Improving Public Budgeting after the Great Fiscal Crisis

Jordi Baños-Rovira, Daniel Montolio

November 15, 2018


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.

A first important policy recommendation of the report is that, with countries facing tight resources and limited fiscal space following the crisis, there is a need to develop budgetary tools enabling finance ministries to make more efficient use of a country’s existing resources. Along with the introduction (or improvement) of medium-term budget frameworks and appropriate fiscal rules and regulations, performance budgeting may help to provide a practical results-based approach which, if well designed, can meet the needs of resource prioritization and sustainable medium-term financing. Recent research[3] suggests ways in which performance budgeting can be simplified and improved, supported by the redesign of processes, improved analysis of costs, and enhanced skills within government.

A second key issue highlighted in the report is to improve the design and performance of government financial management information systems (FMIS), which have largely been on the periphery of public financial management (PFM). There is much scope for improving the design and performance of these systems, which have been slow to integrate the latest developments in digital technology.

Third, during the great fiscal crisis, many governments failed to inform the public of their true underlying fiscal position, or the fiscal risks they were incurring. This failure to disclose information undermined citizens’ trust in government. Even in many advanced economies, the analysis and management of fiscal risks is still in its infancy. The report notes that: 1) the mere existence of fiscal risks should not be used as an excuse for governments to avoid risks—better management and mitigation of risks is key; 2) any discussion of fiscal risks should put the quality of the underlying information at its center; and 3) a dysfunctional PFM system, as much as the poor quality information the system generates, is by itself an element of risk and, as the PFM system evolves, the better identification and management of these risks should be a key objective.

Fourth, during and after the crisis, many governments promoted diverse measures to revitalize the confidence of citizens. The report notes that participatory budgeting—in which citizens directly participate in decision-making on budget allocations of certain spending items—has been one of the most relevant of such initiatives. Since early experiments—such as that carried out in 1989 in the City of Porto Alegre (Brazil), participatory budgeting has spread to all continents, with Portugal being one of the first advanced countries to implement it. Although the experience of many countries suggests that the scope for participatory budgeting is limited to a small share of the budget, mainly concerning capital projects, several studies have identified its potentially positive effects on citizens’ well-being, fiscal transparency, and better understanding of the prioritization of scarce resources.

Participatory budgeting, however, has displayed many challenges in implementation—for example its limited application in large jurisdictions, and problems of establishing practical mechanisms for incorporating citizen’s proposals on the budget while not undermining the statutory role and responsibilities of the executive and legislative branches of government that are clearly defined in a country’s constitution and budget laws.

Finally, the report discusses how the economic and fiscal implications of electoral manifestos or policy platforms put forward by political parties should be assessed and publicly disclosed. Such analyses can help citizens at voting. A survey conducted in Spain in 2015 concluded that two-fifths of respondents considered electoral platforms quite or very important in determining their vote. More that 90 percent of respondents considered it important to estimate the costs of electoral platforms and how such promises would be financed. 80 percent of respondents supported the appointment of an independent body to conduct a rigorous ex-ante analysis of the main initiatives contained in electoral platforms. Unfortunately, only a handful of countries, notably the Netherlands, have yet moved very far in this direction.

[1] University of Barcelona (UB) and Barcelona Institute of Economics (IEB).

[2] This Report was prepared by the Barcelona Institute of Economics (IEB), a research center whose goals are to promote and disseminate work in applied economics, and to contribute to debate and the decision-making process in economic policy. The research work of the Institute’s members is conducted primarily in the fields of fiscal federalism and public economics; urban economics; transport economics and infrastructure; energy sustainability; analysis of the tax system; human capital and innovation. Contributors to the report included Jordi Baños Rovira, Daniel Montolio, Marco Cangiano, Mark Miller, Ernesto Ganuza, and Santiago Lago-Peñas.

[3] Moynihan D., and Beazley, I. (2016): Toward Next-Generation Performance Budgeting: Lessons from the Experiences of Seven Reforming Countries. World Bank, Washington, D.C

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