Budget coherence

Jim Brumby

FAD

Washington DC, Jan 17, 2003

Outline

• What is coherence

• What are the major dimensions of coherent budgeting

• Where do we see coherence failures

Coherent budgeting

• Consistency

• Comprehensiveness

• Substance over form

Orderly provision of public resources to public purposes through time

Traditional view of budgeting

• Interest is mainly (macro) economic

– ‘Government’ as single entity

– All sources of funds are fungible; all uses of funds must compete equally

– Management of public indebtedness

• Transaction costs and ‘institutions’ don’t or barely exist

Dimensions

• Macroeconomic stabilization

• Intertemporal

• Coverage

• Financial

• Managerial

Coherence breakdowns

• Vested interests ‘like’ special treatments

– Deals with government ‘commitment’ problems

• Hard for government to be credible at any point because of its future power

– Needs devices to ‘tie its hands’

Developing countries problems

• Unrealistic planning and budgeting, resulting in

– Cash rationing (cash box budgeting)

– Informal systems (hidden budgeting)

– Lack of credibility (repetitive budgeting and deferred budgeting)

Developing countries

• Special funds

• Payment arrears

• Low effective accountability

• MTEFs with false accuracy and non-credible estimates

Supermarket trolley budgeting

Macroeconomic

• Analysis of sectoral balances per Mundell-Fleming

• Overall fiscal balance=revenues-expenditures

• Govt Saving=current revenues-current expenditures

• Spans all levels of government

GFS/SNA

• Government performs different functions from rest of economy

• Measuring (not estimating/imputing) gross flows of payments to/from government (i.e. cash)

• Economic and functional classification (COFOG)

Statistical approach to support analysis

Macro economic context

• Steps to improve reliability or reduce costs of underachievement

• Transparency: independent review; comparison; sensitivity analysis (15 OECD)

Intertemporal issues

• ‘Contracts’ exist which exceed annual focus– Large projects

– Enduring commitments (entitlements)• Incentives to mislead

– Implied commitments

– Explicit liabilities

– Implicit liabilities

– Contingent liabilities

Dealing with time

• One year snapshot of cash very partial– From cash to accrual

– From less to more information, especially on fiscal risks

– ‘Commitment’ to higher quality information

• From narrow to broad coverage

• Development of IBC

Intertemporal budget constraint

• ‘comprehensive’ concept – tax gap for sustainability; generational accounting; CNW

• CNW= RNW + PV(revenue-expenditure)

– Sensitivity: Budget at risk models

– Period

More intertemporal coherence

• 64% OECD countries provide some MT forward projection of activity

– A few now provide LT projections – 50 years or so

– 4 countries provide pre-election outlooks

• Shift to accrual accounting

– 8 now using some accrual; 5 committed to move to full accrual budget, and 3 some additional

The practice - coverage• Numerous devices ‘test’ comprehensive coverage in space

– Decentralization

– External loans and grants

– Extra budgetary funds

– Autonomous agencies

– Tax earmarking/user charges

– Social security funds

– QFAs

• Two conflicting approaches for coverage:

– Ownership & control versus public purpose

IFAC – Ian Ball

• GFS does not report on all the entities under the control of Government, and is therefore seriously deficient as an accountability instrument. To adopt GFS as the basis of reporting is to facilitate the manipulation of results through transactions with those entities which are under the Government’s control, but outside the reporting entity. The use of GFS as the primary reporting basis would hand to the Government on a plate the mechanisms which Enron had to strain and/or break the rules to achieve.

Financial coherence

• Traditionally:

– All cash

– Based on funds:

• Trust funds

• Consolidated funds

– Based on legal authority

• All input line item driven

• Execution report

Financial coherence

• Migration to:– Cash flow statement

– Operating statement

– Balance sheet

• IFAC standard for cash only

A fully integrated set of accounts

Performance coherence

• Macro goals

• Policy outcomes specified

• Outputs contracted

• Financial goals achieved:– Budget actually executed

• Performance and budget incentives reinforce each other

Outputs and outcomes

• Migration from PB to formal contracting– Externally focused

– Similar in nature

– Controllable

– Comprehensive

– Measurable

– Informative

Output contracting• Quantity, quality, cost, timeliness

• Production outputs (O’comesY;O’putsY)– Payment of benefits

• Procedural outputs (N;Y)– Policy advice

• Craft outputs (Y;N)– Policing

• Coping outputs (N;N)– Education

OECD results budgeting

• 15 publish with budget for most programs

– 6 for some

– 7 for none

• 11 in main budget document

• 5 audited

Conclusions

• Coherence is key

• Innovations in institutions

• Coherence requires– Time

– Capacity

– Coherent advice?