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December 07, 2012

What if… Legislators Approve—and Execute—the Budget?

Posted by Greg Horman

A practice more or less universal across all legislative assemblies is to provide members—MPs, for short—with allowances to enable them to represent their constituents effectively. Typical allowances cover expenses associated with staying in close contact with voters, such as travel to MPs’ constituencies, operating local offices, and communicating through mailings and various media. Although they are the cause of the occasional scandal, debate about these allowances is more over the scope of costs that they cover and up to what ceiling, than over the principle that they are necessary in the first instance. Frequently, these allowances—representing spending by the legislature, not the executive—are outside the government’s budget.

What is uncommon, however, is the situation where MPs themselves administer and distribute funds from the government’s budget.

The Solomon Islands is a case in point and an example of this modality of budget execution taken to an extreme. Depending on the calculation, perhaps 30 percent to 50 percent of the development budget in the Solomon Islands is represented by “constituent development funds.” These are appropriated funds that are directly allocated to and held by MPs for distribution to their constituents. In practice, the funds are deposited into MPs’ own bank accounts, and there is little transparency or accountability for how MPs manage or distribute this money from the public purse. Nor is there any analysis of the impact or effectiveness of the use of the funds. Moreover, expenditure in the development-budget that was originally appropriated to ministries is occasionally re-programmed into constituent development funds. Staff of the Ministry of Finance and donors—grants account for around two fifths of total revenue—agree that this practice undermines sound public financial management.

The Solomon Islands is not unique. Papua New Guinea implements part of its development budget through MPs under a similar arrangement. In Cambodia, an estimated 5 percent of GDP in foregone taxes and fees is spent through MPs and other political channels. Interestingly, the efficiency of use of this revenue is regarded by much of the public as higher than that that of budget funds implemented through formal government channels. Nevertheless, bringing this revenue under the formal PFM system and fixing its weaknesses is still seen as the right action to take. In India, under the Members of Parliament Local Area Development Scheme, lump sums are allocated to each MP. The role of the MP is to decide the purposes for how the funds will be used—much is directed toward capital creation—but that is where it is ends. The normal government procedures for procurement, fund release, and audit do apply after that. Brazil also provides for a small spending package for MPs, which they can utilize as they deem appropriate.

The standard justification put forward for these practices where they occur is that MPs have special knowledge about the needs of the public which may be overlooked by the “heartless bureaucrats” responsible for investment planning. As discussed, carrying out some budget spending through MPs could even be both efficient and effective. Political dynamics are a more compelling, if unspoken, rationale. Providing individual MPs with some flexibility—through highly “discretionary” funds—helps the government extract concessions or reach compromises in other more important areas of fiscal policy.

The problems and risks that arise when MPs administer and distribute funds from the budget are substantial, however. Apart from poor transparency and limited accountability, the threat of corruption and personal enrichment by MPs can be considerable. Distribution of these budget resources may also be inequitable, with MPs directing these funds on the basis of party affiliation, cronyism, or other favored relationships. The results can manifest themselves through low-quality and low-priority spending, likely biased towards the political constituency.

Although not a panacea, some sensible actions can partially mitigate those negative aspects. For instance, all the funds allocated to MPs could remain within the government’s treasury single account for reasons of expenditure control and traceability. Each MP could maintain a register of how this money is distributed, with complete information about the recipient, intended purpose, and amount, so that it is possible to monitor how distributions are put to use. Distributions could be disclosed publicly and immediately after they take place, and followed up through a formal audit process carried out with sufficient independence. Likewise, MPs could be limited in term of discretion, by requiring them to administer and distribute the funds according to guidelines that specify permitted purposes, priority sectors or projects, recipients, transaction amounts, as well as the procedures to be followed at each stage of allocating and paying out these public monies.

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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