Fiscal Consolidation in the G20: The Role of Budget Institutions Adrienne Cheasty Fiscal Affairs Department 20 January 2011
Fiscal Consolidation in the G-20: G The Role of Budget Institutions I. Motivation for the Study II. Budget Institutions for Successful Consolidation III. Evaluation of Budget Institutions in G-20 G Countries IV. Strengthening Budget Institutions in the G-20G 2
II. Budget Institutions for Fiscal Consolidation: a. Stylized Phases of Consolidation Process a. Understanding the Fiscal Challenge c. Implementing through the Budget Process b. Developing a Consolidation Strategy 3
II. Budget Institutions for Fiscal Consolidation: a. 10 Key Institutions a. Understanding the Fiscal Challenge b. Developing a Consolidation Strategy c. Implementing through the Budget Process 4
III. Evaluation of Budget Institutions in the G-20 a. Methodology 10 Institutions and 41 questions (3 to 6 per institution) 3 possible answers given the following ratings: Not met = 0 Partly Met = 1 Fully Met = 2 Ratings averaged to produce summary scores by institution A: Very Strong (2) B: Strong (1.5 to 2) C: Moderately Strong (1 to 1.5) D: Moderately Weak (0.5 to 1) E: Weak: (0 to 0.5) F: Very Weak (0) Institutional scores averaged to produce summary scores by country 5
III. Evaluation of Budget Institutions in the G-20 b. Institutional Strength vs. Past Fiscal Performance Trendline excludes two outliers 6
III. Evaluation of Budget Institutions in the G-20 c. Institutional Strength vs. Fiscal Adjustment Needed Advanced Countries Emerging Countries 7
III. Evaluation of Budget Institutions in the G-20 d. Average Score by Institution a. Understanding c. Implementing A B C D E F b. Planning 8
III. Evaluation of Budget Institutions in the G-20 d. Average Score by Institution Advanced Countries Advanced Country Advanced Average Emerging Countries Emerging Country Emerging Average A B A B C C D D E F E F a. Understanding b. Planning c. Implementing a. Understanding b. Planning c. Implementing 9
III.e. Key Institutional Strengths and Weaknesses: i. Understanding the Fiscal Challenge Fiscal Reporting Most countries publish basic financial statements and statistics, but... coverage of entities & assets is often incomplete less than 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 10
III.e. Key Institutional Strengths and Weaknesses: ii. Developing a Consolidation Strategy 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 11
III.e.Key Institutional Strengths and Weaknesses: iii. 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 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 12
IV. Strengthening Budget Institutions in the G-20: a. General Conclusions Most countries have the basic institutional foundations in place Countries facing the biggest challenges generally have the strongest budget institutions Institutions remain incomplete across advanced & emerging countries Institutional reform could support the credibility of the consolidation process in most G-20 countries 13
IV. Strengthening Budget Institutions in the G-20: b. Specific Recommendations (I) 1. Fiscal Reporting: Improvements in the breadth, depth and timeliness of financial statements and statistics are required to understand the scale and scope of the fiscal challenge 2. Fiscal Forecasting: More frequent and quantitative macro-fiscal scenario planning will ensure consolidation plans are robust to a range of possible futures 3. Fiscal Risks: More rigorous accounting, reporting and management of contingent liabilities, balance sheet risks, and tax expenditures would help to ensure consolidation plans stay on track 4. Fiscal Objectives: National fiscal objectives need to be more comprehensive, transparent, and stable and supported by stronger subnational fiscal frameworks 5. Medium-term Budget Frameworks: Medium-term budget estimates need to more clearly express a government s sectoral priorities and impose more binding constraints on future budgets 14
IV. Strengthening Budget Institutions in the G-20: b. Specific Recommendations (II) 6. Independent Fiscal Agencies: Fiscal councils can play a useful role in ensure that consolidation strategies are based on credible assumptions ex ante and holding governments to account ex post 7. Performance Orientation: Performance information needs to be integrated into budget decision-making through more regular program monitoring and evaluation 8. Top-Down Budgeting: Fragmentation and circumvention of the annual budget process needs to be addressed if countries are to deliver their consolidation plans 9. Parliamentary Approval: Legislative procedures need to be brought into line with the medium-term, top-down approach to budgeting at the Cabinet level 10. Budget Execution: Contingency arrangements and controls over multiyear expenditure commitments need to be strengthened to prevent slippage in execution 15
Thank You 16