Angels and Demons – the Political Economy of PFM Reform

 
Posted by Richard Allen¹ 

In a thought-provoking presentation during the IMF Fiscal Affairs Department’s (FAD) 50^th Anniversary Conference on December 5, 2014, Professor Ravi Kanbur of Cornell University analyzed the intellectual origins and roots of FAD.  In his view, these roots derive not from the influence of Keynes, one of the founding fathers of the IMF, who was more concerned with issues of monetary policy and balance of payments stabilization than with fiscal policy. A much stronger influence on FAD’s development was one of Keynes’ illustrious colleagues at Cambridge University, Arthur Pigou. Professor Kanbur’s main thesis [Presentation_Available here (.ppt)], however, was that FAD, while responsible for many important applications of fiscal policy, had taken little advantage of important recent work on political economy analysis, and the application of behavioral economics to fiscal issues. These developments derive from the work of notable economists such as Knut Wicksell and 2002 Nobel Prize winner Daniel Kahneman. Another strong influence has been the work on public choice theory and the economics of state bureaucracy, a line running from Pareto, through the great Italian school of public finance to the work of scholars such as Buchanan, Tullock and Peacock.

Book Announcement: Reconstructing Iraq's Budgetary Institutions: Coalition State Building After Saddam

 
Posted by James D. Savage, University of Virginia

The invasion of Iraq led to a costly nine-year state-building and reconstruction effort. Reconstructing Iraq's budgetary institutions proved to be a vital element of the state-building project, as allocating Iraq's growing oil revenues to pay salaries and pensions, build infrastructure, and provide essential public services played a key role in the Coalition's counterinsurgency strategy.  Employing a historical institutionalist approach, this book first explores the Ottoman, British, and Ba'athist origins of Iraq's budgetary institutions. The book next examines American pre-war planning, the Coalition Provisional Authority's rule making and budgeting following the invasion of Iraq in 2003, and the mixed success of the Coalition's capacity-building programs initiated throughout the occupation. The budgetary process introduced by the Coalition offered a source of institutional stability in the midst of insurgency, sectarian violence, economic uncertainty, and occupation. This book explores the problem of "outsiders" building states, contributes to a more comprehensive evaluation of the Coalition in Iraq, addresses the question of why Iraqis took ownership of some Coalition-generated institutions and not others, and helps explain the nature of institutional change.

How to Decide on the Budget: Set Menu or à la Carte?

Posted by Renaud Duplay

The recent debate over the United States federal budget, which led to a partial government shutdown, was at times hard to follow. Behind the debate over health care reform, lay also a more procedural struggle over the way to prepare the budget on Capitol Hill. Indeed, part of the butting of heads has resulted from a disagreement over what to negotiate on, in the first place. The US Constitution is relatively light on how the budget should be passed, so many legal options were considered in recent weeks, including: passing a continuing resolution to fund federal services and agencies; passing a continuing resolution linked with a defunding of the Affordable Care Act – Obamacare; funding individual federal agencies on a vote by vote basis; funding individual programs of federal agencies given expected adverse impacts of the shutdown, such as on cancer research trials. These options were, to make it even more complicated, linked to various stances on the federal government debt ceiling: separate decision-making, a linked agreed increase, or what resulted, a temporary suspension. In all this a new federal budget for the new budget year was not on the table. This is now on Congress’ to do list for the next three months.  

All of this is possible because the US federal budget works a little bit like ordering à la carte in a restaurant: you can skip the main course if you don’t feel like it and still end up enjoying the meal (or, more often, not really). Indeed, implementing a deal over the US federal budget requires selecting from a different menu of votes depending on the content of the deal. In addition, authority to spend can be given in various ways: either by appropriations bills – for federal agencies’ operating costs for instance – or by specific legislation that grants authority to spend on entitlement programs until this very legislation is modified or repealed. Those programs are called “mandatory” which by the way sets the tone for any future discussion on them.

A PFM View of the New French “Loi Organique”

Posted by Benoit Chevauchez[1]

France is now equipped with a fiscal rule. The organic budget law adopted last December[2] was the French government’s response to the obligations set out in the European Treaty on Stability, Coordination and Governance (TSCG) signed in March 2012. The Treaty resulted from a process initiated in December 2011 by the European Council, in the wake of the euro crisis. The basic idea of the Treaty is that “Euro zone countries” should adopt national fiscal rules in order to integrate in their own legislation the Maastricht principles of fiscal discipline that are set out in the European treaties.

Before the new treaty was ratified, the French national budget law did not address issues of fiscal sustainability. The French Constitution of 1958 was silent in this regard, even if an amendment adopted in 2008 had introduced the concept of “budget balance over the medium term”, but only as a theoretical principle without any operational impact. Similarly, the 2001 LOLF (loi organique relative aux lois de finances), and its predecessor the 1959 Organic Ordinance, wholly ignored sustainability issues.

In practice, France has had a rather modest record in terms of fiscal sustainability: its EU stability programs have seldom been respected, its macroeconomic assumptions have been frequently optimistic, and its debt level has steadily increased up to 90 percent of GDP. Thus, for France, the adoption of the new organic law (OL) is an important initiative, that might also mark a turning point in its fiscal tradition.

The Philippines Leads Its Peers in Performance Budgeting

Posted by Sandeep Saxena

The Government of the Philippines’ (GoP) budget proposals for the year 2014, presented to the Congress in July, contain important performance information for every government program. For the first time, government departments and agencies have spelt out their vision, mission, target outputs that they will produce from the resources sought, and the expected performance standards in service delivery. For instance, one of the Bureau of Fire Protection’s targets is to respond within five to seven minutes to 87 percent of the more than 5,000 distress calls the Bureau expects to receive in the year. The National Police promises a minimum of 629,258 crime investigations and a 25 percent increase in the number of foot and mobile patrols. The Department of Education aims to deliver a pass rate of 84 percent in the National Achievement Test that will be taken by 12.56 million secondary school students; and the Department of Social Welfare undertakes to serve meals to more than 2.5 million schoolchildren.

This move by the Department of Budget and Management (DBM) is being hailed in the country as “the single most important budgeting innovation in years”. According to media reports, the legislators are “pleasantly amused” at the detailing of information on what an agency must deliver with the use of public resources. They expect the budget scrutiny to be lengthier and the discussion on the floor of the Congress to be more meaningful. With this reform, the government has taken an important step forward in its commitment to promoting and developing a people-centric and results-based public administration.

Keeping Reform in the DRC on Track

Posted by Oscar Melhado Orellana

In this third article on the blog in which IMF area department staff express their views on PFM reforms in “their” country, Fiscal Affairs Department technical assistance advisor, Jean Pierre Nguenang, speaks with IMF Resident Representative for the Democratic Republic of Congo (DRC), Oscar Melhado Orellana, about the importance of PFM technical assistance in keeping the IMF program on track.

What contribution are reforms of PFM, revenue administration and tax policy expected to make to improved economic and fiscal performance in the DRC?

The DRC is one of the poorest countries in the world in terms of nominal GDP, despite being considered one of the richest countries in terms of natural resources. It has more than 30 percent of the world’s diamond reserves and 70 percent of the world’s coltan. The DRC is also one of the lowest-ranked countries in the international Corruption Perception Index. The government is still struggling to bring order to the eastern part of the country where recurrent attacks on citizens are perpetrated by armed groups opposed to the regime.

A New PFM Reform Strategy for Cyprus

Posted by George Panteli[1]

The government of Cyprus recently launched a radical reform plan for modernizing the country’s public financial management (PFM) system. The reforms are crucial to the implementation of the economic and financial recovery program on which we are now engaged with the help of the European Union, the European Central Bank and the International Monetary Fund. It will enable Cyprus to bring its budget process into line with best practice in the EU region, and enforce the fiscal rules and financial discipline that are necessary to comply with our Treaty obligations. At the same time, it will create an opportunity for line ministries to enjoy a new-found flexibility in managing their staff and other resources and to focus efforts on improving the quality of education, health and other public services that in many cases lag behind out counterparts in Europe. The strategy encompasses both traditional aspects of the budget system and emerging topics such as project evaluation processes, the management of fiscal risks including public-private partnerships (PPPs) and the future development of a sovereign wealth fund.  

The reform plan is challenging and a realistic timeline is required since the plan will take several years to implement. What are the plan’s main components?  

Post-Crisis PFM Reforms in Mali

Posted by Christian Josz[1]

This is the second article on the blog in a series about the views of IMF area department staff on PFM reforms in “their” country. In this article Fiscal Affairs Department technical assistance advisor, Benoit Taiclet, speaks with  IMF mission chief for Mali, Christian Josz, about the importance of PFM technical assistance in keeping the IMF program on track. 

What are the challenges of working in Mali at the present time?  How resilient has the country been in the face of the recent political and economic crisis?

Mali ranks among the poorest countries in the world, and has been under a succession of IMF programs for more than two decades. External funding has always played a significant role in the country’s development with grants reaching more than three percent of GDP. More recently, in 2011 the economy traversed a very difficult period when the country was hit by a drought and terrorist attacks. Following the 2012 military coup, fueled by military defeats, persistent corruption and failing institutions, donors suspended or dramatically reduced their support.  By the end of 2012, despite the fiscal austerity measures taken by the government, including the cutting of almost all capital spending, substantial arrears had accumulated, and the country’s debt rose markedly.

Faced with such concerns, the Fund seized the opportunity of last year’s slight recovery to re-settle in the country, with the reinstatement of our Resident Representative’s office in late 2012. We stepped up our involvement in early 2013 when the military situation was resolved with the fielding of an international coalition against rebel separatists and terrorists.

In the first quarter of 2013, the recommitment of IMF support through a rapid credit facility helped trigger the return of a number of donors whose pledges for funding reached US$ 4 billion in May. Now we hope the economy will rebound, as the authorities move to overcome the challenges ahead, and the production of gold and agricultural products increases. But political and security risks still cast a cloud over the nascent recovery.

Time to Overhaul PFM in the UK?

Posted by Tom Josephs

Should the public sector aim to follow the approach to financial control used in the private sector?  In 2011 the UK government took a step in this direction by publishing the first Whole of Government Accounts (WGA) which consolidate the financial accounts of over 1,500 organizations across the public sector on a similar basis to commercial accounting.  Two recent papers[1] suggest that the UK government should build on this initiative—following the introduction of accrual-based accounting and budgeting ten years earlier—by developing better financial control structures which mirror those used in the private sector. The ideas put forward provide a useful contribution to this debate.

WGA is based on the system of accounts used internationally by the private sector, adapted where appropriate for the public sector, and uses a similar presentation to private sector accounts. It is the first time a consolidated set of accounts has been published for the UK public sector. Because it follows commercial accounting practices it should open up the public sector finances to wider external scrutiny by accounting professionals. While WGA’s contribution to increased transparency has been widely recognized it has yet to find a role in policy-making.  Partly this reflects the fact that it is a relatively new innovation. It is unfamiliar to policy-makers and there is no historical series and few international comparators against which to benchmark the current position.  There are significant differences between the key measures of the public sector deficit and net liability position found in WGA compared to the equivalent National Accounts measures produced by the UK’s national statistical agency which are currently used in fiscal policy-making.

PFM Law Reforms: Balancing Legislative and Executive Powers

Posted by Kubai Khasiani and Florence Kuteesa

A growing number of Parliaments in Commonwealth African countries are casting off their Westminster inheritance and demanding a greater role of parliaments in budget decision-making. The last decade has seen restive backbenchers in some of  these countries bring forward Private Member’s Bills which look to enhancing the legislature’s powers over the public purse at the expense of the executive. This approach has sometimes been fiercely contested or not fully supported, and the product of this struggle between the branches of government leaves many unresolved issues and, in some cases, an outcome that is fiscally challenging to the country.

For almost half a century after achieving their independence, former British colonies in Africa implemented a budget preparation system that enshrined a weak legislature and a strong executive in the decision-making process. Ian Lienert examined the British influence on budget systems in Tanzania, as an example, and noted that the  parliament was engaged only very late in the budget preparation process, had limited powers to alter the government budget after it was presented, and was often not consulted about changes made by the government during the budget execution phase. As a result, parliaments seldom had a significant impact on the size or distribution of government revenue or expenditure.

Can an “Independent” Public Body be Truly Independent?

Posted by Richard Allen

Independent central banks in many countries are under threat from governments that want to bring them under a tighter rein. Independent fiscal councils have been abolished by governments that see their independence as an unacceptable threat. Independent auditors are having their autonomy and remits curtailed by governments that are concerned about opening themselves up to scrutiny. Does this signal that governments, while paying lip service to the ideas of transparency and accountability, only accept these ideas on their own terms, and suitably diluted for public consumption? What are the failures of the executive branch—inadequate public accountability, for example—that independent public entities are deemed to fill? How well have the entities concerned filled these perceived gaps?

These are legitimate and complex questions but are the subject of several research studies, including an ongoing study of fiscal councils by FAD. In this article we focus on a narrower question: what do we mean when we say that a public sector entity is “independent” and how can we measure its degree of independence? It seems fair to say that, for entities operating in the public sector such as central banks, audit institutions, accounting standards boards, and fiscal councils, there can be no absolute standard or guarantee of independence. “Independence” is a relative term, and one that depends for its legitimacy on the quality of political institutions and public perceptions, as well as legal and financial considerations. It is possible nevertheless to set out the conditions that make it more likely that an institution such as a fiscal council or an accounting standards board is able to operate independently of the government.

Twenty-one Countries Meet in Albania to Discuss Program Budgeting Reforms

Posted by Gelardina Prodani, Ministry of Finance, Albania and Konstantin Krityan, Ministry of Finance Armenia

As Chair and Deputy Chair of the Public Expenditure Management Peer Assisted Learning (PEMPAL)[1] Budget Community of Practice (BCOP), we would like to inform you about an exciting meeting that was held recently in Tirana, Albania on program budgeting.

From February 25^th to 28^th 2013, the Ministry of Finance of Albania hosted 81 participants from 21 PEMPAL member countries from across Europe and Central Asia (ECA). As suggested by our BCOP members from last year’s plenary meeting,[2] the agenda focused on technical aspects of program budgeting and performance measurement. The three main sessions of the meeting covered international approaches and country cases in (i) design of programs and performance measures, (ii) budget documentation, and (iii) performance monitoring and evaluation.

Представители двадцати одной страны встретились в Албании, чтобы обсудить переход на программное бюджетирование

Авторы: Джеральдина Продани, Министерство финансов, Албания, и Константин Критян, Министерство финансов, Армения

В качестве председателя и заместителя председателя Практикующего сообщества по бюджету (В СоР) Сети по взаимному обучению и обмену опытом в управлении государственными финансами (PEMPAL)[1] мы хотели бы проинформировать вас о встрече, которая недавно состоялась в Тиране, (Албания), по теме программного бюджетирования.

С 25 по 28 февраля 2013 года Министерство финансов Албании приняло в общей сложности 81 участника из 21 страны-члена PEMPAL из Европы и Центральной Азии (ЕЦА).  Как и было предложено членами нашего Практикующего сообщества по бюджету (BCOP) на пленарном заседании в прошлом году,[2] повестка дня фокусировалась на технических аспектах бюджетного финансирования программ и на оценке эффективности работы.  Три основных сессии заседания были посвящены международным подходам и практическим примерам стран в следующих областях: (i) дизайн программ и критерии эффективности работы, (ii) бюджетная документация, и (iii) мониторинг и оценка эффективности программ.

What To Do When Disaster Strikes: Business Continuity Plans in Latin America

Posted by Almudena Fernandez[1]

The governments’ treasury system is a core part of the public financial infrastructure and that of the broader economy. If government cash payments went off line, due to say a fire in the Ministry of Finance, it would cause a disruptive ripple effect across broad swathes of the economy. For example, think about the impact of the loss of public sector wages, non-payment of seniors’ pensions, or cash shortages for key government suppliers.

Therefore, it is important that governments have contingency plans in place should the worst happen, so as to keep the cash flowing and the government operating.

Most Latin American treasuries have done an impressive job of improving their institutions over recent years. For example, the majority of the countries of the region have unified the structure of government bank accounts enabling consolidation and a better utilization of government cash resources through a Treasury Single Account. Now, they are turning their focus to strengthening their Business Continuity Plans (BCP).

Upcoming Event: International Workshop on Government Performance Management, July 1-12, 2013, New Delhi

Posted by Bill Dorotinsky, The World Bank

The Institute of Public Enterprise (IPE), Hyderabad, and the Performance Management Division (PMD), Cabinet Secretariat, Government of India, are collaborating to organize the ‘International Workshop on Government Performance Management’ from July 1-12, 2013. The enclosed brochure gives the details of this workshop.

This workshop is a unique training program that will cover a wide range of issues that concern the design and implementation of effective performance management in government. As part of its administrative reforms, India has implemented one of the most far reaching systems called the ‘Performance Monitoring and Evaluation System (PMES)’ for government departments.

This training program will compare and contrast this experience with similar experiences in developed and developing countries. It will discuss the entire eco-system that is required for designing and implementing an effective performance management system in Government. We believe that a training program of this caliber and quality has never been organized on this subject anywhere in the world.  As you can see from the enclosed brochure, we have carefully chosen the topics and invited some of the leading theoreticians and practitioners to share their experience with workshop participants.

Austria – From an Incremental Improver to a Comprehensive Reformer

Posted by Johann Seiwald[1]

From the mid 1990s on, Austria has steadily improved its framework for fiscal policy and budgeting. With Austria’s accession to the European Union and the corresponding need to meet the Maastricht debt and deficit requirements, in 1996 a top-down approach replaced a “demand-driven” budgeting model in which fiscal discipline was not enforced and line ministries had little incentives for structural changes. Since 2000, the use of lump-sum budgets and performance budgeting has been piloted in more than 20 government agencies, including prisons, a printing office and the police academy. The implementation of a new cost accounting system for all federal ministries, as well as projects aimed at improving performance management, and introducing product definitions for public services and performance indicators in several line ministries, has steadily enriched the financial management framework.

Turkey’s Successful Modernization of Treasury Operations

 Posted by Yasemin Hurcan[1]

In ten years that followed the 2001 economic crisis in the country, Turkey managed to halve its debt to GDP ratio. As a result, Turkey was selected as a benchmark country for debt reduction in the World Bank’s 2012 report “Golden Growth: Restoring the Lustre of the European Economic Model”. A recently published book[2] entitled “Treasury Operations in Turkey and Contemporary Sovereign Treasury Management” discusses how the Turkish Treasury managed to decrease its debt by, amongst other things, restructuring the Treasury’s operations and management. The publication is available as an e-book.

CARTAC Discusses PFM Reform Strategies and State Enterprises

Posted by Eileen Brown and Matthew Smith

Senior finance officials from several CARTAC countries participated in a lively CARTAC workshop in Trinidad from February 25-27 with international experts Richard Allen and David Shand. The workshop discussed how to best structure finance ministries to meet demands to sustain economic growth; how to design their PFM reform strategies and get the most from technical assistance; and how to manage the fiscal risks of state-owned enterprises (SOEs). The countries represented were Antigua, British Virgin Islands, Cayman Islands, Dominica, Haiti, Jamaica, Nevis, St Lucia, St Vincent and Suriname. There were 22 participants as well as the two presenters and two facilitators.

“This workshop really worked for me,” said Devon Rowe, Jamaica’s Financial Secretary (FS) “because it verified some options I was considering and it opened me up to new ideas based on what worked for my Caribbean colleagues.  Mostly it persuaded me that we all benefit when we share experiences. There are mistakes that we will not have to repeat because Dominica, St. Lucia, Antigua and BVI have shared their missteps as well as their successes with us.”

“Dominica always learns something and I am gratified we were able to share so much of what we learned with others” said FS Rosamund Edwards.

“I could write a book of do’s and do not’s in reform,” said Deputy FS John Edwards.  “I like the structure of this workshop – experts tell us about new thinking and world experience, and then respond constructively when we tell them what obtains in the region.”  Antigua and Barbuda had enjoyed a wealth of technical assistance funding and worked hard to properly sequence it.

Can Arab Countries Improve Fiscal Transparency?

Posted by Manal Fouad

When people took to the streets in several Middle Eastern and North African (MENA) countries in early 2011, it was not only about social justice, but also to demand accountability from their governments. This means more information about how public resources are allocated, spent, and audited. Unfortunately, according to a recent publication by the International Budget Partnership, the MENA region records by far the lowest scores on transparency in the Open Budget Index, and most countries are still classified among those with scantest information about their budgets (only Jordan had a relatively good score of 57 in 2012, while Tunisia, Egypt, Algeria, Yemen are all in the bottom range of 0-20). Even more troublesome, Egypt has seen a significant worsening in its rating from 49 in 2010 to only 13 in 2012.

Yet, many of the demands from the youth who led the Arab revolutions were for increased fiscal transparency. These demands range from disclosure of very simple figures to more complicated issues. Such disclosures would answer many questions that are vibrantly present in the public debate. How much does the debt contracted by previous regimes cost in the budget? Are these levels of debt more or less than the government’s spending on health and education? Are the high levels of public subsidy provided on commodities such as food and fuel appropriate? Do these subsidies reach their intended beneficiaries? How much is the military apparatus spending on its wages, pensions and equipment? How much do loss-making public enterprises cost the budget? Is the government paying its salaries and bills to public and private suppliers on time? And more fundamentally: what is the government’s medium-term vision and objectives for the country? Does the budget reflect the country’s and society’s priorities? Is the budget constructed on the basis of realistic assumptions on the availability of resources and costs of programs, and does it include contingencies for unexpected economic conditions or uncertain events? Is public debt sustainable?

New FAD Technical Note and Manual: Cash Management and the Relationship Between Treasury and Central Bank

Posted by Renaud Duplay

Cash management is one of the main issues when reforming PFM systems in developing countries. Bad cash management is costly because it hampers budget execution, causes arrears and increases funding costs. For this reason the Fiscal Affairs Department (FAD) has already released two Technical Notes and Manuals (TNMs) on this subject and is now releasing further guidance material. A new TNM, prepared by Mario Pessoa and Mike Williams, expands the review of cash management issues by specifically addressing the relationship between the treasury and the central bank.  

The note was prepared at the request of the Latin American Treasurers' Forum (FOTEGAL) and addresses both institutional and technical issues and is particularly relevant to developing countries. Based on international experience, the TNM describes the modern framework of a formalized relationship between both institutions standing on two key principles:

Recent Performance-Based Budgeting Reforms in The Netherlands – Another Lap Around the Windmill!

Posted by Maarten de Jong[i]

An unknown person once noted that a cynical person is an idealist who, at some point, made the mistake of turning his ideals into his expectations. Looking at the increasing amount of critical studies on the impact of performance-based and program budgeting reforms, one could become a bit cynical towards this popular and ambitious type of budget reform. Not unlike the experience in other countries, the implementation of performance-based and program budgeting in the Netherlands over a decade ago has only partly lived up to its expectations.

There has not been much evidence that major reallocation of spending has taken place as a result of these reforms. In addition, the informational value of budgets and the administrative burden for line ministries have been continuous sources of debate.  Nevertheless, the concept of linking funding to results has proven its usefulness in agency management and does help the Ministry of Finance differentiate between a powerful claim and a powerful claimant in the budget process. Neither is anyone inclined to give up the benefits of increased transparency and enhanced managerial flexibility that resulted from introducing a program budget. Instead of becoming cynical or glorifying the "good old days" of input budgeting, the Netherlands Ministry of Finance accepted the fact that it may have had some unrealistic expectations and that some of the criticism on performance budgeting as implemented actually made sense and demanded a solution. This resulted in a major overhaul of the budget presentation and program structure in recent years called “Verantwoord Begroten” (translated as Accountable Budgeting).

Chinese Social Media Support Fiscal Transparency

Posted by Qi Zhang and James L Chan[i]

In the past four years, the Chinese government has made unprecedented efforts to implement public access to government financial information. This new policy of fiscal transparency is part of a larger project of public disclosure of government information. The policy basically revoked the long-standing state secret status of government financial information contained in annual government budgets and year-end financial reports.

Under the direction of the Chinese Communist Party (CCP) and with the encouragement of the National People’s Congress (NPC, the Chinese parliament), the State Council (the cabinet) took a major step in 2007 to lift the veil of secrecy over a wide range of government information. The release of financial information is the center-piece of this new policy initiative. Under the leadership of outgoing Premier Wen Jiabao, the pace of implementation has accelerated in the past two to three years through a series of administrative directives. It is noteworthy that in addition to releasing official government finance statistics, the spotlight is on the so-called san gong jingfei (literally ‘three public expenditures’), expenditures for official cars, receptions and travel.

These hotbeds of waste and abuse, as well as outright fraud, have been the targets for public outcries against official corruption. They are also the usual subjects of investigations by the National Audit Office, whose reports over the past dozen years have kicked up annual ‘audit storms’. Since virtually all of this information is usually communicated in the Chinese language only, these ‘dirty linens’ are effectively shielded from the outside world. Similarly, the new fiscal transparency policy has also drawn little international attention.

New Guidance for Sub-National PEFA Assessments

Posted by Greg Horman

The PEFA Program earlier this week released new guidelines for applying the PEFA framework to sub-national governments.

Of the nearly 300 PEFA assessments carried out to-date, more than 70 have been at the sub-national level. Sub-national governments are highly diverse across the world in terms of administrative tradition, functions and responsibilities, the degree of discretion in running their operations independently of the central government, and the role of inter-governmental fiscal transfers. The populations, budgets, and economies of some sub-national entities are far larger than those of other entire countries. So PFM outcomes at the sub-national level matter.

Simplifying Budget Documents – Time for an International Standard?

Posted by Camille Karamaga

Improving the quality of budget documentation lies at the heart of many reforms aimed at enhancing understanding of the content of the budget estimates as well as fostering transparency and accountability. Some budget laws prescribe a minimum set of documents to accompany the budget estimates. These may include, for example, reports on: (i) the medium-term macroeconomic forecast; (ii) fiscal policies and public expenditure trends; (ii) medium-term forecasts of government revenues, expenditures, debt, and the fiscal balance; (iii) medium-term resource ceilings; (iv) government guarantees, contingent liabilities and other fiscal risks; (v) spending on expenditure programs and projects by sector; and (vi) projections of donor aid flows. In countries with a Westminster tradition, the budget speech includes much of this information, but additional documents may be presented to the parliament.

Improving the content and quantity of fiscal information is not the same, however, as improving its quality or transparency. More does not always mean better or clearer. Indeed, it often means the reverse. Governments tend to respond to demands for information from the parliament, financial markets, NGOs and ordinary citizens by producing more and more data, often in unprocessed form. This may get them off the hook of public “accountability”, but places them squarely on another hook, accusations of information overload and obfuscation.

The design of a strategic planning framework, medium-term budget frameworks and program budgets has led to a proliferation of detailed information, performance indicators, and monitoring and evaluation reports. Mountains of annual budget books are produced with separate estimates volumes being prepared by each line ministry. The excessive detail contained in the budget estimates weakens their usefulness as raw material for discussion by parliamentary committees. Nor are they meaningful to the general public. In short, much of the  information produced by the government easily becomes a “data cemetery” which contributes little to the decision-making process or enlightened public debate.

ICGFM 2012 Winter Conference

Posted by Sailendra Pattanayak

The International Consortium on Governmental Financial Management (ICGFM) held its Winter Conference on Good Public Financial Management Practices in a Period of Global Adjustment in Washington, DC during December 10–12, 2012. This was co-hosted by the Fiscal Affairs Department (FAD) of the IMF. The Global Initiative for Fiscal Transparency (GIFT) also partnered with the ICGFM for this conference.

The conference was attended by high-level officials from ministries of finance, state audit institutions and other government ministries/agencies, and members of parliament of more than 25 countries, as well as representatives from international organizations, rating agencies, think tanks, the donor community, civil society groups, and academia. The welcome address was delivered by Ms. Linda Fealing, President, ICGFM, followed by opening remarks from Mr. Sanjeev Gupta, FAD Deputy Director. (Download ICGFM conference agenda Dec 2012.)

Who Breaks a Butterfly Upon a Wheel? Reforming the French Government 2007-2012

Posted by Maximilien Queyranne

In 2007, at the beginning of President Sarkozy’s mandate, the French government launched an ambitious reform agenda to improve the quality of services to the public, to reduce costs and to modernize management of central government financial and human resources. This program was called RGPP (a French acronym for the general review of public policies). As pointed by the OECD, RGPP was active during a key period for public sector reform in France. This momentum it created was characterized by a cocktail of: (i) a president who solemnly promised during the election campaign of 2007 to drastically modernize and streamline the public sector; (ii) a retirement spike in the public sector which allowed for restructuring and boosting productivity; and (iii) a country with some fiscal room for maneuver, a year before the onset of the global financial and economic crisis.

Five years later, the new government has decided to kill off RGPP, on the basis of a report by government internal auditors. At the same time, the OECD published a special review providing an international perspective on RGPP. These reports show that the OECD and government internal auditors’ analyses are largely consistent regarding RGPP’s scope and objectives, but disagree on the methods and decision-making processes that it employed. The reports also indicate that RGPP was poorly integrated with the PFM reforms initiated by the 2001 Organic Budget Framework Law (Loi organique relative aux lois de finances, LOLF) many of which were implemented before RGPP began.

New Budgetary Reforms in Austria: An Emphasis on Flexibility, Performance, and Gender

Posted by Ralph Schmitt-Nilson

Following up on a first set of reforms in 2010, the Austrian budget for 2013 introduces a new set of public financial management (PFM) reforms. Whereas the first stage focused on implementation of a medium-term expenditure framework, the second and latest stage of reform brings fundamental change in a range of fields. It signals three main aspects: more discretion for line ministries, a new performance-oriented budget structure, and a commitment to Gender Responsive Budgeting (GRB).

To improve flexibility for line ministries and big federal agencies, appropriations are shifted to a more aggregated level. The budget entities are given clearly structured duties and global budgets for flexible use. The stated rationale is that an increase in autonomy and responsibility leads to more motivated management and staff of institutions and more efficient use of funds. This builds upon positive experiences that Austria has with the introduction of more flexibility for line ministries since 2000. Line ministries also receive the authority to carry over a substantial part of the budget into the next year. The aim is to avoid spending sprees at the end of the fiscal year when departments often look for ways to use up the current budget. A carry-over facility gives them an incentive to remain frugal with their spending until the end of the year and to improve room for maneuver in the next year. Still, these developments could also be dangerous for yearly budget credibility. First, carry-over facilities make it harder to exactly plan expenditures for the fiscal year on an aggregate level. Second, high levels of carry-over can weaken the incentive for solid budget planning at the line ministry level.

Public Prominence and “Muscle” — the Role of the French Court of Accounts

Posted by Maximilien Queyranne and Delphine Moretti

Supreme Audit Institutions (SAIs) are the national bodies, found in many countries around the globe, responsible for reviewing public expenditure and providing an independent opinion on government financial reporting. The Court of Accounts (Cour des Comptes) in France is one of these bodies but has a wider range of responsibilities, and a more prominent place in public life and political debates than in other countries.

The Court is part of the judicial system and consequently operates independently of the executive and legislative branches of government. Since a ruling by the Supreme Court (Conseil Constitutionnel) in 2001, the Court’s independence as well as its institutional relationship with the executive and legislative branches has been protected by the Constitution. A revision of the Constitution in July 2008 incorporated these important principles (article 47-2).

Timing is Everything: Why Delays in Budget Approval are Undermining Fiscal Policy in Africa…And What Can Be Done About It

Posted by Camille Karamaga

A number of serious public financial management (PFM) problems in Africa can be traced back to a single, simple issue – late submission to and approval of the budget by the legislature. Limited legislative scrutiny of fiscal and budgetary policies undermines transparency and accountability in resource allocation and utilization which form the cornerstone of a good PFM system. Failure to provide the legislature with adequate time to scrutinize the budget reduces their ability to undertake critical analysis of fiscal policies and service delivery objectives. Late approval of the budget also prevents government entities from initiating procurement processes at the start of the financial year based on the approved budget, especially where special warrants or pro forma rules rather than systematic cash plans prepared by spending agencies are used to release funds.

The need to provide adequate time for parliament to scrutinize the budget and for line ministries to plan for the year ahead is recognized in both international standards and national laws. International experience recommends that the annual budget estimates be tabled in the legislature at least three months before the beginning of the new financial year in order to allow meaningful scrutiny. Guidelines on good practice in this area are provided in documents such as the IMF’s Code of Fiscal Transparency, the OECD’s Guidelines on Transparency, and the PEFA Performance Measurement Framework.

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.

Australia’s Changing Budgeting Framework – Accrual or Cash?

Posted by Tim Youngberry[i]

There have been a number of articles on this blog that pose a question on whether the Australian Government has a cash-based budgeting framework or an accrual-based budgeting framework, or some sort of hybrid mix.  Hopefully, this contribution will provide a degree of clarification.

In the 1999-2000 Budget, the Australian Government moved to a full accrual accounting and budgeting framework.  The key features of the framework when implemented included:

• A shift to an outcomes/outputs framework;
• Introducing accrual concepts into the Budget, often referred to as accrual budgeting;
• Applying a capital use charge on line ministries to reflect the cost of the use of “capital assets” and to provide an incentive for improved asset management;
• Introducing devolved banking arrangements so that each agency had its own transactional banker and paying interest to agencies on accumulated cash balances to encourage better cash flow management; and
• Funding agencies on the basis of full accrual expenses (including depreciation) – otherwise known as accrual appropriations.

Signs of Fiscal Progress: Will It Be Enough?

Posted by Carlo Cottarelli and previously published on iMFdirect

We’ve just updated our latest assessment of the state of government finances, debts, and deficits in advanced and emerging economies.

Fiscal adjustment is continuing in the advanced economies at a speed that is broadly appropriate, and roughly what we projected three months ago. In emerging economies there’s a pause in fiscal adjustment this year and next, but this too is generally appropriate, given that many of these countries have low debt and deficits.

The improvement in fiscal conditions in many advanced economies is welcome, but it’s going to take more than lower deficits to get countries under market pressure out of the crosshairs.

Signs of Progress

There are clear signs of fiscal progress in advanced economies. The deficit will decline in about three quarters of advanced economies this year, and in almost 90 percent of them next year. Debt ratios are also starting to come down: we project one-third of advanced economies to have a declining debt ratio this year and half of them to do so next year.

The progress in deficit-cutting in Europe means less fiscal tightening will be needed in the future, reducing the fiscal drag on growth: in 2011–12 the fiscal tightening in the euro area will amount to a cumulative 2½ percentage points of GDP, while in 2013–14 it is projected to be one third of this, which is good news for growth.

Public Financial Management Information System in Georgia

Posted by Nino Tchelishvili, Deputy Head of State Treasury, Ministry of Finance, Georgia  

After the Rose Revolution (2003) the new government of Georgia undertook a large number of reform initiatives targeted at strengthening PFM. MoF focused on further developing the institutional framework of the budget process in order to improve its credibility and the effective allocation of public resources. An FAD mission visited Georgia twice in 2004 and assisted the MoF in formulating its strategy for treasury reforms. An FAD technical expert was assigned to help implement the reform measures in the areas of: Treasury Single Account, Budget Classification, Commitment Control, Accounting Reforms, and Cash Planning and Management.

In parallel with developing the PFM institutional framework, including basic components of a modern treasury system, MoF and the State Treasury started considering measures for reforming the then rudimentary and fragmented treasury information system. The decision to introduce integrated information systems was taken in 2006. Development Partners (WB, SIDA, Netherlands and DFID) provided funds for the Public Finance Management Information System (PFMS) implementation project and MoF embarked on this long and exciting journey in 2007. External technical experts recommended procuring commercial off-the-shelf (COTS) packages and customizing them to local context.

New Zealand to Legislate an Expenditure Rule

Posted by Ian Lienert

Euro-zone countries are being admonished by the EU to strengthen their fiscal frameworks, including by introducing a legislated budget balance rule in national legislation. On the other side of the globe, the New Zealand Government has announced that its fiscal framework will be strengthened, by introducing a spending fiscal rule in amended legislation. The similarity of the EU and New Zealand actions is striking, given the large differences in fiscal consolidation needs. For example, Euro area gross general government debt was nearly 90 percent of GDP in 2011, in contrast to New Zealand’s relatively low ratio of 44 percent. [1]

The New Zealand Government’s announcement was preceded by considerable analysis and strong criticism by some commentators. The Government’s advisor, the Treasury (New Zealand’s “ministry of finance”), while supporting self-imposed limits on new spending as a means of controlling growth in expenses, does not support a legislatively embedded formula-based spending limit.[2] However, because of the Government’s agreement with a minor political party there is a proposal to amend the Public Finance Act, which, if enacted, would make the new fiscal rule permanent, unless a future government initiates its repeal.

Georgian State Treasury Hosts Workshop on Treasury and External Financing Reforms

Posted by Ion Chicu, World Bank, and David Tsekvava, Deputy Head of State Treasury, Ministry of Finance, Georgia 

A three-day PEMPAL [1] Treasury Community of Practice (TCOP) workshop was held in Tbilisi, Georgia on February 27-29, 2012 on public finance reform progress related to Treasury systems and external financing.  Fifty participants from ten countries attended (Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Ukraine).  Experts from the World Bank provided information on regional and international developments and technical support to the discussions.  The meeting was hosted by the State Treasury of the Ministry of Finance of Georgia who proved to be warm and wonderful hosts.

The meeting followed from an earlier meeting in Astana, Kazakhstan on September 27-29, 2011 whereby more than 80 participants from 17 countries from the Bank’s Europe and Central Asia (ECA) region met to discuss progress in implementing integrated financial management information systems across the region. Many TCOP member countries are the recipients of external financing in various forms and a need was identified for a smaller group meeting to address the issues associated with the effective management of external financing.  The practical problems faced in the process of integrating external financing into national budget systems are widely known. In many cases the challenges are related to the fiduciary requirements of the donor organizations. National systems do not always fully fit those requirements, which leads to the use of parallel mechanisms, such as those often established to implement donor-funded investment projects.  Within the framework of public financial management (PFM) reforms, and consistent with the principles espoused by the Paris Declaration of Aid Effectiveness, PEMPAL member countries have been pursuing the objective of integrating external financing into all stages of the budget process. 

How Much Butter Are Those Guns Costing?

Posted by Benoit Taiclet and Greg Horman

We have read—and appreciated—a recent publication under the program, “The Transparency of National Defense Budgets,” by Mariya Gorbanova and Leah Wawro, on budget transparency around defense expenditures.

Defense and security establishments have traditionally been among the organizations least open to public or intra-governmental scrutiny. The secrecy that veils some defense activities often extends far beyond what is justified on security grounds, making the sector particularly vulnerable to corruption, anti-competitive behavior, and other illegal practices. Facilitated by excessively secretive budgets, corruption reduces the operational effectiveness of the armed forces and security services and reduces public trust in them. Corruption in defense and security establishments also wastes scarce resources that could be spent on other public services. International companies are less inclined to invest in countries where government or private-sector corruption is significant, impeding economic development. Thus, corruption not only harms defense institutions themselves, but also hinders a country’s economic and social development, undermines the integrity of the government, and reduces public trust in the authorities.

Improving the Quality of Governance in Poland Through Performance Based Budgeting

Posted by Lukasz Hardt¹ and Maarten de Jong²

An interesting report on Performance Based Budgeting (PBB) in Poland was recently published by Lukasz Hardt (University of Warsaw) and Maarten de Jong (Erasmus University Rotterdam). The authors put emphasis on analyzing de facto mechanisms of PBB implementation rather than focusing only on de jure ones. In other words, they use sociological and politological approaches combined with some insights from recent studies on good governance. Therefore, instead of only studying the legal basis for PBB, they interviewed many key actors responsible for PBB implementation in-depth and sent web based questionnaires to civil servants in the Polish central government. The research was done not only in Poland but also in the Netherlands, since the authors claim that many lessons from the process of PBB utilization in that country can be used in Poland.

The authors make use also of many insights from institutional economics literature where there is a widespread consensus that institutions do matter for the efficient functioning of the socioeconomic system. Therefore, numerous authors claim that the fundamental factors for long-run economic growth are: a democratic and transparent state, an accountable public administration, inclusive society, and an efficient government. These principles form the basic premise of good governance. In the post-transition countries, like Poland, an efficient market system has been created together with the main elements of the civil society. Various state institutions are, however, still lacking or underdeveloped. One of the missing parts is efficient, result-oriented public management. This is confirmed by the meager position of Poland in governance quality rankings. Therefore, Polish public management should be geared towards fundamental change.

“Give time some time”: A Proposed Strategy for Implementing Financial Accounting in the WAEMU Member Countries

Posted by Guilhem Blondy and Xavier Rame

The directives establishing the harmonized fiscal framework in the West African Economic and Monetary Union (WAEMU) in 2009 state that “the government shall keep budgetary accounts and financial accounts” and that implementation of the latter must be completed by January 1, 2019 at the latest.[1]

To attain that objective, this post proposes a sequenced strategy aimed at gradually, over the course of seven years (2012-2018), improving the financial information generated by financial accounting.

To understand the necessity of choosing a gradual approach, it will be helpful to recall the three basic innovations associated with the introduction of financial accounting:

« Donner du temps au temps » : une proposition de stratégie pour la mise en œuvre de la comptabilité générale dans les Etats-membres de l’UEMOA

Posté par Guilhem Blondy et Xavier Rame

Les directives portant cadre harmonisé des finances publiques au sein de l’Union Economique et Monétaire Ouest-Africaine (UEMOA) de 2009 prévoient que « l’Etat tient une comptabilité budgétaire et une une comptabilité générale » et que la mise en oeuvre de cette dernière doit être effective au 1^er janvier 2019 au plus tard.[1]

Pour atteindre cet objectif, ce post propose une stratégie séquencée selon une logique d’enrichissement progressif sur 7 ans (2012–2018) de l’information financière produite par la comptabilité générale.

Pour comprendre la nécessité de privilégier une approche progressive, il est nécessaire de rappeler les trois innovations fondamentales associées à l’introduction de la comptabilité générale :

Accrual Accounting Essential for Government Transparency and Accountability!

Posted by Ian Ball [1]

In this post Ian Ball, CEO, International Federation of Accountants, argues that it is time for governments to take their accounting responsibilities seriously and to modernise their financial management practices. The eurozone debt crisis has highlighted widespread financial reporting failures and must lead to extensive reform, including adoption of accrual accounting and budgeting practices. Politicians and Ministries of Finance must be pressured to implement these reforms before the next crisis hits.  

The sovereign debt crisis has emphasised the seriousness of the results of poor financial management and financial reporting. Obviously, government actions to limit the impact of the global crisis have exacerbated their financial positions, as many governments acquired significant assets and liabilities, gave guarantees of various kinds, and engaged in massive fiscal stimulus programmes. But the situation now would not be as dire if so many governments had not already made commitments that they did not account for properly, and may not be able to meet.

Governments in general are clearly accounting very poorly for their financial performance and position. This could, and should, lead to significant reform. We saw how financial reporting failure in the private sector a decade or so earlier led to dramatic action, including the passage of the Sarbanes-Oxley Act 2002 in the United States, and the creation of regulatory bodies for private sector audits in most major countries.

Enhancing the Capability of Central Finance Agencies

Posted by Richard Allen and Francesco Grigoli

A recent World Bank study investigated the factors that make a ministry of finance (MoF)—or more broadly defined the finance agencies at the center of government—an effective and crucial instrument for economic development.^[1] One of the key findings is that an effective finance function is less about capacities, the number and quality of staff and systems, and more about the capabilities to use these capacities in the political and bureaucratic environment. Politics often gets in the way of the effective management of government resources. Another interesting finding is that centralization of powers in the MoF is important in less developed countries, to control expenditure and assure the strategic direction of government expenditures. For middle-income countries, however, decentralization of operations to line ministries is desirable to ensure effective implementation of government programs and avoid inefficient and unnecessary input-based controls.   

The study affirms that a well-organized and effective finance ministry and its associated central finance agencies (CFAs) are essential to good fiscal outcomes. CFAs are not a single organization or entity of government but a group of ministries and agencies, of which the MoF is usually the most prominent, with collective responsibility for the design and execution of a country’s wide array of financial and fiscal functions. CFAs deliver central finance functions that can be divided for convenience into the 16 categories shown below.

Why a Reform-minded Minister of Finance Needs a Strategic PFM Advisor as Gatekeeper

Posted by Sailendra Pattanayak

Many countries that lack both capacity and infrastructure in the area of public financial management (PFM), particularly the post-conflict ones, have to undertake comprehensive  reforms to establish sound and robust fiscal institutions. Most of these countries usually embark on a multi-pronged reform strategy and receive support—both financial support and technical assistance (TA)—from various international institutions and development partners to build PFM institutional capacity. A key aspect of such support is the funding of a large number of advisors/consultants to assist the ministry of finance in specific PFM areas, e.g., budget planning and preparation, expenditure control and treasury management, accounting/fiscal reporting, auditing, and development and implementation of financial management information systems. These advisors play a crucial role in building the fiscal institutions as the authorities draw upon their specialized expertise in the respective PFM areas. However, as the scope and complexity of TA received from such advisors increase, the strategic coordination of TA and the integrity/coherence of the PFM reform process become all the more critical.

Effective coordination and strategic management of TA from various development partners is essential to identify, monitor and manage potential risks of overlap, inconsistent advice and sub-optimal allocation and use of TA. The TA strategy should also be guided by an overarching PFM reform plan. This process should be led by the authorities, with support, if necessary, from an advisor with skills to provide such strategic advice. This strategic PFM advisor should also act as a gatekeeper between top management (usually the minister or deputy minister of finance) leading the PFM reform agenda and other advisors assisting the ministry technical staff in respective areas to ensure, inter alia, alignment of reform priorities and TA inputs. This will also improve engagement with TA providers and alignment of their support with any future reform plan.

Fiscal Consolidation Plans in OECD Countries: What Do They Mean for the Role of the State?

Posted by Natalia Nolan Flecha[1]

Times are challenging and “austerity” is the watchword. After all, the pressure is on- with the OECD estimating that, on average, a total fiscal surplus of nearly 4% of potential GDP will be needed over the next 15 years just to stabilise public debt levels. Nearly 7.5% will be needed over the same period to reduce debt-to-GDP ratios to the Maastricht-approved level of 60% of GDP.

With their backs against the wall, what choices are governments making regarding their (current and future) obligations to citizens and firms? Where are governments holding their ground, and where are they willing to retreat and make more room for other service providers? Choices taken now could be telling and, to those looking for signs of what’s to come, may even provide some clues into the changing role of the State in a post-crisis world.

A 2011 survey of OECD member countries’ fiscal consolidation plans shows some interesting trends. Noteworthy was that, on average, more than two-thirds of planned retrenchment efforts will take the form of spending cuts (as opposed to revenue raising measures). Operational cuts were a staple of all countries surveyed; on average making up 27% of countries’ total retrenchment efforts. These included across-the-board reductions and/or freezes on such line items as staff wages, IT, procurement, as well as expected efficiency gains from mergers and restructuring of public sector organisations. Second, “big ticket items” also emerged as important targets of finance ministries. As of the end of 2010, 20 of the 30 OECD countries who participated in the study had announced cuts to social protection spending (e.g., pensions, unemployment and other social benefits). Health was next in line, with 15 countries reporting planned reductions here. In total, these two government functions accounted for about half of total general government spending in pre-crisis times.

Liberia Budget Reflection Workshop: Laying the Foundation for a Medium-Term Budget Framework

Posted by Kubai Khasiani, Steve Gurr, and Florence Kuteesa

Liberia is set to introduce a medium-term budget framework starting July 2012. The government of Liberia—with support of a joint team of IMF staff and the UK ODI’s Budget Strengthening Initiative—conducted a workshop in August 2011 to discuss implementation issues and challenges, chart a way forward, and obtain commitment from the various government institutions and stakeholders. The workshop was attended by officials from a wide variety of government institutions and generated lively debates as participants came together and candidly shared their experience. A set of recommendations was agreed at the end of the workshop, which would enhance cooperation and political commitment from all parties and facilitate the consultative process.

The introduction of a medium-term budget framework (MTBF)[1] by the government of Liberia, starting in the fiscal year 2012/13 budget, is stipulated in the 2009 Public Financial Management Act. The provisions of the Act set new challenges for the Ministry of Finance (MoF), line ministries, and development partners. The reform implication(s)—such as mandates and responsibilities of the various actors, and coordination perspectives—formed the focus of a five-day budget process reflection workshop held in Monrovia during August 29 and September 2, 2011. The workshop, organised by the MoF and facilitated by a joint IMF /ODI[2] technical assistance team, allowed an exchange of views between representatives of the ministries responsible for finance and planning on the one hand, and spending agencies on the other, on the potential challenges and prerequisites for a sustained reform implementation. The workshop was attended by 175 officials from the MoF, the Ministry of Planning and Economic Affairs (MoPEA), as well as line ministries and agencies across the government of Liberia.

Spending Cuts without the Cheese Slicer!

Posted by Bat-el Berger[1]

There isn’t a household in Holland which doesn’t have the handy cheese slicer to cut a Calvinistically thin slice from a big Dutch piece of cheese. In Dutch public finance the term “cheese slicer” has become synonymous for across the board expenditure cuts needed to achieve deficit targets. These cuts are easy from a bureaucratic point of view—all ministries share equally in the fiscal pain—and can be rationalized as cutting away government increases of productivity. However, ministries often play games with these kinds of cutback tools; at best priority and non-priority spending are hurt equally. In the hands of line ministries the cheese slicer is not really suited for weeding out ineffective expenditure programs or fundamentally changing the direction of government policies. For that a more fundamental analysis of government expenditure is needed.

Given the broad agreement in Dutch society that fiscal consolidation was needed after the 2008 economic crisis, the Dutch government ordered a new type of in-depth spending review (“brede heroverwegingen”, abbreviated BHO) in September 2009. The objective was to investigate more clever ways to cut public expenditure. No topics were declared off limit. Studies included entitlements levels, civil service cutbacks, tax expenditures, and social security, housing market and health care reforms. After 6 months, just before the new elections, it resulted in a “menu” of spending cuts from which a new coalition government could choose (a) its total amount of “fiscal consolidation” and (b) the expenditure and tax composition of that consolidation, according to the political priorities of the winning coalition. The release of the review on the first of April, 2010, was timed to allow political parties to incorporate the findings of the review in their programs for the election in June the same year. Some parties campaigned on how much they would cut back the welfare state, other on how little.

A “Second-Generation” of Fiscal Rules for Latin America

Posted by Teresa Dabán

In an effort to break from a long history of fiscal profligacy, during the last decade, Latin American countries have strengthened remarkably their fiscal policy frameworks, including by adopting fiscal rules. The “first generation” of fiscal rules has helped to anchor fiscal policy and strengthen fiscal sustainability in the region. However, because of certain design shortcomings the “first generation” of Latin American fiscal rules was not fully equipped to respond to the challenges posed by the global financial crisis nor to manage the current recovery phase. Against this background, this post argues that Latin American countries could benefit from adopting a “second-generation” of fiscal rules, which aside from addressing sustainability and credibility issues, could help enhance the fiscal policy’s role as a key tool for macroeconomic stabilization over the medium term.[1]

Burkina Faso and Mali: Developing Program Budgeting While Getting the Basics Right

Posted by Benoit Taiclet and Lewis Murara

Program-based budgeting (PBB) is considered an important tool for developing countries to channel more efficiently their resources to achieving their development goals. However, PBB is also a rather sophisticated PFM reform, especially when certain public finance management (PFM) basics still need to be improved. Burkina Faso and Mali offer interesting examples of low-income countries whose reforms started at different stages, but finally made good progress both in program budgeting and more general improvement of their respective PFM systems. This success –although it must be stressed that PPB is not yet fully functional - mostly relies on the countries’ own determined pursuit of reform. However it has been facilitated by the synergy built between several stakeholders, the IMF and its Regional Center AFRITAC West, the UNDP and its regional pole in Dakar, as well as bilateral partners such as the Belgian, German and Japanese governments.

Gradual reform or a more risky Big Bang approach?

Both countries chose at an early stage a similar, cautious multi-step scheme for reform. The first step was to ensure a strong state commitment and civil society backing, then to develop costing of policy expenditures and medium term expenditures frameworks. In this scheme PBB was planned to be developed alongside the usual input budget prior to its full implementation. So far Mali has - and Burkina Faso intends to - set up a comprehensive PBB budget as an appendix of the draft budget bill. But still this appendix remains an information tool and to some extent a planning tool only, for the Executive, Parliament and the donor community; it has, however, not yet been considered an appropriate tool to actually manage government financial resources and to monitor the performance of the services.

Reforming PFM Country Systems: The Benefits from a Governance Perspective

Posted by Dr. Stephan Klingebiel, Director, and Timo Mahn, of the KfW Bank office in Rwanda

The road to the 4^th High Level Forum on Aid Effectiveness in Busan later this month is paved with many reports, declarations and surveys. One of the key inputs for Busan is the OECD-DAC survey on monitoring the implementation of the 2005 Paris Declaration. Alas, the results of this third and final survey round, which were published a few weeks ago, show that overall progress has been dismal since 2005. While this does not come entirely unexpected, there has been a vibrant debate about the reasons for this outcome. Since the publication of the survey, several contributors suggested that, going forward, one key element that is required to make progress on the aid effectiveness agenda is to pay more attention to the governance dimensions of aid reforms.

In a paper published at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), we have argued that reforms of Public Financial Management (PFM) systems should have a key part in this. One of the challenges for development practitioners in the field of PFM is that often times, PFM reforms are still not seen as reform programs in their own right, but rather from the narrow angle of improving technical efficiency of financial management systems, processes and procedures. For PFM reforms to succeed, however, it is vital that their effects on governance are recognized and taken into account.

OECD’s Government at a Glance: An Evidence Base for Policymaking

Posted by Zsuzsanna Lonti and Natalia Nolan

Back in October of last year, we previewed some of the key findings from the upcoming release of Government at a Glance 2011, and made our case about the importance of measuring and benchmarking government performance in order to improve governments’ capacities in tough times. This continues to ring true as countries embark on major fiscal consolidation efforts. Indeed, the OECD’s Government at a Glance 2011 is released amid concern about debt levels and even fears of sovereign default; data from the new publication for example show that average public debt among OECD countries was 74.2% of GDP in 2010, up from 55.6% in 2007. 

These high levels of debt will impede long-term economic growth and divert resources from important sectors such as education, healthcare and other vital investments. OECD estimates show that simply stabilising the debt-to-GDP ratio by 2026 would demand an average total improvement in underlying balances of nearly 4% of potential GDP from the 2010 fiscal positions. Ageing societies will further add to spending pressures in the form of healthcare and pensions. And the problem has become too serious to rely on automatic stabilisers that usually kick in during economic recovery.

Policymakers now face the unenviable task of restructuring the state and restoring public finances without excessively eliminating public services, much needed amidst a stormy economic climate. By the end of 2010 about half of OECD member countries had announced detailed medium-term plans for fiscal consolidation, and, as reported in Government at a Glance, the majority are leaning more heavily on spending cuts, rather than raising revenues. In some countries, social and economic programmes are being slashed, wages cut and the size of the public service workforce is being shrunk.  For instance, survey results featured in this new publication reveal that several OECD countries are not filling all the vacancies created by retiring staff – Spain is planning to replace only 1 in 10 central government workers.

For the First Time Brazil Publishes Consolidated General Government Financial Statements!

Posted by Paulo Henrique Feijó e Selene Peres Peres Nunes[1]

The Brazilian Government published for the first time the consolidated general government financial statements (consolidation of central government, states and municipalities’ accounts) according to an adapted model of the International Public Sector Accounting Standards – IPSAS, published by the International Federation of Accountants – IFAC. This is part of a strategy to place Brazil among the countries with advanced accounting practices.

The general government financial statements adapted to international accounting standards refer to the years 2009 and 2010 and include:

- Balance Sheet;

-  Statement of Financial Performance; and

-  Notes.

This is a very significant achievement considering the size of the public sector in Brazil that includes the central government, 26 States, one Federal District, and more than 5,000 municipalities. The consolidation represented a huge challenge to convert each balance sheet to the international accounting standards. This result was possible due to an innovative strategy to improve communication, and through an open dialogue and debate with representatives of each Government and respective branches (executive, legislative, and judiciary), in order to gradually institutionalize the convergence to the international accounting standards.