Interim Budgets Navigating Government Transition

In the realm of government transitions, interim budgets serve as a crucial tool for maintaining stability and continuity during periods of change. An ‘interim budget’ is one of the tools that countries are using where it is not practical for the government to present a full budget in its last year in office when general elections are due before or after the start of a fiscal year.

Interim budgets are essentially stopgap measures designed to manage essential spendings and day-to-day expenses, such as salaries and ongoing programs, until a new government can formulate and present a comprehensive budget aligned with its priorities. The moral imperative behind interim budgets stems from the principle that it would be inappropriate and unethical for an outgoing government to determine fiscal policies and limit the policy scope for the incoming government.

During the transition period, an interim budget operates on the basis of existing policies, aiming to sustain service delivery and governmental operations without introducing significant policy changes or long-term initiatives. Typically, it includes appropriations based on the previous year's budget allocations, adjusted for inflation or other relevant factors, to ensure the government's continued functioning.  It limits expenditures to those deemed essential for the government's proper functioning until the adoption of a regular budget by the legislature.

The duration of an interim budget varies depending on the country's legal and political frameworks but generally covers the initial months of the fiscal year until the new government can introduce a full budget. Once the new administration assumes office, it becomes responsible for presenting a comprehensive budget for the remainder of the financial year, outlining its policy priorities, revenue projections, and expenditure allocations.

It is important to note that interim budgets are temporary measures and become invalid once the regular budget is approved by the legislature. Expenditures or contracts authorized under the interim budget are treated as part of the regular annual budget, emphasizing the transitional nature of interim budgetary arrangements.

Several countries use an interim budget to ensure that a government’s pre-determined functions can continue for the transition period in an election year. For instance, interim budgets in India have been a regular feature in election years (e.g., 2019, 2014, 2009, 2004). They were necessitated because the general elections have been usually held around April-May, whereas the budgets are presented in February.  In Japan, the Public Finance Act allows the Cabinet to prepare a “provisional budget” to cover a specified portion of the fiscal year when the government expects that the regular budget cannot be approved before the new budget year (by 1 April), for reasons such as an upcoming general election^[1]. The provisional budget is replaced by the regular budget for the remainder of the fiscal year once the latter is approved by the National Diet (Japan's parliament).

There are several good practices to follow when preparing an interim budget, including:

• Providing clear provisions in the legal framework for the preparation and execution of interim budgets. The legal framework should clarify the arrangements for an interim budget, such as its limited time frame, and the procedures required for its enactment, such as whether an interim budget requires legislative approval.
• Focusing on ensuring the continuity of essential services. As mentioned above, the primary purpose of an interim budget should be to maintain financial stability during the transition period and continue supplying basic expenses and services. It should focus on existing programs and allocate funds for critical expenditures, such as salaries, pensions, and interest payments. To maintain fiscal responsibility, an interim budget should comply with the government's existing expenditure ceilings and other fiscal rules. The interim budget should not introduce major policy changes, new programs, or investment projects that could financially burden the next government. Such policies and programs should only be introduced and budgeted for after the new government comes in.
• Ensuring transparency and accountability. The interim budget should be concise, focusing on immediate financial needs rather than long-term plans. It should clearly present revenue and expenditure estimates to ensure clarity and accountability. When the new government adopts its first budget, it should cover the entire fiscal year and replace the interim budget. The final budget should incorporate the appropriations that were included and executed under the interim budget.  In-year reports should include interim budget performance reports to the Legislature.
• Coordination between outgoing and incoming governments: While interim budgets are useful financial tools during the change of government, a successful transition also depends on the coordination between outgoing and incoming governments. Governments in transition should coordinate closely with the incoming government to facilitate a smooth handover of fiscal responsibilities. It includes providing necessary information such as transferring financial data and documentation, including budgetary allocations, revenue projections, expenditure plans, financial reports, and ongoing projects to allow the incoming government to make informed decisions.

Preparing an interim budget is a critical task for governments during times of transition whether due to elections or other circumstances. By adhering to these principles, interim budgets can play an important role in facilitating smooth government transitions, providing a framework for financial management and continuity during periods of change.

Interim budgets also apply when the parliaments refuse to adopt the executive’s proposal budget before the start of a new fiscal year. For this, different rules and principles apply.