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August 2012

August 30, 2012

Fiscal Rules and Councils: Most Effective When Used Together

Posted by Elif C. Arbatli [1]

Adopting numerical fiscal rules has been an integral part of the policy response to the medium-term fiscal consolidation challenge posed by the global financial crisis. According to Schaechter et. al. (2012), since 2009, at least 16 countries have adopted new national fiscal rules and many others are in the pipeline. The crisis has also revealed the need for reforming supranational rules, such as the Stability and Growth Pact of the EU and as a result new structural budget balance rules will be adopted in almost all of the EU member states as part of the “fiscal compact.” A recent paper by Charles Wyplosz titled “Fiscal Rules: Theoretical Issues and Historical Experiences,” is a timely review of the theoretical underpinnings of fiscal indiscipline and how numerical fiscal rules can help. Wyplosz argues that fiscal rules are neither necessary nor sufficient to achieve fiscal discipline; but that thoughtfully designed fiscal rules can be effective when supplemented with fiscal institutions (and in particular fiscal councils) that are tailored to the political institutions of the country.[2]

The paper first looks at the theoretical underpinnings of fiscal indiscipline, known as the “common pool problem”. The common pool problem arises when the beneficiaries of public spending or tax policies do not take into account the externalities that these policies impose on other groups (within a population, across different generations, among different levels of government or different states within a monetary union). Fiscal rules can in principle reduce these externalities by imposing explicit principles for fiscal behavior and thereby lowering the scope for deficit bias. According to Wyplosz, there are two key challenges: 1) fiscal rules cannot be fully contingent and hence they are subject to the “time-inconsistency problem” and 2) fiscal rules cannot be fully binding since they can be manipulated, changed or simply ignored. He argues that fiscal institutions (in particular, fiscal councils or other arrangements that give authority to an independent body to interpret rules) can help overcome these challenges.

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August 28, 2012

PEFA Partners Seeking Comments on Exposure Draft of “Guidance Note on Sequencing PFM Reforms”

Posted by the PEFA Secretariat

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Readers familiar with the PEFA Performance Measurement Framework will be aware that the main purpose of an assessment report is to provide the authorities with a high-level overview of the performance of the PFM system at a point in time. In many cases, this overview—which can be expected to highlight strengths and weaknesses found in the system—becomes the cornerstone of a dialogue with development partners about reform priorities.

But when a PFM system is generally weak, what should the priorities be? Where should reforms focus? Many practitioners would answer these questions by agreeing with the proposition put forward many years ago (and recently reiterated) by Allen Schick: “with the basics”. But what are “the basics”, and which of them should be addressed first?

A draft “Guidance Note on Sequencing PFM Reforms” has been developed by Jack Diamond, former IMF Fiscal Affairs Department Division Chief on behalf of the IMF and the European Commission, under the auspices of the PEFA Program, following an extensive period of research and debate around these issues between the PEFA Partners.  

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August 17, 2012

The sequencing debate is over… or is it?

Posted by Philipp Krause*

There seems to be an emerging consensus that advanced budget reforms should not be attempted in developing countries before budgetary basics have been soundly established. In many countries, this may well mean a focus on budgetary basics for the foreseeable future, consigning more advanced techniques to the inbox of another generation of budget officials.

It has not always been so. It has been 15 years since Allen Schick first warned practitioners to “look before they leapfrog”. It shouldn’t be forgotten that his warning came in response to widespread enthusiasm for adopting New Public Management reforms the world over. An often overlooked feature of Schick’s work is his emphasis on the external factors that function as preconditions for advanced budget systems to become viable. For instance, Schick noted that New-Zealand-style contractualism in the public sector only becomes viable in countries where informality has been firmly overcome in private sector practices.

A few weeks ago, Colin Talbot noted that Britain is another example for just such a co-evolution of public sector and private sector practice: in the mid-19th century, private sector property rights, democratic accountability and the professionalization of the civil service all proceeded in lockstep over the course of several decades. One might also add that the formal budget process was only established towards the end of this evolution, in the 1860s. Talbot’s key point is about co-evolution: large-scale societal changes depend on one another as they develop, and such developments are at best measured in decades and possibly a lot longer.

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August 14, 2012

Good PFM Practices in a Period of Global Adjustment: ICGFM Issues Call for Speakers at its Upcoming Conferences

Posted by David Nummy, ICGFM Vice-President for Programs

Five years after the beginnings of the global financial crisis, economic adjustments continue to take place throughout the world. ICGFM will explore both the proactive PFM measures that have taken place as well as the responses that have been undertaken to manage through this period of adjustment. This overall theme will frame the focus of both of its upcoming international conferences.  

The International Consortium on Governmental Financial Management (ICGFM) has issued a call for speakers, panels, and presentations that address good practices in public financial management. As this topic will cover both of its upcoming conferences, proposals are solicited for both the winter conference in Washington, DC from December 10-12, 2012, and the 27th Annual International Conference in Miami from May 19-24, 2013.

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August 10, 2012

Au Revoir, Michel!

Posted by Greg Horman

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Michel Lazare, the founder and chief editor of the PFM Blog, recently moved position from the Public Financial Management Division II in the Fiscal Affairs Department, where he managed the delivery of PFM technical assistance to countries in Asia and the Pacific, Latin America and the Caribbean, and French- and Portuguese-speaking Africa. Now in the African Department, Michel is involved in the Fund’s relationship with four post-crisis countries: Côte d’Ivoire, Guinea, Liberia, and Sierra Leone. Greg Horman reflects with Michel on the place of PFM in the Fund’s TA and surveillance activities and how reform efforts can be supported.

Greg: You are returning to your macroeconomic roots at the Fund after eight years in FAD. How has the Fund’s interest in PFM evolved during that time?

Michel: Traditionally, the Fund’s focus was narrowly on monetary and fiscal policy. Nowadays, PFM is recognized as having macroeconomic and macro-fiscal implications. Over the years, the Fund has realized how PFM tools and institutions, including formal rules and bodies, contribute to facilitating and maintaining fiscal sustainability. Commitment controls, for instance, are now better understood as a mechanism for maintaining fiscal discipline, ensuring that spending is in line with the budget and helping to achieve the government’s fiscal objectives.

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August 07, 2012

New PFM Newsletter in Khmer

Posted by Chita Marzan

The IMF Technical Note and Manual on Modernizing Cash Management has recently been translated into Khmer (attached below), and more such translations are now underway. An article on this technical note and manual (TNM) was featured in the first PFM Newsletter in Cambodia (also below) which was launched in May 2012. This newsletter is a joint effort of Mr. Suhas Joshi, PFM Regional Advisor for Southeast Asia of the IMF Fiscal Affairs Department (FAD), and Mr. Seng Sreng, Director of the Economics and Finance Institute (EFI) of Cambodia. Another article focused on gender-budgeting describing the practices in Pacific Island countries.

The PFM Newsletter evolved from an idea to set up a knowledge exchange group which would connect all the participants of joint IMF/EFI lectures on PFM by email and also through a quarterly newsletter. The newsletter is expected to cover developments in the field of PFM and to bring to the recipients improvements in this field from across the world and in Cambodia itself. The newsletter is to be sent out every quarter jointly with the EFI and also aims to establish a forum for PFM practitioners in Cambodia to exchange ideas and knowledge, and to widen the dissemination of available materials that are relevant for the improvement of PFM in the country. Improving cash management is one of the key objectives of the PFM Reform Program (PFMRP) of the Royal Government of Cambodia. The newsletter is available both in Khmer and in English so that country officials have greater access to international developments in the PFM area.

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