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October 20, 2016

The Timing of the Government’s Fiscal Year

Calendar

Posted by Guohua Huang and Holger van Eden[1]

What is the best fiscal year from an economic and public management perspective? It’s a question not often asked, as it seems a topic that has been resolved by history, tradition and common sense. However, in fact governments around the world have adopted different fiscal years (FYs). The Gregorian calendar year is used by about 70 percent of IMF member countries; the end dates of the 1st, 2nd, and 3rd quarters of the calendar year are used by most other countries. A few use a religious calendar. Examples include:  

  • 1 January – 31 December. All Latin American countries, Francophone Africa, most European countries and many South East Asian countries.
  • 1 April – 31 March. Many countries with historical ties to the United Kingdom follow this calendar, including Brunei, Canada, India, Singapore, South Africa, as well as the U.K. itself.
  • 1 July – 30 June. Australia, Egypt, Kenya, New Zealand, Pakistan, Tanzania, and many countries from the southern hemisphere.
  • 1 October – 30 September. United States (federal government), Thailand, Trinidad and Tobago, and Laos.
  • Religious New Years. Countries such as Iran and Afghanistan use 21 March – 20 March.

The timing of the governments’ fiscal year has evolved over the years and has been influenced by historic, political, economic, and climate-related factors. Aside from the tradition of following the calendar year – usually shared with many other national institutions and processes, a number of other influences can also be noted:

  • The government business cycle. Like private sector companies, governments experience their own business cycles. At certain periods during the year, governments may receive most of their revenues or make large payments. Governments prefer to locate the end of their FYs sometime after such events to avoid highly volatile flows of expenditure or revenue at the end of the year. Otherwise it may be difficult, for example, to make reliable projections of the government’s spending or revenue, or to implement public investment efficiently. If a country has limited access to capital markets, it may be problematic if the government has only a limited access to revenues at the start of the fiscal year. In such situations, countries may choose for a fiscal year different than the calendar year. Alternatively, a country can adopt a tax year that differs from the fiscal year, as in the U.K. for example.
  • Climate, public holidays, historic events. In an agrarian country, flows of government revenue and expenditure will depend on the harvest season, and also on the timing of climate events such as monsoons and heavy rains. In Mongolia, public investment projects can only be executed during a four-month window when soil temperatures are above zero degrees Celsius. The timing of the FY must ensure that sufficient investment funding is available at that time. If the FY ends during an extended holiday season, the process of closing the accounts for the fiscal year can be more challenging because of limited availability of finance personnel.
  • Alignment with the fiscal year of companies. As countries develop from an agrarian economy to one based on industrial production, the FY of private companies will play an increasingly important role in the planning and management of public finances. Forecasting economic growth will be easier if the planning processes in all sectors of the economy are aligned. Fiscal policy may also be more supportive of private sector activity if the fiscal cycles coincide. Of course, the benefits of such alignment are diminished if enterprises themselves have different fiscal years. Helpfully, most of the biggest companies around the world use the calendar year as their FY.
  • Tax year. The tax year is part of the government’s business cycle, but also linked to the business cycle of companies. Decisions by the government to change the tax year can be disruptive to companies, especially multinationals. It may be preferable for governments to change the FY rather than the tax year. On the other hand, in countries such as the U.S. and the U.K. the tax authorities allow enterprises to decide their own tax years. In that case the tax cycle will be less important for the determination of the FY.
  • Statistical accounting period. International comparisons, and also compliance with international treaties such as the European Union and various economic and customs unions in Africa, may be facilitated if the FY and the statistical accounting period are aligned. Data consolidation over the whole of government will be more straightforward. A common calendar for the preparation of the annual budget and the production of macroeconomic and national accounts statistics could also lead to a better understanding of the behavior of economic variables and to improved policy formulation. Currently, most countries report their national accounts and balance of payments statistics using calendar years, but some use the FY, such as, for example, Australia, Haiti, and Nepal.
  • Calendar of the Legislature. The government’s FY should be aligned with the legislative calendar to give the parliament sufficient time to scrutinize the budget. The FY should not commence until after the budget has been approved by the parliament. China is a notable exception to this rule which causes considerable difficulties in budget implementation. Tradition dictates that the National People’s Congress approves the state budget only at the end of March. However, the Chinese fiscal year starts on January 1st. During the first three to four months of the year many expenditure programs are delayed, for example, investment expenditure, government transfers and expenditure in new policy areas.

During the past decades, only a few industrial and developing countries have changed their FY.

  • United States. In 1976, the US federal government changed its FY from 1 July – 30 June to 1 October – 30 September, to allow Congress more time to develop and review the federal budget.
  • New Zealand. In 1989, New Zealand shifted its FY from 1 April – 31 March to 1 July – 30 June, to align with the availability of macroeconomic and balance of payments data at the year end. Another possible motivation was to align the fiscal year with neighboring Australia’s.
  • Timor-Leste. In 2009, Timor-Leste changed its FY from 1 July – 30 June to the calendar year, to facilitate comparison with the cycle of publishing key macroeconomic indicators.
  • In 2016, Fiji decided to change the FY from calendar year to 1 August – 31 July (recently approved by Parliament), to better align the budgeting process with the government’s business cycle.

The transition to a new FY in these countries was generally smooth, but some costs were incurred in re-configuring the budget process and the accounting system; training staff in departments and agencies on the revised calendars for financial reporting and auditing; and changing timelines in procurement planning, contracting, etc.

If a government decides to change its FY in order to better accommodate its business cycle, it may not be necessary to amend the arrangements for collecting revenues or for planning and executing the budget. If the change is motivated by other considerations, however, most business processes of government would need to shift in time as well. It is quite difficult to assess the level of cost and disruptiveness of these changes to the government’s business cycle, and to the wider economy, but they may be substantial.  

[1] Guohua Huang is Technical Assistance Advisor in the Public Financial Management II Division in the IMF's Fiscal Affairs Department. Holger van Eden is Deputy Division Chief in the same division and co-editor of the PFM Blog.

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.

Comments

A very interesting piece, thank you Guohua and Holger.

I was directly involved in the above mentioned change over in Timor - Leste in 2009 when I worked in the Ministry of Planning and Finance as a budget adviser. My recollection of it was the change was due to a mixture of things which included closer correlation with published macro economic statistical data which is mentioned.

On a personal level, I felt many Timorese authorities officials were never comfortable with a July to June approach. Many had civil service experience from either Portugal or Indonesia where the budget is based on calendar year as opposed to being in the middle of the year.

The fact that Timor had a July to June budget year was because Australia (who uses the July to June timing) were the major source of technical assistance in the budget area of the then Ministry of Planning and Finance.

Secondly, there was an issue of the weather, budget execution and implementation of the capital development budget. In Timor Leste the July to June fiscal year was punctuated by a big break in the middle if due to Christmas and the "wet season" which could bring with it inclement weather that could delay implementation. For example, a school may have required renovation in a more remote part, but it was quite common for a road or a bridge to be washed thereby delaying progress.

Many felt that it was far better to have the legislature pass the budget shortly before Christmas. That way everyone goes away for their rest and returns fresh and motiviated to implement the activities they needed to do in the forthcoming year. The logic goes that January and February would be the months for designing and planning and the remaining months to September would see implementation, and then finally if budgetary adjustments were required then these could be done in October and November during the forthcoming budget year allocation.

It wasn't a technically difficult thing to do, we had a six month transition budget (pretty much just an extension of the current appropriations from the previous 12 months to take us through from the from the previous July to June. The complications arose from the amount of work on staff who had just recently been through terrible civil disturbances which left many and/or their families and friends displaced as well as coping with significant political change.

But a few years on and it seems to have gone quite smoothly, but it would be interesting to see if those problems around budget execution on the capital side were assisted by the change in time frames.
Cheers
Richard


This is a very useful blog. The Indian government has also constituted a committee to look into the feasibility of changing the financial year. Most considerations stated in this blog apply equally to india as well.

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