PROMOTING FISCAL SUSTAINABILITY THROUGH IMPROVED BUDGET INSTITUTIONS ALLEN SCHICK School of Public...
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Transcript of PROMOTING FISCAL SUSTAINABILITY THROUGH IMPROVED BUDGET INSTITUTIONS ALLEN SCHICK School of Public...
PROMOTING FISCAL SUSTAINABILITY
THROUGH IMPROVED BUDGET INSTITUTIONS
ALLEN SCHICKSchool of Public PolicyUniversity of Maryland
ASIAN REGIONAL SEMINARPROMOTING FISCAL SUSTAINABILITY
KUALA LUMPUR, MALAYSIA28 FEBRUARY – 2 MARCH, 2011
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DO SOUND BUDGET INSTITUTIONS PUT GOVERNMENT ON A SUSTAINABLE FISCAL PATH?
THE GOOD NEWS
MANY NATIONAL GOVERNMENTS HAVE IMPLEMENTED MAJOR REFORMS TO IMPROVE BUDGET INSTITUTIONS
80 COUNTRIES HAVE ADOPTED FISCAL RULES THAT LIMIT DEBT, DEFICITS, OR AGGREGATE EXPENDITURE
APPROXIMATELY 100 COUNTRIES HAVE MEDIUM-TERM FRAMEWORKS THAT SET BUDGET POLICIES 3-5 YEARS AHEAD
NUMEROUS GOVERNMENTS CLAIM TO HAVE INTRODUCED A VERSION OF PERFORMANCE BUDGETING
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DO SOUND BUDGET INSTITUTIONS PUT GOVERNMENT ON A SUSTAINABLE FISCAL PATH?CONTINUED
THE NOT SO GOOD NEWS
COUNTRIES WHICH ADOPTED THESE REFORMS WERE NOT PROTECTED FROM THE GREAT RECESSION
ADVANCED COUNTRIES GENERALLY HAD GREATER DIFFICULTY COPING WITH THE GREAT RECESSION THAN EMERGING COUNTRIES
WHICH INTERPRETATION FITS?
BUDGET INSTITUTIONS DO NOT SUFFICE
BUDGET INSTITUTIONS MATTER, BUT THE ECONOMY MATTERS MORE
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HOW THEY DEAL WITH THE ECONOMY INFLUENCES THE EFFECTIVENESS OF BUDGET INSTITUTIONS
THE PROBLEM BUDGETS, LIKE ECONOMIES GO THROUGH CYCLICAL
SWINGS, WITH VARIABLE RATES OF GROWTH
BUDGETS TEND TO BE PRO-CYCLICAL, WITH EXPENDITURES INCREASING MORE WHEN THE ECONOMY IS STRONG
FISCAL RULES THAT IGNORE CYCLICAL CONDITIONS REINFORCE THIS TENDENCY
MEDIUM-TERM FRAMEWORKS THAT ASSUME HIGH, UNINTERRUPTED ECONOMIC GROWTH BUILD THIS BIAS INTO BUDGET PROJECTIONS AND OUTYEAR DECISIONS
COUNTRIES THAT BASED EXPANSIONARY BUDGETS ON THESE BIASES NOT WELL PREPARED FOR THE CRISIS
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HOW THEY DEAL WITH THE ECONOMY INFLUENCES THE EFFECTIVENESS OF BUDGET INSTITUTIONS, CONTINUED
IMPROVING BUDGET INSTITUTIONS THE CRITICAL TEST OF RULES AND FRAMEWORKS IS IN
GOOD TIMES, WHEN CURRENT AND PROJECTED FISCAL CONDITIONS ARE FAVORABLE
IN GOOD TIMES, IF GOVERNMENT “PRE-SPENDS” FUTURE FISCAL DIVIDENDS, IT MAY BE SETTING THE STAGE FOR FUTURE IMBALANCES OR CRISES
IT IS ESSENTIAL TO RE-ENGINEER RULES AND FRAMEWORKS TO PROMOTE FISCAL PRUDENCE DURING PERIODS OF STRONG ECONOMIC GROWTH
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STRENGTHENING FISCAL RULESTHE PROBLEM MOST RULES IGNORE CYCLICAL SWINGS IN THE ECONOMY MONITORING AND ENFORCEMENT TEND TO BE WEAK
SUSTAINABLE FISCAL POLICY EXTEND THE FISCAL RULE TO COVER THE MEDIUM TERM OR
LONGER. ONE-YEAR RULES ENCOURAGE EVASION MAKE THE FISCAL RULE PART OF THE MEDIUM-TERM
FRAMEWORK USE THE FISCAL RULE TO CONSTRAIN REVENUE AND
SPENDING ACTIONS WHEN THE ECONOMY IS STRONG ESTABLISH EFFECTIVE ENFORCEMENT MECHANISMS TO
DETER BREACHES DEVISE ADJUSTMENTS OR CLAWBACKS TO CONSOLIDATE
PUBLIC FINANCE WHEN FISCAL TARGETS ARE MISSED CONSIDER SPECIAL TREATMENT FOR INVESTMENT
EXPENDITURE IN DEVELOPING COUNTRIES
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IMPROVING THE MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF)
THE PROBLEM MANY COUNTRIES REGARD THE MTEF AS A TECHNICAL
EXERCISE THAT IS SEPARATE FROM THE BUDGET, WITH ITS OWN STAFF AND PROCEDURES
GOVERNMENTS OFTEN MAKE FORWARD COMMITMENTS THAT PROVE TOO COSTLY
WHEN THE MTEF IS ROLLED FORWARD, CEILINGS SET IN THE PREVIOUS MTEF OFTEN ARE TREATED AS FLOORS
THE MEDIUM-TERM (3-5 YEARS) IS TOO SHORT TO ASSESS LONG-TERM FISCAL SUSTAINABILITY
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IMPROVING THE MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF), CONTINUED
MAKING THE MTEF AN INSTRUMENT OF SUSTAINABLE FISCAL POLICY
INTEGRATE THE BUDGET AND MTEF SO THAT THEY ARE A SINGLE PROCESS, PREPARED BY THE SAME STAFF AND USING THE SAME ECONOMIC/PROGRAM ASSUMPTIONS AND DATA SOURCES
IN CONSTRUCTING AND UPDATING THE BASELINE (FORWARD ESTIMATES) GUARD AGAINST EXPANSIONARY BIASES
MAKE THE FISCAL RULE OR TARGET PART OF THE FRAMEWORK, RATHER THAN A FREE-STANDING PROCESS
TREAT THE BUDGET CONSTRAINT AS A GENUINE LIMIT, NOT JUST AS A STARTING POINT FOR THE NEXT YEAR’S BUDGET
DISCOURAGE AD HOC EXPENDITURE DECISIONS OUTSIDE THE MTEF FRAMEWORK DURING IMPLEMENTATION OF THE BUDGET
TO THE EXTENT FEASIBLE, APPEND LONGER-TERM PROJECTIONS TO THE MTEF
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INTEGRATING MEDIUM-TERM FRAMEWORKS AND NATIONAL PLANS
THE PROBLEM MANY ASIAN COUNTRIES RELY ON NATIONAL PLANS TO
MAKE STRATEGIC POLICY DECISIONS, TYPICALLY FOR THE NEXT FIVE YEARS
NATIONAL PLANS OFTEN DISREGARD BUDGET IMPLICATIONS
ADDING AN MTEF MAY ADD COMPLICATIONS BECAUSE IT ROLLS FORWARD EVERY YEAR, BUT THE PLAN IS FOR A FIXED TERM
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INTEGRATING MEDIUM-TERM FRAMEWORKS AND NATIONAL PLANS, CONTINUED
INTEGRATE NATIONAL PLANNING INTO THE BUDGET FRAMEWORKDEVELOPING COUNTRIES BENEFIT FROM HAVING STRONG
BUDGET AND PLANNING SYSTEMSPLANNING AND BUDGETING TEND TO HAVE DIFFERENT VALUES
AND PERSPECITVES. PLANNING IS CHANGE-ORIENTED; BUDGETING FAVORS CONTINUITY. PLANNING FOCUSES ON OPPORTUNITIES; BUDGETING ON COSTS
MAKE PLANNING MORE REALISTIC BY IMPOSING A BUDGET CONSTRAINT
ASSURE THAT THE PLAN AND THE BUDGET ARE CONSISTENTWHEN THE PLAN IS STRUCTURED BY PROGRAMS OR SECTORS,
CROSS-WALK IT TO BUDGET CLASSIFICATIONSBRAZIL HAS SOUGHT TO INTEGRATE PLANNING, MTEF, AND THE
ANNUAL BUDGET. THE PLAN COVERS ALL PROGRAMS: THE MTEF MUST BE CONSISTENT WITH IT, AND THE BUDGET MUST CONFORM TO THE MTEF
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USING THE BUDGET PROCESS TO ALLOCATE FISCAL SPACE
THE PROBLEM
BUDGETING IS INCREMENTAL; MOST ALLOCATIONS ARE BASED ON PAST DECISIONS
BUILT-IN SPENDING DUE TO AGEING, RISING HEALTH COSTS SHRINK AVAILABLE SPACE
POLITICAL RESISTANCE TO TAX INCREASES
THE GROWING TENDENCY OF GOVERNMENTS TO MAKE AD HOC SPENDING DECISIONS THROUGHOUT THE YEAR
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USING THE BUDGET PROCESS TO ALLOCATE FISCAL SPACE, CONTINUED
PROTECTING AND ENLARGING FISCAL SPACE MTEFS POTENTIALLY ENLARGE SPACE BY ENABLING GOVERNMENT TO
ALLOCATE FOR 3-5 YEARS
FUNDAMENTAL (OR STRATEGIC) SPENDING REVIEWS MAY EXPAND SPACE THROUGH CUTBACKS IN LOW PRIORITY PROGRAMS
ACROSS THE BOARD CUTS EXPAND SPACE THAT CAN BE REALLOCATED THROUGH THE BUDGET
SETTING ASIDE MONEY IN BIDDING FUNDS INCREASES COMPETITION AMONG PROPOSED PROGRAM INITIATIVES
ADJUSTING ENTITLEMENTS BEFORE CRISIS CAN SIGNIFICANTLY ENLARGE FUTURE FISCAL SPACE
WHEN IT IS EFFECTIVELY IMPLEMENTED, PERFORMANCE BUDGETING CAN INTELLIGENTLY ALLOCATE AVAILABLE FISCAL SPACE
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DEALING WITH LONG-TERM FISCAL SUSTAINABILITY
THE PROBLEM
MTEF TYPICALLY COVERS 3-5 YEARS, NOT LONG TERM PROSPECTS
COUNTRIES THAT HAVE SUSTAINABLE MEDIUM-TERM CONDITIONS MAY STILL FACE UNSUSTAINABLE FISCAL FUTURES
BOTH ADVANCED AND EMERGING COUNTRIES NEED TO BE CONCERNED ABOUT THEIR FISCAL FUTURE
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DEALING WITH LONG-TERM FISCAL SUSTAINABILITY, CONTINUED
INCORPORATING THE LONGER-TERM INTO BUDGET WORK FEW COUNTRIES HAVE SUFFICIENT DATA AND TECHNICAL CAPACITY TO
MAKE RELIABLE LONG-TERM PROJECTIONS
HOWEVER, COUNTRIES CAN DEVELOP THE SKILLS AND DATA TO EXTEND THE TIME HORIZON OF THEIR PROJECTIONS
ALL COUNTRIES CAN REFLECT ON LONG-TERM IMPLICATIONS WHEN THEY TAKE POLICY INITIATIVES
EMERGING COUNTRIES WHICH MAY FACE PRESSURE TO EXPAND INCOME SUPPORTS SCHEMES SHOULD BE ESPECIALLY MINDFUL OF LONG-RUN FISCAL IMPLICATIONS OF PROPOSED ENTITLEMENTS
SMALL DIFFERENCES IN THE DETAILS OF INCOME SUPPORT PROGRAMS CAN COMPOUND TO ENORMOUS LONG-TERM DIFFERENCES
GOVERNMENT SHOULD BE MINDFUL OF HOW THEY ALLOCATE FINANCIAL RESPONSIBILITY FOR RISKS, FOR EXAMPLE, THE RISK OF LENGTHENED LIFE EXPECTANCY
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BUILDING FISCAL RISKS INTO BUDGET INSTITUTIONS
THE PROBLEM WHEN THEY BUDGET, GOVERNMENTS OFTEN DISREGARD
FISCAL RISKS
RISKS OCCUR BECAUSE THE FUTURE COURSE OF THE ECONOMY IS UNCERTAIN
RISKS OCCUR BECAUSE THE GOVERNMENT IS EXPOSED TO CONTINGENT LIABILITIES SUCH AS GUARANTEES
CONTINGENT LIABILITIES ALSO OCCUR WHEN CITIZENS OR ENTERPRISES EXPECT GOVERNMENT ASSISTANCE WHEN THINGS GO BAD
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BUILDING FISCAL RISKS INTO BUDGET INSTITUTIONS, CONTINUED
IMPROVING BUDGET INSTITUTIONS RELY ON RANGES RATHER THAN POINT ESTIMATES TO
PROJECT MEDIUM-TERM FISCAL SPACE
RESERVE MONEY WITHIN THAT SPACE FOR FUTURE UNCERTAINTIES AND CONTINGENCIES
CONSIDER BASING THE BUDGET ON INDEPENDENT ECONOMIC FORECASTS
COMPILE AN INVENTORY OF EXPLICIT CONTINGENT LIABILITIES
TO THE EXTENT FEASIBLE, USE VALUE-AT-RISK OR OTHER METHODS TO ESTIMATE THE GOVERNMENT’S EXPOSURE
IMPROVE RISK-SHARING AND RISK-MONITORING PROCEDURES
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MAKING PERFORMANCE BUDGETING AN INSTRUMENT OF GOOD FISCAL MANAGEMENT
THE PROBLEM
IN MANY COUNTRIES, PERFORMANCE BUDGETING (PB) IS LITTLE MORE THAN A MEANS OF CLASSIFYING OR DISPLAYING EXPENDITURES
IT IS NOT A SIGNIFICANT DETERMINANT OF HOW RESOURCES ARE ALLOCATED
IT IS NOT A SIGNIFICANT INFLUENCE ON HOW SPENDING UNITS MANAGE RESOURCES AND OPERATE
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MAKING PERFORMANCE BUDGETING AN INSTRUMENT OF GOOD FISCAL MANAGEMENT, CONTINUED
ORIENTING PERFORMANCE BUDGETING TO RESULTS PERFORMANCE IS ONLY ONE CONSIDERATION IN ALLOCATING RESOURCES;
POLITICAL AND INCREMENTAL PRESSURES ARE OFTEN MORE INFLUENTIAL
HOWEVER, GOVERNMENTS CAN TAKE STEPS TO ENLARGE PB’S EFFECTIVENESS
IDEALLY, GOVERNMENTS SHOULD SYSTEMATICALLY CONSIDER THE CHANGES IN RESULTS EXPECTED TO ENSUE FROM CHANGES IN EXPENDITURES
SOME GOVERNMENTS EMPLOY A “BENDING THE CURVE” METHOD TO ANALYZE RESULTS EXPECTED FROM POLICY CHANGES
IN THIS METHOD, THE BUDGET ESTIMATES THE RESULTS EXPECTED IF POLICY IS NOT CHANGED, PROPOSED CHANGES AND ESTIMATED IMPACTS, AND FINANCIAL RESOURCES TO IMPLEMENT THE CHANGES
HOWEVER, GOVERNMENTS CAN CHOOSE AMONG MANY VERSIONS IN IMPLEMENTING PROGRAM BUDGETING
AT THE OPERATIONAL LEVEL, PB IS EFFECTIVE WHEN MANAGERS HAVE DISCRETION IN SPENDING APPROPRIATED FUNDS FOR AUTHORIZED PURPOSES
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INCLUDING “COST” MAY STRENGTHEN FISCAL SUSTAINABILITY
THE PROBLEM ALMOST ALL COUNTRIES BUDGET ON A CASH BASIS, AND
ARE LIKELY TO CONTINUE DOING SO IN THE FUTURE
THEY DO NOT INCLUDE “COST” (RESOURCES CONSUMED OR LIABILITIES INCURRED) IN REPORTING THEIR FISCAL POSITION, IN MEASURING THE EFFICIENCY OF OPERATIONS OR IN COMPARING POLICY ALTERNATIVES
ACCRUAL-BASED BUDGETING IS NOT APPROPRIATE FOR MOST COUNTRIES. MOREOVER, IT DOES NOT RECOGNIZE THE GOVERNMENT’S GREATEST LIABILITY: MOST FUTURE PENSIONS AND OTHER ENTITLEMENTS
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INCLUDING “COST” MAY STRENGTHEN FISCAL SUSTAINABILITY, CONTINUED
INCLUDE COST IN BUDGET WORK CONTINUE TO BUDGET ON THE CASH BASIS,
SUPPLEMENTED WITH COST INFORMATION
FOR FISCAL AGGREGATES, ESTIMATE THE PRESENT OR NOMINAL VALUE OF FUTURE PENSIONS AND OTHER MAJOR ENTITLEMEMENTS, BUT DISREGARD OTHER RESOURCES CONSUMED
TO ASSESS POLICY ALTERNATIVES INCLUDE PROJECTED FUTURE COSTS TO PREPARE ALTERNATIVES SUCH AS LEASE-BUY AND PPPs
FOR OPERATIONAL EFFICIENCY, INCLUDE ONLY COSTS OVER WHICH MANAGERS HAVE EFFECTIVE DISCRETION
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ORIENTING THE CENTRAL BUDGET OFFICE TO SUSTAINABILITY AND RESULTS
THE PROBLEM THE TRADITIONAL BUDGET OFFICE FOCUSES ON
DETAILED EXPENDITURE CONTROL
IN MANY DEVELOPING COUNTRIES IT CLOSELY MONITORS AND REGULATES BUDGET EXECUTION THROUGH SHORT-TERM (MONTHLY, BIMONTHLY, OR QUARTERLY) ALLOTMENTS
WHEN THIS OCCURS, THE REAL BUDGET IS KNOWN AFTER THE FINANCIAL YEAR IS OVER AND THE OFFICIAL BUDGET DOES NOT SERVE AS A STRATEGIC POLICY STATEMENT
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ORIENTING THE CENTRAL BUDGET OFFICE TO SUSTAINABILITY AND RESULTS, CONTINUED
REORIENTING THE BUDGET OFFICE IN COUNTRIES THAT HAVE EFFECTIVE MTEFS AND PERFORMANCE
BUDGETS, THE BUDGET OFFICE HAS DIVESTED MANY CONTROLS IT BECOMES RESPONSIBLE FOR MANAGING THE BASELINE,
MONITORING AND SCORING PROPOSED TRADEOFFS, AND PROMOTING OR CONDUCTING PROGRAM AND STRATEGIC REVIEWS
A KEY ROLE OF THE BUDGET OFFICE IS TO ADVISE GOVERNMENT ON THE RESULTS ACHIEVED OR EXPECTED THROUGH CHANGES IN EXPENDITURES
THE BUDGET OFFICE ALSO PROMOTES GOOD PRACTICE IN MEASURING AND REPORTING OUTPUTS AND OUTCOMES
IT MAY BE APPROPRIATE TO RETAIN CENTRAL EXENDITURE CONTROLS IN COUNTRIES WITH UNSTABLE REVENUE SOURCES
COUNTRIES WHERE BASIC BUDGET PRACTICES ARE NOT YET WELL EMBEDDED SHOULD MOVE CAUTIOUSLY IN ADOPTING ADVANCED PRACTICES
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DEALING WITH FISCAL SHOCKS
THE PROBLEM
FISCAL SHOCKS, WHICH OFTEN ARE UNPREDICTABLE, DESTABILIZE PUBLIC FINANCE
FISCAL RULES AND THE MTEF ARE BRUSHED ASIDE, BY AUTOMATIC OR DISCRETIONARY RESPONSES TO THE SHOCKS
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DEALING WITH FISCAL SHOCKS, CONTINUED
RESPONDING TO FISCAL SHOCKS THE BEST WAY TO AVOID SHOCKS IS TO HAVE PRUDENT
POLICIES IN PLACE BEFORE THE CRISIS SOME COUNTRIES CAME OUT OF THE GREAT RECESSION
WITH LITTLE DIFFICULTY; OTHERS ARE STILL STRUGGLING TO RECOVER
DEPENDING ON POLITICAL AND OTHER CONDITIONS, SHOCKS MAY BE RIPE OCCASIONS FOR FUNDAMENTAL EXPENDITURE REVIEWS AND RIGHT-SIZING THE PUBLIC SECTOR
THE EFFECTS OF SHOCKS ARE MAGNIFIED WHEN GOVERNMENT IS THE HOLDER OF LAST RESORT FOR ECONOMIC AND SOCIAL RISKS
IN THE AFTERMATH OF THE FISCAL CRISIS, IT MAY BE APPROPRIATE TO CONSIDER STRONGER STANDBY FACILITIES FOR CUSHIONING SHOCKS
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CONCLUSION: INTEGRATE BUDGET INSTITUTIONS TO PROMOTE SUCCESSFUL REFORM
THE PROBLEM MAJOR INSTITUTIONAL REFORMS TEND TO BE
DISCONNECTED FROM ONE ANOTHER
FISCAL RULES, MTEF, AND PERFORMANCE BUDGETING TEND TO BE SEPARATE REFORMS, EACH WITH ITS OWN ORGANIZATIONAL CHAMPION
WHEN THIS OCCURS, GOVERNMENT’S CAPACITY TO SUCCESSFULLY INNOVATE MAY BE IMPAIRED
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CONCLUSION: INTEGRATE BUDGET INSTITUTIONS TO PROMOTE SUCCESSFUL REFORM CONTINUED
INTEGRATE BUDGET INSTITUTIONS RULES, MTEF, AND PB ARE ALL ELEMENTS OF MODERN BUDGET
INSTITUTIONS TO PROMOTE EFFICIENT AND SUSTAINABLE POLICIES
MTEF IS THE APPROPRIATE VEHICLE FOR INTEGRATING THE REFORMS, WHEN IT IS IMPLEMENTED IN THE MANNER DISCUSSED EARLIER
THE FISCAL RULE WOULD PROVIDE THE BUDGET CONSTRAINT IN MTEF, AND PERFORMANCE BUDGETING WOULD SUPPLY A BASIS FOR DECIDING POLICY CHANGES
IT IS IMPORTANT THAT THEIR DATA BASES ALSO BE INTEGRATED
WHEN REFORMING BUDGET INSTITUTIONS A KEY CONSIDERATION SHOULD BE WHICH EXISTING DATA AND PROCEDURAL REQUIREMENTS MAY BE REDUCED
A COUNTRY’S SOCIAL-ECONOMIC DEVELOPMENT AND ADMINISTRATIVE CAPACITY ARE HIGHLY RELEVANT IN DETERMINING WHETHER AND HOW TO INTEGRATE BUDGET INSTITUTIONS