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Posted by Humberto Laudares
In a recent paper presented at a CLAD conference, Manning, Shepherd, Jurgen and Laudares explored the track of public management reforms in the OECD and Latin America countries in the last 20 years (Download OECD-LAC Public Management Reforms - 2008 - final).
Continue reading "Public Management Reform: should Latin America learn from the OECD?" »
By Suhas Joshi
Despite considerable work in the external audit area in the Pacific internal audit has largely been an orphan. In all the Pacific Island Countries (PICs) Internal Audit has been limited to the conduct of compliance audit and it’s ineffective implementation has led to misappropriation of funds, lack of compliance, incorrect payments and errors in financial reporting.
Posted by Ian Lienert and Gosta Ljungman
When looking at models for managing public expenditure, it quickly becomes obvious that in just about every regard, countries face a trade-off between control and efficiency. From one perspective, the ministry of finance has an interest in guiding the use of public finds with a firm hand. From another perspective, there are arguments for easing centralized control to capture the potential for efficiency gains in the public administration. The right balance between these two perspectives depends on both the preferences of the government, and the country specific circumstances that make up the risk and rewards of different budget models. What works well in one country may be outright inappropriate in another.
It is this dichotomy that lies behind the diversity of country practice with carry-over. A possibility to spend a budget allocation beyond the year for which it was originally appropriated has become the norm in countries where the public sector is stable and well managed, and where the focus is on promoting rationality and efficiency in the use of budget funds. In countries that are in the process of reforming their public sector, and where budget management is constrained by inadequate systems and a lack of capacity, carry-overs are less common, and limited to investment.
In a new Technical Guidance Note Carry Over of Budget Authority (Download Carry-Over -- Technical Guidance Note) we discuss the rationale behind carry-over, the arguments for and against this type of end-year flexibility, and the various options for setting up a regime that can balance the associated gains and risks. We also examine the various preconditions that need to be met before wide-ranging carry-over possibilities should be introduced.
A principal conclusion is that countries should be careful to interpret the popularity of carry-over regimes in advanced countries as a sign that carry-overs will have a positive impact in all situations. Carry-overs demand a level of sophistication of budgeting (especially accuracy of projections of appropriations, and devolution of budgetary authority to spending agencies), accounting, and audit that is only found in relatively few advanced countries. For the vast majority of countries, the potential benefits of carry-over will not outweigh the costs, with one exception—clearly identifiable investment projects whose implementation stretch over a multi-year period.
By Mr. Udaya Pant
India has some excellent capacity building institutions, both at the national and sub-national levels, in PFM and cross-cutting issues. Some of these are in New Delhi. All of these institutes, except the Financial Management Research and Resource Society (FMMRS) are government supported institutions. The FMMRS has emerged as a leading capacity building institution in the non-profit sector. Below is a brief write up on these institutions:
Posted by Sailendra Pattanayak
The IMF Fiscal Affairs Department (FAD) conducted a Professional Development Seminar on Debt Management on December 10, 2008. The focus of the seminar was on recent trends in debt management practices and what debt managers could do to help alleviate the impact of the current financial crisis. The role of debt management in overall fiscal sustainability was discussed, and coordination of debt management strategy with fiscal and monetary policies was emphasized. The seminar consisted of three separate theme-based sessions, with presentations by staff from FAD as well as from the Monetary and Capital Markets (MCM) Department of the IMF.
Continue reading "FAD Professional Development Seminar on Debt Management" »
Posted by Eivind Tandberg
On of the challenges facing the incoming US administration is how to contain and reduce the expected high and increasing budget deficits. A Washington Post article on January 7 quotes President-elect Obama as saying that:
Even if the package of spending and tax cuts helps restore the nation's immediate economic health, the government is likely to be left with "trillion-dollar deficits for years to come" unless policymakers "make a change in the way that Washington does business."
"We're going to have to stop talking about budget reform. We're going to have to totally embrace it. It's an absolute necessity."
Whereas the challenges are clearly recognized, and the new administration has signaled a clear commitment to pursuing fiscal responsibility and sustainability, including through budget reforms, there has been little information on the specific mechanisms that may be applied so far. Much of the debate has on long-term fiscal issues has focused on taxes and on major expenditure policy issues, in particular related to social security and health spending. It will be interesting to see whether the new administration's proposals also will include concrete steps related to budget management systems and procedures.
The $800 billion stimulus package includes some provisions to enhance transparency and promote efficient use of the funds. These include establishing a special panel to monitor use of the money; a Web site that will allow taxpayers to monitor use of the money; and a ban on lawmakers' pet projects, known as earmarks. Perhaps we may expect that some of these mechanisms will be generalized or expanded to cover broader budget areas?
The Washington Post referred to an economic adviser saying that the president-elect plans to unveil "major initiatives" designed to eventually bring the deficit under control as part of his first budget proposal, which he will submit to Congress next month.
In the mean time, Congress members have began developing their own proposals. According to Examiner.com:
Senate Budget Committee Chairman Kent Conrad and the Budget Committee's top Republican, Senator Judd Gregg, have proposed a bipartisan fiscal task force of lawmakers and administration officials that would create a plan to reduce budget deficits and lower the national debt. Blue Dog Democrats would like to see legislation that would force Congress to pay for spending proposals with equal spending cuts or with new revenue. House Democrats this week plan to consider legislation that would require all federal agencies to undergo new audits and would call for congressional hearings when agency inspectors general find evidence of waste or fraud.
By Peter Fairman, Senior Public Sector Specialist, PEFA Secretariat
1. Introduction
I represented the PEFA Secretariat at the annual conference (November 12-13, 2008) hosted by Centre for Aid and Public Expenditure (CAPE), based in Overseas Development Institute in London. The theme of the conference was “Reforming for Results: Can PFM Reform Uplift Government Performance?”, with particular focus on service delivery. Attendance was close to 100 participants from overseas governments, aid agencies, academia and consulting companies. The presentations and list of participants are available on the ODI website (www.odi.org.uk).
Issues directly and indirectly concerning the PEFA program were addressed in many of the presentations; the main messages from some of these are presented below (references to PEFA indicators are mine).
Posted by Ian Lienert
When budget revenue projections are conservative, governments receive pleasant surprises – they benefit from more tax and nontax revenues than planned, which allows debt to be reduced faster than planned or, alternatively, expenditure to be higher. In contrast, if budget revenue projections are too optimistic, it is difficult to cut back expenditure, at least in the short-term. This can result in public debt increasing to a level higher than desirable, assuming market deficit-financing is available. In countries where debt market financing is unavailable, there is likely to be an undesirable build-up of payment arrears.
An IMF Occasional Paper published in 2007 examined the budget forecasting experience in eleven OECD countries. It found that in 8 of the 11 countries, revenues were underestimated during the late 1990s and early 2000s. Canada was the country that most strongly underestimated tax and nontax revenues. The countries for which revenue projections erred on the optimistic side during the observation period were France, Germany and the United States. It may be concluded that OECD countries leant towards revenue projection conservatism during this period.
In chapter IV of Occasional Paper No. 258, an IMF staff team first examined the institutional arrangements for budget forecasting processes in Australia, Canada, France, Germany, Italy, Netherlands, New Zealand, Sweden, Switzerland, United Kingdom and United States. The study then analyzed forecast errors -- forecasts minus outcomes -- for various macroeconomic and fiscal variables. The statistical analysis was generally conducted for a nine year period, from 1995 to 2003.
Concerning institutional aspects, the study noted that, whereas budget projections are prepared by the Ministry of Finance (or the equivalent) in all countries, the degree to which the forecasting process is formalized varies. Some countries prepare stylized forecasts with some cross-checks with sectoral and revenue experts (e.g., Sweden, Switzerland). Others use detailed model-driven processes maintained by technical experts (e.g., Australia, France and the United States). Some countries reassess their fiscal forecasts after consulting with the private sector (e.g., Australia, Canada). In the United States, the Congressional Budget Office (CBO) plays a similar role – it provides a view independent from that of the “ministry of finance” 1/. In the case of the CBO, there is a mandate to prepare 10-year projections of major fiscal variables based on current legislated policies. A few other countries have established congressional or parliamentary budget offices (see, for example, the blog of July 21, 2008, on the recent establishment of such an office in Canada; http://blog-pfm.imf.org/pfmblog/2008/07/canada-creates.html ).
With regard to revenue forecasting, Canada stands out as the country with the most consistent and largest underestimation of budget revenues. Canada’s GDP forecasts were deliberately conservative during 1995-2003: actual economic growth was on average ½ percentage point higher than that assumed in budget projections. Inflation (the GDP deflator) was also underestimated, by 0.2 percentage points. All tax and nontax revenue components were underestimated (the forecasting records of four different taxes were analyzed).
Statistical tests were conducted to detect whether, during the small sample period, there were systematic tendencies to underestimate nominal GDP, total revenues and nontax revenues during the 1990s and early 2000s. This analysis revealed that Canada, New Zealand, Sweden, and the United Kingdom all exhibited a consistent bias in either the macro forecasts or for aggregate fiscal revenues. In all countries, errors in output projections tend to explain a substantial share of revenue errors. Canada stood out as the country where a number of small, unidirectional forecast errors led to the overall bias towards conservatism in revenue projections.
For full results, see the “Budget Forecasting” chapter in IMF Occasional Study 258 Northern Star: Canada’s Path to Economic Prosperity, published in 2007 and available for purchase – see http://http://blog-pfm.imf.org/pfmblog/2008/07/canada-creates.html. The chapter is based on a more comprehensive study, IMF Working Paper/05/66, How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries? prepared by Martin Mühleisen, Stephan Danninger, David Hauner, Kornélia Krajnyák, and Bennett Sutton in March 2005 (see http://www.imf.org/external/pubs/cat/longres.cfm?sk=18080.0). The preparation and publication of these studies were strongly supported by Canadian officials.
Blog comments on the study
The research is solidly-based and includes a battery of statistical tests for errors in macroeconomic and fiscal variables; it also discusses the interaction between forecast variaiable. Although the study is now beginning to become a little dated, it indicates that the majority of selected OECD countries leaned towards pessimism in their budgetary revenue projections. However, it is difficult to generalize this conclusion for the 11 countries examined. The reasons are:
• Limited time series and lack of strong results. The sample period is less than 10 years. Also, statistically significant results that indicate a forecasting bias towards conservatism were obtained for a few countries only.
• Buoyant economic growth in sample period. The late 1990s and early 2000s was characterized by a period a buoyant economic growth. This resulted in both growth and budget revenues being higher than assumed. If the time series were to be updated to include the worldwide weakening of economic growth in 2008, for example, the results would mostly change somewhat.
• Data caveats. The study acknowledges the various data caveats needed for postmortems of forecasting errors. Both “budget projections” and “actual” outcomes can be revised, depending on each country’s budget and statistical reporting processes. These impinge on the empirical analysis. For example, supplementary budgets that are substantially different from initial budgets adopted by parliament can materially affect the entire analysis.
• Country specific factors play an important role in these results—but these can be changed over time. OECD countries periodically review their projection methods, including ways of assuring forecast quality (the study examines relevant issues).
• For example, the “prudence factor” and budget contingency reserves affected the results for Canada. During 1994 to 1998, prudence was explicitly incorporated into the Canadian forecasts by deliberately adopting budget forecast assumptions that were more pessimistic than private sector forecasters. During these years, the Department of Finance based budget projections on lower economic growth and higher interest rate assumptions than the average of private sector forecasters (on which Canada relies more heavily than other countries). This practice was helpful for contributing to the reduction in public debt, which had built up to worrisomely high levels in the early 1990s.
• Is revenue forecasting pessimism desirable? The results for Canada suggest that GDP and revenue forecast pessimism is desirable when a strong fiscal adjustment and reduction in debt is necessary. However, Canada stopped deliberately making conservative model-based forecasts after the worst of the fiscal crisis of the early 1990s was over. Clearly there are limits to which a strong ministry of finance can continue deliberate revenue projection pessimism, especially given that, in annual budget negotiations, spending ministries are likely to be more aggressive in obtaining the available “fiscal space” to maximize their budget revenues. Also, in countries where legislatures have considerable scope for changing the executive’s draft annual budget – strong amendment powers – parliament/Congress may increase budget expenditures if it suspects that the executive has deliberately been pessimistic in its revenue projections. When these tradeoffs occur, there may be a case for the ministry of finance to prepare realistic, rather than pessimistic, GDP and/or revenue projections. Clearly the case for realistic forecasts is stronger in countries whose fiscal and public debt positions are sufficiently comfortable.
1/ The “ministry of finance” function in the United States is performed by an Office of Management Budget (for spending projections) and a Department of Treasury (for revenue and debt projections). These two executive departments are complemented by a Council of Economic Advisors – the trio agrees on macroeconomic projections and forecast assumptions.
2/This is the reason why Japan was excluded from the sample. In the late 1990s, Japanese fiscal policy was implemented largely through supplementary budgets, whose projections differed significantly from those in initial budgets (because of intentional policy changes). In view of Japan’s fiscal policy responses during the Asian crisis (in particular), it would be very difficult to compare Japan’s forecast errors with those of the other countries, where supplementary budgets were admittedly adopted, but had a lesser budgetary impact.
Posted by Lubin Doe
The authors structured their work in three parts: the role of the government, public sector management challenges and civil service reform in Ghana
Role of government. The debate is presented as a choice between two theories: public interest and public choice. The public interest theory considers the law of supply and demand as unable to yield sustainable real economic growth, high social welfare and optimal equity. Therefore, government intervention is necessary to eliminate/reduce the effects of market failure. The public choice paradigm attributes public sector failures to the inability of governments to deliver quality public goods and services efficiently and transparently because of rent-seekers.
Posted by Christian Schiller
The Public Finance Team (headed by Matthias Witt) of the German development agency GTZ (Gesellschaft fuer Technische Zusammenarbeit) just published its December 2008 newsletter (Download en-newsletter-public-finance-reform-no14.pdf .) The GTZ newsletters are always stimulating and fun to read as they cover a broad range of public finance topics. The December 2008 issue focuses on results-orientation in public management.
The newsletter points out that success in moving towards more results-orientation in public management does not only depend on appropriate changes in the budgetary system and procedures, but cultural changes may be equally important. The newsletter highlights this by reporting on the work the GTZ is doing in Peru, which was discussed at an expert talk on “Backbone of State Modernization and Public Policy—Performance Based Budgeting in Peru” (organized by GTZ in November 2008). One of the key messages of the meeting was that a change in the mindset of the people in the public administration is a critical factor in moving towards more results-orientation in the public sector in Peru
Continue reading "Latest GTZ Newsletter: Focus on Results-Orientation in Public Management" »
Posted by Eivind Tandberg
Comprehensive, transparent and reliable financial reporting is a cornerstone of good public financial management. The US Government financial report for fiscal year 2008 (October 2007 - September 2008) was released in December 2008. The report provides many examples of good international practices. However, the accompanying audit report from the US Comptroller General, which includes negative opinions for key government sectors, illustrates that it may be difficult to meet all requirements in this area, even for an advanced economy government with significant financial management resources.
Posted by Richard Allen
Recently, in a paper published in the OECD Journal on Budgeting, vol. 2008/3, entitled “Reforming Fiscal Institutions: The Elusive Art of the Budget Advisor”, and in a yet unpublished paper presented to a World Bank seminar on December 19 (“The Challenge of Reforming Budgetary Institutions in Developing Countries”), I set out some views concerning the complex process of reforming budgetary institutions and public financial management (PFM) systems in developing countries.
The core idea of these papers is that the reform of budgetary institutions is an extremely slow and challenging process that has taken more than 200 years in advanced countries such as France, the United Kingdom and the United States—in a series of slow moving waves somewhat like Kondratieff cycles—and is still not completed. The reasons for this are linked to the familiar doctrine, developed by Douglass North and others, of emerging states, and the gradual transition of countries from rent-seeking states dominated by elites, to open democratic societies. Budgetary institutions and processes are a central rent-seeking and rent-providing mechanism in developing countries, and thus play an important role in this transitional process.
Continue reading "The Challenge of Reforming Budgetary Institutions in Developing Countries" »
Posted by Michel Lazare
The (still) small world of the Public Financial Management blogs is moving. Here are a few news:
1. The MTEF Blog (see our August 22 post "Welcome to the new MTEF blog") now goes by the name "MTEF is the Bayesian Heresy." This results from the merge in principle on January 1 (but already effective in practice) of the MTEF blog with the Bayesian Heresy Blog (see in particular the December 8 posting of the Bayesian Heresy "announcing a bail out and a merge."
De facto, the Bayesian Heresy blog had not published many posts over the last few months. The MTEF blog has already inherited the rather eclectic choice of topics of the Bayesian Heresy blog, while keeping a marked for fiscal issues in general (see in particular its recent posts on MTEF and on performance budgeting). We wish full success to this new version of the MTEF blog.
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