The Role of Budget Institutions Controlling Public Spending in Advanced Economies Ministry of Economy and Finance Rome, November 14-15, 2011 International Monetary Fund Marco Cangiano
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 c. Implementing through the Budget Process b. Developing a Consolidation Strategy 3
I. Budget Institutions for Fiscal Consolidation: 10 Key Institutions a. Understanding the Fiscal Challenge b. Developing a Consolidation Strategy c. Implementing through the Budget Process 4
II. Evaluation of Budget Institutions Understanding the Fiscal Challenge Financial statement published Fiscal Reporting covers all central govt includes a is audited & Stats cover all balance sheet certified quickly public sector 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 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 Fiscal risk statement quantify all contingent liabilities alternative macro-fiscal scenarios analyzes asset & liability risks controls on tax expenditures 5
II. Evaluation of Budget Institutions Developing a Consolidation Strategy (I) 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 fiscal objective precise & transparent in place for 3+ years covers general gov't sub-national rule Medium-term Budget Frameworks Multi-year budget estimates indep. validation of forecast clear sectoral priorities covers of central gov't binding multi-year ceiling 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 6
II. Evaluation of Budget Institutions Developing a Consolidation Strategy (II) 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 Prepares macrofiscal forecasts Evaluates ex ante fiscal policy Evaluates ex post fiscal performance Performance Orientation Budget includes program classification Programs are basis of appropriation Performance targets by program Regular performance monitoring Regular expenditure reviews 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. 7
II. Evaluation of Budget Institutions Implementation through the Budget Top-Down Budgeting Budget preparation in cabinet generally follows a top-down procedure, but... ministries often ignore ceilings bottom-up rigidities remain widespread Ceilings fixed at start respected during preparation limited earmarking or legal rigidities all major decisions in budget top-down approval in parliament 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 Overspending requires supp. Budget must propose offsetting changes well managed contingency reserves controls on multi-year commitments 8
III. How does it apply to crisis countries 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. 9
III. How does it apply to crisis countries Fiscal Reporting Problems built up over the past 2 decades from outside the general government are now inside Portugal Gross General Government Debt (Percent of GDP) 120 Arrears 120 General Government Gross Debt 100 SOE & PPP reclassifications 100 80 SOE & PPP debt outside the General Government sector* Non-SOE & PPP General Government debt 80 60 60 40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Only includes Central Government SOE debt pre 2007 40 10
III. How does it apply to crisis countries Medium-term budget frameworks The inability to follow through with MT plans has led to fiscal drift SGP Budget Balance Forecast Error 2000-2008 (Percent of GDP) 2 2 0 0-2 -2-4 Budget forecast T+1 Forecast T+2 Forecast -4-6 Greece Italy Portugal France UK Austria Germany Sweden Belgium Ireland Spain Netherlands Denmark Finland 11-6
III. How does it apply to crisis countries Budget Execution The majority of the slippage in Greece has been through in year expenditure over-runs Greece: Average percentage overspend 2005-2009 16 14 12 10 9.7 8 15.1 6 4 3.2 2 2.2 0 Fiscal Planning Budget Preparation Budget Execution Total Overspend 12
III. How does it apply to crisis countries Budget Execution Leading to large budget over-runs Budget Balance: Budget Forecast vs Outturn (Percent of GDP) 2 2 1 1 0 0-1 - 1-2 - 2-3 - 3-4 Greece Italy Portugal UK Spain France Belgium Austria Austria Sweden Ireland Netherlands Germany Denmark Finland - 4 13
III. How does it apply to crisis countries Arrears: execution and reporting failures In both countries, arrears have emerged from outside the budget perimeter Greece Arrears 4.3% of GDP 91% from outside the CG budget Local Govt Budgetary Central Govt Portugal Arrears 3% of GDP 95% from outside the CG budget Budgetary Central Govt Others Social Security Hospitals Local Govt Hospitals Regional Govt Others 14
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 15