Public Financial Management (PFMx) Module

Transcription

1 Public Financial Management (PFMx) Module 4 The Annual Budget Preparation and Approval This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Fiscal Affairs Department (FAD) courses. Any reuse requires the permission of the IMF and FAD.

2 Budget Preparation and Approval Executive Fiscal policy objectives Political and strategic priorities Annual Budget The annual budget is the Government s most important policy instrument.

3 The Budget Cycle

4 Budget Preparation and Approval Stages 1. Budget strategy setting Budget Preparation and Approval Budget guidelines and submissions Budget review, negotiations and reconciliation 4. Budget approval

5 Defining the Annual Budget The Annual Budget is proposed revenue and expenditure of the Government for a 12 month period. Executive Legislature Approved Budget

6 The Annual Budget

7 The Annual Budget Annual Budget: Government s objectives Revenue Expenditure

8 Why the Annual Budget is important OBJECTIVE: Resources cover government spending needs Fiscal Policy What? Should taxes be increased to spend more on key programs? Should taxes be cut to stimulate economic growth? DESIGN Public Financial Management How? Annual Budget Revenue Expenditure IMPLEMENTATION

9 A Political Exercise Annual Budget Executive Citizens/Voters Legislature

10 Technical Aspects of Budgeting Fiscal responsibility Budget rules and procedures Efficient service delivery Effective resource allocation

11 Principles of Budget Preparation Traditional Principles Comprehensive - All revenues and expenditures Universality -Total revenue covers total expenditures Unity - Single budget and budget process Annuality - All appropriations have a clear end date Specificity - Purpose of each appropriation is clearly stated

12 Challenges to Budget Preparation Comprehensiveness and Universality Budget Unity Annuality

13 Challenges: Comprehensiveness and Universality Comprehensiveness and Universality Budget Unity Excluding expenditures Earmarking revenues for set purposes Offsetting Separate budgets for capital and current expenditure Annuality Unused appropriations are cancelled End of year spending: use it or lose it Multiyear commitment

14 Challenges: Budget Unity Comprehensiveness and Universality Budget Unity Excluding expenditures Earmarking revenues for set purposes Offsetting Separate budgets for capital and current expenditure Annuality Unused appropriations are cancelled End of year spending: use it or lose it Multiyear commitment

15 Challenges: Annuality Comprehensiveness and Universality Budget Unity Excluding expenditures Earmarking revenues for set purposes Offsetting Separate budgets for capital and current expenditure Annuality Unused appropriations are cancelled End of year spending: use it or lose it Multiyear commitment

16 Limits of Annual Perspective Shortsightedness Uncertainty Limits of Annual Perspective Incremental Unrealistic costing

17 Budget Credibility Inaccurate or biased forecasts Overspending Budget Credibility Weak budget execution Unanticipated events

18 Principles of Budget Preparation Traditional Principles Modern Principles Comprehensive Universality Unity Annularity Stability Transparency Performance Specificity

19 Modern Budget Reforms and Budget Principles Top-down budget techniques Fiscal strategy statement Medium-term budget frameworks Focus on results Stability Performance Budget transparency Transparency

20 Evolving Budget Process Characteristics Traditional Modern Timeframe Annual Medium-term Budget process Bottom-up Top-down Macro-fiscal framework Budget coverage Spending ceilings None Narrow None Comprehensiveness Broad Binding/indicative Budget negotiations Incremental Strategic and policy focus Appropriation structure Line item and input Programs and outputs

21 Budget Preparation Overview OBJECTIVE: Resources cover government spending needs Available resources Policy Priorities and existing demands

22 Traditional Bottom-Up Budgeting Ministry of Finance/ Treasury Budget submissions Total Budget Expenditure Budget submissions Ministries, Departments, and Agencies

23 Top Down Budgeting $ Ministry of Finance/ Treasury Total Budget Expenditure Ministries, Departments, and Agencies $ $ $ Spending with pre-set ceilings and limits

24 Roles of Both Budgeting Approaches Limits on total expenditure Strategic priorities and ceilings for ministries Allocations within ceilings Costings of existing and new proposals

25 Budget Calendars A formal budget calendar Stability Specifies when documents will be provided to Parliament / Legislature Time for involvement of key participants

26 Budget Calendar Sample Month January/February February March March/April May June July August September December Summary Sample Budget Calendar Ministry of Finance (MOF) prepares forecasts. MOF prepares fiscal strategy with ceilings. Cabinet approves fiscal strategy and ceilings. Legislature approves fiscal strategy. MOF issues budget circular. Ministries submit budget requests. Budget negotiations and reconciliation. Cabinet approves draft budget. Budget submitted to Legislature. Legislature approve budget. Strategy setting Guidelines and submissions Review, negotiation and reconciliation Approval

27 Budget Calendars and Medium Term Budgets MTBF Guides budget process. Includes updated revenue and expenditure forecasts for the upcoming budget.

28 Three Stages of the Budget Preparation Process #1 Strategy setting #2 Budget guidelines and submissions #3 Budget review; negotiation and reconciliation

29 Budget Preparation Process: Strategy Setting #1 Strategy setting #2 Budget guidelines and submissions #3 Budget review; negotiation and reconciliation A. Limits on total expenditure. Consistent with medium term fiscal objectives and targets B. Identifies sectoral priorities for services and public investment C. Ceilings on expenditure for spending ministries D. Understanding assumptions and potential fiscal risks

30 Budget Preparation Process: Guidelines and Submissions #1 Strategy setting #2 Budget guidelines and submissions #3 Budget review; negotiation and reconciliation Budget circulars Ministries submit budgets within ceilings according to guidelines

31 Guidelines and Submissions Budget Circular Standard Contents Macro-fiscal targets and information Budget priorities and ceilings Procedural guidelines for submissions

32 Budget Preparation Process: Review, Negotiation and Reconciliation #1 Strategy setting #2 Budget guidelines and submissions #3 Budget review; negotiation and reconciliation MOF reviews submissions to ensure compliance with policy, limits and effectiveness MOF suggests revisions and negotiates with spending ministries MOF reconciles final submissions with expenditure ceilings Draft budget is approved by the Cabinet / President

33 Legislative Role in Budget Approval Influencing Factors 1. Constitutional provisions 2. Political context and traditions 3. Available resources

34 Constitutional Role of the Legislature Political System Presidential Parliamentary Legislature Ability to amend or adjust the budget Constitutional Restrictions No changes permitted Restricted Unrestricted

35 Legal Power to Amend the Budget Power of the Legislature: OECD Countries, 2012 No changes 9% Unrestricted 36% 55% Restricted No changes Source: OECD 2012

36 Political Context and Party systems Divided government Vote of confidence in the government Minority and coalition governments

37 Powers to Amend the Budget A vote on the budget is a vote of confidence in the Government No changes For example: Greece; Ireland; United Kingdom. Restricted No changes Yes 52% No 48% Unrestricted For example: Chile; Mexico; United States. Source: OECD 2012.

38 Resources and Capacity to Review the Budget Specialized staff support budget committees Specialized budget research units Independent fiscal agencies Congressional or Parliamentary Budget Offices

39 Important Aspects of Budget Approval Timeframe Two Stage Pre-Budget Reports Role of Committees

40 Budget Approval: Timeframe Timeframe Time to scrutinize the budget (3 months) Budget approved prior to the fiscal year Two-Stage Two stage Process Demonstrates fiscal responsibility Pre-Budget Reports (Fiscal Strategy Statement) Linked with top-down approach Manages expectations Role of Committees Budget Sectoral

41 Parliamentary System - Budget Approval Calendar Swedish Riksdag (Parliament) Budget Approval Timetable Dates Actions 15 April Early June 20 September September November End November December 1 January Government presents Spring Fiscal Policy Bill. Parliament approves Fiscal Policy Bill. Government presents Budget Bill to Parliament. Finance Committee reviews the overall expenditure and revenue. The sectoral committees review individual agency appropriations. Parliament approves in one vote total expenditures and revenues for each of the 27 expenditure areas. Parliament approves individual appropriations within each of the 27 expenditure areas. Start of fiscal year.

42 Budget Approval: Two Stage Timeframe Time to scrutinize the budget (3 months) Budget approved prior to the fiscal year Two-Stage Two stage Process Demonstrates fiscal responsibility Pre-Budget Reports (Fiscal Strategy Statement) Linked with top-down approach Manages expectations Role of Committees Budget Sectoral

43 Parliamentary System - Budget Approval Calendar Swedish Riksdag (Parliament) Budget Approval Timetable Dates Actions 15 April Early June 20 September September November End November December 1 January Government presents Spring Fiscal Policy Bill. Parliament approves Fiscal Policy Bill. Government presents Budget Bill to Parliament. Finance Committee reviews the overall expenditure and revenue. The sectoral committees review individual agency appropriations. Parliament approves in one vote total expenditures and revenues for each of the 27 expenditure areas. Parliament approves individual appropriations within each of the 27 expenditure areas. Start of fiscal year.

44 Budget Approval: Pre-Budget Reports Timeframe Time to scrutinize the budget (3 months) Budget approved prior to the fiscal year Two-Stage Two stage Process Demonstrates fiscal responsibility Pre-Budget Reports (Fiscal Strategy Statement) Linked with top-down approach Manages expectations Role of Committees Budget Sectoral

45 Parliamentary System - Budget Approval Calendar Swedish Riksdag (Parliament) Budget Approval Timetable Dates Actions 15 April Early June 20 September September November End November December 1 January Government presents Spring Fiscal Policy Bill. Parliament approves Fiscal Policy Bill. Government presents Budget Bill to Parliament. Finance Committee reviews the overall expenditure and revenue. The sectoral committees review individual agency appropriations. Parliament approves in one vote total expenditures and revenues for each of the 27 expenditure areas. Parliament approves individual appropriations within each of the 27 expenditure areas. Start of fiscal year.

46 Budget Approval: Role of Committees Timeframe Time to scrutinize the budget (3 months) Budget approved prior to the fiscal year Two-Stage Two stage Process Demonstrates fiscal responsibility Pre-Budget Reports (Fiscal Strategy Statement) Linked with top-down approach Manages expectations Role of Committees Budget Sectoral

47 Parliamentary System - Budget Approval Calendar Swedish Riksdag (Parliament) Budget Approval Timetable Dates Actions 15 April Early June 20 September September November End November December 1 January Government presents Spring Fiscal Policy Bill. Parliament approves Fiscal Policy Bill. Government presents Budget Bill to Parliament. Finance Committee reviews the overall expenditure and revenue. The sectoral committees review individual agency appropriations. Parliament approves in one vote total expenditures and revenues for each of the 27 expenditure areas. Parliament approves individual appropriations within each of the 27 expenditure areas. Start of fiscal year.

48 Oversight Role of Committees

49 Supplementary Budgets Reasons for Supplementary Budgets in OECD Countries (Number in FY 2011) Changing economic forecasts Increase in mandatory spending & stimulus measures New policy initiatives Transfer of funds between appropriations Cancelation of planned spending Ad hoc emergency needs Source: OECD 2012.

50 Supplementary Budgets Supplementary Budgets in OECD countries (Number in FY 2011) Australia Austria Belgium Canada Chile Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom United States Source: OECD Note. for Italy and Norway, the number is greater than 20.

51 Limits to Legislative Oversight Responsible Budgeting Pre-budget report Two-stage process Limits on amendments Budget committee approval Increased spending and deficits Bypassing budget restrictions Trade-offs and deals Programs for political supporters Political ideologies Responding to Constituency

52 Appropriations Different Approaches Line item Program structure Performance based

53 Appropriations: Line Item Line Item Program Structure Performance based Legislature approves each line item. Structuring budget by program e.g. primary education. Information on program goals and results. Detailed control of inputs. Limits expenditure prioritization. Facilitates expenditure prioritization. Assists integration of planning and budgeting. Holds governments accountable for results. Complex to implement.

54 Appropriations: Program Structure Line Item Program Structure Performance based Legislature approves each line item. Structuring budget by program e.g. primary education. Information on program goals and results. Detailed control of inputs. Limits expenditure prioritization. Facilitates expenditure prioritization. Assists integration of planning and budgeting. Holds governments accountable for results. Complex to implement.

55 Appropriations: Performance based Line Item Program Structure Performance based Legislature approves each line item. Structuring budget by program e.g. primary education. Information on program goals and results. Detailed control of inputs. Limits expenditure prioritization. Facilitates expenditure prioritization. Assists integration of planning and budgeting. Holds governments accountable for results. Complex to implement.

56 Appropriations: Example of Performance Based Budget Document

57 Transparency of Budget Documents Financial information to be included in the annual budget Macro-fiscal information Budget data and outturns Budgetary explanations and fiscal risks

58 The Budget Cycle and Budget Preparation Four stages: sequenced steps Guided by a formal budget calendar

59 Sequenced Budget Preparation Promotes Good Budgeting Budget Preparation and Approval Stages 1. Strategy setting 2. Guidelines and submissions 3. Review, negotiation, and reconciliation 4. Approval Fiscal Responsibility Effective Resource Allocation Efficient Service Delivery

60 Budget Preparation Annual Budget Executive Citizens/Voters Legislature Budget Preparation and Approval Key Budget Principles Modern Budget Reforms