1 year, 176 posts and 128244 visitors

Posted by Eivind Tandberg

The PFM blog was launched in September 2007. 2008 was our first full year of operations, and we wanted to give you a little overview of what has been happening on the blog during the year. We will provide some statistics about the use of the blog. We will also identify which articles were most popular among the readers, which PFM categories were most popular among our contributors and who were the most active contributors.

Welcome to Peter Heller's New Blog: "Thinking About Fiscal Policy"

Posted by Christian Schiller

I would like to alert the readers of the PFM Blog to a new blog, the "Thinking about fiscal policy" Blog which was created by Peter Heller a few weeks ago. Peter was my first Deputy Division Chief when I joined the Fund in the early 80s. I worked for him in various positions and we also published together.

One moment which I remember in particular was when we were sitting together in the Thomas church in the city of Leipzig, listening to the music of Johann Sebastian Bach being played in the church where Bach had worked as a cantor and music director for 27 years until his death in 1750. Peter was in Leipzig for a presentation of his book “Who Will Pay---Coping with Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges” (2003). At the presentation in the afternoon, the place was packed--not only because in the East it was still not as common as in other parts of Germany to be able to listen to an American world class economist, but also because his talks are always very insightful and thought provoking.

Over more than a quarter of a century, he has substantially contributed to the thinking of the IMF in the public finance area, including research, surveillance, program design and implementation as well as technical assistance.

Peter retired from the Fund in 2006. He is presently Senior Adjunct Professor of International Economics at the Paul H. Nitze School of Advanced International Studies at The Johns Hopkins University in Washington. He also teaches at the Graduate School of Governance of the University of Maastricht.

I am glad that he now has created his own blog so we can all benefit from his thoughtful and always very creative thinking. I am looking forward to his postings.

OECD-MENA conference of Senior Budget Officials in Cairo

Posted by Mr. Dimitar Radev.

The first meeting of the OECD-MENA network of Senior Budget Officials took place in Cairo, Egypt on 24-25 November 2008. The meeting’s main focus was on implementing performance budgeting, this subject being, as specified in the distributed agenda, the top priority selected by MENA-SBO delegates.

Such a choice might be somewhat surprising for the outside observers, having in mind the region’s mixed results in budget modernization. However, it clearly indicates the interest of increasing number of countries in introducing advanced budget reforms, a process that needs to be properly managed, because of its complexity and associated risks.

Signs of the Season - The deadweight loss of Christmas

Posted by Eivind Tandberg

One of the sure signs that Christmas is approaching is that economic journals contain increasing numbers of references to the classic article by Joel Waldfogel: The Deadweight Loss of Christmas (American Economic Review, December 1993). In a discipline where attempts to combine rigorous analysis and humour are few and far between, this article stands out in many ways.

Waldfogel's paper uses stringent matematics and survey results to estimate the efficiency loss of Christmas present giving in the US. The deadweight loss arises because the recipient's valuation of the gifts may be significantly less than the actual cost of providing these presents. Waldfogel estimates this loss to be between 1/10 and 1/3 of the value of the gifts. In 1992 this loss amounted to between 4 and 13 Billion USD. In comparison, the deadweight loss of income taxation in the US at that time was estimated to be about 50 billion USD.

As interesting as the original paper, are the many other articles that have been inspired by it. If you google "Deadweight loss of Christmas" you will get a long list of different articles and blog postings. Some of these take issue with the thoretical foundation for Waldfogel's work, his research design or with technical details of the paper. Others are more concerned about the moral and societal implications.

Integrating Cross-cutting Themes into the Budget Process

In his essay on Objectivity in Social Science, Max Weber pointed out that all theoretical constructs do violence to reality.  The world of budgeting seems to offer no end of support evidence to support this simple but profound observation about the dangers of making overly fine distinctions.  The annuality of the budget cycle in most countries ignores the fact that not all expenditure can be sliced into discrete 12 month chunks - giving rise to complementary accounting periods and carryover arrangements to address the resulting behavioural distortions. Golden Rules allow governments to borrow to fund investment but not current expenditure despite the reality that school teachers are as important as school buildings to the long-term health of nations economic and finances.

And so it is with national systems of budget classification, most of which continue to rely on the line ministry as the fundamental unit of expenditure allocation and control despite the fact that many of societies' problems cannot be neatly contained within ministerial silos.  How do these systems cope the complexity of "real world" problems and the need for cooperation between line ministries in addressing them?  This posting looks at three recent attempts to address inter-ministerial policy challenges through the budgeting process.

Performance Budgeting Seminar in Sao Paulo Discusses Experiences Worldwide

Posted by Mario Pessoa

The government of the State of Sao Paulo, Brazil, promoted a seminar on performance budgeting in partnership with the IMF and the Interamerican Development Bank, from December 1 to 3, 2008. Experiences in Latin America and OECD countries, in the Brazilian States of Sao Paulo and Minas Gerais, and in the City of Curitiba, were discussed. The main conclusion is there is no unique approach and it is essential to consider local circumstances. Additionally, to implement a performance budgeting approach it is necessary to count on high-level political support, clear leadership to implement the methodology selected, good information systems, realism in the targets, define few and very clear performance indicators, have a good communication strategy, and have a long-term perspective. To be more effective, it is also important to establish incentives, such as flexibility to remunerate personnel and manage budgetary resources and eliminate disincentives such as a set of formalistic compliance regulations that used to be present in many parts of developing countries. The presentations (some of them available only in Portuguese or Spanish) can be assessed by cliking on this link.

Keeping a Lid on Spending

Posted by Gosta Ljungman

One of the more intriguing aspects of public policy making is the difficulty of maintaining healthy government finances. Not only is the short sighted temptation to spend now and pay later sometimes too hard to resist, but even with the best of intentions do countries end up with high deficits and a growing debt. It is almost like there is a gravitational force pulling government budgets into red figures. Some institutionalized support appears to be, if not necessary, at least enormously valuable to stay on the straight and narrow path of fiscal sustainability.

Judging from the performance of a handful of countries that have established aggregate expenditure ceilings as a centrepiece of their fiscal framework, this type of arrangement seems to be particularly effective in combating the tendency for spending growing faster than revenue. In a recent IMF Working Paper: Expenditure Ceilings—A Survey, I look more closely at the choices that have to be made when designing an aggregate expenditure ceiling, namely: 1) the comprehensiveness; 2) inflation adjustments; 3) mechanisms to manage expenditure fluctuations; 4) time horizon; 5) numerical definition; and 6) legislative status. I also examine the construction of the expenditure ceiling in three countries: Finland, the Netherlands and Sweden, to see how each of these six aspects have been treated. From this study, some interesting—and for countries considering the introduction of an aggregate expenditure ceiling potentially valuable—patterns emerge.

Counting the fiscal cost of the current crisis: A glimpse from the UK?

Posted by Richard Hughes

The unremmitting flow of bad economic and financial news over the past few weeks and ongoing discussions of fiscal stimulus packages and expanded financial rescue plans suggest that it is too early to start counting the overall cost to the public purse of the latest economic crisis.  However, the UK's latest Pre-Budget Report which was published on 24 November provided an initial glipse of the potential fiscal repercussions of the current financial and economic turmoil.

Public Financial Management Performance Assessment Report for South Africa

Posted by Davina Jacobs

I. Assessment of the PFM strengths and weaknesses in South Africa

In a recent PEFA assessment Report (Download final_sa_pefa_report_2008.pdf,) South Africa scores well when viewed from the perspective of the three main objectives of a sound PFM system, namely aggregate fiscal discipline, strategic allocation of resources and the efficient delivery of services, especially in regard to aggregate fiscal discipline. The PFM systems in South Africa are capable of allocating resources in accordance with priorities. The utilization of a three year macro fiscal framework, with a definite budget calendar that facilitates the meaningful bottom-up participation by Departments, along with the very successful integration of cash management and debt management, and the achievement of predictable budget releases and effective payroll management all point to efficient delivery of services. However these positives are negatively impacted by some procurement and non salary expenditure management challenges.

The IMF's Fiscal Affairs Department: How it All Began

Posted by Peter W. Kohnert (1)

In 1964 the International Monetary Fund established the Fiscal Affairs Department (FAD). This post describes the circumstances under which this happened. It reports about the activities in the fiscal area undertaken by the United Nations and the World Bank at that time, and presents the different aspects that were discussed in the Executive Board of the Fund before a decision of establishing FAD was actually taken.

Are Governments Obliged to Bail Out their Central Banks?

Posted by Ian Lienert

With a worldwide financial crisis in full swing, central banks are being called upon to provide support to an ailing financial sector. In some cases, central bank credit is being provided directly to financial institutions. What are the risks that the central bank itself will not be able to support the financial cost of these operations? Will the government have to step in and bail out its central bank? Is there any chance that the central bank will become bankrupt?

An IMF Working Paper published in February 2008 examines government legal obligations to recapitalize central banks when their balance sheets became seriously impaired. The paper indicates that even in cases where the government is nominally responsible for maintaining the financial strength of the central bank, it may do so only in a cosmetic fashion. In a number of countries, governments have not provided central banks with financial support on a timely basis, leaving them excessively reliant on seignorage to finance their operations and/or forcing them to abandon monetary policy objectives.

IPSASB to Act Quickly to Facilitate Transparent Reporting of Government Actions in Response to the Financial Crisis

Posted by Abdul Khan and Sage De Clerck

The global financial crisis was a topic of considerable interest in the recent meeting of International Public Sector Accounting Standards Board (IPSASB) in Zurich. IPSASB noted that governments are undertaking a range of initiatives—often involving significant amounts of public money--in response to the crisis, and a key requirement would be to ensure that the financial implications of these actions are transparently reported. Since many of these initiatives would involve governments providing funds or issuing guarantees to private sector entities in exchange for acquiring equity or debt instruments, it is critical that public sector accounting standards deal with the recognition, valuation, and disclosure of these financial instruments in government financial reports.

Creating Fiscal Space for Infrastructure: The Case of Tanzania

By Richard Hughes

After a decade or more in which it took a back seat to provision of basic services such as education, health and social protection in economic development theory and practice, infrastructure in back on the economic policy agenda in both developed and developing countries. In the United States and other advanced economies, kickstarting infrastructure investment is being seen in the context of the current crisis as a way to both deliver a timely, temporary and targeting fiscal stimulus while, at the same time, raising their long-run growth prospects. In Africa the work of the UK’s Africa Commission and the World Bank’s Africa Infrastructure Country Diagnostic have brought into stark relief the extent to which a lack of access to basic infrastructure services such as clear water, electricity and roads is constraining current welfare and future growth potential of the region.

But how do countries meet the sizable fiscal costs of infrastructure investment? A recently IMF Working Paper (Download wp08256.pdf ) looked at question of how to create sustainable fiscal space for infrastructure investment in Tanzania, a country with one of the least developed infrastructure networks in the region. However, its findings and conclusions are relevant for other low-income countries in Africa and elsewhere that face large gaps between their infrastructure needs and their access to long-term investment financing.

Performance Management – The Chilean Experience

Posted by Theo Thomas

Chile has been on the cutting edge of performance budget and public management reforms for many years. Having started to introduce performance indicators back in 1993, a system of program evaluations in 1997 and a ‘Management Improvement Program' (PMG) in 1998, Chile’s experience provides some useful lessons for the many countries across the world that are trying to implement similar kinds of reforms.

At the end of October Heidi Berner, Head of the Management Control Division within the Budget Office of the Chile Ministry of Finance, shared her extensive experience of Chile’s reforms with a packed audience at the World Bank. The high level of interest, from staff working in all regions, reflects the level of interest both in Chile’s experience and the subjects’ status as the new ‘megatrend’ in budgeting and public management.  A copy of her presentation can be found here: Download PerformanceBudgeting-Chile_oct2008.ppt