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December 26, 2007

Two-years after the "Big Bang:" an update on France's PFM Reforms

Posted by Francois Michel

In 2001, France enacted a new organic budget law, including many reforms such as program budgeting, empowerment of the line ministries, increase of parliamentary controls, extension of commitment authorizations, and introduction of multifaceted accounting reforms. The law envisioned four years to plan the reform, with full implementation planned over a decade. Two years into implementation, many lessons are emerging from implementation of these significant transformations.

On December 7, 2007, the IMF Fiscal Affairs Department (FAD) hosted a high-level seminar with senior officials from the French government to explore the intricacies of the reform, and to try to identify the challenges that still lay ahead. Speakers were Messrs. Hürstel and Mordacq, respectively Assistant Director at the Budget Directorate and General Director of State Modernization, and Mrs. Morin, Deputy Director of the Accounting Directorate.

A successful transition…

Six years after the adoption of a new budget system law, the “Loi organique relative aux finances publiques” (LOLF), and two years after its entrance into force, much has been accomplished.

Of particular significance are, on the budgetary side, the presentation of dramatically clarified, output-oriented documents to parliament, whose amendment powers were considerably extended; the improvement of the budget calendar, including systematic discussions on structural reforms and performance indicators; the extension of the approach to budget laws for social security funds; and, perhaps most importantly, the relatively smooth transition in line ministries to the new budgetary control mechanisms, and their improved dialogue with the Ministry of Finance.

Much has also been done on the accounting side—a key aspect of the reform—with the certification of state accounts by the court of audits (although with some qualifications). Further progress included the overhaul of the system of internal controls, and the introduction of analytical accounting in each program’s annual performance plans and reports.

… has revealed further challenges

The transition to the new budget system will take time, and considerable effort, to produce all the benefits envisaged initially. This is not so much because of technical difficulties—e.g. the budgeting of “commitment authorizations”, the control of the “asymmetrical fungibility”, or the deployment of a new government financial information system by the Ministry of Finance. This is because the reform is more cultural in nature, and the new performance-oriented management and control methods need to percolate down to local spending units in order to be fully implemented.

There is, however, broad consensus on the fact that the reform is mature enough to set the stage for France’s announced fiscal consolidation, based on the results from the General Review of Public Policies (Révision Générale des Politiques Publiques, RGPP). The RGPP is a comprehensive, five-year reform plan, whose preliminary outline was presented on December 12, 2007 [2].

The RGPP brings to the fore two aspects that the initial budget system law had left open:

  • the definition of a clear Medium-Term Fiscal Framework encompassing all public spending (central and local governments and social security funds). This framework should be submitted to Parliament in 2008 perhaps under the form of a Multi-Annual Budget Law—including a list of structural reforms and some appropriation ceilings at the mission level. This relatively unexpected transition to a multi-annual budget is deemed necessary to give managers the visibility needed to conduct structural reforms;
  • the strengthening of the rules governing the adoption of tax expenditures—notably via the possible adoption of a tax expenditure ceiling in budget laws.

These recent developments make even clearer the scope and pace of the reforms that have been unfolding since 2001, but also their very challenges. Participants in the FAD seminar confirmed that successful implementation of performance-based budgeting and accrual accounting requires much time, strong implementation capacity, and sustained political support. In France’s case, a very thorough but progressive, flexible approach, open to unanticipated developments (such as those introduced in the 2005 revision of the organic law or the most recent ones from the RGPP) appears to be a key component for building a strong PFM system.

These will certainly serve as valuable lessons for countries considering following France’s footsteps in “front-loaded” PFM reforms.

Presentations for all are available here:

Download mordacq_managerial_reform.ppt

Download hurstel_budget_reform.ppt

Download morin_accounting_reform.ppt

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