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October 03, 2011

Budget Institutions Supporting Fiscal Consolidation

Posted by David Nummy

Countries around the world are struggling to devise the policies that will best address the challenges resulting from the financial crisis. In a book to be issued by the Fiscal Affairs Department of the International Monetary Fund, the case is made that key budget institutions will be necessary to both devise and execute those policies.

Previewing the book that will be issued later this year, Marco Cangiano kicked off the International Consortium on Governmental Financial Management (ICGFM) fall season by presenting on Budget Institutions for the 21st Century at the monthly DC Forum held at the Carnegie Endowment for Peace in Washington, DC on September 7, 2011. Mr. Cangiano, an Assistant Director of the IMF Fiscal Affairs Department, outlined ten budget institutions that will be key to countries around the world in addressing the challenges of dealing with the post-financial crisis environment in the three typical phases of a fiscal consolidation (but the same would apply in designing a stimulus package): understanding the fiscal challenge; developing a strategy; and implementation of the strategy though the budget process.

The initial position 

Making the point that countries have to have a solid understanding of their fiscal situation and the challenges they face, the first three budget institutions discussed were Fiscal Reporting, Macro-Fiscal Forecasting, and Fiscal Risk Management. Risk management, an area more frequently associated with the private sector, is a discipline in the public sector still relatively underdeveloped that will become increasingly critical in coming years as governments come to grips with the real contingent liabilities that they face and the events that could trigger them into becoming overwhelming burdens on public resources. A category of Risk Management of particular interest in the discussion at the DC Forum was Tax Expenditures. Quantifying the use of public resources to promote public policy through the tax code is an area of PFM that is not well developed and few countries serve as a role model in incorporating this in fiscal analysis.

The strategy

Once an objective view of the size and dimension of the fiscal imbalances are understood, the next step in addressing the fiscal challenges is to develop a Consolidation Strategy. In this category, four institutions were discussed that can be critical in assuring that a comprehensive policy is adopted to address fiscal challenges in a manner that is effective and efficient. A clear set of Fiscal Objectives, a Medium-Term Budget Framework, an Independent Evaluation, and some element of Performance Orientation, all contribute to the development of a strategy fully informed on impacts of policy as well as those policies that will be effective. The increasing creation of Independent Fiscal Agencies was of interest to the ICGFM audience. It was noted that a number of countries are establishing an independent body to produce macro assumptions for the budget or to evaluate fiscal policy and performance. After noting that such agencies come in many different shapes and forms, Mr. Cangiano stressed that they are an increasingly important complement and not a substitute for effective central fiscal agencies, such as treasuries and ministries of finance.

With a sound understanding of the fiscal problems and a fiscal consolidation strategy developed, three more critical institutions will be key in implementation of the consolidation strategy. A Top-Down Budgeting approach will more likely assure that individual budget components sum up to the goal of consolidation. An informed process of Parliamentary Approval is almost always necessary to establish legal authorities to execute a budget and this is a critical institution to keeping a strategy on track and intact. Finally, the audience agreed that a fiscal consolidation strategy is best implemented through the budget process and that Budget Execution is key to ensuring that fiscal policies are adhered to and tracked.

The forthcoming IMF book on budget institutions will be further highlighted during upcoming ICGFM’s winter conference to be held in Washington, DC from December 5-7, 2011. Registration information for the conference can be found at the website, www.icgfm.org

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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