The Role of Budget Institutions - MEF · changing sectoral priorities • …coverage is limited in...

The Role of Budget Institutions

International Monetary Fund

Marco Cangiano

Controlling Public Spending in Advanced Economies

Ministry of Economy and Finance

Rome, November 14-15, 2011

OUTLINE

I. Budget Institutions in G20 countries

II. Cross-country Evaluation

III. Institutional weaknesses in crisis countries

2

I. Budget Institutions for Fiscal Consolidation:

Stylized Phases of Consolidation Process

a. Understanding the Fiscal Challenge

b. Developing a Consolidation

Strategy

c. Implementing through the

Budget Process

3

I. Budget Institutions for Fiscal Consolidation:

10 Key Institutions

4

a. Understanding the Fiscal Challenge

b. Developing a Consolidation

Strategy

c. Implementing through the

Budget Process

II. Evaluation of Budget Institutions

Understanding the Fiscal Challenge

5

Fiscal Reporting

0%

25%

50%

75%

100%

Financialstatementpublished

…covers all central govt

…includes a balance sheet

…is audited & certified quickly

Stats cover allpublic sector

Advanced Emerging All• Most countries publish basic financial

statements and statistics, but...

• …coverage of entities & assets is often incomplete

• …less the 1/3 are audited & certified within 6 months

• …and few provide an overview of the whole public sector

0%

25%

50%

75%

100%

Fiscal riskstatement

…quantify all contingent liabilities

…alternative macro-fiscal

scenarios

…analyzes asset &

liability risks

…controls on tax

expenditures

Advanced Emerging All

Fiscal Risk Management

• Fiscal risk statements are widespread, but…

• …contingent liabilities are not always quantified

• …there is little exploration of alternative macro-fiscal scenarios

• …balance sheets risks tend to be ignored

• …as are risks around tax expenditures


Developing a Consolidation Strategy (I)

6

Fiscal Objectives

• Most governments fix a medium-term fiscal objective, but...

• …less than 1/2 provide a precise, transparent, & stable target for fiscal policy

• …only 1/2 cover all general government

• …and only 1/3 are supported by sub-national rules

Medium-term Budget Frameworks

• Multi-year estimates are the norm, but…

• …few emerging countries validate their forecast assumptions or provide detail on changing sectoral priorities

• …coverage is limited in both advanced and emerging countries

• …and few countries fix binding multi-year expenditure ceilings

0%

25%

50%

75%

100%

Medium-termfiscal objective

…precise &

transparent

…in place for

3+ years

…covers

general gov't

…sub-national

rule


0%

25%

50%

75%

100%

Multi-yearbudget

estimates

…indep.

validation of forecast

…clear sectoral

priorities

…covers 75%

of central gov't

…binding

multi-year ceiling



Developing a Consolidation Strategy (II)

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Independent Fiscal Agencies

• Independent fiscal councils are increasingly common in advanced countries...

• …and mostly focus on providing ex ante forecasts or policy advice…

• …relatively few play a role in analyzing ex post fiscal performance

Performance Orientation

• Most major economies classify expenditure by program…

• …but less than half use programs as the basis of legal appropriation.

• Most major economies also set non-financial performance targets…

• …but these are not always monitored and evaluated on a regular and systematic basis.

0%

25%

50%

75%

100%

Prepares macrofiscalforecasts

Evaluates ex ante fiscalpolicy

Evaluates ex post fiscalperformance


0%

25%

50%

75%

100%

Budgetincludes

programclassification

Programs arebasis of

appropriation

Performancetargets by

program

Regularperformance

monitoring

Regularexpenditure

reviews



Implementation through the Budget

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Top-Down Budgeting

• Budget preparation in cabinet generally follows a top-down procedure, but...

• …ministries often ignore ceilings

• …bottom-up rigidities remain widespread

• …the budget process is often circumvented

• …and budget approval in parliament remains bottom-up in many countries

Budget Execution

• Overspending usually requires a supplementary budget, but…

• …few governments are required to propose offsetting cuts

• …contingency reserves are not always adequate

• …and controls on multi-annual commitments are lacking in many emerging countries

0%

25%

50%

75%

100%

Ceilings fixedat start

…respected

during preparation

…limited

earmarking or legal rigidities

…all major

decisions in budget

…top-down

approval in parliament


0%

25%

50%

75%

100%

Overspendingrequires supp.

Budget

…must propose

offsetting changes

…well managed

contingency reserves

…controls on

multi-year commitments


Problems have been concentrated in 3 areas:

• Weak fiscal reporting – serious problems have emerged from beyond

the budget perimeter, changing the size of fiscal adjustment, which

was compounded by…

• Lack of binding MT Budget Frameworks – leading to fiscal drift over

the past decade, exacerbated by the above surprises and...

• Poor budget execution – resulting in spending overruns and build up

of arrears, leading to…

• Weak fiscal reporting – as spending through arrears went

unrecorded.

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III. How does it apply to crisis countries

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Problems built up over the past 2 decades from outside

the general government are now inside Portugal Gross General Government Debt

(Percent of GDP)


Fiscal Reporting

*Only includes Central Government SOE debt pre 2007

40

60

80

100

120

40

60

80

100

120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SOE & PPP reclassifications

Non-SOE & PPP General Government debt

SOE & PPP debt outside the General Government sector*

General Government Gross Debt

Arrears

The inability to follow through with MT plans has led to

fiscal drift

11

SGP Budget Balance Forecast Error 2000-2008

(Percent of GDP)


Medium-term budget frameworks

-6

-4

-2

0

2

-6

-4

-2

0

2

Greece Italy Portugal France UK Austria Germany Sweden Belgium Ireland Spain Netherlands Denmark Finland

Budget forecast T+1 Forecast T+2 Forecast

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2.2

3.2

9.7

15.1

0

2

4

6

8

10

12

14

16

Fiscal Planning

Budget Preparation

Budget Execution

Total Overspend

The majority of the slippage in Greece has been through in

year expenditure over-runs

Greece: Average percentage overspend 2005-2009


Budget Execution

13

Budget Balance: Budget Forecast vs Outturn

(Percent of GDP)


Budget Execution

Leading to large budget over-runs

- 4

- 3

- 2

- 1

0

1

2

- 4

- 3

- 2

- 1

0

1

2

Greece Italy Portugal UK Spain France Belgium Austria Austria Sweden Ireland Netherlands Germany Denmark Finland

14

Portugal

Arrears ≈ 3% of GDP

95% from outside the CG

budget

Greece

Arrears ≈ 4.3% of GDP

91% from outside the CG

budget

In both countries, arrears have emerged from outside the

budget perimeter


Arrears: execution and reporting failures

Local Govt

Others

Hospitals

Social Security

Budgetary Central Govt

Local Govt

Regional Govt

Hospitals

Budgetary Central Govt

Others

Conclusions

• Addressing weak reporting requires fundamental – yet not

glamorous reforms:

– Accounting based on internationally accepted standards

– Same for fiscal and statistical reporting

– Extending coverage to all fiscally relevant sectors

– Controlling expenditure at an early stage (commitment controls)

– Full disclosure and understanding of fiscal risks

• Moving to a modern budget process requires deep seated

institutional changes across the government

– Binding MTBFs change the way that all public agencies work

within the budget process: not just the Ministry of Finance.

– Top down process works best with early parliamentary buy-in

from the beginning.

• All this takes time, investment in resources, and buy-in across

government entities

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