SIGMA/OECD recently published a Study on the differences between the organisation of budget management in selected government administrations. The study focused on Western Balkans countries and the Republic of Moldova, which are candidates for European Union (EU) membership.
The conclusions have important lessons for a much wider audience than just the countries aspiring to join the EU. The Study showed that the Ministry of Finance (MoF) in these countries typically engages in direct budgetary negotiations with many more organisations (between 46 and 101 in 2023) compared with ‘good practice’ economies (between 11 and 18). In those applicant countries, many ‘second level’ organisations, such as agencies and others, negotiate their budgets directly with the MoF, rather than with their controlling ministry. In countries with good PFM practices, a ministry would include its controlled ‘second level’ organisations in its overall budgetary negotiations with the MoF. Budgetary ceilings would thus incorporate such organisations into the allocations for the ‘first level’ organisation.
The types of second level organisation that are involved in this practice include non-executive branches of government (e.g., parliament, courts), national science academies, some regulatory agencies, cultural, media, educational, and health organisations and even some non-governmental organisations. These latter can include the national public broadcasting organisation, the national press agency, organisations such as the Red Cross and some professional institutions. In ‘good practice’ countries, only transfers to such institutions are included in ministry budgets.
Overall, many independent oversight bodies negotiate directly with the MoF in the applicant countries. This is to secure their independence and is a consequence of the development of democratisation. In some applicant countries, but not all, some public funds such as social security funds are integrated into the budget but in others, they are treated as extra-budgetary funds, which is in line with good practice.
There are two basic reasons why second level organizations negotiate their budgets directly with the MoF.
- Status:
Direct negotiation of budgets with the MoF is seen by some managers as safeguarding an institution's functional and professional independence from politically motivated interference by ministers. Other organisations’ managers regard retaining control over their own budget, and not being subject to ministry restraints, as an important status sign and one which elevates the institution's perceived importance.
- Improvement in MoF control:
Some MoFs prefer direct budgetary control as a way of reducing risk during budget preparation and execution. Also, MoFs may feel that line ministries do not have the capacity and skills to carry out a broader responsibility for budget management in their sector.
The Study points out that having many budget organisations at the same level as ministries adds to the burden on the MoF. It moves the MoF’s focus from a strategic approach and makes introducing advanced PFM reforms (such as program-based budgeting) more complex. It also adds to budget documentation and makes more difficult the addition of performance information. Another problem is who should represent the budget organisation in a parliamentary debate on its budget or finances. It also dilutes ministerial responsibility for government policy results and makes subordinate organisations less accountable to their line minister. Such ministers are less able to allocate budgets according to sector policy priorities.
Also, the use of ceilings is negatively affected. First, a key issue in budget preparation is the allocation of budget ceilings. The greater the number of organisations directly negotiating budgets with the MoF the greater the challenge of efficient allocation. Second, during budget execution circumstances are likely to change and the greater the number of budgetary organisations negotiating with the MoF the greater the MoF problem in ensuring that overall execution is efficient and effective. Other problems can include making budget discipline more difficult and the management of investments and fiscal risk. In short, the proliferation of budgetary organisations tends to result in “fragmented and weak public investment management systems and limited consolidation of budget execution data by budget organisations.”
There are other implications. Significant administrative and financial management problems for ministries arise from this fragmented budget-making approach. This conflicts with the EU policy to improve public financial management and internal control (PFM/IC). First, the organisational management of a ministry administration is fragmented encouraging a silo approach. Yet most public problems require complex coordination arrangements. Coordination must occur at the civil service level but in many applicant (and other) countries no overall head of the civil service exists, only a series of departmental heads. This makes a comprehensive ministry response to changes in circumstances much more difficult to achieve. Second, the PFM/IC reforms applicant countries are required to achieve to become EU Member States become much more challenging to implement.
The Study makes the following three broad recommendations.
First, limit the number of budget organisations reporting directly to the MoF.
Second, make line ministers accountable for budget management in their sector. This may require changing the overall organisation of the civil service to complement ministerial accountability.
Third, align public administration and public financial management reform.
