initiative). Developing countries, in particular, try to develop PPPs to address economic infrastructure bottlenecks. However, the trend is universal: a recent study of PPPs in Europe found that between 1990 and 2005, more than a thousand partnerships had been signed in the European Union alone, representing an investment of almost 200 billion euros.

These developments have triggered intense (and remarkably fruitful) academic research. Thus, although much remains to be done, the major opportunities and challenges posed by PPPs, especially the fiscal risks induced by the absence of an effective accounting framework and the crucial notion of risk sharing, were identified with enough precision by the end of 2003 to allow the IMF to issue a series of reference publications on the subject.

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February 20, 2008

Capital Budgeting and Public Financial Management -- Part I

Primer on Systems and Issues: Context and Definitions

Posted by Bill Dorotinsky

Public investment is an important potential contributor to economic growth and achievement of social development objectives. In addition to the level of investment and the sectoral allocation, the capital budgeting process is an important determinant of the quality of investment projects and their implementation.

Recent years have seen renewed attention to capital investment for economic growth and development. In particular, much attention has been given to finding fiscal space for increasing capital investment. But, absent good processes for using existing or new funds, the impact of capital investments will not yield the expected results. This post provides an overview of selected issues regarding capital budgeting and capital budgeting systems as an aid in understanding what goes wrong and what might be done about it. The post draws directly from a chapter written by the author for a World Bank Public Expenditure Review entitled Ukraine Creating Fiscal Space for Growth: A Public Finance Review (World Bank, 1996).

Continue reading "Capital Budgeting and Public Financial Management -- Part I" »

February 19, 2008

Governor Arnold Schwarzenegger and California's Budget

Posted by Michel Lazare

To further illustrate our February 1, 2008 post on the difficult fiscal outlook in a number of US states and the harsh measures that states are considering to adjust their fiscal position, here is a YouTube video on the bugetary measures proposed by the Governor of California, Arnold Schwarzenegger.

This video is not dated, but was posted on YouTube on January 26, 2008.

Continue reading "Governor Arnold Schwarzenegger and California's Budget" »

February 18, 2008

OMB Going Paperless: the Draft FY09 Budget Released by the White House is an E-Budget

Posted by Michel Lazare

The US President's draft FY09 budget was released on February 4, 2008. Not many observers or commentators have noted that, for the first time, the White House did not release the budget in print but electronically: this FY09 budget is an e-budget.

In the picture above, President George W. Bush holds up a computer with the e-Budget for the cameras during a cabinet meeting held on February 4, 2008. Later the President said: "I submitted the budget today to Congress. It's on a laptop notebook, an e-budget. It saves paper, saves trees, saves money. I think it's the first budget submitted electronically."

Continue reading "OMB Going Paperless: the Draft FY09 Budget Released by the White House is an E-Budget" »

February 15, 2008

David Walker (GAO): Long-Term Fiscal outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future

Davewalker5x7_2 Posted by Michel Lazare

Further to our January 29, 2008 post on "David Walker (GAO head): The USA is Living beyond its Means -- Difference between Accrual and Cash," here is below the summary of David Walker's testimony before the Committee on the Budget of the U.S. Senate: "Long-Term Fiscal Outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future."

(link to the full text of David Walker's testimony: Download gao08411t_longterm_fiscal_outlook.pdf )."

Continue reading "David Walker (GAO): Long-Term Fiscal outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future" »

February 13, 2008

Monitoring and Evaluation of Public Spending Programs

Overview (Part I)

Posted by Teresa Dabán

The establishment of a framework for monitoring and evaluating (M&E) public spending programs and policies is an integral part of the entire process of policy-decision making and public accountability, and therefore a key element of a country’s public financial management system. This post presents a brief overview of the purposes and challenges related to the implementation of sound M&E systems of public spending programs.

The post, whose targeted audience are the “users of evaluations” of public spending programs instead of the “evaluators”, concludes that

  1. there is an increasing pressure on countries to step up their efforts to strengthen, or establish if they do not have one already, their government M&E systems;
  2. M&E systems are useful, and needed, at all of the stages of the policy-decision making process;
  3. the strength of a M&E system depends on the institutional arrangements underpinning its implementation; and,
  4. there is a large diversity of methods, techniques and analytical tools that can support the implementation of a M&E system, the choice of which will depend of a range of considerations.

Continue reading "Monitoring and Evaluation of Public Spending Programs" »

February 11, 2008

Performance Budgeting in Australia

Lessons from two decades of effort

Posted by Lewis Hawke

The latest edition of the OECD Journal on Budgeting includes an article on Australian experience with performance budgeting. This is a reprint from the title, Performance Budgeting in OECD Countries (see the January 11, 2008 blog entry Does Performance Budgeting Perform?). It is interesting that the OECD has chosen to highlight this particular chapter. Why did they choose this one in particular? Well for one thing, it offers some useful insights into Australia's relatively long performance budgeting journey to date.

Continue reading "Performance Budgeting in Australia" »

February 08, 2008

Transition to Accrual - A Stepwise Approach

Posted by Bill Dorotinsky

As countries struggle with implementing accrual counting, more and more resources are emerging to assist with their efforts. In an October 15 blog, we posted an IMF FAD Technical Guidance Note on Transitioning to Accrual Accounting. A blog reader kindly brought to our attention another useful reference, "A Stepwise Approach to Transition from a Cash, Modified Cash, or Modified Accrual Basis of Accounting to a Full Accrual Basis for Developing Countries," published in the February 2007 issue of Public Fund Digest (available on-line at the link above). The Public Fund Digest is a publication of the International Consortium of Government Financial Management (ICGFM) -- a recent December 2-4, 2007 conference on which we also blogged about.

The article, written by Jesse Hughes, Professor Emeritus of Accounting at Old Dominion University, provides a succinct series of steps and issues to be addressed in transitioning to an accrual basis:

  1. Identifying and classifying government reporting entities -- not an easy task, as the  article notes, compounded by the wide variety of governmental and quasi-governmental bodies and varying degrees of government control.
  2. Accounting for Cash -  deemed relatively easy in the article, as many governments already have some procedures in place to start with. However, as the note points out, transfers between entities need to be netted out, which is far more challenging than might at first seem the case.
  3. Compiling asset and liability information for reporting entities - a challenge for any country, and an optional disclosure item under the Part 2 of Cash IPSAS.
  4. Other optional IPSAS Cash Basis Part 2 Disclosure Items -- really many elements, including disclosure of administered transactions, transactions of related parties, comparison of actual versus budgeted revenues and expenditures, disclosure of ownership interest in controlled entities, and joint ventures.

Two of the most useful aspects of the article appear as Appendices -- a decision-tree for determining the level of control of another entity for financial reporting purposes (Appendix 1) and a detailed spreadsheet action plan for implementing the transition (Appendix 3).

February 06, 2008

Fiscal Rules - Beneficially Binding?

Posted by Gösta Ljungman

Widespread turbulence in public finances over the past decade has rekindled an interest in numerical fiscal rules as a way of addressing the well-known difficulty in ensuring that political assemblies take full consideration of the fiscal impact of their decisions. On top of a creeping increase in public expenditure and deficits in a number of countries, the future challenge posed by an ageing population is receiving more and more attention, and various options for ensuring sustainability are being discussed. Medium- and long-term fiscal policy objectives, and institutionalized restrictions on fiscal policy formulation, are possible ways of addressing these issues.

However, the experience with fiscal rules presents a mixed message. In some cases they have been highly successful in consolidating public finances and promoting a responsible fiscal policy, while in other cases the actual impact has been negligible. The emerging picture seems to be that numerical fiscal rules in themselves are not sufficient to promote fiscal discipline; they have to be supplemented by institutional reforms supporting the rules, and implemented in a political environment, which is conscious and concerned about the long-term health of public finances.

Continue reading "Fiscal Rules - Beneficially Binding?" »

February 05, 2008

New Challenges for Public Finance Reform in China

Posted by Holger van Eden

China Last week the World Bank presented here in Washington a new book titled "Public Finance in China - Reform and Growth for a Harmonious Society". The book has been edited by the ex-deputy Finance Minister, Mr. Lou Jiwei -- one of China's most influential reformers and currently chairman of the China Investment Corporation, China's new sovereign wealth fund -- and World Bank senior economist Mr. Wang Shuilin. A panel of experts including Mr. Lou and Fiscal Affairs Department (FAD) Director, Mrs. Teresa Ter-Minassian noted a number of challenges facing China in the public finance field, ranging from intergovernmental fiscal reform, tax policy modernization, further development of public financial management to various sectoral reform agendas. Health, education, and pension reforms stand out according to the book's many prominent authors as the major policy challenges given the aspiration of the Chinese government to limit growing regional and other income disparities and to manage the aging of the population.

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February 04, 2008

The Value of PETS

Public Expenditure Tracking Surveys: Detecting Leakages in Public Service Delivery Chains

Posted by Francois Michel

The major argument of the World Development Report 2004 : Making services work for poor people was that developing public services is fundamental for achieving the eight Millennium Development Goals and, beyond, creating conditions for sustainable growth. In addition, the report convincingly showed that the issue was not only one of funding. In most sectors and developing countries, there is a weak association between spending and outputs—more money does not translate directly into better “front-line” services. Associating inputs with outcomes appears to be an even thornier issue.

Public Expenditure Tracking Surveys (PETS) are one of the tools developed by the World Bank to grapple with the issue, as Doris Voorbraak and Kai Kaiser (respectively Senior Public Sector Specialist and Senior Economist, Poverty Reduction and Economic Management, World Bank) presented at an FAD seminar on December 20, 2007 (Download public_expenditure_tracking_surveys.ppt ).

Continue reading "The Value of PETS" »

February 01, 2008

Fiscal Double Whammy: Combination of Balanced-Budget Rule and Economic Slowdown Forcing U.S. States to Make Tough Fiscal Decisions

Posted by Michel Lazare

A majority of US states are facing a difficult fiscal situation according to the survey made by the Center on Budget and Policy Priorities (CBPP).

In a January 28, 2008 revision of a survey of states fiscal outlook (prepared by Elizabeth C. McNichol and Iris J. Lav ), CBPP indicates that "19 states face a total budget shortfall of at least $32 billion in fiscal year 2009; 9 others expect budget problems." These dire projections were made by the states themselves and were aggregated by CBPP.

Because they have passed a fiscal rule, which forces the state legislators to adopt a balanced budget, "the vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures."  They have to resort to fiscal retrenchment--not a very pleasant perspective at times when the US economy is noticeably slowing down--, which could in turn negatively affect economic growth prospects (procyclical effects).

Continue reading "Fiscal Double Whammy: Combination of Balanced-Budget Rule and Economic Slowdown Forcing U.S. States to Make Tough Fiscal Decisions" »

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