© 2006 International Monetary Fund
Production: IMF Multimedia Services Division
Cataloging-in-Publication Data
Diamond, Jack, 1946–
Budget system reform in emerging economies : the challenges and the reform agenda / by Jack Diamond — Washington, D.C. : International Monetary Fund, 2006.
p. cm. — (Occasional paper ; 245)
ISBN 1-58906-474-7
1. Program budgeting. 2. Accrual basis accounting. 3. Expenditures, Public. 4. International Monetary Fund. I. Title. II. Series : Occasional paper (International Monetary Fund) ; no. 245
HJ2031.D43 2006
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Contents
Abbreviations and Acronyms
Preface
I Overview
II The Strategy for Budget System Reform in Emerging Market Economies
Stages in Budget System Development
A Three-Track Path to Reform
The Steps toward Reform
Three Preconditions for Reform
Institutional Framework for Devolved Management
Managing the Change Process
The Wider Framework for Budget Reform
Is There Need for a New Legal Framework?
III Moving from Program to Performance Budgeting
The Road from Old to New Performance Budgeting
Issues of Design in a Program Structure
The Wider Strategic Framework for the Program Structure
Introducing Medium-Term Budget Frameworks
IV Introducing a Performance Management Framework
Different Measures of Performance
Defining a Framework for Performance Measurement
Experience in Using Performance Measures
Guidelines for Using Performance Measures
Establishing a Performance Information System
Developing a Performance Management System
Concluding Remarks
V Establishing Basic Public Expenditure Management Thresholds
Internal Control Systems
Internal Audit
Financial Management Information Systems
Costing Systems
Assessing the Performance of the Budget System
Concluding Remarks
VI Moving from Cash to Accrual Accounting
Cash Versus Accrual Accounting
Accounting Models for Different Management Needs
Accrual Accounting as a Component of Wider Budget System Reform
Preconditions for the Move to Accrual Accounting
A Five-Stage Transition to Accrual Accounting
Preliminary Guidance for Accrual Accounting
The GFSM 2001 Standard for Fiscal Reporting
Concluding Remarks
VII The Institutional Framework for Budget System Reform
The Impetus for Performance Budgeting
Different Approaches to Less-Centralized Budget Management
The Five Ds in Practice
Concluding Remarks
VIII Managing the Reform Process
What Can Be Learned from the OECD Experience?
The Overall Approach to Reform
Elements of a Reform Strategy
Providing an Enabling Environment
The Need for a Compatible Legal and Regulatory Framework
The Key Lessons for Budget Reform
Concluding Remarks
References
Boxes
1. Pros and Cons of a Traditional Line-Item Budget
2. OECD Practices: Flexibility in Budget Management
3. Russian Budget System Reforms
4. Chinese Budget Reforms: Strengthening Basic PEM Systems
5. Major Types of Fiscal Policy Rules
6. Summary of Good Practices in Institutional Transparency
7. Elements of the Brazilian Fiscal Responsibility Law, 1999
8. The Steps toward the “New” Performance Budgeting
9. OECD Practices: Use of a Program Structure
10. The U.S. Government’s Program Assessment Rating Tool (PART)
11. Limitations of a “Bottom-Up” Planning Process
12. Connecting Planning with Budgeting
13. OECD Practices: Use of MTBFs
14. Process for Agreeing on Program Budget Format
15. General Guidelines on the Design of Programs
16. Desirable Properties of Outputs
17. Desirable Properties of Outcomes
18. Typical Service Quality Characteristics
19. OECD Practices: Use of Performance Information
20. The U.K. Government’s Public Service Agreement (PSA) Framework
21. Key Principles for Reporting Performance Information
22. Elements of the Strategic Plan
23. The Operating Plan
24. OECD Practices: Performance Management in Government
25. The Attributes of a Well-Designed FMIS
26. Changes in Information Needs to Accommodate Performance Budgeting
27. Attributes of a Costing System
28. Basic Steps of a Program-Based Costing System
29. Critical Objectives of PEM Systems Measured through a Standardized Assessment
30. Pros and Cons of Cash-Based Accounting
31. OECD Practices: Reorienting toward Accruals-Based Accounting Systems
32. Usefulness of Accrual Accounting for Government Operating Units
33. Design of the Capital Use Charge
34. Steps Involved in Moving to Modified Accruals
35. Key Features of GFSM 2001
36. Stages in Accommodating GFSM 2001 Reporting
37. The Pros and Cons of Devolved Budget Management
38. Different Types of Autonomous Public Bodies
39. Seven Broad Types of Performance Contract
40. Pros and Cons of Contracting
41. OECD Practices: Degree of Commercialization in Budget Management
42. OECD Practices: Performance Management in Government Agencies
43. Tanzania’s Experience in Creating Executive Agencies
44. Commercialization of Government Services
45. Guidelines for Contracting In and Outsourcing Government Services
46. The Malaysian Modified Budget System
47. The Steps for Creating Major Institutional Change
48. Thailand: Line Agencies Reform Contract
49. Formal Performance Agreements between Central Authorities and Agencies in Latin America and the Caribbean
50. The Experiences of Australia and Sweden with Using an Efficiency Dividend
51. The U.S. Government Performance and Results Act, 1993
52. Turkey’s Public Financial Management and Control Law
53. Checklist for Assessing the Risks in Delivering TA for Budget Reform
Figures
1. The Concept of Performance in Different Budget Systems
2. Technical and Economic Efficiency
Abbreviations and Acronyms
ABC | Activity-based costing |
BO | Budget office |
BOP | Balance of payments |
B-O-T | Build-Operate-Transfer |
CBO | Congressional Budget Office (U.S.) |
CE | Chief executive |
CoA | Chart of accounts |
COFOG | Classification of the functions of government |
CRM | Constituent/customer relationship management |
ECOFIN | Council of Economics and Finance Ministers of the European Union |
EU | European Union |
FAD | Fiscal Affairs Department (of the International Monetary Fund) |
FRL | Fiscal responsibility law |
GAO | Government Accountability Office (U.S.), formerly General Accounting Office |
GFMIS | Government financial management information system |
GFS | Government finance statistics |
GFSM | Government Finance Statistics Manual |
GPRA | Government Performance and Results Act (U.S.) |
IMF | International Monetary Fund |
IRA | Independent revenue authority |
IT | Information technology |
LM | Line ministry |
MoF | Ministry of finance |
MBS | Modified Budgeting System |
MTBF | Medium-term budget framework |
MTEF | Medium-term expenditure framework |
OECD | Organization for Economic Cooperation and Development |
OMB | Office of Management and Budget (U.S.) |
PART | Program assessment rating tool |
PBC | People’s Bank of China |
PEFA | Public Expenditure and Financial Accountability Program (World Bank, European Commission, IMF, and others) |
PEM | Public expenditure management |
PFM | Public financial management |
PPBS | Planning, programming, and budgeting system |
PPP | Private-public partnership |
PSA | Public service agreement |
SDA | Service delivery agreement |
SGP | Stability and Growth Pact (EU) |
SMART | Specific, measurable, achievable, relevant, and timed |
SNA | System of national accounts |
SPO | State planning office |
SUNAT | State revenue authority of Peru |
TA | Technical assistance |
TSA | Treasury single account |
UN | United Nations |
Preface
Over the past two decades, many countries in the Organization for Economic Cooperation and Development (OECD) have introduced fundamental changes in budget management involving increased emphasis on performance and results achieved from the use of public resources. With increasing frequency over the past decade, the Fiscal Affairs Department (FAD) of the IMF has been called upon to assist middle-income countries, especially emerging economies, in adopting these types of budget reforms. Repeatedly, technical assistance (TA) missions have been required to offer advice on how to introduce or sustain such reforms. In doing so, missions typically have addressed a number of recurring questions. What has been the experience of OECD countries? Are there any general lessons to be learned? Can, or should, the same general reform strategy be applied to non-OECD countries? Just how universal is this reform paradigm? How should countries first begin these reforms, and how should they be subsequently sequenced? Do all countries have the management capabilities within their governments to implement such reforms?
Given that the same questions are raised in many countries, it was considered useful to attempt to provide the answers, perhaps more comprehensively, based on a review of our experience providing TA to middle-income countries. Not surprisingly, this comprehensive view revealed the basic underlying strategy that was being recommended for budget system reform, and this is reported in this study. Not only is this an important input to FAD’s ongoing efforts to review and improve its TA advice, but it is hoped that it also will be useful to policymakers and administrators in emerging economies who are contemplating such reforms.
Given the nature of the study, based on a review of TA advice, this is very much a product of the numerous FAD TA teams that have worked on a wide range of related issues. The fundamental contribution from all these colleagues, especially in the two public finance management divisions of FAD, is gratefully acknowledged here. The author is particularly appreciative of the opportunity to work with and to learn from Piyush Desai, Geoff Dixon, Ole Hovland, Tony Olliffe, and Vijay Ramachandran, whose contributions to this study are significant. Special thanks are due to Jim Brumby, Marc Robinson, and Holger van Eden who commented on—and considerably improved—previous drafts. As always, the author bears responsibility for any remaining errors. Special mention should be made to Miriam Villarroel, Raquel Malamud, and Victoria Macchi, who labored with such good humor on a number of previous drafts of this study. Linda Griffin Kean edited the manuscript and coordinated production of the publication.