Fiscal Rules and Fiscal Councils: New Data Just Out!

 

Posted by Victor Lledó[1]

Fiscal rules and fiscal councils have been increasingly recognized as important tools to promote sound fiscal policies.[2] By constraining discretion and fostering transparency, they enhance fiscal discipline and make fiscal policy more predictable. In particular, fiscal rules can help governments establish fiscal targets that support fiscal sustainability, while fiscal councils help ensure those targets are realistic.

Together, they can raise the financial and reputational costs of deviating from the announced targets. In doing so, they help prevent excessive fiscal deficits and unstable debt dynamics. Fiscal rules and fiscal councils also contribute to improve fiscal behavior over the business cycle and encourage better risk management as building buffers in good times makes space to conduct countercyclical policies in bad times and to absorb the realization of fiscal risks. Healthy and resilient public finances, in turn, give policymakers the room needed to serve other objectives, including economic efficiency and growth, as well as achieving a more equitable distribution of income.

Accrual Budgeting in Kazakhstan

Posted by John Zohrab[1]

From the perspective of fiscal transparency, accrual budgeting (AB) is superior to cash budgeting, because it facilitates the management of the budget in terms of the full resource implications of policies and programs and provides a much wider set of fiscal indicators. A cash budget is managed in terms of cash flows and balances whereas, in addition, an accrual budget takes into account accrued expenses and revenues, as well as the full range of assets, and liabilities and net worth.[2]

However, implementing AB is generally perceived to entail risks and complexities. This is presumably why, starting in 1989, only a handful of countries have so far implemented it in central government: Australia, Austria, Canada, Denmark, Iceland, New Zealand, Switzerland and the United Kingdom. It is also presumably why most countries prefer to stick with cash budgeting. So why is Kazakhstan considering the introduction of AB?[3]

Central Government Expenditure Rule Under Scrutiny in France

By Guilhem Blondy and Vianney Bourquard[1]

A central government expenditure rule that has been in place in France for twenty years has been assessed by the Court of Audit in a report that was recently submitted to the Parliament. According to the Court, the rule has reduced the growth of central government expenditure, while loopholes in its coverage and poor in-year reporting have weakened the rule’s influence on budgetary policy. The full report (in French) is available at : Le budget de l’État en 2015 (résultats et gestion) / Publications / Publications / Accueil / Cour des Comptes - Cour des comptes.

The report notes that 17 EU member countries have implemented budget rules covering all or part of their public expenditure, using budgetary accounting, financial accounting, or government financial statistics as a measuring tool. France chose two such rules - a central government expenditure rule (“norme de dépenses de l’État”) created in 1996 and a healthcare expenditure rule (“objectif national des dépenses d’assurance-maladie”) established in 1997[2]. The report mentions that France was at that that time engaged in a difficult fiscal consolidation exercise to qualify for membership of the Economic and Monetary Union. These rules were supplemented in 2014 by a local government expenditure target (“objectif d’évolution de la dépense publique locale”), but this rule is less binding than the others. Both the central government and healthcare expenditure rules use accounting data rather than statistical data to improve the timeliness of reporting expenditure outcomes.

Medium-Term Budgetary Frameworks, Fiscal Rules, and Fiscal Councils in East Africa

Posted by Victor Lledó[1]

A workshop on Medium-term Budgetary Frameworks, Fiscal Rules and Fiscal councils took place in Addis Ababa, Ethiopia from January 11-14, 2016. The workshop was organized by the East Africa Regional Technical Assistance Center (AFE) and was attended by 23 delegates from Burundi, Ethiopia, Kenya, Malawi, Tanzania, Uganda, and the East Africa Community (EAC) Secretariat. Participants, all senior officials, hailed from Ministries of Finance, Supreme Audit Institutions, Parliamentary Budget Offices, and Think Tanks. Overviews on fiscal institutions, medium-term budget frameworks, fiscal rules, and fiscal councils were presented by Fazeer Rahim (Macro-Fiscal Advisor, AFE), Phyllis Makau (Director of Kenya’s Parliamentary Budget Office), Victor Lledó (Senior Economist, FAD), and Andy King (Chief of Staff, U.K. Office of Budget Responsibility). These presentations were followed by discussion of specific country cases presented by some of the delegates. A wrap-up session in the last day distilled key lessons.

Some of the key take-away messages— potentially relevant for further analytical and operational work on fiscal rules and fiscal councils— were as follows.[2]

“Your Majesty, Rebuild that Fiscal Buffer” – Some Fiscal Policy Advice from the Eighteenth Century

Posted by Renaud Duplay[1]

 In 1774, Anne-Robert-Jacques Turgot, Baron de Laune, was appointed Minister of Finance by Louis XVI, and immediately resolved to set out his principles of good financial governance in a letter to the king. This letter is still considered a hallowed text in the French Ministry of Finance and its continuing relevance to fiscal policy is striking.

 Turgot proposes a set of fiscal objectives and rules. “No bankruptcy, no tax increase, no new indebtedness. In peacetime, the Crown should only borrow for the purpose of amortizing existing debt, or buying back old debts at a more favorable rate.” Thus, the government should in normal times not run a deficit. This rule would, however, accommodate exceptional circumstances—such as war—. It was the closest thing to a structural balance rule an eighteenth-century gentleman could have thought of. In normal times, debt and the cost of indebtedness would decline.

Transparency and Participation in Public Financial Management: What Do Budget Laws Say?

Posted by Paolo de Renzio, International Budget Partnership, and Verena Kroth, London School of Economics

An increasing number of governments, as well as international and civil society organizations, are promoting the public disclosure of budgetary information, and calling for greater citizen involvement in budget processes. Most agree that fiscal transparency generates significant benefits, as it is an important precondition for better governance, improved economic performance and prudent fiscal policy, resulting in lower deficits and debt accumulation. Moreover, transparency functions as a political expression of democratic governance, giving citizens and taxpayers information that they are entitled to, and that they can use to hold their governments accountable.

Given its increasing importance, how can transparency and participation in public financial management be promoted or improved? As a possible avenue, it is interesting to look at the role of legislation in promoting both disclosure of budgetary information and opportunities for citizen engagement in the budget process. Key questions then are: (a) to what extent does budget legislation in different countries cover issues related to budget transparency and participation, and in what level of detail? and (b) does the degree to which legislation covers issues related to public disclosure of budget information seem to affect the actual level of budget transparency in different countries?

Forward Estimates: Rocking or Rolling?

Posted by Kris Kauffmann

In my view, it is now well established that using rolling forward estimates is a central element to the successful implementation of any Medium Term Expenditure Framework approach. By establishing the future costs of existing policies, for say 2-3 years after the budget, this provides a foundation for future budget planning processes, where the focus shifts to the costs verses benefits of changing those existing policies and their established costs. Multi-year estimates also support longer term macro fiscal as well as managerial planning. In recalling Australia’s MTEF reforms and describing the impact of rolling forward estimates, a senior official is quoted as telling the World Bank that “If you had to pick out the one thing that we have done above all others, this reform would be the most dramatic change.”

Yet we often see in developing and emerging market countries that while government may have adopted what appears to be forward estimates in their budget processes, they have not been able to achieve the dramatic changes in budgeting described above. It is a characteristic of these countries that the forward estimates, while published in the previous budget, are not accepted as being highly relevant for future budget processes.

Reforming Budget System Laws

Posted by Ian Lienert 

A new Technical Note and Manual (TNM) entitled Reforming Budget System Laws has been issued. TNM/10/01 is mostly unchanged from the Guidance Note on this issue, authored by Israel Fainboim and myself and published on the PFM blog on October 22, 2007. The TNM explores the variations and provides principles to guide countries seeking to draft new budget laws or to amend existing laws.

The TNM points to the opposite positions that OECD countries have regarding the need to adopt a law – or laws – for providing a framework or rules for government budget processes. At the one extreme, Denmark and Norway have never adopted a formal law to govern the budget system. At the other extreme, the United States has adopted many laws relating to the federal budget system (not to mention State level laws). Most countries lie between the extremes of these two countries.

Extrabudgetary Funds -- Removing the 'Extra' and Minimizing the Risks

Posted by Bill Dorotinsky

Extra-budgetary funds (EBFs) are a large and persistent issue in developed and developing countries. An October 26, 2007, blog post highlighted the magnitude of such funds, offered a taxonomy of EBFs, and suggested some questions for evaluating them. This post offers a similar perspective, drawing on a draft World Bank policy note prepared for the Polish authorities in 2001.

Public finance professionals generally oppose creation or continuation of 'extra-budgetary funds' because they undermine comprehensive budgeting, fragment financial reporting and cash management, and frequently there are transparency, oversight, and accountability concerns for the EBF's directly. But there are principles that, if followed, can minimize the risks from EBF’s, effectively removing their ‘extra-budgetary’ character.

Fiscal Rules - Beneficially Binding?

Posted by Gösta Ljungman

Widespread turbulence in public finances over the past decade has rekindled an interest in numerical fiscal rules as a way of addressing the well-known difficulty in ensuring that political assemblies take full consideration of the fiscal impact of their decisions. On top of a creeping increase in public expenditure and deficits in a number of countries, the future challenge posed by an ageing population is receiving more and more attention, and various options for ensuring sustainability are being discussed. Medium- and long-term fiscal policy objectives, and institutionalized restrictions on fiscal policy formulation, are possible ways of addressing these issues.

However, the experience with fiscal rules presents a mixed message. In some cases they have been highly successful in consolidating public finances and promoting a responsible fiscal policy, while in other cases the actual impact has been negligible. The emerging picture seems to be that numerical fiscal rules in themselves are not sufficient to promote fiscal discipline; they have to be supplemented by institutional reforms supporting the rules, and implemented in a political environment, which is conscious and concerned about the long-term health of public finances.

Fiscal Double Whammy: Combination of Balanced-Budget Rule and Economic Slowdown Forcing U.S. States to Make Tough Fiscal Decisions

Posted by Michel Lazare

A majority of US states are facing a difficult fiscal situation according to the survey made by the Center on Budget and Policy Priorities (CBPP).

In a January 28, 2008 revision of a survey of states fiscal outlook (prepared by Elizabeth C. McNichol and Iris J. Lav ), CBPP indicates that "19 states face a total budget shortfall of at least $32 billion in fiscal year 2009; 9 others expect budget problems." These dire projections were made by the states themselves and were aggregated by CBPP.

Because they have passed a fiscal rule, which forces the state legislators to adopt a balanced budget, "the vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures."  They have to resort to fiscal retrenchment--not a very pleasant perspective at times when the US economy is noticeably slowing down--, which could in turn negatively affect economic growth prospects (procyclical effects).

The Dutch Fiscal Framework: Unique, or Transferable to Other Countries?

Posted by Frits Bos, CPB Netherlands Bureau for Economic Policy Analysis

The Netherlands has a well developed and successful  medium term fiscal and budgetary framework that has helped stabilize government finances and has helped constrain the growth of the public sector. The Dutch framework is based on real expenditure ceilings and a sustainable deficit target over the medium term. Expenditure envelopes are fully planned in for the duration of government on the basis of a four-year “Coalition Agreement” between the political parties in government. Expenditure growth paths were based, until recently, on cautious assumption about the structural growth rate of the economy. To what extent is the Dutch framework, which has a number of specific institutional features, transferable to other countries? What are the strengths and weaknesses of the framework. Frits Bos, of the CPB (the Netherlands Bureau for Economic Policy Analysis), discusses below the main features of the Dutch system. A recent paper published by Mr. Bos presents  the historical development, the procedures and the specific rules of the Dutch fiscal and budgetary framework

Does Performance Budgeting Perform?

Posted by Holger van Eden

“Performance Budgeting in OECD Countries,” a recent publication of the OECD’s Budgeting and Public Expenditures Division, reviews the experiences of eight OECD countries (Australia, Canada, Denmark, Korea, Netherlands, Sweden, United Kingdom, United States) that have introduced performance information in the budget process over the past decade. The book is available in hard-copy and e-book versions at the OECD Online Bookshop (click link above).

The main author of this publication, OECD senior economist Teresa Curristine, discusses extensively the question of whether 'performance budgeting performs,' and not surprisingly, the answer is not that clear. There are many approaches to introducing performance budgeting reforms, and many reasons for doing so. As with many complex public reforms, the results are usually rather nuanced.

The short and cynical answer by the casual reader is perhaps “No, it doesn’t”, or not “Not enough, given the effort”, or “Not yet, even after many, many years of implementation.” The many nuances in this book do clarify that performance-based reforms can work in certain circumstances, but do leave interested governments a bit in the dark on what road to take in their country in further developing performance budgeting.

Promoting Fiscal Discipline - Fiscal Responsibility Laws

Posted by Mario Pessoa

Fiscal discipline is essential to improve and sustain economic performance, maintain macroeconomic stability, and reduce vulnerabilities. Discipline is especially important if countries, industrial as well as developing, are to successfully meet the challenges, and reap the benefits, of economic and financial globalization. Lack of fiscal discipline generally stems from the injudicious use of policy discretion. The benefits of discretion are seen in terms of the ability of policymakers to respond to unexpected shocks, and in allowing elected political representatives to fulfill their mandates. But discretion can be misused, resulting in persistent deficits and pro-cyclical policies, rising debt levels, and, over time, a loss in policy credibility.

A recent IMF book entitled "Promoting Fiscal Discipline", edited by by Manmohan Kumar and Teresa Ter-Minassian, addresses some of the key issues involved in promoting fiscal discipline, with particular emphasis on output stabilization and the cyclicality of fiscal policy, and on ways to avoid procyclicality in good times. It examines the role and determinants of fiscal discipline (chapter 1), the extent, consequences, and causes of procyclicality, and “mechanisms that could help reduce procyclicality and strengthen fiscal discipline-targeting cyclically adjusted fiscal balances (chapters 2 to 4), the introduction of fiscal responsibility laws (chapter 5), and the creation of nonpartisan fiscal agencies (chapter 6).

Germany: Ministry of Finance's Task Force Recommends Introduction of Performance Budgeting and Accrual Accounting

Posted by Michel Lazare

A few days ago, our FAD colleague and PFM Blog author Marc Robinson published a short article in IMFSurvey Magazine titled "Major Reforms for German Budget System." Here is a summary of the key points; the full text of the article is accessible by clicking here.

The German Ministry of Finance's Budget and Accounting Reform Task Force, who was assisted by staff of FAD, recently recommended "the introduction of product budgets--often known elsewhere as programs. The intention is to focus greater attention in the budget formulation stage on choices about how much money is allocated to" various outputs.

"Under the task force's proposals, the product budgets would not in the first instance be used for parliamentary budget appropriations. The idea is that they would initially be used [...] in formulating the budget. The logical next step would, however, be to shift the annual budget law also onto programmatic basis."

Comparative Budget Law study released in French

Posted by Ian Lienert

In PFM, there is often a dearth of comparative studies. This was especially the case for the legal framework of budget systems. Given different legal traditions and the varying importance of law across countries, budget-related laws are more different than budget systems themselves. Two years ago, the dearth in this subject was plugged when OECD published an English version of The Legal Framework for Budget Systems: An International Comparison, which includes in-depth studies of 13 OECD countries.

More recently this study has been made available in French [hard copy only at this time]. The original English version is available electronically (PDF format) at the OECD Journal of Budgeting site.

From Line-item to Program Budgeting - Opening the 'black-box' of spending

Posted by Bill Dorotinsky

A perennial question of annual public budgeting for Ministries of Finance and legislatures, and the general public, is "What are we getting for the money?" It is the proverbial "black box" of annual spending, where funds are allocated by traditional line-item budgets to agencies, but there is no sense of what the money actually achieves. While under line-item budgeting, budget offices know what inputs are being purchased, there is no clear indication of what activities, purposes, or objectives -- or ultimately outputs or outcomes -- are being purchased, or how government policies translate into spending. A common first step for many countries towards opening the black box of spending is to adopt a program classification of spending, and introduce program budgeting. A program classification is often thought of as a first step in introducing a performance orientation into the budget process.

While sounding like a very dry, technical exercise, the reality of successful introduction of program budgeting is more complex, involving elements of change management across government. Various governments across the globe have been introducing program budgets over many decades, including within the past decade in Russia, Brazil, and more recently, the Republic of Korea (RoK). A recent book by the Korean Institute of Public Finance and the World Bank, From Line-item to Program Budgeting (John Kim, Editor; Seoul, 2007), summarizes some key lessons from the global experience, and offers practical advice to countries embarking on this journey.

Public Finance Reference Reading: Revisiting the Classics — Schick's Contemporary Approach to PEM (1998)

Posted by Bill Dorotinsky

As public finance professionals, we are frequently asked for useful background reading to better understand public financial mangement systems. Thankfully, there are a number of classic works still highly relevant and 'must reads' for anyone interested in the topic. Occasionally, we will post references to these documents as a service to our readers.

New Danish Accrual Budgeting System

Posted by Marc Robinsonp>

Denmark has this year introduced an accrual budgeting system, and in doing so has joined the ranks of a very small group of countries with such systems (including the UK, Australia, and New Zealand). The core feature of the new Danish system is that government agencies receive a budget appropriation for the expenses – i.e. operating costs as measured using accrual accounting – they will incur in the financial year. No longer do they receive a budget limiting the expenditure (payments) that they may make.

Increasing Fiscal Transparency -- Brazil's Budgetary Fiscal Risk Report

Posted by Mario Pessoa

As public financial management (PFM) systems develop and become more complex, the need to identify, quantify, and manage various public finance risks expands. As the need expands, the capacity and instruments to do so expand as well. Brazil's PFM system advanced considerably with the adoption of its Fiscal Responsibility Law (FRL) in 2000, and it has further advanced transparency by publishing a "Budgetary Fiscal Risk" report (BFR) as one of many annexes to its annual budget.

Budget practices and procedures — everything you'd want to know about OECD countries

Posted by Bill Dorotinsky

Ever lay sleepless at night, wondering how far in advance of the new fiscal year OECD country legislatures receive the budget from the executive? Or if ministers in OECD countries are allowed to reallocate/vire funds between line items within their responsibility? For PFM specialists and country PFM officials, these can be important guideposts for reform directions.

Well, wonder no more, and sleep peacefully. The OECD just released publicly their Budget Process and Procedures database for 2007, featuring 30 OECD and 8 non-OECD countries. As the OECD web page itself says: "The purpose ... is to provide budget practitioners and academics the opportunity to compare and contrast national budgeting and financial management practices with a view to share experiences and best practices. It is a unique, comprehensive and free resource that covers the entire budget cycle: preparation, approval, execution, accounting and audit, and performance information."

Drafting Budget System Laws -- IMF Technical Guidance Note

Posted by Ian Lienert

Law is a dry subject. Budgeting is as well. Would happiness be attained if the two subjects were to be married? Denmark sees no need for such a marriage: it has never adopted a formal law to govern the budget system. At the other extreme, the United States believes in this marriage: it has adopted many laws relating to the budget system—both a federal and State level. Most countries lie between the extremes of these two countries.

A new IMF FAD Technical Guidance Note on Budget Systems Laws, prepared by Ian Lienert and Israel Fainboim of the Fiscal Affairs Department, explores the variations, and provides principles to guide countries seeking to draft new budget laws or to amend existing laws.

Dr. Allen Schick on Budget Tools and Rules

Posted by Richard Allen

Professor Allen Schick led an FAD-seminar on "Analytic  Tools Versus Decision Rules for Fiscal Policy" on September 19, 2007.  Many analytic concepts can  be formulated into rules that guide or constrain decisions on the budget  or fiscal policy. Alternatively, analytic tools can be used  to inform decisions, but not to dictate how governments allocate resources.

Central American MTEF Workshop

Central American countries, Panama, and the Dominican Republic sponsored a workshop on medium-term expenditure frameworks (MTEFs) for Vice-Ministers, Budget Directors and Treasurers on October 8-9, 2007. The workshop was hosted by the Honduran Ministry of Finance in Tegucigalpa, and was organized and delivered by the IMF Fiscal Affairs and Western Hemisphere Departments, with the support of the World Bank and InterAmerican Development Bank, and participation of speakers from Colombia and Spain.