Ten Lessons from Spending Reviews in Eastern Europe

Posted by Suzanne Flynn, Fazeer Rahim, and Natalia Zbirciog-Vandenberghe[1]

A recent workshop organized by the Center of Excellence in Finance (CEF) in Ljubljana, Slovenia[2] discussed the benefits, approaches, and lessons learned in developing spending review processes in South-East European. The workshop was facilitated by experts from the IMF’s Fiscal Affairs Department, the Structural Reform Support Service (SRSS) of the European Commission (EC), and the Ministries of Finance and Justice of the Slovak Republic.

Participating countries (Albania, Greece, Lithuania, FYR Macedonia, Moldova, Montenegro, Malta, and Ukraine) are all at an early stage of using spending reviews as a tool to generate efficiency gains in public spending. Some countries have undertaken one-off sectoral spending reviews, while others are setting up the necessary structures to undertake such reviews. The event provided an opportunity for these countries to learn from the experience of EU Member States in implementing spending reviews, and to share their own experience.

In September 2016, the Eurogroup called on euro area Member States to actively use spending reviews and approved a set of common principles for improving expenditure management. These principles are: (i) strong and sustained political commitment at the national level; (ii) the use of international best practices in the design and implementation of spending reviews; (iii) monitoring the impact of spending reviews and communicating results to the public; and (iv) consistency between spending reviews and countries’ annual and multiannual budget planning procedures.

The importance of capacity building in this area is reflected in technical support delivered by the SRSS to a range of EU Member States, some of which have also attended training at the CEF.

The experience of Slovakia was presented by the Slovak officials. In 2016, the new government initiated a program of reviewing all areas of spending during its term of office. A Value for Money Unit was set up at the Ministry of Finance, which has subsequently conducted ten spending reviews (around three every year) covering IT systems, healthcare (twice), transport, education, labor market and social policies, the environment, groups at risk of poverty and social exclusion, agriculture and rural development, and the public sector wage bill. These reviews have been made public, and included in the government’s budget documentation.

Participants in the workshop agreed on the benefits of introducing a formal spending review process. These benefits include the reallocation of scare resources towards more productive areas, and the generation of fiscal space to enable the implementation of new policies. Spending reviews also require the central budget office to develop stronger tools and technical capacity for analyzing trends in public expenditure, estimating the cost of spending proposals and expenditure baselines, and benchmarking the performance of spending programs and projects in sectors such as health and education against international comparators. Developing such tools can help the central budget office engage in a more constructive discussion with spending ministries and agencies during the budget process.

Ten key lessons from European countries that have implemented spending reviews were also discussed, building on a survey conducted by the EC in 2017. These lessons include the need to:

1. ensure high-level political commitment at all stages of the review process;
2. adopt a medium-term perspective to allow more ambitious savings to be realized;
3. set clear top-down savings targets to ensure that ambitious yet realistic policies are developed;
4. link spending review timelines with the budget calendar;
5. lock savings into multi-year budgets;
6. combine the expertise of the central budget office with those of line ministries, and if needed, external experts;
7. examine spending from different perspectives, both horizontally across programs and vertically across spending items;
8. focus on areas where savings can be achieved most easily, especially for countries new to spending reviews;
9. leave enough time to implement reforms, as this period is often under-estimated; and
10. undertake regular and transparent monitoring of the savings achieved, and communicate information on the reviews and their impact to the public.

[1] Suzanne Flynn is the EC-Financed FAD PFM adviser under the project “Southeastern Europe: Strengthening Economic Governance and Public Financial Management”; Fazeer Rahim is a Senior Economist in FAD’s PFM 1 Division; Natalia Zbirciog-Vandenberghe is a PFM Policy Officer with the SRSS, European Commission.

[2] The Center of Excellence in Finance (CEF) is an international institution based in Slovenia which provides capacity development for public finance officials in countries of South-Eastern Europe. Simona Blazheska Stankovikj provided excellent facilitation – the digital story from the event is available here.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Digital Innovation in Public Finance in South America

Posted by Katherine Baer and Gerardo Uña[1]  

A seminar on Digital Innovation in Public Finance was organized by the IMF’s Fiscal Affairs Department and the Inter-American Development Bank (IDB), with the support of the Ministry of Finance of Peru and the Peruvian Tax Agency (SUNAT). The seminar took place in Lima, Peru on September 26-27.

The event covered topics relating to digital innovation in tax policy, tax administration, and public financial management (PFM). It provided an opportunity for senior tax and budget/treasury officials from most of the South American countries (Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay) to share their recent experiences in introducing digital innovations. An opening session highlighted some of the main themes of the FAD publication Digital Revolutions in Public Finance and set the stage for further discussions.[2]  Participants from other countries, including the U.S. Internal Revenue Service, the Mexican tax administration, and the French Treasury also discussed their experiences.

Some of the seminar’s highlights were as follows:

• FAD made a presentation on national and international tax policy challenges that both users and providers of digital services pose.^[3] The presentation highlighted how digital platforms are potentially fostering an increase in small business growth and forcing governments to revisit previous trade-offs when setting tax thresholds. At the international level, a key issue is how to determine taxing rights and the apportionment of international corporate profits. Related to this topic, the representative from Uruguay’s tax administration made a presentation on the approach his government is taking to defining “source” country or income. Uruguay is a useful case study on how smaller economies can establish taxing rights based on a pragmatic approach to the challenges that international service providers such as Google and Uber are presenting to developing countries.
  
  
• Tax administrations in the South America region are rapidly adopting new digital methods and tools, such as machine learning, data analytics and cloud computing, especially for purposes of control (audit and compliance monitoring). Chile, Colombia, and Peru, as well as Mexico are making significant strides in this area. Tax directors highlighted the importance and role of the VAT e-invoice for ensuring that VAT-able transactions are automatically recorded and as a basis for improving VAT compliance. However, only a few countries (Chile, Peru) have linked the new e-invoicing system to broader VAT compliance improvement initiatives or could show concretely how taxpayer services/satisfaction had improved, or compliance costs had fallen. One presenter emphasized that integrating data and analytics into the tax administration’s core operations is much more a management and organizational challenge than a technological one. He pointed out that even advanced tax administrations have a tremendous amount of ‘data’ but not much ‘information’, a problem that many tax administrations of the region are also experiencing. VAT e-invoices are especially challenging. They generate enormous amounts of data but a clear framework for analyzing these data is often lacking.
  
  
• The latest technological and digital innovations in PFM systems were also discussed. A FAD presentation on using daily fiscal data for real time macroeconomic surveillance attracted much interest, not least because South America is a leader in terms of availability of these data.[4] In the PFM area, Brazil is clearly the most advanced in the region. The Brazilian Treasury is adopting machine learning to perform routine tasks that Ministry of Finance staff previously carried out and is piloting the use of blockchain technology for issuing Treasury bills. South American countries continue to promote initiatives to modernize their Financial Management Information Systems (FMIS), but innovative approaches such as a modular approach or using the FMIS as a platform are still in the initial stages.[5]
  
  
• Most countries in the region are facing challenges in improving cybersecurity and using cloud computing more intensively. While more secure technologies (such as blockchain) are being adopted, there is much work to be done to ensure that both the revenue and treasury/budget agencies in the region have robust systems to ensure the confidentiality and security of fiscal information.

To summarize, most South American countries have embarked on an ambitious path of digital and technological transformation in the fiscal area. The newly adopted IT systems—and digital innovations—are often sophisticated and potentially useful. A main challenge in the medium term is ensuring that the significant resources that countries are investing in new technologies, training staff, reorganizing structures, and generating large volumes of data, result in improved tax compliance, lower costs of compliance and administration, and more efficient and effective public expenditure.

[1] Katherine Baer is Assistant Director in FAD and Gerardo Uña is Senior Economist in FAD.

[2] Sanjeev Gupta, Senior Fellow at the Center for Global Development and former Deputy Director in FAD, delivered a keynote speech on digital innovation and its implication for the public finances from a broader international perspective.

[3] Aqib Aslam (FAD).

[4] Florian Misch (FAD).

[5] This topic was discussed in panel presented by Carlos Pimenta (IDB) and Gerardo Uña (FAD).

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Adoption of Accrual Accounting Accelerates

Posted by John Stanford[1], Ross Smith[2] and Amon Dhliwayo[3]

Governments by nature are resistant to change, and when change occurs it normally is a slow, gradual process. Following this pattern, the uptake of accrual financial accounting and reporting initially moved slowly, after the drive to accrual began in New Zealand and Australia in the late 1980s.

However, times are changing. Within the next five years, it is expected that nearly two-thirds of governments will report on an accrual basis, according to a recent report by the International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA). The report draws on the updated International Public Sector Financial Accountability Index.

The 2018 Index Status Report captures information from 150 countries. It finds that while only 25 percent of governments currently report on an accrual basis, an additional 40 percent of governments are projected to migrate to accrual by the end of 2023. This upward trend is particularly marked in Asia, Africa, and Latin America and the Caribbean (see map). The high quality financial reporting guidance that the International Public Sector Accounting Standards (IPSAS) provide is at the core of these exciting developments.

Government Accounting Reporting Framework by End of 2023 (Click on the map for a better image quality)

Source: IFAC / CIPFA International Public Sector Financial Accountability Index: Data from 150 countries

Accrual reporting creates a strong base for good public financial management in countries that are well prepared for this reform. It also provides a comprehensive and transparent view of public finances that enhances the ability of citizens to hold governments to account for the use of taxpayers’ resources. And accrual reporting can be an effective tool for governments to manage and sustain the delivery of public services for generations to come.

Other highlights noted in the latest Index Status Report are that:

• More than half of governments that currently report on the accrual basis have either adopted IPSAS, or national standards based on IPSAS[4].
• Within 5 years, it is expected that almost three-quarters of countries reporting on an accrual basis will rely on IPSAS.

The report also highlights critical success factors for accrual reform projects. These factors include coordinated planning, committed and sustained support from politicians and senior policymakers, clear on-going communications, a change management plan, and effective training and capacity building programs.  

IFAC and CIPFA are planning to expand the coverage and scope of the International Public Sector Financial Accountability Index, and to provide periodic status reports during the coming years.

[1] Technical Director, International Public Sector Accounting Standards Board (IPSASB), Toronto, Canada.

[2] Deputy Director, International Public Sector Accounting Standards Board (IPSASB), Toronto, Canada.

[3] Manager, Standards Development and Technical Projects, International Public Sector Accounting Standards Board (IPSASB), Toronto, Canada.

[4] Jurisdictions can adopt IPSAS directly, or indirectly by a national endorsement mechanism or through national standards which reference IPSAS.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Tackling Mismanagement and Corruption in Natural Resource Enterprises

Posted by Andrew Bauer and Ines Schjolberg Marques[1]

Oil, gas and mining state-owned enterprises (SOEs) are pervasive in resource-rich countries. Outside of China—which has dozens of SOEs at the national and provincial levels—there are at least 139 such companies. A third of them operate in the mineral sector.

Why Countries Adopt Accrual Budgeting

Posted by Gerhard Steger[1]

Accrual accounting and budgeting, which includes setting up a balance sheet, provides the most comprehensive picture of public wealth. It brings together all the accumulated assets and liabilities that the government controls and thus offers a broader fiscal picture beyond debt and deficits.[2] It is important to understand why governments in some countries have moved to accrual budgeting, while others stick to solely conducting budgeting on a cash basis, even if both groups of countries share an accruals-based financial reporting system. A recent study compares two countries that have opted to establish financial reporting on an accrual basis but keep cash budgeting (Belgium and Portugal) and two others (United Kingdom, Austria) that have adopted accrual budgeting.[3] The chart below outlines the framework used.

Advances in Treasury Management in Latin America

Posted by Gerardo Una[1]

The 9th Forum of Latin American General Treasurers (FOTEGAL) took place in Buenos Aires, Argentina from September 12-14, 2018. The event was organized by the Ministry of Finance of Argentina, together with the IMF, the Inter-American Development Bank (IDB), and the World Bank. A separate but parallel meeting of the Latin American General Accountants Forum (FOCAL) also took place.

Improving Public Budgeting after the Great Fiscal Crisis

Posted by Jordi Baños-Rovira and Daniel Montolio[1]

The global economic and fiscal crisis of 2008 elevated the importance of putting in place robust institutional and budgetary management procedures to deal with elevated levels of public debt, risks of medium-term fiscal sustainability, as well as the fiscal impact of an aging population. A recent report[2] (The Barcelona Institute of Economics (IEB) Report 3/2018) reviews these challenges and how the lessons of the crisis can be translated into more efficient and more transparent budgeting systems.

FAD’s Annual Retreat of PFM Advisors—Echoes from the Field

Posted by Bruno Imbert and Jacques Charaoui[1]

The IMF’s Fiscal Affairs Department (FAD) hosted the fifth annual retreat of its PFM advisors in Washington DC from October 15-19, 2018. The event gathered together more than 40 advisors located either in the IMF’s Regional Technical Assistance Centers (RTACs) around the world, or in country positions, together with Washington-based staff. It provided an opportunity to discuss progress in implementing a wide range of PFM tools and reforms in the field, and to share experiences and good practices.

Institutionalizing Pakistan’s Fiscal Policy Decisions

Posted by Muhammad Afnan Alam[1]

“A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.” (James Madison, 1788)

In a perfect world of fully-informed policymakers solely motivated by social welfare maximization, complete discretion would enable them to optimally respond to changing circumstances at any time. In the real world, however, information asymmetries are pervasive, time-inconsistency looms large, and policy behavior is shaped by considerations other than pure social welfare. Hence, even the best designed democratic systems require institutional constraints on policy discretion to complement democratic controls and prevent undesirable policy outcomes.

Public-Private Partnerships and the Government’s Balance Sheet

 Posted by Tim Irwin[1]

Around the world, public-private partnerships (PPPs) are being used to build and maintain roads, hospitals, power plants, and many other kinds of valuable infrastructure. At the same time, they create problems for public financial management (PFM) because they often involve government guarantees or long-term payment commitments, which aren’t easy to manage using the traditional tools of PFM. Some of the steps that ministries of finance can take to solve these problems are the subject of a recently published IMF “How To” note, which grew out of work commissioned by the late Mario Pessoa.