Public Financial Management and Its Emerging Architecture
Front Matter

Front Matter

Author(s):
M. Cangiano, Teresa Curristine, and Michel Lazare
Published Date:
April 2013
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    “Governments across the world are constantly searching for ways to improve their public financial management systems. This impressive book covers many of the questions that get asked in this search. It offers insightful perspectives on the challenges of managing public money and will inspire and inform reform ideas across the globe for years to come. Academics and practitioners alike should keep a copy close at hand. I certainly will.”

    Matt Andrews, Associate Professor of Public Policy, Kennedy School of Government, Harvard University; author of The Limits of Institutional Reforms in Development: Changing Rules for Realistic Solutions

    “Faced with growing debt and an uncertain macroeconomic outlook, many governments are experimenting with institutional innovations such as new budgetary rules and fiscal councils. Yet the naïve import of reforms has uncertain benefits. This much-needed book seeks to avoid simplistic prescription, and fosters awareness of the coherence and context of budget institutions. It is an indispensable guide for postcrisis fiscal designers.”

    Joachim Wehner, Associate Professor of Public Policy, London School of Economics and Political Science; author of Legislatures and the Budget Process: The Myth of Fiscal Control

    “This timely volume helps us all better understand the bow wave of public financial and fiscal policy reforms that have been initiated by thoughtful practitioners in nations around the world. Thanks to the chapters by leading public finance analysts, we now have a comprehensive conceptual framework to assess the practices adopted by individual nations, often in the heat of a financial crisis. This couldn’t come at a better time, as leaders and analysts alike will need better guide-posts to help nations achieve more sustainable and rationalized public finances in the tumultuous years to come.”

    Paul L. Posner, Director, Public Administration Program, George Mason University

    “This helpful volume analyzes the key public financial management innovations that took place over the past two decades. Grouping these innovations loosely into three categories—information, processes, and rules—the authors argue that public financial management is an integrated framework with its own architecture, logic, and connections. There may not therefore be a direct link between individual innovations and outcomes, and general advice is not likely to fit any specific country. The book also poses some intriguing questions, such as what is the likelihood that innovations developed in more advanced economies will work in developing countries.”

    Irene S. Rubin, Professor Emeritus of Public Administration, Northern Illinois University; former editor-in-chief, Public Administration Review; author of The Politics of Public Budgeting and Balancing the Federal Budget: Eating the Seed Corn or Trimming the Herds

    “In the wake of the financial crisis public resources are particularly scarce. Thus, effective and efficient use of taxpayers’ money requires sound financial management and full transparency: citizens, parliaments, and financial markets deserve a clear picture of where public finances stand. This book provides an impressive overview of country practices, reforms and innovations in the area of public financial management. This timely publication is a rich source for practitioners in public administrations as well as for the academic community and the interested public.”

    Gerhard Steger, Director General of the Budget, Austrian Ministry of Finance; Chair, OECD Working Party of Senior Budget Officials

    “The most comprehensive and informative guide on public financial management! It is well-timed as well. I certainly believe that it will be well received in the Asian region, including Korea, where the importance of PFM is being recognized more than ever.”

    Won-Dong Cho, President, Korean Institute of Public Finance

    “In this comprehensive survey of current trends in public financial management, the authors present and analyze PFM instruments and practices from around the world. Their analysis is firmly empirical, based on a broad spectrum of sources, and the presentation is balanced; no reader is left with the impression that sophisticated techniques can replace political commitments and hard work. This anthology will for a long time remain a rich source of information for both practitioners in ministries of finance and academic researchers.”

    Per Molander, former Director-General; architect of Swedish budget reform of the 1990s

    © 2013 International Monetary Fund

    Cover design: IMF Multimedia Services Division

    Cataloging-in-Publication Data

    Joint World Bank–International Monetary Fund Library

    Public financial management and its emerging architecture / editors, Marco Cangiano, Teresa Curristine, and Michel Lazare – Washington, D.C. : International Monetary Fund, ©2013.

    p.; cm.

    Includes bibliographical references.

    1. Finance, Public—Management. I. Cangiano, M. (Marco). II. Curristine, Teresa, 1970– III. Lazare, Michel. IV. International Monetary Fund.

    HJ9733.P83 2013

    ISBN: 978-1-47553-109-1 (paper)

    ISBN: 978-1-47551-219-9 (ePub)

    ISBN: 978-1-47551-220-5 (Mobipocket)

    ISBN: 978-1-47551-221-2 (PDF)

    Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.

    Publication orders may be placed online, by fax, or through the mail:

    International Monetary Fund, Publication Services

    P.O. Box 92780, Washington, DC 20090, U.S.A.

    Tel.: (202) 623-7430 Fax: (202) 623-7201

    E-mail: publications@imf.org

    Internet: www.imfbookstore.org

    Contents

    Foreword

    Public financial management (PFM)—the fine art of budgeting, spending, and managing public monies—has undergone a “revolution” since the late 1980s. This uniquely interdisciplinary combination of economics, political science, public administration, and accounting has seen an influx of innovative ideas and reforms that have sought to address some of the perennial challenges of managing public finances.

    To constrain the likely temptation to increase expenditure and spend, rather than save, in times of plenty, countries have introduced fiscal rules and fiscal responsibility laws. To understand and plan for the impact of today’s policy choices on finances in the years ahead, governments have adopted medium-term budget frameworks. To help guard against over-optimistic economic and budgetary estimates, some countries have established independent fiscal councils. To shift the focus of decision making from how much money programs receive to the results they can achieve, many governments have introduced performance budgeting and management initiatives. To better understand the true state of public finances and underlying risks, some governments have sought to increase the comprehensiveness and coverage of fiscal reporting and accounting and have introduced risk management techniques. This profound wave of change in the ways public spending is managed largely started in Australia, New Zealand, and the United Kingdom and has since then passed through virtually all advanced economies, and to some extent, has also reached emerging market economies and low-income countries.

    While the field of PFM has changed dramatically over the last two decades, very little has been written about this revolution, with the exception of a few specialized articles. In filling this gap in the literature, this book takes advantage of the unique perspectives provided by IMF public financial management experts, who, over the last two decades, have gained practical experience with many if not all of these reforms and are well placed to draw lessons, make sense of the PFM revolution, and share their cross-country experiences of what has worked in practice and what has not.

    The book poses critical questions about these reforms and evaluates what they have accomplished and the issues and challenges they have encountered, including with the global financial and economic crisis. The crisis highlighted the critical importance of a sound public financial management framework in ensuring that well-designed fiscal policies are effectively implemented. But it also demonstrated the underlying limitations of some countries’ PFM frameworks and the flawed design and weak implementation of some PFM innovations, as well as their failure to entrench themselves. Based on these experiences, this book draws general lessons to help guide reformers in their pursuit of the next generation of PFM reforms.

    The IMF remains committed to working with all its member countries to provide advice and assistance on public financial management, drawing on its deep experience of working on these issues all over the world. I hope that this publication will help countries meet the challenges of managing public finances in an increasingly complex and uncertain global environment.

    Christine Lagarde

    Managing Director

    International Monetary Fund

    Acknowledgments

    The idea for this book came from a conversation with Professor Allen Schick in which we discussed how public financial management has developed over the past two decades. Subsequent conversations led to the conclusion that Professor Schick and the staff of the IMF’s Fiscal Affairs Department had rich and unique academic and practical experiences to share on how public financial management reforms have evolved and the emerging state of the discipline at the beginning of the twenty-first century. Special recognition goes to Professor Schick for his role in propelling the project and acting as a sounding board for all of us.

    This book was a joint effort involving the staff of the two Public Financial Management Divisions of the Fiscal Affairs Department. A large number of friends and former colleagues contributed by reviewing and commenting on various versions of the chapters as well as by participating in a number of lively internal seminars. The work of the entire Fiscal Affairs Department, under the leadership of its Director, Carlo Cottarelli, has provided a stimulating environment in which parallel projects have kept our eyes open, particularly to the views of the nonspecialists. There was, however, no substitute for the many interactions with member countries and colleagues from sister institutions. These interactions provided a much-needed reality check as the elements of the public financial management architecture started to emerge. Participating compatriots included past and present generations of public financial management specialists of the Fiscal Affairs Department, who have generously given us their time, wisdom, and experience, in an attempt to make this book accessible to the uninitiated. In addition to the chapter authors and the staff of the two Public Financial Management divisions, we wish to thank the reviewers, Xavier Debrun, Manal Fouad, Greg Horman, Bacari Kone, Florence Kuteesa, Lewis Murara, Peter Murphy, Sailendra Pattanayak, Mario Pessoa, Dimitar Radev, and Xavier Rame, for their insightful comments and suggestions. We also wish to express our gratitude to our administrative assistants Molly Abraham, Tracy Bowe, Veronique Catany, and Sasha Pitrof for their support, and especially Melinda Weir, who was instrumental in bringing the project to completion. We are very grateful to Michael Harrup of the IMF’s External Relations Department for coordinating the production of the book. We thank all of you and especially our families and friends for their patience and support throughout this project.

    Marco Cangiano, Teresa Curristine, and Michel Lazare

    Abbreviations

    CBA

    central budget authority

    CBO

    Congressional Budget Office (United States)

    CEMAC

    Central African Economic and Monetary Community

    CFI

    central fiscal institution

    CMU

    cash management unit

    CPIA

    Country Policy and Institutional Assessment

    DMO

    debt management office

    ECCU

    Eastern Caribbean Currency Union

    EITI

    Extractive Industries Transparency Initiative

    EU

    European Union

    FMIS

    financial management information system

    FRL

    fiscal responsibility law

    G-8

    Group of Eight advanced economies

    G-20

    Group of Twenty advanced economies

    GAAP

    generally accepted accounting principles

    GDP

    gross domestic product

    GFSM

    Government Finance Statistics Manual

    HIPC

    Heavily Indebted Poor Countries

    IFI

    international financial institution

    IPSAS

    International Public Sector Accounting Standards

    IT

    information technology

    MTBF

    medium-term budget framework

    MTDS

    medium-term debt management strategy

    MTFF

    medium-term fiscal framework

    NCoA

    National Commission of Audit (Australia)

    NDP

    national development plan

    NPM

    new public management

    OECD

    Organisation for Economic Co-operation and Development

    PB

    performance budgeting

    PEFA

    Public Expenditure and Financial Accountability

    PFM

    public financial management

    PI

    performance information

    PIP

    public investment program

    PPP

    public-private partnership

    ROSC

    Report on the Observance of Standards and Codes

    RRA

    resource revenue account

    SGP

    Stability and Growth Pact

    SOE

    state-owned enterprise

    T-bill

    treasury bill

    TSA

    treasury single account

    UN

    United Nations

    VAR

    value at risk

    WAEMU

    West African Economic and Monetary Union

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