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February 23, 2015

Budget Laws vs. Appropriation Acts

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Posted by Renaud Duplay[1]

Is a government budget a forecast or an authorization? Both, of course, but ask various PFM practitioners to pick one answer first and you will see a clear divide between “macro-fiscalists” – who think forecasts first – and financial managers – who think of control and authorization first. But you may also detect some cultural divide as well: people from Westminster style countries may think forecasts first while people from continental European countries, like France, may choose authorization as the main feature of a budget.

This cultural divide, which my FAD colleague Benoit Chevauchez already discussed on a previous post on PFM taxonomy, may be linked to the various forms a budget can take as both a technical and a political object.

Which are those forms?

Leaving aside “second generation” PFM reforms such as performance budgeting or medium-term budget frameworks, there are four basic elements that comprise the design and implementation of an annual budget:

  • A policy statement describing the macroeconomic assumptions on which the budget is based, presenting the fiscal objectives and targets pursued by the government, and the main policy decisions (new programs or savings) proposed.
  • Detailed forward-year fiscal forecasts of revenue, expenditure, the fiscal balance, and debt.
  • A legal provision to authorize or limit the incurrence of expenditure by ministry and/or program.
  • Some legal provisions required to implement the policy measures adopted by the budget.

Many countries of the French or Spanish tradition have adopted a comprehensive approach to implementing those various elements which culminate in the annual adoption by Parliament of a budget Act. This Act enshrines the financial data for the future year, appropriates money for public policies, and includes a series of legal provisions such as new taxes, changes in entitlement programs, or general provisions for exerting fiscal discipline over public agencies. In France for instance, the outline and content of the annual budget bill is strictly provisioned by the Public Financial Management Act of 2001 (the LOLF). A central feature is the so-called “balance article”, a specific section which summarizes gross revenue, expenditure, the fiscal deficit, and the impact of the budget on debt. Any change to the legal provisions included in the budget bill during the parliamentary debate must be reflected in the figures contained in this section. All legal provisions included in the draft law are accompanied by a detailed presentation and assessment, including their medium-term financial impact.

Countries of the Westminster tradition have adopted a different approach and make a clear difference between forecasts and the granting of authority to spend. Fiscal forecasts are included, together with a discussion of fiscal policy and government priorities, in a budget statement which has no legal force and is normally debated in Parliament in the form of a vote of confidence (i.e., if the vote is rejected the government must resign). Annual authority to spend is granted through Appropriation Acts but also through other laws which permanently appropriate money for specific programs, such as entitlements. The adoption of the legal provisions required for implementing policies included in the budget is often discussed later in Parliament.

What are the respective merits of these approaches?

Budget Acts have the advantage of greater transparency in reconciling fiscal forecasts with appropriations and policy measures: the published budget act will reflect the impact of parliamentary debate; additional appropriations require a supplementary Budget Act meaning a complete reassessment of the fiscal forecasts; no expenditures escape the authority of the budget act.

However, Budget Acts tend to have a coverage limited to the scope on which it has authority, which is often narrower than central government. There lies the advantage of separating a budget statement from an Appropriation Act: the former can have a much broader coverage than the latter and indeed, budget statements in Westminster countries tend to present a broad fiscal outlook of at least the whole of central government, and sometimes a much wider perspective of general government or the whole public sector.

Some Westminster-style countries, such as Australia and Canada, have found ways to enhance transparency by providing that any supplementary Appropriation Act be accompanied by a complete update of the fiscal forecasts. After budget approval, Canada’s Parliament discusses a Budget Implementation Act which aggregates the various provisions required to give legal force to policies included in the budget. Those provisions, however, do not always ensure a full, transparent, and timely reconciliation between the overall fiscal forecasts, the detailed appropriations, and other legal measures.

In the end, the fragmented approach of Appropriation Acts is inseparable from the political tradition of Westminster-style countries where the government enjoys a strong majority which will not question the main assumptions of the budget or will simply overthrow the incumbent cabinet or its finance minister. In countries with a different balance of power between the legislature and the executive, a Budget Act approach would be more advisable as the Appropriation Act approach may lead to the kind of legal and political stalemate which has been witnessed on Capitol Hill for the past 15 years, something I already discussed in a previous post.

However, if advisable, the Budget Act approach should also be strengthened in terms of its coverage. This may sometimes require amending the Constitution but useful improvements can be made by first enhancing the supporting documentation of the annual Budget Act. Its introductory policy statement can indeed embrace a much wider scope – taking inspiration from Westminster-style countries – and include tables reconciling the forecasts with the narrower coverage of the Budget Act itself.

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.


[1] Technical Assistance Advisor, Public Financial Management 2 Division, Fiscal Affairs Department, IMF.

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