Budget problems in American states

Posted by Eivind Tandberg

Our colleagues at the Center on Budget and Policy Priorities in Washington DC recently published an interesting overview of the worsening budget situation of many American states (Download 9808sfp1.pdf), authored by Elizabeth McNichol and Iris J. Lav.  The report summarizes the fiscal challenges facing the states and describes the steps the states are taking to adress these challenges. Because most states, unlike the federal government, cannot run a deficit, economic downturns will generally have a more immediate impact on the states' fiscal situations.

According to the paper, at least 39 states are seeing shortfalls in their budgets for the current fiscal year compared to the initial budget. Flat or declining revenues are a major source of the shortfalls. Several states have also prepared estimates for future budget years and expect continued fiscal pressures. The paper lists steps that states are taking to reduce spending and close the budget gaps. These include reductions in education and social spending, as well as reductions in workforce.

Budget Amendment Powers Being Reexamined in South Africa

Posted by Ian Lienert

The South African Parliament currently votes on budget appropriations in their entirety. It could, in principle, reject an allocation to a particular department. However, the outright rejection of a departmental allocation would necessarily be interpreted as a vote of no confidence in the government. With a view to changing this situation, in August 2008 the South African Parliament received submissions on the new draft Bill that would provide Parliament with power to amend the executive’s proposed budget.

In an article recently featured in the International Budget Partnership’s 45, Len Verwey of the Institute for Democracy in South Africa (IDASA) highlights pros and cons of the draft legislation. Submissions by other organizations made similar points to those summarized below. For example, the National Treasury emphasized its desire to support Parliament in this process, as well as the need for a “fiscal responsibility” clause that would establish the parameters for any budget amendments by parliament.

Tackling public sector corruption with better information: the U.K. Treasury Fraud Report

Posted by Bill Dorotinsky

Anti-corruption is a major focus of governments and international organizations. An enormous amount of work is underway to combat corruption. Anti-corruption commissions are being established or operating in many countries, ranging from an advisory model (Macedonia) to those with police powers (Indonesia). Laws are being toughened. Anti-money laundering commissions are being established. Internal audit bodies and internal control systems are being reviewed and strengthened. Legislative oversight arrangements are being enhanced, and Supreme Audit Institutions (external auditors) fortified. And many other measures to enhance transparency and accountability undertaken.

But despite the attention to anti-corruption, most of the available data is limited to perception-based indicators. These are useful, but do pose challenges when trying to develop measures to tackle corruption in a specific country or context. For example, in the public sector, what are the most common patterns of corruption in country X?

PFM Blog has run across a useful practice underway in the U.K. for some years by H.M. Treasury.  Annually, government departments are surveyed for actual fraud cases detected (within government, primarily, but also capturing some external fraud against government programs). The latest report, Fraud Report 2006-7 (October 2007), and prior reports, are down-loadable.

The 2008 World Bank/CABRI/OECD Survey of Budgeting Practices and Procedures in Africa and Asia

By Lubin Doe

The OECD has established a comprehensive database on budget institutions in 97 countries worldwide. This base also contains the results of the 2008 World Bank/ Collaborative Africa Budget Reform Initiative (CABRI)/OECD survey of 26 African and 13 Asian countries.

The survey seeks to gather general information on budget institutions and responses to specific issues on budget preparation, adoption, execution, accounting, and audit. Questions were also fielded on performance budgeting and aid management.

How Effective are Aid Agencies?

By Tej Prakash

During the past decades, the total amount of external aid going to developing countries has increased greatly, and a great deal more has been committed in the coming years as a part of the Millennium Development Goals. The effectiveness of this aid depends upon many factors: the absorptive capacity in the recipient countries, their governance and managerial systems, and the effectiveness of their institutional framework. There is much literature on this subject. However, there is another side to the story that has not been explored as much: how much of the blame or credit goes to the aid giving agencies; can any lessons be learnt from the experience so far, both from the policy and the practice of giving aid.

Two related papers, one by Easterly and Pfutze (Easterly, William, and Tobias Pfutze, 2008, “Where Does the Money Go? Best and Worst Practices in Foreign Aid,” Journal of Economic Perspective, Vol. 22, Number 2 (Spring), pp. 29—52)and the other by Easterly (Easterly, William, 2007, “Improving Aid Agencies,” Economic Policy, UK, pp. 635—678), explore this issue and examine the track record of aid agencies in the past decades, both in establishing aid policy and in the actual flow of funds. Based on the past experience of successful and not-so-successful aid, they ask three questions: what is an ideal aid agency, what are best aid giving practices, and have the aid agencies followed the best practices.

Whither Medium-term Expenditure Frameworks (MTEFs)?

By Richard Hughes and Richard Allen

On Thursday, 2 October 2008 the IMF’s Fiscal Affairs Department hosted a half-day seminar on Medium-term Expenditure Frameworks: Lessons from Success and Failure in Advanced and Developing Countries.  The seminar was the first in a series that FAD will be hosting on the subject.  It was chaired by Marco Cangiano (IMF, Fiscal Affairs Department) and divided into three sessions (Download mtef_seminar_agenda.doc ):

1. A presentation by Richard Hughes (IMF, Fiscal Affairs Department) the lessons from his experience with MTEFs in advanced countries (Download rhughes_mtef.PPT);
2. A presentation by Dr. Salvatore Schiavo-Campo (World Bank) on the lessons from experience with MTEFs in developing countries (Download rsc_mtef_presentation.doc) ; and
3. A panel discussion on how to make MTEFs more credible.

This posting provides a summary of the presentations and discussion.

Poland Pushes Ahead With Performance Budgeting

By Marc Robinson

Poland is on the path towards performance budgeting (PB). This was the key message to emerge from a conference on Performance Budgeting—Prospects for Poland which was held by the Polish Ministry of Finance in Krakow on 2-3 October. The conference was attended by hundred of delegates from Polish ministries. They were joined by international guests who outlined developments in France, the USA, Canada and Denmark. I represented the IMF, and made a presentation (Download M.Robinson.pdf) on the relationship between PB, medium-term budgeting and strategic planning.

Senior Officials from African Countries Discuss Cash Management Issues in a Workshop Organized by IMF AFRITAC East

Posted by Sailendra Pattanayak

AFRITAC East, the regional technical assistance center of the IMF in east Africa, in collaboration with the Africa Capacity Building Foundation, conducted a workshop on cash management reforms, at the Kenya School of Monetary Studies in Nairobi from September 22–26, 2008. It was attended by 31 mid- and senior-level officials - including Heads of Departments of Treasury, Fiscal Policy Units, Macroeconomic Management Units, Financial Controllers, Senior Economists, Principal Finance and Accounting Officers, and Budget Officers - from 9 countries (Ethiopia, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Uganda, and Zanzibar). The workshop was facilitated by AFRITAC East advisors and staff from the IMF Headquarters. It was inaugurated by the Permanent Secretary to the Treasury of the Ministry of Finance of Kenya, and closed by the AFRITAC East Center Coordinator.

During the last few years, AFRITAC East has provided technical assistance aimed at developing and strengthening cash management systems in its member countries. Diagnostic studies have been conducted in all AFRITAC East countries, and provided the basis for formulation of cash management reform strategies and action plans, which are being implemented by several countries. AFRITAC East continues to provide technical assistance on the implementation of these strategies.

Implementing MTEFs in Countries with Different Legacy Systems

Posted by Ian Lienert

On September 24, the PFM blog drew attention the important role that forward estimates play in developing medium-term expenditure frameworks (MTEFs). Specific reference was made to the proceedings of CABRI’s annual seminar in December 2007, under the title: "Are We Asking the Right Questions? Embedding a Medium-Term Perspective in Budgeting" (Download cabri 2007.pdf). Three papers in the same publication examine the influence of legacy systems on MTEFs in African countries.

Two papers examine the PFM legacies in francophone and anglophone African countries—for Burkina Faso and Kenya respectively. A third paper, authored by myself, contrasts the role of legacy systems on MTEFs in French and British-influenced countries. The paper concludes that while it is necessary to pay attention to inherited institutional and organizational arrangements for PFM, there are other, more fundamental, constraints that thwart the effectiveness of the MTEFs that have been introduced in Africa.

Allen Schick and Paulo Mauro Discuss Budgeting for Fiscal Risks

On September 17, at a well-attended FAD seminar, Professor Allen Schick and FAD Division Chief Paulo Mauro presented their views on "Budgeting for Fiscal Risks". Professor Schick is an acknowledged expert on the subject and, in 2002, wrote a path-breaking book with Hana Polackova Brixi and Sweder van Wijnbergen — "Government at Risk: Contingent Liabilities and Fiscal Risk"—published by the World Bank and Oxford University Press. This seminar was timely, given the fact that FAD has recently produced an IMF Board Paper on the subject "Fiscal Risks—Sources, Disclosure, and Management".

Professor Schick was quite complementary on the recent FAD paper and agrees with many of the recommendations contained in the Paper. Pr. Schick suggested that a clearer distinction between "fiscal risks" and "fiscal uncertainties" could be made:

- In the FAD paper fiscal risk is defined as the "possible deviation of fiscal outcomes from budget estimates or other projections";

- Pr. Schick provides an alternative definition which focuses on the "contingency of future revenues or expenditures on uncertain events";

Indonesia’s Fiscal Institutions Are Improving

Posted by Ian Lienert

A recent IMF report examines the improvements in Indonesia’s fiscal institutions over the past few years. Progress includes the establishment of a fiscal policy office; revisions in tax legislation; some improvements in tax administration; and the adoption of legal and administrative measures to improve public sector governance. Moreover, more fiscal information is disclosed to the public, thereby improving fiscal transparency.

Despite these improvements, the report notes that further reforms are needed to improve fiscal institutions and transparency, particularly concerning disclosures related to oil and gas revenue flows.

IMF Fiscal Affairs Department: an Update of Activities for the 2008 Annual Meetings

Posted by Michel Lazare

The attached 4-page flyer (Download FAD-new.pdf ), which has been prepared to provide an update of FAD's activities in 2008 to the participants to the 2008 Annual Meetings of the IMF (to be held in Washington on October 11-13, 2008), contains an overview of FAD's key responsibilities and outputs.

FAD provides services to the IMF's member countries through a number of channels and products:

• Fiscal policy analysis and advice, in connection with Fund surveillance and financial assistance, aimed at fostering stability and sustainable growth.
• Technical assistance and capacity building, through on-site missions from Fund headquarters or regional TA centers (RTACs). FAD undertakes about 500 TA missions and expert visits annually.
• Policy development and research on traditional and emerging fiscal policy issues and trends, and
• Outreach, targeted seminars, and training events.

The 2008 flyer indicates in each of the key fiscal topics (macro-fiscal analysis, tax policy, revenue administration, public financial management, expenditure policy, decentralization, and fiscal transparency) what have been in the recent past the main focus of FAD's activities.

For instance, the flyer indicates in the Public Financial Management area that:

"Strong PFM systems are key to ensuring effective delivery of intended budget policies. FAD provides PFM advice through HQ review, TA missions, and resident and short-term experts. These cover:

• Diagnostic assessment of the efficiency, effectiveness, and transparency of PFM systems.
• Strategic advice on the development, sequencing, and prioritization of PFM reform programs.
• Advice on legal design and drafting, including budget system and fiscal responsibility laws.
• Advice on “first generation” reforms, such as budget preparation, expenditure and revenue classification, ac­counting and fiscal reporting, cash management, treasury systems, and internal control and audit.
• Advice on “second generation” reforms, such as medium-term budgeting, performance budgeting, accrual accounting, and fiscal risk assessments.
• Advice on restructuring ministries of finance, state treasuries, and debt management offices."

This Annual Meetings flyer also lists FAD research activities:

• IMF Board papers: Globalization, Financial Markets and Fiscal Policy; Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses and Update; Fuel and Food Price Subsidies—Issues and Reform Options; Fiscal Implications of Climate Change; Fiscal Risks—Sources, Disclosure and Management. Public enterprises and Fiscal Risks—lessons from the Country Studies.
• Selected Issues Papers (SIPs): SIPs, which are policy-oriented papers elaborated usually in the context of Article IV consultations with member countries, were prepared for a wide range of developing, emerging, and industrial countries. Over the past year, SIPs were prepared for a range of developing, emerging market, and industrial countries and covered a broad spectrum of topics, including: assessments of tax and pension reforms, creating fiscal space, improving fiscal coverage, strengthening fiscal policy frameworks, reforming fiscal regimes for mining, and reviewing options for decentralization, fiscal rules, and prudent levels of fiscal reserves and public debt
• IMF Working Papers: Topics have included the cyclical behavior and interactions of monetary and fiscal policy, government size and output volatility, the contribution of tax administration reforms to fiscal adjustment, tax amnesties, natural resource endowments and the domestic revenue effort, corruption and tax revenues, investment incentives and effective tax rates in Southeast Asia, capital budgeting practices, policy challenges of aging populations, and the effect of early retirement provisions on youth unemployment.
• FAD staff also staff contributed journal articles and conference papers on a range of topics, including revenue mobilization and globalization in sub-Saharan Africa, tax competition, economic integration and the relationship between profit and wage taxes, small business taxation, financing social pensions, the role of budget advisors, independent fiscal agencies, fiscal rules, climate change, the fiscal-financial nexus. Finally, in addition to the books on PPPs and PSIA, a book on performance budgeting was published by FAD, and a handbook on the experience of selected countries in developing medium-term expenditure frameworks is being prepared.

Our PFM Blog's "about" tab on top of this page also contains some general information about FAD's role.

You can also consult our last November post for FAD activities in 2007.

FAD provides services to the IMF's member countries through a number of channels and products:

Quality of Development Aid - Accra Meeting 2008 – What are the Issues and How to Get There.

Posted by Mario Pessoa

The Facts

The Accra Agenda for Action

The Third High-Level Forum on Aid Effectiveness has just concluded its works in Accra, Ghana. More than 1,500 delegates from 85 countries reached an agreement denominated the "Accra Agenda for Action" (Download AAA.pdf ) on how to make foreign aid to developing countries more effective. The key elements agreed in the Agenda are:

Predictability – donors will provide 3-5 year forward information on their planned aid to partner countries;

Country systems – partner country systems will be used to deliver aid as the first option, rather than donor systems;

Conditionality – donors will switch from reliance on prescriptive conditions about how and when aid money is spent to conditions based on the developing country’s own development objectives; and

Untying – donors will relax restrictions that prevent developing countries from buying the goods and services they need from whomever and wherever they can get the best quality at the lowest price.

Are Government Debts Really Irresponsible?

Posted by Andy Wynne

Disclaimer: Andy Wynne, an independent consultant,  is the editor of the International Journal of Governmental Financial Management; the point of view he expresses in the following post is not necessarily shared by either PFM Blog or the IMF.

In recent years it has been assumed that fiscal discipline should be one of the main objectives of public financial management. Thus, for example, the World Bank cites aggregate fiscal discipline as the first of the three much quoted objectives for public expenditure management.1/ The European Union has set targets of 3% for annual fiscal deficit and 60% for government debt. Several countries are adopting fiscal responsibility acts which limit the fiscal deficits which their governments are allowed to apply when setting their annual budgets.

The financial crises in Mexico (1994-95), Southeast Asia (1997) and Russia (1998) brought extensive economic dislocation, fiscal hardships and liquidity problems for the governments of these countries. The debt crisis for the governments of many developing countries over the last two decades had a similar effect and made them dependent on policy advice from the World Bank and IMF. Having suffered these problems it is a question of once bitten, twice shy. Many governments now accept the need to constrain their public expenditure to avoid future debt problems. However, in doing so they may not undertake much needed investment in public infrastructure which could be essential to achieve optimal economic growth in the future.