Multi-year budgeting à la française
When it is presented to Parliament alongside the annual budget (loi de finance) next month, this new loi de programmation will be the culmination of two years of preparatory work on the part of the Budget Directorate within the French Ministry of Finance and represent, in the words of President Sarkozy, "a revolution in France’s public administration" which will bring the country "up to the standard of other European countries." While multi-year expenditure planning has been a feature of public financial management in many northern European countries including the Netherlands, Sweden, Finland and the United Kingdom for more than a decade, budgetary procedures in most southern European countries (with the exception of Spain) have remained on a firmly annual cycle. France’s first budget pluriannuel, alongside the recent revival of multi-year budget plans in Italy, therefore represents an interesting experiment in whether a budgetary model that suited the executive-dominated budget processes of northern Europe can thrive in countries further south whose budgetary procedures are rooted in more formal, Napoleonic legal traditions and characterized by more interventionist legislatures.
Some of the key parameters of this new French model of multi-year budgeting were set out in the Report on the Evolution of the National Economy and Orientation of the Public Finances (Rapport sur L’Évolution de l’Économie Nationale et sur les Orientations des Finances Publiques) presented by the French budget minister in July as background to the Assembly’s Budget Orientation debate. A comparison between the nascent French approach and the more established northern European models of multi-year budgeting reveals both broad areas of commonality but also some interesting innovations that would, in fact, put France well ahead of “the European standard” of public financial management.
Choosing a multi-year budgeting model
Countries looking to design a credible multi-year expenditure planning system come up against an inevitable tension between the scope, detail and firmness of the expenditure projections contained therein. The existing northern European models of multi-year expenditure planning fall into two broad categories (illustrated in the figure below) based on where they strike the balance between these different dimensions:
- the Dutch-Finnish model of multi-party coalition agreements which place a firm, four-year limit on aggregate expenditure for the period in which the coalition government is in power. This aggregate expenditure ceiling covers the vast majority (around 80 percent) of central government spending and is not revised for the length of a four-year parliament. While the coalition agreement includes a sectoral breakdown of expenditure, the detailed interministerial allocation is viewed as purely illustrative and subject to revision through the annual budgeting process. The Dutch-Finnish model is therefore characterized by a broad scope, high degree of firmness, and low level of detail.
- the British model of periodic Spending Reviews which fix detailed sectoral expenditure ceilings for each of the 25 main government departments for a multi-year period. This system of ceilings (known as Departmental Expenditure Limits or DELs) only covers about 50 to 60 percent of central government expenditure. The remaining 40 to 50 percent is accounted for by demand-led or volatile items such as debt interest and social security expenditure and continues to be managed on an annual basis. This residual category of expenditure is therefore referred to as Annually Managed Expenditure or AME. DELs are fixed for a period of three-years but generally reviewed every two so that government departments always have a planning horizon of at least one year ahead. The British model is therefore characterized by a more limited scope, a lower degree of firmness and a higher degree of detail than the Dutch-Finnish model.
Key features of the French model in European context
As the July Report itself acknowledges, France’s multi-year budget drew heavily upon the UK Spending Review model for inspiration. It’s therefore not surprising that the two countries strike roughly the same balance between these different dimensions. Features shared by both British and French models include:
- Time horizon: For its first multi-year budget, France has adopted the “2+1” approach employed by the UK for its first four Spending Reviews in which expenditure ceilings are set for three years but reviewed every two to allow for an overlapping “reference year” between the preceding and subsequent exercises.
- Coverage: As in the UK, France’s first multi-year budget will cover only a fraction (about 40 percent) of overall public expenditure. However, thanks to their unwritten constitution, the British have always had the luxury of choosing which categories of expenditure to class as DEL or AME according to their innate volatility. By contrast, the French government’s degree of control over different categories of expenditure is more strictly defined in law. Specifically while the government has broad discretion over the expenditure of the State (l’État), its legal authority to influence the budgets of the country’s social security institutions, local authorities and other independent agencies, which account for around two-thirds of public expenditure, is more circumscribed. For this reason, the coverage of France’s first multi-year budget will be limited to the one-third of total public expenditure that falls within the legal purview of (l’État) despite the fact that this category of expenditure includes a number of items (such as debt interest payments and membership fees to the European Union) which the three northern European countries prefer to exclude from their multi-year ceilings due to their non-discretionary and volatile nature.
- Level of detail: Like the British, the French system breaks down the three-year ceiling on the aggregate expenditures of the State (l’État), known as la norme de la dépense, into 32 sectoral ceilings (known as missions). However, the existence of a number of interministerial missions poses a unique challenge for the enforcement of multi-year budgetary discipline under the French system. The need to reinforce ministerial accountability helps to explain the decision announced elsewhere in the report to reduce the number of such interministerial missions from 11 to 8 as part of a wider rationalization of the budget template in the run up to the first multi-year budget.
- Contingency reserves: Both countries set aside sizable contingency reserves within their multi-year expenditure plans to enable them to deal with unforeseen crises and irresistible spending pressures that arise during the three-year period. At around 1 percent of State (État) expenditure by the third year of programming, France’s reserve is similar in size to those that the UK and Finland set aside within their multi-year plans. However, with a number of more volatile items included under France’s expenditure ceiling, the pressures on this reserve are potentially much greater.
- Expenditure reviews: Both exercises were preceded by a comprehensive, bottom-up expenditure review aimed at finding efficiencies and releasing resources from lower impact/priority areas for reallocation to higher impact/priority areas. Since the UK’s first Comprehensive Spending Review in 1998, expenditure reviews have become an integral feature of its multi-year expenditure planning process. It remains to be seen whether the French propose to conduct another mini-General Review of Public Policies (Révision Générale des Politiques Publiques or RGPP) in the run-up to their next multi-year budget in 2010.
Some interesting French innovations
At the same time, there are a number of aspects of the nascent French model that set it apart from those that have been in operation in elsewhere in Europe for the past ten years. Some of these differences reflect the need to adapt the multi-year budgeting model to the French institutional and legal different context. For example:
- Legal basis: In most northern European countries, multi-year budgets have no formal status in law and merely represent a commitment on the part of the government to adhere to those limits when presenting future budgets to parliament for formal legal authorization. In France, the multi-year budget will be formally presented to Parliament in the form of the aforementioned loi de programmation and be the subject of a vote – reflecting the greater influence of the legislative branch and the emphasis on formal legal authority in the France; and
- Pay and workforce planning: France’s multi-year budget is also underpinned by more rigorous workforce planning than one finds in countries like the UK – reflecting both the centralization of wage bargaining arrangements in France and the pivotal role that the country’s public sector unions will play in determining the credibility of the French first multi-year budget. Details of Government’s three-year spending plans accompanied by clear statement of the challenging pay and workforce growth assumptions used to construct them, including the President’s famous campaign pledge to replace only on in every two retiring civil servants.
Other novel aspects of the French approach, however, represent genuine innovations which would put country at the forefront of public financial management in Europe. In particular, the July Report also set out the French Government’s intention to get a grip on tax expenditures (dépenses fiscales) whose growth has been a major source of fiscal leakage in many countries but particularly those that operate some form of multi-year expenditure ceiling. While the French government began reporting on the size and composition of tax expenditures several years ago, the 2009 budget will incorporate a rolling target (albeit an indicative one) on the stock of tax expenditures with a view to imposing a similar level of discipline over this fiscal channel as over conventional expenditures. While many other European countries report on either the stock or flow of tax expenditures in their budget documentation, France would be one of the first countries to impose any form of target on the overall stock and evolution of tax expenditures.
Posted by Richard Hughes
