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June 18, 2020

PFM Legal Responses to the Pandemic  – Be Fast, but Wise

Covid
Posted by Ozlem Aydin Sakrak, Alessandro Gullo and Karla Vasquez[1]

Amid the unprecedented disruption brought by the pandemic, many countries have swiftly adopted legislation to preserve their economies. The crisis is testing how PFM legal frameworks can strike the right balance between the two key principles– flexibility and accountability. Fast legislative action is necessary to mobilize funds expeditiously. On the other hand, proper checks and balances between the legislative and the executive should be maintained to prevent irregular fiscal practices and to adequately account for the use of the funds that are mobilized.

How can existing PFM legal frameworks help adopt emergency measures?

PFM legal frameworks include several mechanisms for emergency circumstances when unforeseen spending and other types of government support (e.g., guarantees) are needed. These include supplementary budgets, virement rules, and the use of contingency reserves. For instance, Mexico relied mainly on its reallocation powers to prioritize spending, France adopted a supplementary budget, Peru, and UK used their contingency funds to support part of the spending.[2]

Other legal mechanisms have also been used for rapid deployment. Countries such as India have applied disaster management laws, allowing the use of disaster funds. In the US, the activation of the Disaster Relief Fund had to be preceded by a declaration of national emergency by the President.

Do emergency situations provide a legal basis to act, and if so how and with what safeguards?

Existing PFM frameworks may not always provide a sufficient legal basis to act. During the pandemic, new legislation, complemented by ordinary PFM mechanisms, has often become necessary.

  • Providing a legal basis to act

In many constitutional systems the executive has used its emergency law-making powers to activate budgetary mechanisms provided under PFM law or to adopt ad hoc legislation. In Spain, for example, the government issued decrees to tackle the economic and social impact of COVID-19. These decrees have the force of primary law and must be ratified or repealed by the Parliament within thirty days of their adoption. In Peru, the executive can legislate through emergency decrees on financial and economic matters and has repeatedly used this prerogative during the pandemic. In Albania, the Executive amended the 2020 budget through the issuance of a normative act.

However, in other jurisdictions, the law-making powers of the executive may face constraints. For example, in Estonia, emergency presidential decrees cannot enact or amend the budget.

Sometimes the legislative powers of the executive are linked to a state of emergency. In Argentina, the Law on Social Solidarity and Productive Recovery declared a public emergency, delegating specific legislative powers such as on health matters and debt restructuring.  

  • Enabling emergency spending

COVID-related legislation also secured public resources through additional funding or transfers from existing funds. In the U.S., the Cares Act established a $150 billion “Coronavirus Relief Fund” that helps State and local governments fund the unanticipated costs of the pandemic. Germany set up an Economic Stabilization Fund to support commercial enterprises.

In Canada, the COVID-19 Emergency Response Act authorizes the government to spend from the Consolidated Revenue Fund, in areas such as public health.

Spending can be accelerated also by expediting regular financial authorization processes. In Canada, the Minister of Finance can borrow money until September 2020 without the authorization of the Governor in Council.

  • Safeguarding the proper use of resources

Countries have set up in legislation specific funds, accounts or budgetary lines to channel emergency spending and ensure its use for the intended purposes. Provisions include:

  1. Targeted purpose. Use of the funds is allocated to specific activities, for instance, the acquisition of medical and personal protective equipment (Hungary and Estonia) or support of companies (the Economic Stabilization Fund in Germany)
  2. Clear rules on management and control. Most countries established funds within the state budget and under the control of the Treasury. France created under the general budget a specific budgetary “mission” to track the use of COVID-related expenses. Appropriations are subject to the same budget execution rules provided under the organic budget law.
  • Temporary nature. Funds or accounts are often subject to a sunset clause. In Ecuador, a special account for humanitarian aid and economic recovery is operative for nine months.
  1. Special oversight. In the US the CARES Act created a Congressional Oversight Commission to report to Congress on the implementation of the Act and designated a Special Inspector General for Pandemic Recovery to oversee the Secretary of Treasury’s actions. In France, a monitoring committee under the Prime Minister is responsible for monitoring the implementation and evaluation of financial support measures.
  • Adopting swift legislation

Many countries used fast-track legislative procedures. In the UK, the Coronavirus Act 2020 was passed in four sitting days, while the swift adoption of the legislation in France relied on its traditional mechanism of the supplementary budget.  

The role of parliamentary committees may also be important to legislate expeditiously. In Switzerland, the Financial Delegation of the Federal Chambers approved certain emergency appropriations related to COVID-19 expenditures.

In conclusion, while many existing PFM legal mechanisms were usefully applied, the pandemic often required the deployment of additional tools. In both cases, the application of PFM legal frameworks has been characterized by flexibility, speediness, and a broad delegation to the Executive, accompanied by parliamentary ratifications and time limits in emergency legislation. To counterbalance these features, accountability mechanisms have been put in place, such as clear rules on the use of the funds, regular reporting, and audit and other oversight mechanisms.

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] Ozlem Aydin Sakrak is with the IMF’s Fiscal Affairs Department, Alessandro Gullo and Karla Vàsquez with the Legal Department.

[2] The UK increased the capital limit of the Contingencies Fund for a temporary period (Contingencies Fund Act 2020).

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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