Chul Ju Kim, Deputy Dean, ADBIYong Beom Cho, Senior Capacity Building and Training Specialist, ADBIMatteo Molineris, Former Research Associate, ADBI

Toward Better Fiscal Governance in Asia and the Pacific*

briefpolicy

Key Points

• Publicfinanceplaysanimportantroleineconomicdevelopmentandtheprotectionofpeople’slivelihoods,especiallyduringtimesofcrisis,suchasintheCOVID-19pandemic.Expandedpublicfinance,ifnotwellmanaged,willresultinsharpincreasesinfiscaldeficitandpublicdebt.

• Well-functioningfiscalgovernancecancontributetomitigatingfiscalrisksbystrengtheningefficiency,accountability,andtransparency,aswellasmaintainingfiscalspace.

• Fiscalgovernancehasthreeintertwinedandcomplementingcomponents:(i)fiscalrulesthathelpsecurefiscaltargets;(ii)amedium-termexpenditureframeworkthatmakesfiscalmanagementsustainableinthemediumterm,and(iii)fiscalinstitutionsthatenhancefiscalsustainabilitythroughchecksandbalances.

• Governmentsareencouragedtotakeappropriatestepstostrengthentheirfiscalgovernance,consideringtheiruniquepolicyenvironmentaswellasothercountries’experiencesandinternationalbestpractices.

No. 2020-3 (June)

© 2020 Asian Development Bank InstituteISSN 2411-6734

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Fiscal Governance for Sustainable Growth and Development in Asia and Pacific Region24–25 April 2019Bangkok, Thailand

Jointly organized by the Asian Development Bank Institute and the United Nations Economic and Social Commission for Asia and the Pacific. Presentation materials are available at https://www.adb.org/news/events/efficient-fiscal-governance-sustainable-growth-asia.

Public finance plays an important role in the social and economic development of developed and emerging countries. This role has been gradually expandingfromameansofconventionalmacroeconomicpolicy toa last-resortpolicy tool toovercomeeconomiccrises,suchastheglobalfinancialcrisisin2010andtherecentcrisis inducedbythecoronavirusdisease(COVID-19)pandemic,andtoaddresstheneeds to copewith new challenges such as demographic transitions and climatechange. Developing countries in Asia and the Pacific, in particular, have becomemoredependentonpublic financeduetotheirhuge investmentneedsforhealth,pensions,education,infrastructure,andenergyforsustainabledevelopment.

However, the imprudent expansion of government spending may create fiscal risks that include skyrocketing debt, inefficient expenditure, and the crowding out of private investment.Developedcountrieshavealreadysufferedsuchproblems(see Appendix). Japan’s high public debt ratio of around 240% of gross domesticproduct(GDP) iswellknown.TheUnitedStatesmayhaveexperienceda“fiscalcliff”intheearly2010sinovercomingtheglobalfinancialcrisis.AswiftandsizablefiscalresponseincountriesaffectedbyCOVID-19ismuchwarrantedtoavoidasteepdeclineinconfidenceandeconomicactivities,butthereremainsthethornyissueofhowtowindupandrestorethecountry’sfiscalpositionafterthepandemicissubdued.

Ensuring sustainability in public finance in line with its growing roles is crucial.Thisbringsustotheimportanceoffiscalgovernance,becauseitistheveryframeworkofpublicfinancebeingmanaged.Inthisregard,itismeaningfultoexplorebetter fiscal governance as a means of maintaining fiscal sustainability throughefficient,accountable,andtransparentpublicfinance.Ofcourse,whatformoffiscalgovernance a country takes is entirely its owndecisionwith due consideration of

* WithacknowledgmentoftheexcellentsupportprovidedbyJungwooChoi,formerADBIintern,fordatacollection.

ADBI Policy Brief No. 2020-3 (June) 2

its social and economic circumstances as well as itshistoricalandeconomicpathdependence.Nevertheless,an elaboration of this topic is expected to illustrate afuturepathwayofpublicfinancemanagement,providinglessons and best practices that countries can use as avaluablereferenceforimprovingtheirpublicfinance.

What Is Fiscal Governance?

Fiscal governance is one such area where there is no clearly agreed definition. Many institutions haveprovided their own definitions reflecting their differentfocusesonfiscalgovernance.Countrieshavealsotakenthelibertyofcomingupwiththeirowndefinitionsdependingontheirpublicfinanceneeds. Inthisbrief,wefollowthewidely known European Commission definition of fiscalgovernance as“those rules, regulations and proceduresthatinfluencehowbudgetarypolicyisplanned,approved,carriedout,monitoredandevaluated.”1

Fiscal governance performs important functions with the goal of maintaining fiscal sustainability.It enhances the efficiency of public expenditure andimprovestheaccountabilityandtransparencyofpublicfinance.That is tosay,a lackofgood fiscalgovernancecan bring about inefficient spending, increase fiscaldeficit, hinder economic development, and eventuallyresultintaxpayers’burden.

According to many institutions, fiscal governance has three distinct components: fiscal rules, a medium-term expenditure framework (MTEF), and fiscal institutions. As can be expected, these areintertwined,complementingandreinforcingeachother.Fiscal rules are a requirement of theMTEF and in turnenhance the effectiveness of the MTEF by bringing alegally binding aspect. The MTEF can promote bettercoordinationamongfiscalinstitutionsandenhancetheirresponsibility. Fiscal institutions play a pivotal role inimprovingtheeffectivenessoffiscalrulesandtheMTEFin theprocess of implementing them. Fiscal rules helpinstitutions keep their independence and autonomyfrom political pressure. Moreover, all three contributetoconstrainingtheuseofexcessivediscretionbypolicymakers topreventanegative impactonpublic financeandmaintain fiscal sustainability. Sucha relationship isshowninFigure1.

Fiscal Rules

A fiscal rule refers to a “permanent constraint on fiscal policy, typically defined in terms of an indicator of overall fiscal performance” (KopitsandSymansky1998).Fiscalrulesareoftenexpressedasnumericalceilingsortargets preferred by the International Monetary Fund(IMF) and theOrganisation for Economic Co-operationand Development (OECD). Numerical fiscal rules weresystematically introduced by the Maastricht Treaty inthe EuropeanUnion (EU) in 1992with upper limits forthedeficit-to-GDPratioof3%anddebt-to-GDPratioof60%,whichwerefurtherformulatedintheStabilityandGrowthPactin1997.However,non-numericalfiscalrulesare also adopted and proven effective as they signala strong policy will of fiscal authorities toward fiscalconsolidation.Typical examples of such non-numericalrules include the Golden Rule in the United Kingdomandthe“pay-as-you-go”orPAYGOpracticeintheUnitedStates.2 It is largelyunderstoodthatnumericalrulesaremorecommonandeffective.

There are generally four types of fiscal rule: debt rules, budget balance rules, expenditure rules, and revenue rules.Debtrulesandbudgetbalancerulessetanexplicit

1 SeeEuropeanCommissionwebpage.2 Asianexamplescanalsobefound.InJapan,theAbeadministrationin2013removedtheexistingexpenditureceilingandreplaceditwithan

overallexpenditurelimitwherebyexpenditureshouldnotexceeddomesticrevenue.InMongolia,expendituregrowthcannotexceedthegrowthofnon-mineralGDP(Lledóetal.2017).

MTEF = medium-term expenditure framework.

Source: Prepared by the authors.

Figure 1: Relationship between the Three Components of Fiscal Governance

E�ciency Transparency

Rules

MTEF

Enhancing e�ectiveness

Contributing to independence

Complementing in�exibility

Embracing and actualizing

InstitutionsIncreasing binding e�ect

Improving cooperation and responsibility

Accountability

Fiscal Sustainability

Fiscal Governance

Toward Better Fiscal Governance in Asia and the Pacific2 3

limit for public debt and budget balances, whereasexpenditure rules limit total or primary spending, andrevenue rules set ceilings on revenue. Debt rules andbudgetbalancerulesarewidelyusedinmanycountriescomparedtoexpenditurerulesandrevenuerules.

Fiscal rules now have been widely adopted in public finance all over the world, except for some Asian countries. According to the IMF Fiscal Rules Dataset,only 13 economies of the 49 regionalmembers of theAsianDevelopmentBank(ADB)hadfiscalrulesasof2015(Table1).Asiancountriesarealsoadoptingmainlydebtrulesandbudgetbalancerules.TheOECD(2013)foundthat JapanandtheRepublicofKoreahaveonekindoffiscalrule(expenditurerule),unlikeotherOECDmembercountries—and even that rule is only for internal use.This seeming reluctance toward fiscal rules by Asiancountriesmayindicatetheirpreferenceforexpansionaryfiscalpolicyforthedevelopmentoftheireconomies.

Fiscal rules have both strengths and weaknesses to some extent. Above all, they help reducedeficits, manage debt, and eventually enhance fiscalconsolidation.Furthermore,theycontributetoensuring

Table 1: Fiscal Rules Used by ADB Members (ratio to GDP)

Member Debt Budget Balance Expenditure Revenue Legal Basis

Armenia 60%

Australia √ √ 2%annualcap √ √

Georgia 60% 3% 30%ofGDP* √

HongKong,China √ √

India 3% √

Indonesia 60% 3% √

Japan √ √ √

Malaysia 55% 3%**

GoldenRule√

Maldives 60% 3.5% √

Mongolia 40% 2% √ √

Pakistan 60%(untilFY2018)50%(afterFY2018)

4%(FY2020)3.5%(afterFY2020)

√

Singapore √ √ √(Constitution)

SriLanka 85%(until2019)60%(from2020)

5% √

FY = fiscal year, GDP = gross domestic product. Notes: * For Georgia, 30% of GDP is applied to the expenditure in nonfinancial assets. ** For Malaysia, the International Monetary Fund does not consider this 3% rule a fiscal rule because there are no formal sanctions even if the government does not follow the rule.Source: Modified from Lledó et al. (2017).

the credibility of fiscal policy from political pressuresandleadtofiscalsustainabilityinthelongterm.Ontheotherhand,fiscalrulesmayrestrictthecapacityoffiscalauthoritiestoflexiblyrespondtoeconomicfluctuations,with a compounding effect on the business cycle,known as procyclicality. In addition, fiscal rules maylead to “creative accounting,” which refers to attemptsto show improvement in fiscal targets without actualimprovementand,asa result, can reduce transparency(MilesiFerretti2000).

Given wide differences in development states and fiscal conditions, there is no all-purpose solution, requiring fiscal rules to be tailored to specific country contexts. For instance, Italy has recently had sometension with the EU regarding the country’s budgetdeficit. Italy argued that the EU should ease its fiscalrules toboost theeconomy,while theEUcriticizedthecountryfornotkeepingtoEUrules.Ontheotherhand,inAsia,MalaysiaandThailandhaveappliedstricterfiscalrules than the EU based on their experiences duringthe Asian financial crisis in 1997, leading to relativelystrong fiscal positions (Box 1). These cases suggestthat the role of fiscal rules critically hinges on the

ADBI Policy Brief No. 2020-3 (June) 4

specificpolicyenvironmentofacountry.Reflectingthegrowing importance of implementability, the IMF hasrecently proposed so-called second-generation rules,arguing that fiscal rules shouldbe simple, flexible, andenforceable(Eyraudetal.2018).

Countries in Asia and the Pacific must urgently strengthen their fiscal discipline and, thus, fiscal space for sustainable development. Countries needtohaveaclearunderstanding that thegreater the roleof public finance in the future, the larger the role offiscal rules—be they numerical or non-numerical—tomaintain fiscal sustainability. Specifically, the followingrequireattention:

• Fiscal rules can contribute to achieving fiscalsustainabilitybystrengtheningfiscaldiscipline.

• When designed and implemented, such fiscalrulesshouldbe tailored to thestatusofpublicfinance, economic development stage, andpolicyprioritiesofeachcountry.

• Fiscal rules should be flexible to some extentso that a country can cope with unexpectedeconomicfluctuations.

Box 1: Fiscal Rules in Thailand and Malaysia

Thailand

Thecountry’sfiscalruleswerenotintroducedinthe2015FiscalRulesDatasetoftheInternationalMonetaryFund.However,Thailand has statutory bases, such as the Fiscal Responsibility Act and the Public Debt Management Act, based on itsConstitution(Section 62).TheFiscalResponsibilityActstipulatesthatcapitalexpendituremustaccountfornolessthan20%oftheannualbudgetandmustnotbelessthanthefiscalyearbudgetdeficit.Inaddition,theFiscalPolicyCommitteehasitsowndebtrules:publicdebtshouldbelessthan60%ofgrossdomesticproduct,andforeign-denominateddebtshouldbelessthan10%oftotalpublicdebt.

Malaysia

The country hasmany relevant acts and various fiscal rules compared to other countries. In addition to a domestic debtceiling,therearelimitsonoffshoreborrowings,issuancesofconventionaltreasurybills,anddebtservicecharges.AfeatureofMalaysian fiscal rules is thatsomeceilingsaresetasabsoluteamounts rather thanspecific ratios.Forexample,offshoreborrowingshouldnotexceedRM35billion,andissuancesofconventionaltreasurybillsshouldnotexceedRM10billion.Debtservicechargesshouldbelessthan15%ofrevenueoroperatingexpenditure.

Source: Country presentations at the ADBI–UNESCO Fiscal Governance for Sustainable Growth and Development in Asia and Pacific Region policy dialogue, April 2019, Bangkok, Thailand.

Fiscal rules should be tailored to the status of public finance, economic development stage, and policy priorities of each country.

Medium-Term Expenditure FrameworkA medium-term expenditure framework (MTEF) is a multiyear fiscal plan to make fiscal management sustainable in a medium-term horizon beyond the perspective of annual budgets. It  is an effort to linktheplanningandimplementationofpoliciesintoannualbudgets with amedium-term perspective. As of 2008,more than two-thirds of all countries in theworld hadadopted MTEFs (World Bank 2013). The instances ofMTEFs in selected countries in Asia and the Pacific areshowninTable2.

MTEFs are aimed at integrating midterm national priorities into annual budgets, thereby improving fiscal balance and enhancing the predictability of fiscal policy making. Annual budgets have manyshortcomings: difficulty inmaintaining fiscal soundness,limitationsincopingwithincreasingdemandforlonger-termpublicspending,suchassocialsafetynets,education,andaging,andlesstransparentdecision-makingbudgetprocesses.MTEFscanaddresstheseshortcomingsthroughstrategicresourceallocationwithmultiyearperspectives.

Toward Better Fiscal Governance in Asia and the Pacific4 5

They identify the available resources through midtermmacroeconomic forecasts, make baseline projections ofcurrentpolicyexpenditure,preparecostestimatesofnewspending, set expenditure ceilings, and finally allocatesuchresourcestoeachministryorsector.

The characteristics actually adopted for MTEFs are widely varied across countries. Australia, whichintroduced the first MTEF in the world in the 1980s,doesnotpresentexpenditureceilingsinMTEF(ForwardEstimates)butlinksthemrelativelywelltothecountry’sannual budget (Francesco and Barroso 2014). Nepalclassifies the long-term development activities intothree priorities listed in its annual budget. Accordingto an assessment of OECD countries, Denmark andthe Netherlands have developed a medium-termperspective during their budget formulation process(OECD2013).However,suchamedium-termperspectivedoes not guarantee the effectiveness of their MTEFs(OECD 2014). Thus, a vigorous mechanism is neededinwhich the performance of budgetary allocation andindividualprojectsismonitored,assessed,andfedbackintotheMTEFsandthentheannualbudgets.

In general, MTEFs are evaluated to significantly contribute to the improvement of public finance

Table 2: Medium-Term Expenditure Framework in Selected Countries in Asia and the Pacific

Country Legal Basis Length of Ceilings Frequency of Ceiling Revision

Indonesia √ 4years Annually

Korea,Republicof √ 5years Annually

Malaysia 3years Annually

Myanmar 3years Annually

Philippines 6yearsormore Annually

Singapore 5years Every5years

Thailand √ 3years Annually

VietNam 3years Annually

Australia 4years Morethanonceperyear

Japan 3years Notrevised

NewZealand 4years Annually

Source: Excerpt from OECD and ADB (2019).

management. They have improved budget deficitmanagement, increased the recognition of resourceconstraints, and fostered cooperation betweengovernment agencies through interagency discussionandconsultationintheprocess(WorldBank2013).AstudyontheRepublicofKoreahasfoundthattheaccountabilityandautonomyoflineministrieshaveimprovedbyhavingthem refrain from requesting exorbitant budgets andautonomously restructuring nonessential expenditures(Kim2018).Publicunderstandingofstatebudgetshasalsoincreasedwithmoreinformationonbudgetsavailable.

On the other hand, MTEFs pose a few problems and limitations in improving fiscal management.Foremostis thatMTEFswere not linkedwell to annual budgets.Thisbasicallystemmedfromthe lackof legallybindingarrangements.Non-bindingexpendituresprovidepolicymakers with guidelines for budget formulation, notbindingtheirdecisionsonannualbudgets.Eveniftheydo not follow these guidelines, policy makers cannotbe held legally accountable even in countries withstatutory-basisMTEFs.The successofMTEFseventuallydependsontheattitudesandbehaviorofpolicymakers.

Anotherproblemisthediscrepancybetweenprojectedand actual outcomes of fiscal targets on MTEFs.

The success of MTEFs eventually depends on the attitudes and behavior of policy makers.

ADBI Policy Brief No. 2020-3 (June) 6

Oftentimes, projected medium-term gross revenueis exaggerated, while expected gross expenditure issqueezed. This is because policy makers do not wantfiscalindicatorstoworsenduringtheirtermwhiletryingtospendasmuchmoneyaspossible.Lastly,theabsenceof a valid performance monitoring and feedbackmechanismhasledtothelowereffectivenessofMTEFsagainstoriginalexpectations.

The above discussion suggests several lessons to duly take into account to make MTEFs more effective.Suchconsiderationsincludethefollowing:

• Annual budgets should be further alignedwith MTEFs to increase the predictability offiscalmanagement andminimize the variancebetweenprojectedtargetsandactualoutcomes(seeBox2forcountryexamples).

• For such an enhanced linkage, strong andcontinuouspoliticalsupportiscrucial.

• There should be a change in behavior of thebureaucracy toward MTEFs with a midtermperspective.

• Atthetechnicallevel,awell-designedperformancemanagement system needs to be establishedtocontributetotheenhancedaccountabilityofgovernmentinfiscalmanagement.

Fiscal Institutions

Fiscal institutions in the context of fiscal governance refer to not only independent fiscal institutions,

Box 2: Medium-Term Expenditure Framework and Annual Budget

Nepal

Themedium-termexpenditureframework(MTEF),asa3-yearrollingbudget,identifiesfactorsaffectingalignmentbetweenstrategic plans and the annual budget. It also links the periodic plan objectives to the annual budget’s program andactivities.Toaccomplish this, theMTEFclearlydefines theorderofpriorityofproposedprogramsandprojects.Prioritizingthedevelopmentactivitiesintoprioritylevels(P1,P2,andP3) listedintheannualbudgetduringbudgetformulationhelpsformulateamorerealisticdevelopmentbudget.

Republic of Korea

The1-dayNationalFiscalStrategyMeeting,chairedbythePresident,isanannualmeetinggatheringallgovernmentministerstodiscussnationaldevelopmentstrategiesandprioritiesforresourceallocation.Theyconsiderthemid-andlong-termfiscalstrategy and national priorities, fiscal targets (expenditure, revenue, debt, and balance), and expenditure ceilings of eachministryandsector.Ministerstakepartinthediscussionfromtheirpositionsascabinetmembersratherthantheheadsoftheirrespectiveministries.Thismeansministersarerequiredtodiscussmajorfiscalissuesfromtheperspectiveofthenationandpeople,transcendingtheinterestsofministries.Basedontheresultsofthismeeting,the5-yearNationalFiscalManagementPlanisdrafted,developed,andfinallyproposedtotheNationalAssembly.

Source: Country presentations at the ADBI–UNESCO Fiscal Governance for Sustainable Growth and Development in Asia and Pacific Region policy dialogue, April 2019, Bangkok, Thailand.

as is often the case, but all organizations engaged in fiscal management and budget processes and their relationships. Budget power has centeredtraditionallyontheexecutiveratherthanthelegislature.This has subsequently raised the risks of discretionarydecision-makingofgovernmentinfiscalpolicywithoutproper checks, requiring control of such discretiondemocratically. Some argue that the legislativebudgetary power should be expanded. Others assertthatthelegislaturedoesnothavesufficientcapacitytoensurefiscaldisciplineandisunlikelytoberesponsiblebecauseofpoliticalreasons.

Key issues related to fiscal institutions include how to increase efficiency and how to secure accountability and transparency. Tackling these issues requires(i) identifyingtheplayersinvolvedinmakingbudgetarydecisions, and (ii) grasping the nature and processof negotiation within the government and of budgetdeliberation in parliament. Indeed, the tense relationbetween the executive and the legislature criticallydepends on the political governance of a country. Forinstance, Japan, a parliamentary country, does nothave any critical tensionbetween the twobranchesofgovernment owing to prediscussion and adjustmentwith the ruling parties. In Viet Nam, too, there is littletension (Box 3). On the contrary, in the Philippines, apresidential country, the president even exercises vetopowersonthecountry’sbudgetbillafterithaspassedinparliament (Box3).IntheRepublicofKorea,theNationalAssemblyhascommonlypassed thebudgetbillonlyafewdaysbeforeorevenintheearlymorningofthefirstday of the following fiscal year. Hence, the discussion

Toward Better Fiscal Governance in Asia and the Pacific6 7

of how to establish more suitable fiscal institutions iscritical and needs to be understood in the historical,political,andeconomiccontextsofacountry.

This discussion extends to the issue of independent fiscal institutions. Fiscal councils are widely knownindependent fiscal institutions, such as the CentralPlanningBureauoftheNetherlandsandtheCongressionalBudgetOfficeintheUnitedStates(Pіrdal2017).Foremost,“independence” means structural independenceand functional autonomy. More specifically, to beindependent,aninstitutionshouldbefreefromoutsideinterference,havesufficientresources, includingbudgetandstaff,andbeabletoaccessthedesiredinformation.An independent fiscal institution typically sets mainlylong-term fiscal targets and strategies, prioritizes fiscalpolicies, makes macroeconomic and long-term fiscalprojections,andassessesprogressagainst fiscal targets.Bycarryingoutthesefunctions,ithelpstoestablishfiscaldiscipline, improve fiscal performance, and cope with

Box 3: Fiscal Institutions in the Philippines and Viet Nam

Philippines

ThefiscalinstitutionsinthePhilippinesaretheDevelopmentBudgetCoordinationCommittee (DBCC)andCongress.TheDBCCisaninteragencybodywithinthegovernmentwhichconsistsoftheDepartmentofBudgetandManagement,theDepartmentof Finance, the National Economic and Development Authority, and the Office of the President. It reviews and approvesrevenueprojections,theborrowinglevel,theaggregatebudgetlevel,andexpenditurepriorities.Furthermore,itrecommendstothecabinetandthepresidenttheconsolidatedpublicsectorfinancialpositionandthenationalgovernmentfiscalprogram.Inotherwords,theDBCCparticipatesend-to-endinthebudgetcycle.

Therelationshipbetweenthegovernmentandcongressregardingfiscalpolicyappearsnotamicableattimes.Thegovernmentoftenfailstopassproposedbudgetsincongressbeforethestartofthefiscalyear.Incaseaproposedbudgetisnotpassed,thebudgetforthepreviousfiscalyearisautomaticallyreenacteduntilthepassageofanewbudget.Forthe2019budget,thepresidentvetoedthelegislativeinsertionsof₱95.3billionworthofappropriationitemscalledthe“porkbarrelfunds”suchasroadsandbridges.Eventually,thegovernmentoperatedusingthereenactedbudgetof2018fromJanuary2019untilApril2019.

Viet Nam

VietNamhasa fiscal systemofdecentralizedmanagement, attachingpowers to the responsibilitiesof statemanagementagencies at all levels.All levels, from theNationalAssembly to subordinateagenciesof the localpeople’s committees, areinvolvedinthedecision-makingprocessoffiscalpolicy.Thestatebudgetisdividedintocentralandlocal,andtherearetwodirectionsintheprocessofestimatingthestatebudget:top–downandbottom–up.Top–downreferstotheNationalAssemblyissuingaresolutiononthefive-yearfinancialplan,aswellasthethree-yearfinancialandstatebudgetplan.Bottom–upreferstothesubordinate-agencylevelsubmittingitsbudgetestimatestoanupper-levelagencyorministrybasedontheNationalAssembly’sbudgetplan.

Meanwhile,thereareconflictsofinterestinthebudgetingprocessbetweenbudgetdepartmentsandotherlineministries,theMinistryofFinance(allocatingtherevenueresourcesandregularexpenditure),andtheMinistryofPlanningandInvestment(allocatingdevelopmentinvestmentexpenditures)withinbudgetdepartments.Andtherearealsosomebetweenthecentralgovernment and local authorities regarding the proportion of support local authorities can get from the central budget,because47among63citiesdependon the financial support fromthecentralgovernment.However, thingsare less tensebetweenthegovernmentandtheNationalAssembly,becausetheNationalAssemblyisthecompetentagencyinapprovingfiscal policy inViet Nam. The country does not have any independent fiscal institutions involved in the decision-makingprocessoffiscalpolicy.

Source: Country presentations at the ADBI–UNESCO Fiscal Governance for Sustainable Growth and Development in Asia and Pacific Region policy dialogue, April 2019, Bangkok, Thailand.

economicvolatilitybycomplementingtheinflexibilityoffiscalrules.

Independent fiscal institutions have limitations as well. In addition to structural weaknesses, such as ashortage of expertise and difficulty in access to timelyinformation, more critical is whether they can secureneutrality.There isnocertainty that independent fiscalinstitutions are completely free from the governmentor parliament in their analysis and decisions. Theirpositionmaynotbewelcomedby either,whichmightconsequentlythreatentheirveryexistence.Inparticular,even if they are introduced, their rolesmay be limitedin politically unstable countries. In that vein, the 2018PEMNAsurveyfoundpersuasivelythatfiscalcouncilsareconsideredlessimportantthanfiscalrulesandMTEFsforfiscalresponsibility(PEMNA2018).

Fiscal management, and hence fiscal sustainability, can be greatly enhanced by establishing constructive

ADBI Policy Brief No. 2020-3 (June) 8

relationships among fiscal institutions involved in the process.Thefollowingofferskeylessons:

• Thereshouldbeahealthychecks-and-balancesmechanism between the government andparliament.

• This mechanism depends on simultaneouslyendowing the government with the authorityanddiscretionforfiscaldisciplineandeffectivepolicy decisions while providing parliamentwith the budgetary power for accountabilityandtransparency.

• An independent fiscal institution should havea clear mission and authority that are closelyalignedwithpoliticalgovernanceaswellastheeconomiccontextofacountry.

Emerging Issues

Further opening up the budget process and ensuring people’s participation recently have gained importance as part of efforts to set up better fiscal governance.Good fiscalgovernancecancontribute tofiscal sustainability by promoting transparency in thedecision-making process of fiscal policy. Transparencyis also critical in designing and implementing broadfiscal reforms. Therefore, it is worth paying attentionto the recent trend of open budget and participatorybudgetingtoenhancesuchtransparency.

Conducted by the International Budget Partnership and released every 2 years, the Open Budget Survey assesses open budgeting practices in three areas: transparency, oversight, and participation (ADBI andUNESCO 2019). The survey results are shared to buildcapacity on fiscal transparency and advocate improvedopenbudgetingpractices.Inthemostrecentsurvey,18countries in Asia and the Pacific scored lower than theglobal average in the Open Budget Index measuringtransparency, with an average score of 40 against theglobal average score of 42 for 115 countries. The topglobalperformerisNewZealand,andthePhilippinesandIndonesia are ranked high among Asian countries.Thisresultsuggests furthereffortsareneededtostrengthentransparencyinthebudgetprocessinAsiaandthePacific.

Transparency is also critical in designing and implementing broad fiscal reforms.

Though still in the early stages, participatory budgeting has been gaining importance in countries as an approach to enhance transparency. Publicparticipation in the budget process at the local ormunicipal government level is relatively easily foundin some countries, but not asmuch at the national orcentral government level (OECD 2019; Dias, Enríquez,andJúlio2019).Inthissense,theRepublicofKorea’scaseis remarkable. Introduced in2018forthe2019nationalbudget by law, the country’s participatory budgetenables the public to participate in project proposals,subsequent evaluation, and prioritization through theParticipatoryBudgetingCitizens’Committee.ThescaleoftheRepublicofKorea’sparticipatorybudgetingamountsto$220millioninfiscalyear2020.

Good fiscal governance will certainly evolve to develop a high standard of transparency in all aspects of public finance management in the longer term,eventhoughfiscaltransparencyhasnotreceivedmuchattentionsofar.Heightenedattentionandfurtherstudies on the improvement transparency in publicfinancearerequired.

Conclusion

Good fiscal governance is a cornerstone to promote sustainable socioeconomic development and secure fiscal soundness. Many countries have implementedreform measures in this direction  (Box  4). Givencontemporary and future fiscal challenges, enhancingfiscal governance requiresmore attention to itsdesignand good alignment of its implementation with thecountry’sdevelopmentstrategy:

• Fiscal rules should focus simultaneously onsecuringfiscaldisciplineandfiscalspace,giventhegrowingdependenceonthepublicfinanceof a country.They also need to be flexible fora country to be able to cope with economicfluctuationseffectivelyandproactively.

• MTEFsarerequiredtostrengthentheirbindingpower in order to increase the practicality offiscal policy. To this end, continuous politicalwill,changeinbudgetarybehaviorandefficient

Toward Better Fiscal Governance in Asia and the Pacific8 9

feedbackmechanismsarenecessary,inadditionto strong links between the MTEF and theannualbudget.

• Fiscal institutions should work toward a morerobust system of checks and balances toincrease accountability and transparency. Anindependent fiscal institution, if introduced,needs tobedesignedconsidering thepoliticalandsocioeconomiccircumstancesofacountry.

• These three pillars of fiscal governance areintertwined, complementing and reinforcingeachotherintermsoftheirrolesandfunctions.

Given contemporary and future fiscal challenges, enhancing fiscal governance requires more attention to its design and good alignment of its implementation with the country’s development strategy.

There is no one-size-fits-all solution in the development of countries because their socioeconomic backgrounds are different.Thisisalsotrue for fiscal governance. Nevertheless, experiencesof other countries, lessons learned, and best practicesprovide valuable foundations for countries in Asia andPacific.Theyshouldcombinesuchlessonsandpracticesinto their unique development strategies and fiscalmanagement.

Box 4: Fiscal Governance Reform Case

Lao People’s Democratic Republic

Duringtheso-calledfirst-generationreform(2000–2013),thecountryimplementedpublicfinancemanagementreformsbyrevising legislations. Its key achievementwas treasury reform, including theestablishmentof the centralized treasury andprovincial treasuries, as well as the introduction of an upgraded government financial information system. However, thisreformfacedchallenges.Thegovernmentcarriedoutmultiplereformsatthesametime,butitslimitedtechnicalknowledgeandskillscouldnotmatchitsambitiousplan.Moreover,staffrotationsandtheMinistryofFinance’schangeinmanagementandcommitmentsloweddownthereformprocess.

Subsequently,thegovernmentintroducedin2017Public Finance Vision 2030 and Development Strategy 2025with10strategiesand6prioritizedprograms,withthefollowingobjectives:(i)strictlyadheretotheStateBudgetLaw,(ii)developandapplyacomprehensivemodernframeworkinlinewithinternationalstandards,(iii)implementtheStateBudgetPlanasapprovedbytheNationalAssembly,(iv)equippublicservantswithsoundpoliticalideologyandsufficienttechnicalcapacity,and(v)ensurefiscaldisciplineandmanagepublicdebtprudentially.Thegovernment,ledbytheMinistryofFinance,hasappointedthePublicFinanceManagementReformSteeringCommittee and ImplementingCommittee aswell asTechnicalTeam to launchanddisseminatereformsatcentralandlocallevels.

Source: Country presentations at the ADBI–UNESCO Fiscal Governance for Sustainable Growth and Development in Asia and Pacific Region policy dialogue, April 2019, Bangkok, Thailand.

ADBI Policy Brief No. 2020-3 (June) 10

Appendix: Government Debt and Fiscal Balance of ADB Regional Members and Selected OECD Members (% of gross domestic product, 2018)

Member Debt Balance Member Debt Balance

ADB

Afghanistan 6.9 1.5 Mongolia – 2.6

Armenia 51.3 –1.8 Myanmar 38.2 –2.6

Australia 41.4 –0.8 Nauru 58.3 29.6

Azerbaijan 18.8 5.6 Nepal 30.2 –6.7

Bangladesh 34 –4.6 NewZealand 29.8 0.8

Bhutan 102.4 –2 Pakistan 71.7 –6.4

BruneiDarussalam 2.6 –3.6 Palau – 6.5

Cambodia 28.6 –0.8 PapuaNewGuinea 35.5 –3.9

PRC 50.6 –4.8 Philippines 38.9 –1.5

Fiji 46.2 –5.5 Samoa 50.3 0.1

Georgia 44.9 –0.9 Singapore 113.6 3.6

HongKong,China 0.1 2.3 SolomonIslands 9.4 0.7

India 68.1 –6.4 SriLanka 83.3 –5.3

Indonesia 30.1 –1.8 Taipei,China 35.1 –1.9

Japan 237.1 –3.2 Tajikistan 47.9 –2.8

Kazakhstan 21 2.7 Thailand 42.1 –0.3

Kiribati 20.6 –2.5 Timor-Leste 6.1 –15.2

ROK 37.9 2.6 Tonga –0.8

KyrgyzRepublic 56 –1.3 Turkmenistan 29.1 –0.2

LaoPDR 57.2 –4.4 Tuvalu 28.1 25.8

Malaysia 55.6 –3.6 Uzbekistan 20.6 2.2

Maldives 68 –4.6 Vanuatu 51.4 4.8

MarshallIslands 25.2 2.3 VietNam 55.6 –4.4

FSM 20.3 27.3

OECD

Canada 89.9 –0.4 Italy 132.2 –2.1

France 98.4 –2.5 Portugal 120.1 –0.4

Germany 61.7 1.9 Spain 97.1 –2.5

Greece 184.9 1 UnitedKingdom 86.8 –1.4

Ireland 63.7 0 UnitedStates 104.3 –5.7

ADB = Asian Development Bank, FSM = Federated States of Micronesia, Lao PDR = Lao People’s Democratic Republic, OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China, ROK = Republic of Korea. Notes: Debt: general government debt; Balance: net lending/borrowing.No data available on the Cook Islands and Niue among ADB regional members.Source: International Monetary Fund. 2019. World Economic Outlook (October).

Toward Better Fiscal Governance in Asia and the Pacific10 11

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