Abstract

With increasing frequency, the IMF has assisted middle-income countries, especially emerging economies, in adopting the types of budget reforms that have been introduced in many Organization for Economic Cooperation and Development (OECD) countries - reforms that emphasize performance and results achieved from the use of public resources. This paper examines the experience of OECD countries in introducing such reforms and assesses whether the same reform strategy be applied to non-OECD countries. It examines how emerging economies should begin such reforms, and how they should be sequenced thereafter. Based on a thorough review of the technical assistance provided by the IMF's Fiscal Affairs Department (FAD) to middle-income countries, this paper will be useful to policymakers and administrators in emerging economies who are contemplating such reforms.

© 2006 International Monetary Fund

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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.

The Challenges and the Reform Agenda
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