3. Pillar II: Fiscal Forecasting and Budgeting
- Sailendra Pattanayak
- Published Date:
- April 2018
Budgets and their underlying fiscal forecasts should provide a clear statement of the government’s budgetary objectives and policy intentions, and comprehensive, timely, and credible projections of the evolution of the public finances.
103. Fiscal forecasts provide information about the projected development of the government’s finances, while the budget seeks legislative authorization for its expenditure plans for the coming year. In most countries, the government’s budget is the single-most important fiscal document, receiving high levels of public and parliamentary attention. The budget sets out the government’s fiscal objectives and policies, demonstrates how those policies will impact the public finances, and seeks the legislature’s approval for the proposed levels of expenditure, revenue, and debt. It is therefore important that fiscal forecasts and budgets are based on credible projections of macroeconomic developments, provide comprehensive information on the government’s fiscal objectives and budgetary plans, facilitate policy analysis and accountability, and that the budget calendar gives the legislature sufficient time to scrutinize and approve the plans before the budget year begins.
104. The budget documentation should provide a comprehensive, timely, and credible overview of the government’s plans for raising and spending public resources. It should include
a statement of the government’s fiscal strategy, containing clear fiscal policy objectives against which fiscal performance can be assessed;
a medium-term fiscal framework (MTFF), which incorporates projections of key macroeconomic and fiscal indicators for two to four years beyond the budget year;
a medium-term budget framework (MTBF), which includes projections of expenditure by sector, ministry, or agency for two to four years beyond the budget year in line with the government’s strategic priorities;
a summary of the government’s national and sectoral policy priorities as outlined in a national development strategy, or sector-specific plans;
annual budget estimates, which provide a detailed breakdown of expenditure for each ministry or agency for the coming budget year;
draft budget legislation to give legal effect to the proposed revenue measures and expenditure appropriations, as well as any other measures to authorize financing of the budget, such as amendments to debt ceilings where applicable; and
budget annexes or supplementary statements or documents, which can include a range of other relevant information such as the government’s debt management strategy, a fiscal risk statement, long-term fiscal projections, estimates of the impact of new policy measures on the public finances, a statement of tax expenditures, and the financial operations of social security funds and other extrabudgetary entities.
105. Fiscal forecasting and budgeting (under Pillar II of the Code) covers four dimensions:
2.1. The comprehensivenessof the information disclosed by the government on macroeconomic, fiscal, and budgetary developments. 2.2. The orderlinessof the budget preparation and approval process. 2.3. The policy orientationof budget documentation. 2.4. The credibilityof the economic and fiscal forecasts and budgets prepared by the government.
Dimension 2.1. Comprehensiveness. Fiscal forecasts and budgets should provide a comprehensive overview of fiscal prospects.
106. To ensure sound fiscal policymaking and accountability, governments, legislators, citizens, and markets need to have a comprehensive understanding of macroeconomic and fiscal prospects, and the impact of changes in government policies on the public finances. Accordingly, the four principles under this dimension of the Code focus on several key aspects of comprehensiveness of fiscal forecasts and budgets:
Institutional coverage. The extent to which the forecasts and budgets include all the entities of government, and thus present a full picture of government fiscal operations (2.1.1).
Flow coverage. The extent to which the budget documentation includes all fiscal flows, including government tax revenue, nontax revenue, borrowing, and expenditure (2.1.1).
Funding source, including external financing through grants or loans (2.1.1).
Accurate assessment of macroeconomic conditions and forecasts, when the government sets the stance of fiscal policy (2.1.2).
Multi-annual forecasting horizon with projections that cover a three- to four-year period (2.1.3).
Disclosure of obligations under major investment projects for which financing may be disbursed over several years (2.1.4).
Table 3.1 provides a list of relevant standards, norms, and guidance material related to dimension 2.1 of the Code.
|Standards/Guidance Material||Brief Description|
|OECD Best Practices for Budget Transparency||These guidelines recommend that the budget be comprehensive, encompassing all government revenue and expenditure, so that the necessary trade-offs among varying policy options can be assessed. They also recommend that expenditures be presented in gross terms. These guidelines state that “The budget is the government’s key policy document. It should be comprehensive, encompassing all government revenue and expenditure, so that the necessary trade-offs between different policy options can be assessed.” It also states that “expenditures should be presented in gross terms.…” See OECD (2002).|
|PEFA||Includes four related indicators: (i) PI-5 on budget documentation; (ii) PI-6 on central government operations outside financial reports; (iii) PI-11 on public investment management; and (iv) PI-24 on the procurement process. See PEFA (2016b).|
|Public Investment Management Assessment (PIMA)||PIMA is a diagnostic tool, developed by the IMF in 2015, revised in 2018, that assesses the public in-vestment cycle, including planning, allocation, and implementation phases. See (IMF, 2015b).|
|World Bank Country Procurement Assessment Report (CPAR)||The CPAR is a procurement system assessment tool, launched in the 1990s. While the tool has been replaced by other tools (including MAPS), many CPARs are published on the World Bank website.|
|OECD Methodology for Assessing Procurement Systems (MAPS2)||The OECD’s Development Assistance Committee, in cooperation with the World Bank and other partners, is revising its MAPS tool, launched in 2010. The tool is intended to catalyze and accelerate the development of modern, efficient, sustainable, and more inclusive public procurement systems that reflect national development objectives. See OECD (2010a).|
|International Budget Partnership, Open Budget Survey||Conducted biannually by the IBP, the Open Budget Survey measures a wide range of budget transparency issues to calculate a summary national score. http://internationalbudget.org/what-we-do/open-budget-survey/|
Principle 2.1.1. Budget Unity Revenues, expenditures, and financing of all central government entities are presented on a gross basis in budget documentation and authorized by the legislature.
107. The integrity of the budget process requires that all fiscal activity undertaken by the central government be included in the budget and approved by the legislature.66
The annual budget should ideally cover all central government entities67 whose activities are primarily financed through compulsory revenues, and all forms of public expenditure and revenues (in the form of taxes, fees, charges, fines, or contributions).
The information (on revenue, expenditure, and financing) presented in the budget should be recorded on a gross basis,68 which is important to ensure that decision makers have a complete picture of the scale and extent of each activity.
Levels of Practice for Principle 2.1.1
Basic Practice: Budget documentation incorporates all gross revenues, expenditures, and financing by budgetary central government ministries and agencies.
108. Basic budget documentation should cover all gross revenues, expenditures, and financing of all budgetary central government ministries and agencies. At the basic level, it is expected that the budget documentation should reflect all central government activities financed through budgetary appropriations, but not the activities of entities that are outside the budget—namely, extrabudgetary funds (EBFs). All tax and nontax revenues, grants (both domestic and foreign), budgetary expenditures including donor-funded budgetary activities, and financing should be presented in gross terms.
109. A complete picture of the central government requires inclusion of all fiscal operations irrespective of whether they are financed domestically or externally. Particularly in low-income developing countries, external loans and grants could be a significant source of fiscal financing. The inclusion of the inflows from these sources, along with the corresponding expenditure they finance, is essential for presenting the overall picture of government finances. Failure to do so risks introducing a statistical discrepancy between flows and stocks because a loan would increase the stock of debt without the disbursement being recorded as a flow in the budget that gave rise to that debt.
110. Tax revenues should not be netted of against payments due from ministries or agencies to their suppliers. Tax revenues should also not be retained by, diverted, or hypothecated to a specific ministry or agency without being presented in the budget and authorized through the appropriation process.
111. Information on nontax revenue should be included in the budget documentation irrespective of whether the collecting government agency is entitled to retain these revenues, or is required to transfer them to the general pool of fungible government revenue. It is not uncommon for some government agencies to be allowed to retain and use nontax revenue from fees and charges directly for expenditure (Poter, 2013).69 Such arrangements, however, should be based on a clear set of principles/criteria for the retention of nontax revenues (see Box 3.1). The respective agencies’ revenues and associated expenditures should be recorded and reported in gross terms so that the full extent of government activity can be properly established.
Box 3.1.Principles/Criteria for Retention of Revenues by Ministries/Agencies
It is important to specify a set of principles regarding the retention of revenues by individual ministries or agencies that distinguish among the following:
(i) Operating revenues from the sale of goods and services. These revenues should not be retained unless there is strong justification and/or a requirement under a specific statute to maximize the respective agencies’ commercial collections. If at all required, such retained revenues should be counted as negative expenditure in the budgets of the respective ministries/agencies to encourage them to maximize their commercial collections. This means that ministries and agencies can retain and spend any overcollection during the year without exceeding their gross appropriation.
(ii) Capital receipts from the sale of assets. All capital receipts should be returned to the ministry of finance and allocated through the budget process. Individual ministries/agencies should not make isolated decisions about the structure of the government balance sheet.
(iii) Fees and charges collected from the direct beneficiaries of government services. Fees and charges should be set at the level required to recover the costs of providing the corresponding service as reflected in the ministry’s budget allocation. Any collections above budgeted amounts should be returned to the finance ministry to prevent ministries from becoming “tax farms.”
Good Practice: Budget documentation incorporates all gross revenues, expenditures, and financing by central government ministries, agencies, and extrabudgetary funds.
112. Good practice requires that the budget documents provide information on the fiscal activities of the whole of the central government, including EBFs and any other extrabudgetary government activities (including externally or donor-funded extrabudgetary government activities). Bringing information on EBFs and extrabudgetary government activities into the budget documents ensures that legislators and the public have a more complete picture of the fiscal operations of the whole of central government.
113. Including EBFs in the budget documentation does not necessarily require their detailed budgets to be subject to legislative approval. Depending on the legal framework in place, incorporating EBFs in the budget documentation could involve presenting information on their revenues and expenditures for the information of the legislature, rather than including the expenditure of these entities in the appropriation bill for approval by the legislature (Allen and Radev, 2010). Nevertheless, prudent fiscal management requires that, even if legislative approval of EBFs’ budgets is not prescribed, adequate arrangements are in place to review and approve EBF budgets to ensure their consistency with and consolidation into the government fiscal framework. This can be done by requiring that the budgets of EBFs be subject to final review and approval by the ministry of finance. Ideally, for the purposes of including the revenue and expenditure details of EBFs in the budget documentation, common requirements should be established for the classification of expenditure and revenue, accounting and reporting, internal control, and internal and external audit (Allen and Radev, 2010). Box 3.2 presents the example of Brazil.
Box 3.2.Brazil: Federal Government Budget Documentation
The budget documentation of the central government presents gross revenue, expenditure, and financing for the central government, budgetary funds, and social security. The Annual Budget Law (LOA) includes the operations of central government, and no expenditure can be made without an explicit budgetary appropriation. Budgetary funds are created by law and are funded by earmarked revenue. Nevertheless, they are included in the LOA and are submitted to the common rules regarding budget preparation and execution. The administrative budget1 of the Central Bank is also presented in the LOA. Nevertheless, as the budget does not include extensive information related to the Length-of-Service Guarantee Fund (Fundo de Garantia por Tempo de Serviço—FGTS), a large extrabudgetary fund submitted to specific governance arrangements,2 the practice related to budget unity is not meeting the advanced standard.3Source: IMF (2017a).1 This includes wages, recurrent expenditures, and investment but not the operations related to monetary policy.2 FGTS is intended to provide account-based cash benefits to employees on termination of employment for any reason, including retirement. Nearly all employees in the private sector are entitled to FGTS benefits. FGTS is funded entirely by employers.3 The FGTS was also used to finance government programs without budget authorization.
Advanced Practice: Budget documentation incorporates all gross revenues, expenditures, and financing by central government ministries, agencies, extrabudgetary funds, and social security funds.
114. The most comprehensive budgets cover all domestically and externally funded transactions of central government, including those of social security funds. The standard for advanced practice, therefore, requires that the budget covers all revenues, expenditures, and financing operations of all central government entities, including those of extrabudgetary funds, and also those of social security funds (see Box 3.3 for Portugal example).
115. The inclusion of social security funds70 ensures a more complete presentation of central government fiscal operations. Social security funds are typically EBFs but are of a somewhat special character. They hold assets and liabilities separately and engage in financial transactions on their own account, including, sometimes, significant financial investment activity. Unlike other EBFs, social security funds typically represent a larger portion of total government expenditure in developed countries than in developing countries.71 They typically also have a residual claim on financing by the treasury in the event of a funding shortfall, implicitly, if not explicitly, constituting a potential contingent liability on the state. The compulsory nature of social security funds and the long-term obligations they place on public resources call for their inclusion in the budget documents. It could, however, be challenging politically to integrate fully into the budget, social security funds that are not directly managed by government entities.72 In such cases, their budgets ideally should be annexed to the central government’s budget and presented to the legislature at the same time.73
Box 3.3.Portugal: Coverage of Budget Documentation
Portugal’s annual budget documentation incorporates all general government revenue, expenditure, and financing activities. These include all Integrated Services, Autonomous Funds and Agencies, and social security, as well as summaries of regional and local government sectors. Beginning in 2012, in line with the Budget Framework Law, which required the government to include all general government entities within the state budget, all public corporations that are classified within the general government perimeter are also included within the budget documentation.
The budget presents all expenditures and revenues on a gross basis, an important feature given the importance of own source revenues in Portugal. The budget tables provide a clear distinction between expenditures funded through general revenues and those funded through own source revenues. Own source revenues of public administration bodies in Portugal—including those of reclassified public corporations—accounted for 17 percent of expenditures, and social security accounted for an additional 18 percent of expenditures in 2014. In line with EU requirements, the budget documentation that accompanies the annual estimates includes forecasts of the general government fiscal aggregates.Source: IMF (2014c).
Principle 2.1.2. Macroeconomic Forecasts The budget projections are based on comprehensive macroeconomic forecasts, which are disclosed an5 explained.
116. Macroeconomic forecasts are key to the budget forecasts, as they determine how the fiscal situation will evolve over both the coming year and the medium term. Accurate and realistic forecasts for key macroeconomic variables increase the chances that the revenue and expenditure projections will be reliable, particularly in the case of nominal GDP and inflation that feed directly into fiscal forecasts. Furthermore, an accurate assessment of macroeconomic conditions and forecasts is necessary to inform decisions when the government sets the stance of fiscal policy. This principle is also related to Principle 3.1.1, which requires governments to analyze how the fiscal outcome would differ as a result of changes in fiscally relevant macroeconomic variables.
117. Macroeconomic forecasts include the projected values of key macroeconomic variables that underpin the fiscal projections. Macroeconomic forecasts should cover, at a minimum, indicators of real and nominal GDP, and their components—inflation, wages, the unemployment rate, and the balance of payments—should extend over the medium term (three to five years), and be applied uniformly by all users. The explanation of these forecasts, including a description of drivers, key relationships, and deviations from past trends, should be presented, ideally at a relatively disaggregated level. For example, the explanation of the GDP forecast could be built up from its components, such as consumption, investment, government expenditure, exports and imports on the expenditure side, and, on the production side, the outputs of the agriculture, mining, manufacturing, construction, extractive industries, and service sectors.74
118. Good macroeconomic forecasts should be as follows:
Internally consistent, using the same base assumptions—such as the exchange rate, world commodity prices, interest rates, and external economic growth—that are clearly laid out and discussed by the government in the budget documents.
Accurate, using forecasts that incorporate all available information, such as the latest national accounts statistics, and forward-looking indicators, such as surveys of households, business and consumer confidence, and investment intentions. This information should be integrated using an internally consistent macroeconomic framework, based on well-understood economic relationships, often estimated through econometric techniques. Ex ante, the accuracy of forecasts can only be assessed through examination of the underlying assumptions and the explanations accompanying forecasts, while ex post, their accuracy can be assessed objectively by comparing forecasts with actual reported data. Figure 3.3 shows an example of an analysis of forecast accuracy for the EU countries.
Unbiased, without demonstrating any systematic tendency toward unrealism. It is a well-documented phenomenon in both advanced and developing countries that political pressure—both explicit and implicit—tend to result in overly optimistic macroeconomic and revenue projections,75 thus providing the government with apparently greater fiscal space for its spending policies (Frankel, 2011). If forecasts are consistently higher than the outturns, this is an indication of forecast bias, though judgment needs to be applied in this assessment, as large, sustained, and unanticipated macroeconomic shocks, such as the global financial crisis of 2008, can result in forecasts that may appear biased ex post. Figure 3.3 shows the optimistic bias in the forecasts in EU countries, where any bias must be reported under the Stability Programs.76
Figure 3.1.Absolute Error Ex Post Real GDP Forecast Accuracy in EU for Budget Year (Average 2000–15)
Source: IMF staff estimates.
Note: The volatility adjustment is the average absolute forecast error divided by the standard deviation of growth over the period.
Figure 3.2.Optimism Bias Ex Post Real GDP Forecast Accuracy in EU Budget Year (Average 2000–15)
Source: IMF staff estimates.
Levels of Practice for Principle 2.1.2
Basic Practice: The budget documentation includes forecasts of key macroeconomic variables.
119. A basic macroeconomic forecast should include projections of the most important determinants of fiscal projections. These determinants include forecasts of real GDP growth, inflation, the unemployment rate, employment growth, exchange rates, interest rates, and the current account balance. For example, the budget documentation should include a table that provides, for each of these variables, the latest outturn data, the forecast or estimate for the current year, the forecast for the budget year, and, ideally, forecasts for two or three additional years. A basic macroeconomic forecast should be developed within a simple framework that ensures consistency among the key macro variables. Box 3.4 presents the example of Brazil. In many countries, it would be relevant to include assumptions on donor financing commitments, which may constitute a large source of revenue and could significantly alter forecasts.
Box 3.4.Brazil: Macroeconomic Forecasts in the Budget
Brazil produces three-year forecasts for key macroeconomic indicators, which are presented in several budget documents and budget execution reports, but explanations of the forecasts are limited. The budget guidelines and the draft annual budget include, at a minimum, forecasts of real GDP growth, inflation, the real dollar exchange rate, and short-term interest rates, covering the budget year and between one and three forward years. However, the scope of the forecasts presented can vary significantly across documents. The budget guidelines also include monthly projections of imports, wages, price indexes, and oil prices for the budget year. Only a short explanation of the macroeconomic outlook is provided to support these forecasts. Forward-year forecasts are indicative and rely on extrapolation methods rather than on detailed analysis. There is only a very brief mention of the expected impact of global economic developments on the Brazilian economy.Source: (IMF, 2017a).
Good Practice: The budget documentation includes forecasts of key macroeconomic variables and their underlying assumptions.
120. To be considered good practice, in addition to the table of key macroeconomic variables, the budget documentation should discuss key assumptions that underlie the forecasts. These assumptions could include developments in the world economy and expected changes in exchange rates, interest rates, and commodity prices. Where there have been large changes in the underlying assumptions compared to the previous year, these should be justified. Providing information and explanations of such assumptions increases the external understanding of the forecast and its credibility. It is also a useful source of self-discipline for the forecaster, to assess whether the underlying assumptions are reasonable. One useful approach to reinforce the validity of the forecasts and their underlying assumptions is to provide a comparison with those produced by other sources such as the IMF or investment banks, and an explanation of any material differences.
Advanced Practice: The budget documentation includes forecasts and explanations of key macroeconomic forecasts and their components, as well as their underlying assumptions.
121. The budget documentation should provide a full explanation of the forecasts, analyzing the drivers of each component, key relationships, and reasons for any deviation between the observed trend of these variables and their projected path. The assessment should cover both the domestic and international economic outlook and provide details on the most important sectors, such as the mining sector for a major mineral producer and the investment sector for a country experiencing a surge or decline in construction activity. The budget documentation should include analysis of the key economic relationships and place the forecasts in a historical context. An example from Australia is shown in Box 3.5.
Box 3.5.Australia: Assumptions about Business Investment
Australia is typical of advanced practice in publishing key assumptions underlying its economic outlook. The following example from Australia shows an analysis of the changing shares of business investment in GDP (Figure 3.5.1).
Business investment is forecast to fall in the near term, driven by further declines in mining investment as large resource projects are completed. Mining investment has fallen for the past three financial years. In doing so, it has detracted by more than 1 percentage point annually, on average, from real GDP growth over this period. With much of this adjustment now complete, the impact on the broader economy from falling investment in the mining sector is expected to wane in 2017–19. Figure 3.5.1 shows the significant movements in mining and non-mining business investment as a share of GDP.
Figure 3.5.1.Australia: Mining and Non-Mining Business as a Share of GDP
Principle 2.1.3. Medium-Term Budget Framework Budget documentation includes outturns and projections of revenues, expenditures, and financing over the medium term on the same basis as the annual budget.
122. While the legislature approves the budget on an annual basis, an understanding of developments in revenues, expenditures, and financing beyond this relatively short time horizon is important. Budget decisions made today generally have consequences for several years to come, and events expected to occur in two or three years may call for action today. This realization has prompted many countries to introduce an MTBF (Brumby and Hemming, 2013; Harris and others, 2013). The amount of detail about spending provided in the MTBF determines whether a country achieves a basic, good, or advanced level of practice under this principle.
123. MTBFs strengthen multiyear fiscal discipline and allow governments to take account of both the short- and medium-term fiscal impact of new policies. They accomplish this by combating the tendency for the expenditure level to rise incrementally over time. MTBFs typically constitute part of a wider set of frameworks for medium-term fiscal policy planning (see Box 3.6). An MTBF can help improve fiscal discipline in at least three ways:
by ensuring that policymakers, the legislature, and citizens are aware of the full multiyear fiscal impact of new policies before they are adopted;
by providing the government an early warning about the sustainability of existing policies and encouraging it to take corrective action in advance where necessary; and
by establishing binding or indicative multiyear expenditure limits that are sustainable, while including room for expenditure in subsequent budgets.77 This approach helps ensure fiscal discipline, credible policies, and predictable funding while allowing flexibility at very detailed levels.
Box 3.6.Medium-Term Budget Framework Terms and Concepts
Medium-term fiscal framework (MTFF)—standing requirements to commit to, report against, and be held accountable for medium-term aggregate fiscal objectives, such as debt limits, surplus targets or deficit ceilings, and broad expenditure limits. Projections of expenditure, revenue, financing are presented at aggregate levels.
Medium-term budget framework (MTBF)—procedures for making multiyear forecasts of revenue and expenditure and to set numerical expenditure limits beyond the annual budget horizon. Expenditure projections are more disaggregated than in the MTFF and, in some countries, follow the same classification as the annual budget.
Binding framework—a framework that holds the government accountable for the ceilings on expenditure that are set both for the budget year and the out-years of the MTBF. “Binding” may imply a limit on spending set in a legal instrument or, more likely, a political commitment by the government. Accountability means that the government should be required to take action if the previously set expenditure ceiling has been, or is expected to be, exceeded.
Indicative framework—a framework in which the limits on expenditure in the budget year and the out-years of the MTBF are not binding on the government and may be changed if economic circumstances change or new spending initiatives are adopted.
Fixed framework—a framework in which the medium-term expenditure limits are set but are not subsequently revised.
Rolling framework—a framework where outer years are revised and an additional year is added.Source: IMF staff.
124. A well-designed MTBF can alert government to adverse developments related to ongoing policies, allowing it to initiate adjustments well in advance, or to sequence policy priorities. For example, medium-term projections can inform whether certain indexation mechanisms for public-sector wages, pensions, or unemployment benefits that might appear affordable today are also sustainable over the medium to long term. By identifying the problem and providing incentives to make policy changes today, MTBFs can help policy-makers initiate early adjustments that have a large impact over time, rather than forcing large and disruptive adjustments later. Similarly, MTBFs can help the government sequence the adoption of priority spending programs in light of resource availability and other priorities today versus the future.
Levels of Practice for Principle 2.1.3
Basic Practice: Budget documentation includes the outturns of the two preceding years and medium-term projections of aggregate revenues, expenditures, and financing.
125. At the basic level, MTBFs should provide aggregate projections of the revenue, expenditure, and financing components consistent with a credible macroeconomic forecast. The key links between the macroeconomic projections and the fiscal outlook should be described. Revenue projections should be realistic, and be based on the latest outturn data, elasticities, and recent trends provided by the agencies or departments responsible for collecting taxes and other revenues. Box 3.7 provides the example of Costa Rica.
Box 3.7.Costa Rica: Medium-Term Budget Framework
Costa Rica prepares a report on the medium-term budget framework (MTBF) covering a four-year period, which is discussed by the Legislative Assembly during its deliberations on the government’s annual budget proposal. The report includes projections of the main fiscal variables and analyzes risks associated with, for example, the slowdown in the world economy. It explains the macroeconomic assumptions used to project revenues, expenditures, and financing. It also assesses the medium-term fiscal situation and fiscal sustainability and includes recommendations on fiscal policies. However, the MTBF does not contain detailed medium-term projections of spending by ministry, economic category, or program.Source: (IMF, 2013a).
Good Practice: Budget documentation includes the outturns of the two preceding years and medium-term projections of revenues, expenditures, and financing by economic category.
126. Decomposing medium-term budgetary projections by economic category provides a clearer picture of expenditure and revenue dynamics. Expenditure should be projected by major economic categories such as salaries, goods and services, subsidies, and grants, and similarly revenue by main tax and non-tax categories. Expenditure projections should be based on the latest plans and policy commitments set out by the government. Those elements of expenditure that are driven in part by macroeconomic factors—such as interest payments, subsidies on imported goods such as food and fuel, or social security benefits, which may be linked to inflation through an indexation mechanism—should also be projected on a consistent basis with the macroeconomic forecasts. Information should be incorporated on expenditure programs with defined profiles, such as capital expenditure where costs will start small, increase as the project moves into its full construction phase, and then taper of as the project nears completion, while operation and maintenance costs get phased-in. Box 3.8 provides the example of Cameroon.
Advanced Practice: Budget documentation includes the outturns of the two preceding years and medium-term projections of revenues, expenditures, and financing by economic category and by ministry or program.
127. A further breakdown of medium-term budget projections by ministry or program provides a detailed picture of the government’s sectoral priorities and facilitates multiyear budget planning at the operational level. At this advanced level of practice, the advantages of an MTBF at the aggregate level are augmented by improved predictability at the disaggregated level. With medium-term projections disaggregated by ministry or program, uncertainties surrounding the budgetary allocation to each ministry, agency, or program over the medium term are reduced significantly, thus encouraging more effective management of resources by the spending agencies. Box 3.9 provides the example of South Africa.
Box 3.8.Cameroon: Medium-Term Budget Framework
Under the regional directives of the Economic and Monetary Union for Central Africa (CEMAC), the six member countries are encouraged to prepare multiyear fiscal and budgetary projections as a framework for the preparation of the annual budget. Cameroon is the most advanced in implementing this new approach and has implemented a medium-term budget framework (MTBF) since 2013. The MTBF is the first step in the preparation of the annual budget and includes projections of revenues and expenditures for three years ahead based on an economic classification that distinguishes between current and capital expenditures. Preparation of the MTBF is in line with the elaboration of the annual budget and includes two phases:
Programming phase (January-July). Following a review of the previous year’s budget execution, a first MTBF is prepared. It presents revenues and expenditure forecasts for three years ahead. This MTBF is shared with line ministries to help them prepare their own sectoral forecasts, which are then discussed with the Ministry of Finance.
Budgeting phase (August-October). Following these discussions, the MTBF is updated and expenditure ceilings are approved and shared with line ministries under a circular issued by the prime minister. Then, the budget proposal document is finalized and transmitted to Parliament (mid-October).
The ceilings included in the MTBF have been well respected and have supported aggregate fiscal discipline. The deviations between the spending outturns by ministry during 2014–2016 and the ceilings in the MTBF averaged only 0.4 percent.Source: IMF Technical Assistance Missions to Cameroon.
Box 3.9.South Africa: Medium-Term Expenditure Projections
The South African budget presents medium-term expenditure projections categorized by (i) current expenditure, further divided into employee compensation costs and debt interest payments; (ii) transfers and subsidies; (iii) investment in capital and financial assets; and (iv) a contingency reserve. Similarly, medium-term projections of revenues are split into several economic categories, including taxes on income and profits, labor costs, property, consumption, and international trade.
The budget also provides projections of the split of expenditure among national, provincial, and local funds; the composition of grants to subnational government by function and program; and consolidated public-sector expenditure by function and program. More detailed statistical tables provide a breakdown of expenditure by department, individual tax and other revenue streams, and sources of financing.Source: South African authorities.
Principle 2.1.4. Investment Projects The government regularly discloses its financial obligations under multi-annual investment projects and subjects all major projects to cost-benefit analysis and open and competitive tender.
investment projects require an upfront commitment of funds and therefore are akin to liabilities. The implementation of large projects typically requires funds to be disbursed over several years, and they require funding over the long term to operate and maintain the assets concerned;
project appraisals must contend with differences in the timing of costs and benefits: construction costs are typically incurred over the first few years, while benefits are realized over the life of the asset, often extending several decades; and
effective implementation and operation of investment projects are dependent on the project managers maintaining a close relationship with the government officials responsible for carrying out the critically important procurement function and providing resources for the operation and maintenance of the assets, once construction work has been completed. Effective coordination between the ministry of finance and the agency responsible for national development planning is also important.79
129. To improve the transparency of decision making on public investment, the government should disclose all financial obligations related to ongoing investment projects and, where appropriate, use cost-benefit analyses and open competitive tender processes. For further discussion, see Fainboim, Last, and Tandberg (2013).
130. Given the special nature of investment projects, the disclosure of their total financial obligations should occur on a regular basis. The budget process in most jurisdictions involves annual appropriations. Accordingly, when approval is sought from the legislature for the first year’s appropriation for a multi-annual investment project, it is important that the legislature is informed of the anticipated full cost of the project over the years to its completion, and its link to the medium-term strategic planning of government. This ensures that the legislature is aware of the medium-term implications of its approval of the first year’s appropriations. In addition, regular updates and disclosure are necessary because the financial obligations for a multiyear investment project may vary substantially over the course of its implementation due to delays, cost variances, and design changes. At a minimum, the legislature should be informed every year of the updated total cost of a multi-annual project, when appropriations for the next year are being sought for that project. Box 3.12 provides an example of how these costs are monitored in Chile and Korea.
131. Effective public investment requires standardized cost-benefit analysis (CBA) to assess the merits of individual projects and prioritize the allocation of funds across projects. CBA quantifies in monetary terms as many of the costs and benefits of a project as feasible, including items for which the market does not provide a satisfactory measure of economic value (Box 3.10).80 To ensure a robust and transparent system for appraising, prioritizing, and selecting projects for financing, the government should prepare guidelines that require a CBA to be carried out at least for large projects that meet certain criteria, using a standardized methodology. Smaller projects, or projects in social sectors, should also be evaluated but using lighter techniques (e.g., cost-effectiveness analysis). Many countries require information on CBAs, especially for large projects to be published, sometimes in summary form, with clearly defined exceptions, such as projects with national security implications. Many countries have also established a central unit responsible for developing the CBA methodologies and, in some cases, for providing advice to the ministries and agencies that design, finance, and implement individual projects.
132. The procurement procedures for investment projects should be open and competitive to maximize value-for-money and ensure transparency in the issuance of contracts to suppliers. An open and competitive tender maximizes the probability that the winning bid is the lowest price for the specified output at a determined quality standard. Ensuring comparable tenders requires carefully applied rules and standards. A country can be said to have an open and competitive procurement system if the government can provide evidence demonstrating that (i) major projects are subject to procurement rules that substantially meet each of the key elements noted in Box 3.11; (ii) these rules have been consistently enforced; and (iii) the law includes provisions that allow unsuccessful bidders to appeal a procurement decision, and that these provisions are enforced in a fair and impartial way.
Box 3.10.Cost-Benefit Analysis
Cost-benefit analysis (CBA) is a set of techniques and evaluation tools used to determine the optimal allocation of public resources, by seeking to maximize net social benefits. CBA in the public sphere differs from the analysis of investment in the private sector because the government provides public goods and benefits that individuals do not purchase on the market and which create additional measurement challenges. CBA has considerable overlap with private investment analysis on other issues, such as developing alternatives, common units of measure, discount rates, costing, financing, and risk assessment.
There is no single, best approach to CBA. The nature of CBA will vary based on the nature of the project. While CBA can be used to assess any proposed public expenditure project, including recurrent programs and regulations, CBA is most commonly applied to an assessment of competing infrastructure projects, which differ in terms of location, design, scope, and function.Sources: Mishan and Quah (2007); UN Industrial Development Organization (1993); and Gramlich (1998).
Box 3.11.Elements of a Well-Designed Public Procurement System
The following elements are important:
A clear and comprehensive legal framework that governs all aspects of the procurement process and that promotes competitiveness and transparency
Clarification of functional responsibilities and accountabilities for (i) implementing procurement operations, (ii) applying the procurement rules within the buying entities, and (iii) enforcing these responsibilities and accountabilities, including the application of appropriate sanctions.
A cadre of well-trained procurement staff who possess the technical proficiency to implement procurement functions
Levels of Practice for Principle 2.1.4
Basic Practice: One of the following applies: (i) the government regularly discloses the value of its total obligations under multi-annual investment projects; (ii) subjects all major projects to a published cost-benefit analysis before approval; and (iii) requires all major projects to be contracted via open and competitive tender.
Good Practice: Two of the following apply: (i) the government regularly discloses the value of its total obligations under multi-annual investment projects; (ii) subjects all major projects to a published cost-benefit analysis before approval; and (iii) requires all major projects to be contracted via open and competitive tender.
Advanced Practice: All of the following apply: (i) the government regularly discloses the value of its total obligations under multi-annual investment projects; (ii) subjects all major projects to a published cost-benefit analysis before approval; and (iii) requires all major projects to be contracted via open and competitive tender.
133. The practices under this principle are defined against three criteria relating to disclosure of total obligations of multi-annual investment projects, CBA, and competitive procurement (see Box 3.12 for the examples of Chile and Korea). To have an advanced level of transparency in relation to public investment projects, the Code requires that all three criteria are met. Where only two criteria are met, the level of practice is considered good, and where only one criterion is met, the level is considered basic.
The total financial obligations associated with each major multi-annual investment project over the life of the project should be disclosed regularly and, at a minimum, each year when legislative approval is being sought for appropriations to finance that project. Systems should also be in place to ensure ongoing monitoring of total project costs to minimize the risk of cost overruns. In addition, estimates of the future costs of operating and maintaining fixed capital assets should be included when preparing medium-term budget projections.
Clear and transparent guidelines should be established to ensure that information on the CBAs of large projects is disclosed, at least in summary form, with clearly defined exceptions (e.g., projects with national security implications).
All projects should be subject to a transparent and competitive public procurement process. The system should require open and competitive tendering, together with appropriate safeguards (e.g., a formalized complaints review procedure) to secure the integrity of the procurement process.81
Box 3.12.Chile and Korea: Managing Public Investment Projects
In Chile, the Medium-Term Financial Projection elaborated by the Ministry of Finance includes the government’s total obligations under multi-annual investment projects. A summary of the following three years’ investment project obligations is included in the Budget Office’s Public Finance Report (Informe de Finanzas Publicas) presented to Congress. The main source of this information is the National Investment System (NIS), under which all the investment projects financed through the budget are subject to ex ante cost-benefit analysis. The results of these evaluations are published on the NIS’s website (http://sni.ministeriodesarrollosocial.gob.cl). Proposed PPP projects are subject to a similar procedure. In addition, since 2009, completed projects are subject to ex post evaluation, the results of which are used to refine the methodology for conducting CBAs. Finally, all major projects are contracted via open and competitive tender.
Korea meets the three criteria under the public investment principle of the Code:
Manages total obligations under multiyear investment projects. The annual Budget Bill includes estimates of the construction costs of ongoing and planned investment projects over the medium term, and the associated cost of operations and maintenance. During budget execution, total project costs are closely monitored by the Ministry of Strategy and Finance (MOSF) using the Total Project Cost Management System, which covers all cost items related to a project, including design, land acquisition, and construction costs.
Conducts CBAs. A CBA, as a part of a proposed project’s feasibility study, is conducted before the project is approved. In addition, large-scale projects with a total cost of KRW 50 billion or more are also subject to a preliminary feasibility study (PFS), conducted by the Public and Private Infrastructure Management Center with the authorization of the MOSF. The PFS includes a CBA, other economic analysis, policy analysis, and a balanced regional development analysis.
Uses open and competitive tender as the principal procurement method. In 2002, the Korea On-Line E-Procurement System (KONEPS), a web-based procurement platform, was launched to address the entire procurement processes, including procurement requests, bids, contracts, and payments. These standardized and simplified processes facilitate competition by lowering the barriers to entry for suppliers and contractors.
Dimension 2.2. Orderliness. The powers and responsibilities of the executive and legislative branches of government in the budget process should be defined in law, and the budget should be presented, debated, and approved in a timely manner.
134. The orderliness of the budget process depends on two key principles under this dimension:
A clear legal basis, with supporting regulations and administrative practices, defining the key outputs and respective time frames, and responsibilities of different stakeholders (2.2.1). It is common for the basic principles of budget management to be embodied in a budget system legal framework (which may have a higher status than ordinary laws, or even by enshrined in the constitution).
A wide range of timely information should be provided to the legislature and the public in a predictable and timely manner (2.2.2).
Table 3.2 provides a list of relevant standards, norms, and guidance material related to dimension 2.2 of the Code.
|Standards/Guidance Material||Brief Description|
|Lienert and others (2004)||This volume “The Legal Framework for Budget Systems: An International Comparison,” provides a comprehensive comparison of legal frameworks for budget systems for OECD countries, supported by detailed case studies of selected countries. In conducting the comparison across frameworks, the book addresses several important themes, including the role of key actors in the budget process such as the legislature and the executive, and key principles underlying budget system laws such as authoritativeness, annuality, universality, and unity. https://www.oecd.org/gov/budgeting/43487903.pdf|
|OECD Best Practices for Budget Transparency||Recommends that the government’s draft budget be submitted to the legislature for scrutiny no less than three months prior to the start of the fiscal year. The budget should be approved by the legislature prior to the start of the fiscal year. See OECD (2002). http://www.oecd.org/gov/budgeting/best-practices-budget-transparency.htm|
|PEFA||Includes one related indicator: PI-17 on the budget preparation process. See PEFA (2016b). www.PEFA.org|
|International Budget Partnership, Open Budget Survey||Conducted biannually by the IBP, the Open Budget Survey measures a wide range of budget transparency issues to come up with a summary national score. http://internationalbudget.org/what-we-do/open-budget-survey/|
Principle 2.2.1. Fiscal Legislation The legal framework clearly defines the timetable for budget preparation and approval, key contents of the budget documentation, and the powers and responsibilities of the executive and legislature in the budget process.
135. The fiscal legislation sets the formal rules for organizing the budgetary process and the respective roles and responsibilities of the executive branch and the legislature. Many countries have enacted a budget system law that provides the legal framework for budget formulation, approval, and execution.82 In some countries, this is an organic law, which has a higher status than ordinary laws. The relative importance of codified budget laws, regulations, and administrative practices varies considerably among countries with varying traditions of public administration. For each major step of the budget preparation process, the legal framework aims at prescribing the calendar for decision making, the documents to be prepared and published, and the respective responsibilities of the executive and the legislature. The budget system law is usually complemented by regulations and instructions setting the detailed rules to implement the budget, including, for example, the expenditure control framework, cash management, and accounting. The structure of the fiscal legislation reflects the specific political, constitutional, and administrative tradition of each country. For a review of legal frameworks for budgeting in different countries, see Lienert and Jung (2004) and Lienert (2013).
136. The legislation should clearly set the timing of budget submission, adoption, and publication. When the constitution does not establish a specific timeline for the submission of the budget by the executive, the fiscal legislation should include provisions allowing sufficient time for the legislature’s scrutiny, amendment, and approval. The various practices related to the timely submission and approval of the budget are discussed under Principle 2.2.2.
137. The legislation should also define the key documents that the executive should submit to the legislature in its annual budget proposal. In addition, it should define the classification used to present fiscal information in the budget and other financial reports. Box 3.13 provides a possible structure incorporating some key elements for the design of a budget system law.
Box 3.13.Main Sections of a Budget System Law (Illustrative)
Section I: General Provisions and Purpose—explains the interpretation and application of the law and provides key definitions.
Section II: Macroeconomic and Fiscal Policy—specifies the principles, fiscal rules, and procedures for the formulation, approval, and evaluation of the government’s medium-term fiscal policy and strategy.
Section III: Budget Formulation and Approval—specifies the process for the preparation, adoption, and modification of the annual budget and associated documentation.
Section IV: Budget Execution and Treasury Management—specifies the arrangements for (i) the planning, deposit, withdrawal, and control of cash; (ii) the acquisition, maintenance, and disposal of assets; and (iii) the issuance, management, and extinguishment of liabilities to meet the undertakings set out in the budget.
Section V: Accounting, Reporting and Audit—defines the standards, coverage, format, and timetable for producing the government’s financial reports and accounts and the procedures for addressing any authorized deviations from the approved budget identified in reports by the country’s SAI.Source: IMF staff.
138. To ensure an orderly budget preparation and approval process, the legal framework should define the powers of the legislature to modify the budget proposed by the executive. Provisions limiting the power of the legislature to amend the draft annual budget proposed by the executive vary considerably depending on the form of government adopted in each country’s constitution (including based on whether a parliamentary, presidential, or semipresidential system is in place). Moreover, these powers may be limited by rules that allow only amendments that are neutral on the deficit level or are restricted to decreasing expenditures (Lienert, 2013; Wehner, 2010; Box 3.14).
Box 3.14.Examples of the Latitude of the Legislature to Amend the Budget
Canada: Parliament approves the budget, and the fiscal policy and aggregates within it, through a vote of confidence before turning its attention to detailed review of the main and supplementary estimates. Parliament may reject or reduce spending proposed in the estimates but not increase it. As a result of these procedures, the fiscal policy and appropriation levels adopted by Parliament do not differ significantly from the government’s proposal.
France: There is a prebudget debate (débat d’orientation des finances publiques) in June over the general government fiscal stance. While examining the draft budget in October, Parliament votes on the overall budget balance, total revenue, and total expenditure, before scrutinizing and approving detailed appropriations. Parliamentary procedure prevents any increase in appropriations without approval of the government.
Germany: The “key figures decision” (Eckwertebeschluss) is presented by the minister of finance to Parliament and is discussed by the parliamentary budget committee in March. However, neither the Eckwertebeschluss nor the financial plan is formally approved by Parliament. The constitution does not restrict the right of Parliament to amend the government’s draft budget proposal. The Parliament has a veto over the government’s proposal to change the aggregate expenditure ceiling, future commitments, or expected revenues.
India: Parliament approves the budget following procedures outlined in the constitution. Although the “General Discussion” at the beginning of the budget debate focuses on the budget as a whole and the broad tax and expenditure policy aspects, there is no requirement for the budget aggregates to be approved before considering the detailed spending proposals. The constitution prohibits Parliament from increasing a budget provision or introducing a new expenditure item as it reviews the government’s budget proposal.
Italy: Planning targets are endorsed by the Parliament at an early stage of the preparation of the annual budget. Parliament cannot change the targets during parliamentary approval, but, when discussing the Stability Law, it can increase expenditure or reduce revenues provided that it identifies compensatory funding.
Turkey: The Plan and Budget Committee of the National Assembly carries out preliminary examinations and consultations on the draft annual budget in October and November, before the budget is presented to the legislature’s plenary session for approval in December. However, the Assembly votes on the draft budget law on a chapter-by-chapter basis and cannot introduce amendments that increase total expenditures or reduce revenues. Expenditures and revenues, as well as the draft law, can be amended by the Plan and Budget Committee.Source: Lienert (2013).
Levels of Practice for Principle 2.2.1
Basic Practice: The legal framework defines one of the following: (i) the timetable for budget preparation and approval; (ii) the key content requirements for the executive’s budget proposal; and (iii) the legislature’s powers to amend the executive’s budget proposal.
Good Practice: The legal framework defines two of the following: (i) the timetable for budget preparation and approval; (ii) the key content requirements for the executive’s budget proposal; and (iii) the legislature’s powers to amend the executive’s budget proposal.
Advanced Practice: The legal framework defines all of the following: (i) the timetable for budget preparation and approval; (ii) the key content requirements for the executive’s budget proposal; and (iii) the legislature’s powers to amend the executive’s budget proposal.
139. The practices under this principle are defined against three key elements that should be specified in the legal framework. These three elements are the timetable for budget preparation and approval, key contents of the budget proposal (also discussed in Section 2.1), and the legislature’s power to amend the executive’s budget proposal. To have an advanced level of transparency in relation to public investment projects, the Code requires that all three criteria be met. Where only two criteria be met, the level of practice is considered good, and where only one criterion is met, the level is considered basic. Examples of recent fiscal legislation from Iceland and two from the African regions are shown in Boxes 3.15 and 3.16, respectively.
Box 3.15.Iceland: Fiscal Legislation for an Orderly Budget Process
The legal framework comprises the Public Finance Act of 2015 (PFA), along with relevant provisions of the constitution, the Standing Orders of the Althingi (Parliament), and the Local Government Act.
Budget Timetable: A detailed timetable for the budget process is defined. A new government must submit a fiscal policy statement to the Althingi. Every spring a five-year fiscal plan, based on the goals set out in the fiscal policy statement, is submitted to the Althingi. The Budget Bill is submitted at the opening date of the annual session of the Althingi, on the second Tuesday of September, according to the Standing Orders, as provided in Article 35 of the constitution. The Standing Orders indicate that the objective of the Althingi is to complete the readings of the Budget Bill by the end of the first full week of December.
Contents of Budget Documentation: Key contents of the budget documentation are clearly prescribed in law. The PFA requires the Budget Bill to include main fiscal indicators, government revenue and expenditure projections by economic and functional classifications, budget appropriations by ministry, and any authorizations to borrow, lend, or provide guarantees. The PFA also prescribes additional information such as budget assumptions, tax expenditures, balance sheet data, and fiscal risks, to be included in notes accompanying the Budget Bill.
Power to Amend: The Althingi influences the broad fiscal policy goals and the five-year fiscal plans through the parliamentary process of resolutions. A draft resolution cannot pass until it has received two readings and an examination of a standing committee. The Budget Bill cannot be passed into law until it has received three readings and an examination by the appropriate standing committees. All amendments to the budget bill must include an evaluation of their effect on public finances.Source: Iceland authorities.
Box 3.16.WAEMU and CEMAC Countries: Fiscal Legislation
To strengthen public finances and foster convergence among their member countries, two of the recently established regional economic and monetary unions in Africa (WAEMU and CEMAC) adopted a set of regional directives, respectively in 2009 and 2011. Based on international best practices, these directives provide a framework under which the member countries (eight for the WAEMU1 and six for CEMAC2) conduct their fiscal policies and prepare the annual budget. The directives are at various stages of being implemented by the member countries.
Both WAEMU and CEMAC directives include specific provisions on the following:
Competencies: The power of preparing the budget lies with the minister in charge of finance, subject to validation by the council of ministers.
Timeliness: The budget proposal must be presented to the legislature before the start of the budget session (e.g., generally by mid-October) and must be approved before the end of the year.
Content: The annual budget must (i) be based on a medium-term fiscal framework; (ii) include data that are comprehensive, timely, and reliable; (iii) adopt a standardized format; and (iv) be supported by a list of mandatory appendixes (including the medium-term fiscal framework).
Scrutiny: The rules for legislative approval of the budget are strictly regulated (e.g., the first part of the budget, related to revenue, must be approved before the legislature discusses the second part, related to expenditure) and the powers of the legislature and the executive to amend the budget must be defined.
Principle 2.2.2. Timeliness of Budget Documents The legislature and the public are consistently given adequate time to scrutinize and approve the annual budget.
140. Citizens, through their representatives or direct interactions, should be given adequate time to review, discuss, and approve the budget before the new fiscal year. In all Group of Twenty countries, the draft budget is submitted to the legislature at least three months before the start of the new fiscal year (Table 3.3), thus allowing adequate time for an in-depth debate on budgetary choices and related trade-offs, including by relevant committees and subcommittees of the legislature. More time for debate may be required in countries where the legislature has substantial powers to amend the draft budget (Wehner, 2010). The budget timetable should be published, along with associated budget preparation, review, and approval procedures, to which the executive rigorously adheres. The publication of this information under an open-data format is encouraged to foster independent analysis by citizens and other stakeholders. On citizens’ participation in the budget preparation and approval process, see Principle 2.3.3.
141. The budget should be adopted and published before the beginning of the new fiscal year, and clear rules should be set to ensure the continuity of government activities when this is not the case. To avoid a shutdown of government, these rules should define how the government’s activities and policies will be funded in the event a regular budget cannot be adopted before the start of the fiscal year. Many countries have legal provisions that allow the government to continue funding its activities and policies after the end of the fiscal year, within a monthly cap on expenditures usually set at one-twelfth of the previous year’s budget. Typically, these arrangements allow continuity on a no-policy-change basis based on the previous year’s budget. These arrangements should be limited in time—for example, to no more than three months after the end of the fiscal year.
Levels of Practice for Principle 2.2.2
Basic Practice: The budget is submitted to the legislature and made available to the public at least one month before the start of the financial year and is approved and published up to one month after the beginning of the financial year.
Good Practice: The budget is submitted to the legislature and made available to the public at least two months before the start of the financial year and is approved and published by the start of the financial year.
Advanced Practice: The budget is submitted to the legislature and made available to the public at least three months before the start of the financial year and is approved and published at least one month before the start of the financial year.
142. Budgetary timeliness has two critical dimensions, the first relating to the time allowed for scrutiny and approval of the draft budget and the second relating to the timing of approval of the budget relative to the start of the upcoming fiscal year:
Time allowed for scrutiny and approval of the budget. A period of at least two months is considered necessary to allow for scrutiny and debate by the legislature. Following submission of the budget by government to the legislature, this two-month period is required for legislators to (i) study the proposals contained in the budget; (ii) obtain feedback from their constituencies and other stakeholder groups; (iii) prepare for and engage in debate in the legislature on the policies contained in the budget; (iv) examine the detailed budget estimates; (v) propose amendments to the budget proposals, if allowed under the legal framework; and (vi) vote on the budget measures and estimates.
Timing of approval of the budget. The ideal time for approval of the budget is before the start of the fiscal year to which it relates, thus ensuring that the policies it contains and the expenditure it proposes are authorized before the period to which they relate. This allows for timely communication of budgets to respective ministries and implementing agencies, giving them the opportunity to better plan and coordinate their budget implementation. Advanced practice requires approval at least one month before the start of the fiscal year. Good practice requires approval within the last month before the new fiscal year. Basic practice requires approval no later than one month after the start of the fiscal year. Table 3.3 provides examples of the practices adopted in a range of countries.
|Four Months or More||Three Months||Two Months||One Month||After the Start of The Year|
Dimension 2.3. Policy Orientation. Fiscal forecasts and budgets should be presented in a way that facilitates policy analysis and accountability.
143. Clarity about fiscal policy objectives is critical for guiding the budget process and holding the government accountable for its strategies and priorities. It enables ex post comparison of what was achieved and thus holds the government accountable for its performance. Principles under this dimension relate to:
providing measurable fiscal policy objectives and reporting on their achievement (2.3.1) to help link the budget and fiscal rules/targets;
providing nonfinancial performance information (2.3.2) to understand the government’s policy priorities, their alignment with fiscal objectives, and how budgetary resources were allocated for different uses; and
public participation in the budget process to enhance accountability and the quality of information (2.3.3) and the publication of documents that are targeted toward a broad audience of citizens and other stake-holders. This type of accountability frequently adds to, and complements, traditional procedures focused on compliance with authorized spending limits, and the important oversight functions exercised by bodies such as the legislature, the supreme audit institution, and fiscal councils.
Table 3.4 provides a list of relevant standards, norms, and guidance material related to dimension 2.3 of the Code.
|Standards/Guidance Material||Brief Description|
|PEFA||Includes five related indicators: PI-2 on the composition of expenditures; PI-8 on service delivery targets, and the monitoring of outputs; PI-9 on public access to key fiscal information; PI-15.2 on the adoption of a fiscal strategy; and PI-18 on the role of the legislature in scrutinizing the budget. See PEFA (2016b). www.PEFA.org|
|International Budget Partnership, Open Budget Survey||Conducted biannually by the IBP, the Open Budget Survey measures a wide range of budget transparency issues to calculate a summary national score. Beginning in 2012, a new section on public participation in the budget process was added to the Survey. http://internationalbudget.org/what-we-do/open-budget-survey/|
|Global Initiative for fiscal Transparency (GIFT) High-Level Principles, 2015||Principle 10 states that citizens should have the right, and they, and all non-state actors, should have effective opportunities to participate directly in public debate and discussion over the de-sign and implementation of fiscal policies. www.fiscaltransparency.net|
|OECD Budget Transparency Toolki||The section on openness and civic engagement contains guidance on making budget information accessible to the public, using open data to support budget transparency, and making the budget more inclusive and participatory. See (OECD, 2017) www.oecd.org/gov/budgeting/Budgeting-Transparency-Toolkit.pdf|
Principle 2.3.1. Fiscal Policy Objectives The government states and reports on clear and measurable objectives for the public finances.
144. Fiscal policy objectives are the government’s stated aims for the evolution of the public finances and are typically expressed in the form of a target for one or more fiscal aggregates. These fiscal aggregates can include “headline” aggregates such as total revenue, total expenditure, the budget balance, the primary balance, and the stock of debt, typically expressed as a percentage of GDP. They may also be expressed in adjusted terms, such as the structural balance that separates and takes out cyclical influences on the government’s fiscal position, thus ensuring that fiscal policy does not exacerbate cyclical fluctuations in revenue and expenditure.
145. Fiscal policy objectives should be comprehensive in terms of a clear delineation of the boundaries of fiscal operations that they seek to cover. The path for reaching these objectives should be described in a fiscal management strategy, which guides the annual budget or the MTBF (discussed later in this chapter) and makes it possible to determine whether progress is on track.83 The specific fiscal variable(s) that are the focus of fiscal objectives or fiscal management strategies will depend on the nature of the challenges facing a country. However, establishing long-term expectations of fiscal sustainability should be paramount.84 As such, rolling fiscal objectives without a medium-term (or longer-term) target can be useful but should be used with caution, as they may not provide a solid fiscal policy anchor.
146. Fiscal policy objectives may take the form of fiscal rules (see Box 3.17) or targets for the public finances over the medium term.85 These targets may be enshrined in law or may be presented as a policy commitment in the annual budget or some other policy document. They should be (i) numerical, defined in precise terms, thus enabling measurement and determination of their achievement,86 and (ii) time bound, which supports determination of a path to achievement.87 Precisely defined time-bound objectives are easier to communicate and facilitate a transparent assessment of the government’s adherence to them. In addition, an objective would not be considered precise if the data required for its measurement are not available.88
Box 3.17.Fiscal Rules
The IMF has a regularly updated database of fiscal rules and their characteristics, which contains the following definition of a fiscal rule:
A fiscal rule imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Fiscal rules typically aim at correcting distorted incentives and containing pressures to overspend, particularly in good times, so as to ensure fiscal responsibility and debt sustainability.
The number of countries adopting one or more fiscal rules has increased significantly in recent years, totaling 96 in 2015. The number of countries and the year the first fiscal rule was adopted are shown in Figure 3.17.1.
Figure 3.17.1.Increase in the Number of Fiscal Rules, 1947–2017
Rules have different implications for the way fiscal policy responds to shocks. Regarding output shocks, overall balance or debt rules typically provide the lowest degree of cyclical flexibility. A cyclically adjusted or structural balance rule allows the full operation of automatic stabilizers, though it does not provide room for discretionary fiscal stimulus, and is more difficult to calculate and explain to the public. Rules defined “over the cycle” provide room for both discretionary and cyclical adjustments. Expenditure rules are consistent with cyclical and discretionary reductions in tax revenues, but they do not normally permit discretionary expenditure stimulus.
Revenue rules do not generally account for the operation of automatic stabilizers on the revenue side in a downturn (or in an upturn for revenue ceilings).Source: IMF Fiscal Rules Data Set (http://www.imf.org/external/datamapper/FiscalRules/map/map.htm).
147. The credibility of a government’s fiscal objectives would be further enhanced by ex ante specification of situations under which the government could deviate from its stated fiscal targets. Experience has shown the importance of flexibility in fiscal policy to deal with economic shocks. While adherence to stated fiscal targets/rules would be the expected norm in good economic times, allowing room to maneuver when the economy is weak or is faced with exogenous shocks may be desirable. Transparently defining escape clauses in fiscal rules reduces the scope for manipulation while allowing flexibility. Escape clauses should also define the conditions under which the fiscal rule would be reinstated.
Levels of Practice for Principle 2.3.1
Basic Practice: The government states and regularly reports on a numerical objective for the main fiscal aggregates, which is either precise or time bound.
148. A basic fiscal objective should take the form of a quantitative, or readily quantifiable, target for one or more fiscal aggregates (see Box 3.18 for an example from Turkey). This objective could be set in legislation or merely stated in the annual budget, or in a fiscal strategy report issued by the government. Even if the objective is not time bound, reporting on achievement of the objective typically would be associated with the fiscal forecasts published as part of the MTBF or in the annual budget documents. The budget documentation should include a section that clearly states each target or rule, discusses historically the extent of compliance with, or deviations from, the rules, and how the budget forecasts are consistent with them.
Box 3.18.Turkey: Expenditure Rules/Fiscal Targets
The government of Turkey, following the 2003 Public Financial Management and Control Law (2006), prepares a Medium-Term Program (MTP) and a Medium-Term Fiscal Plan (MTFP). The MTP provides a three-year macroeconomic forecast and sets out the government’s macroeconomic and fiscal policy objectives for the same period. The MTFP provides estimates of budgetary revenue, expenditure, the targeted budget balance, and borrowing positions for the following three years, as well as expenditure ceilings for each budgetary entity in line with the MTP targets. However, there is no in-year reporting on progress against any of these fiscal objectives except in budget execution reports, which cover only budgetary central government, and changes in successive medium-term fiscal forecasts are discussed only in qualitative terms with no reconciliation of what accounts for the changes.Sources: IMF, Fiscal Rules Database; and IMF (2017d).
Good Practice: The government states and regularly reports on a numerical objective for the main fiscal aggregates, which is both precise and time bound.
149. A fiscal objective carries considerably more weight if it is to be achieved by a specified date, rather than being stated as an open-ended commitment. Good practice is to establish intermediate milestones to deter mine with precision if progress is being made year by year to reach the fiscal objective. If the date for achieving the objective is specified too far in the future, it may be difficult to define these intermediate steps. Moreover, the more distant the objective, the more likely that forecasts will place it outside the range of reasonable probabilities of achievement given existing policy. Box 3.19 provides an example of how fiscal rules are defined in Colombia and Peru.
Advanced Practice: The government states and regularly reports on a numerical objective for the main fiscal aggregates, which is both precise and time bound and has been in place for three or more years.
150. Fiscal objectives are credible not only when they are defined in precise terms and are time bound but also when the government demonstrates a commitment to adhere to them. To provide a credible anchor for decision making, fiscal objectives must have been in place long enough, at least a period of three or four years, and any changes to specified fiscal targets/objectives should have been undertaken only under the respective escape clauses under the fiscal rule. If fiscal objectives change frequently, they do not provide consistent guidance for the preparation of the annual budget or MTFFs or enable progress on achieving the objectives to be measured. The effectiveness of a fiscal objective that has been in place for less than three years is hard to evaluate. An example of advanced practice in Chile is provided in Box 3.20.
Box 3.19.Colombia and Peru: Numerical and Time-Bound Fiscal Policy Objectives
Colombia adopted a fiscal rule in 2012 that stipulates a central government structural deficit of 1 percent of GDP, or less, from 2022 onward, with a declining transition path between 2012 and 2021. Intermediate targets of 2.3 percent of GDP by 2014 and 1.9 percent of GDP by 2018 have also been set. Additionally, the law requires that, in each intervening year, the structural deficit must be lower than in the previous year. The government’s medium-term fiscal plan contains multi-annual primary balance targets that guide budget decisions and expenditure and revenue measures.
Peru’s fiscal policy objectives are clearly stated and embedded in time-bound numerical fiscal rules set by the 2013 Fiscal Responsibility and Transparency Law (FRTL) and reported against. Before 2014, the government’s fiscal objectives were set by the 1999 FRTL, which included fiscal rules focusing on budget balance targets, spending ceilings and debt limits for the nonfinancial public sector (NFPS), and central and subnational governments. Since 2005, the actual compliance with the fiscal rules were regularly reported to the legislature for the nonfinancial public sector and the central government while compliance by subnational governments was not systematically reported. The 2013 FRTL law sets spending limits for the general government (used to determine spending ceilings for the national and subnational governments) anchored in a structural fiscal target for the nonfinancial public sector, together with debt rules for different levels of government and other more specific rules. Since the FTE was undertaken (in December 2016), the NFPS Fiscal Responsibility and Transparency Framework (FRTF) has been revised and strengthened. The new framework establishes that the NFPS is subject to joint compliance with four fiscal rules, based on measurable variables (debt ceiling, fiscal deficit, general government nonfinancial spending growth, and general government current spending growth excluding maintenance). For the subnational governments, two rules were established to limit indebtedness levels and current expenditures. Besides this, the FRTF includes corrective measures in case of noncompliance with the fiscal rules.Sources: IMF (2015d); and IMF Executive Director’s Office for Peru.
Box 3.20.Chile: Structural Balance Rule
In 2001, Chile adopted a structural balance rule under which government expenditures are budgeted in line with structural revenues, that is, revenues that would be achieved if (i) the economy were operating at full potential and (ii) the prices of copper were at their long-term levels. Independent experts are used to calculate the structural parameters that define the level of structural revenues. A fiscal council, established in 2013, oversees two independent committees—on, respectively, potential GDP and long-term copper mineral prices—and ensures that the parameters are correctly used in the computation of the structural balance. The Fiscal Responsibility Law requires that the main fiscal target be defined at the beginning of each presidential administration by decree. Annually, the Ministry of Finance produces two reports to Congress on the performance of the fiscal target under the structural balance rule. The first report is published in July (Evaluación de la Gestión Financiera del Sector Público y Actualización de Proyecciones) and contains information on the fiscal target from the previous year. The second report is published in October (Informe de Finanzas Publicas) and contains the fiscal target for the next fiscal year, in line with the fiscal objective defined for the administration period.Source: IMF, Fiscal Rules Database.
Principle 2.3.2. Performance Information Budget documentation provides information regarding the objectives and results achieved under each major government policy area.
151. Performance information helps justify the allocation of public resources, measure the effective use of those resources, and enforce accountability of the officials who manage these resources. Government spending is aimed at achieving stated policy objectives, such as higher literacy, preventive health care, and more efficient transportation. Together with the funds’ allocations, a clear specification of the quantity of services to be provided and their intended results is important for assessing the appropriateness of funding levels. Ex post analysis of what was achieved by spending through the budget, compared to what was intended, sheds light on the effectiveness of public programs and the proficiency of managers to whom public funds were entrusted. Performance information can also be used to drive cost efficiencies in service delivery. Although not a prerequisite, many countries have adopted a program classification, which enables a more precise definition of policies and their link to budget allocations (see Box 3.21 and Principle 1.3.1). There is an extensive literature on performance budgeting and management: see, for example, Robinson and Last (2009); Robinson (2013); and Curristine and Flynn (2013).
Box 3.21.Key Characteristics of a Program Classification
A program is a set of activities that meets specific policy objectives of the government (e.g., primary education, or the development of crop production). In contrast to a functional classification, a classification by program focuses on the government’s policy objectives and how these policies will be implemented. Programs may be subdivided into activities (e.g., the vaccination activity within a disease prevention program), which in turn may encompass a series of related initiatives and projects.
Classifying expenditures by program serves two purposes: (i) identifying and clarifying the goals and objectives of government spending and (ii) monitoring operational performance through indicators that may relate to the inputs, outputs, or outcomes of a particular program.Source: Jacobs and others (2009).
152. Performance information is usually defined around inputs, outputs, and outcomes. Definitions of these concepts and other key terms are provided in Box 3.22.
Box 3.22.Definition of Key Terms Related to Performance Information
Input: Amount of resources used to produce outputs, usually expressed in money terms (e.g., wages, purchase of goods) or the number of people employed.
Output: Products or services delivered by a program or an organizational entity (e.g., the number of inspections done by a regulatory agency, the number of student days of instruction), usually expressed in terms of quantity, quality, and cost. “Quality” can be defined in terms of timeliness, accessibility, and customer satisfaction.
Outcome: Events, occurrences, or changes in conditions related to the achievement of policy objectives (e.g., the improvement in the quality of air, the knowledge of children as measured on standardized tests). Outcomes can be expressed in general societal terms, or at a level more immediate to the organization in question (intermediate outcomes).
Other concepts related to performance include:
Economy: Purchase of inputs at the lowest cost
Efficiency: Inputs consumed for producing one unit of output
Productivity: Units of output produced per unit of input/time
Effectiveness: Units of output required to achieve desired outcome level
153. The choice of performance indicators determines their effectiveness. Great care must be taken when establishing performance indicators.89 They should be proposed by line ministries because these entities know their programs best, but the proposals should be validated centrally to ensure that they are, indeed, useful in measuring program effectiveness. Experience has shown that a relatively small number of indicators are generally preferable to a larger number because collecting data takes effort, and information on a few indicators tends to be more consistent, timely, and easier to analyze than data for many indicators.
154. Performance data are increasingly used for formal control and accountability purposes. For much of the history of budgeting, control and accountability mechanisms have focused on inputs, such as wages, travel expenses, and goods and services. In many advanced economies, the shift to a performance-oriented budget system has been accompanied with changes in the control and accountability frameworks. Program managers in these systems are given greater discretion in the use of resources and deciding the input mix. This increase in flexibility, and reduction in central controls, is counterbalanced by enhanced internal controls and oversight mechanisms. In addition, a stronger accountability mechanism holds the managers accountable for the results of their operations. The accountability framework in these systems seeks to demand achievement of results and not just compliance with procedures in using the inputs.
155. Regular and timely performance reporting is central to a well-functioning performance budgeting system. Performance budgeting without active monitoring of results, both in-year and ex post, represents an unfulfilled promise. A well-developed monitoring system, including specification of data to be reported with a clear link to objectives, outputs and outcomes promised in the budget, validation of data, and regular reporting, is necessary for both good and advanced practice (see Box 3.23 for Canada example). Arrangements should exist at the central level as well as in line departments to collect, collate, and report performance information for both internal and external reporting in a harmonized manner.
Box 3.23.Canada: Monitoring and Evaluation System
Canada has a well-developed monitoring and evaluation (M&E) system integrated with its performance budgeting process. The M&E system is overseen by the Treasury Board Secretariat (TBS) and carried out by evaluation units set up in each federal department. The TBS reviews each departmental performance report before it is sent to Parliament. Performance monitoring focusing on outputs is conducted on an ongoing (in-year) basis, coupled with more sophisticated evaluations focusing on program and policy outcomes.Source: Lahey (2010).
Levels of Practice for Principle 2.3.2
Basic Practice: Budget documentation includes information on the inputs acquired under each major government policy area.
156. Basic practice requires that the budget documentation present information on the inputs—e.g., staff and financial resources—used to deliver policy objectives. In the most basic form, budgets should report financial allocations by spending units, using a combination of an administrative and an economic classification. Some countries also present this information by program, projects, or activities. Reporting information on inputs is relatively basic but helps with tracking the cost of government operations.90
Good Practice: Budget documentation reports targets for, and performance against, the outputs to be delivered under each major government policy area.
157. Good practice requires that the budget documentation present information on the outputs to be produced under each major policy area and link them to the allocated resources to provide some basis as to how prudently and efficiently the resources are being spent. For example, the government may choose to achieve a policy objective of reducing the incidence of maternal and neonatal mortality by increasing the number of consultations with pregnant women, which would be the deliverable outputs in this case. At a minimum, the information presented should include deliverables that are planned for the budget year (see Box 3.24 for Malawi example), as well as a comparison of actual performance against the previous year targets, along with respective financial allocations/outturns.
Box 3.24.Malawi: Presentation of Output Information
Beginning in 2011, Malawi presented output-based information for core functions in its three-year medium-term budget document. Outputs are provided separately for the recurrent and development portions of the budget and cover the budget year plus one forward year. Budgeted amounts by items (economic classification) for recurrent and development expenditures continue to be presented for each item of voted expenditure. Outputs are defined to be specific, measurable, achievable, relevant, and time bound and can be monitored and evaluated.Source: Government of Malawi, 2011, Budget Document Number 5.
Advanced Practice: Budget documentation reports targets for, and performance against, the outcomes to be achieved under each major government policy area.
158. Advanced practice requires the reporting of outcomes under each of the major policy areas to help assess the government’s achievement of intended policy objectives. For example, reducing the incidence of maternal and neonatal mortality is an outcome resulting from consultations by health professions with pregnant women. Outcomes may take a longer time to achieve and progress more difficult to measure on an annual basis. Often, sophisticated evaluation techniques are required to separate the effect of the government services from other influences. Therefore, outcome indicators need to be designed with care, keeping in view their measurability. Most governments use outcome indicators together with output and input information (see Box 3.25 for Peru example). Outcome indicators are most relevant if they are related to the policy objectives and reflect the key challenges in the policy field. While a set of indicators will need to be used to operationalize the objective, there is a risk of defining too many, and partly irrelevant, indicators. There is also a danger that advanced practice may become a largely paper exercise with only limited impact of decision making and actual performance.
Box 3.25.Peru: Performance Information and the Budget Process
In Peru, implementation of a performance-based budgeting system (Presupuesto por Resultados) started in 2007. This strategy consists of budget programs, performance indicators, independent evaluations, and incentive schemes for goal achievement. More than 70 percent of the budget is presented by program. Performance information is elaborated at the three government levels (central, regional, and local).
The performance information on the outcomes of major policy areas is regularly disclosed, with some results included in budget documentation. Both outcome and output indicators are produced for monitoring the performance of budget programs. Each indicator is selected after a review process conducted by the Budget Unit of the Ministry of Economy and Finance. All performance indicators are available online and linked to budget execution (“Resulta” website). The entities responsible for each budgetary program ensure the quality of the information submitted and establish the baseline, and targets on performance outcome and output indicators, under the coordination and oversight of the Ministry of Economy and Finance. Since 2013, budget documentation includes forecasts for a selection of the indicators considered most important and compares forecasts with past performance.Source: IMF (2015d).
Principle 2.3.3. Public Participation The government provides citizens with an accessible summary of the implications of budget policies and an opportunity to participate in budget deliberations.
159. Public participation in the budget process provides an opportunity to include all citizens in the budget process in a manner that is complementary to the constitutional roles of the executive, legislature, and supreme audit institution. Public participation is especially useful to collect information on the perceived quality of services being provided, identify problems that are not being addressed, and establish priorities within specified funding amounts for a sector or program It can also provide valuable input to fiscal policy decisions that relate to interpersonal equity (e.g., the design of the tax scale or of transfer programs) and intergenerational equity (e.g., the size of public debt).
160. Public participation may be invited at various stages in the fiscal management process. It will generally occur during the annual budget cycle but may also take place with respect to fiscal policy issues that take place over a longer time frame than the annual budget cycle (e.g., major tax or spending reviews, or public debate on large infrastructure projects). Participation can take several forms, such as a call for contributions to medium-term planning; consultation by central finance agencies or line ministries on the selection of specific projects or spending initiatives for inclusion in the annual budget submissions; engagement at the time of the legislative scrutiny of the government’s prebudget statement or main budget proposals; and oversight of budget implementation, especially of major capital projects and social sector programs and service delivery. Participation can occur at different levels—local, provincial, national—and involve a wide range of participants—for example, citizens, civil society organizations, and technical experts.91 The choice of institution(s) and modalities is generally based on a variety of considerations, including a country’s legal and political environment, technical aspects of policymaking processes, public pressure for greater participation, and the capacity and interests of civil society actors. However, to be meaningful, public participation should be inclusive and open to avoid special interest groups dominating the discussion (Box 3.26 summarizes key elements of GIFTs Principles of Public Participation). Research92 also finds that for public engagement to provide useful input on establishing priorities across sectors and programs, it should leverage new communication technologies and clearly specify the objectives at various stages of public engagement.
Box 3.26.Key Elements of the Global Initiative for Fiscal Transparency Principles of Public Participation in Fiscal Policy
Openness: Provide full information on and be responsive with respect to the purpose of each engagement; its scope, constraints, intended outcomes, process, and timelines; as well as the expected and actual results of public participation.
Inclusiveness: Proactively use multiple mechanisms to reach out to engage citizens and nonstate actors, including traditionally excluded and vulnerable groups and individuals, and voices that are seldom heard, without discrimination on any basis.
Timeliness: Allow sufficient time in the budget and policy cycles for the public to provide inputs in each phase, engage early while a range of options is still open, and, where desirable, allow for more than one round of engagement.
Depth: Support each public engagement by providing all relevant information; highlighting and informing key policy objectives, options, choices, and trade-offs; identifying potential social, economic, and environmental impacts; and incorporating a diversity of perspectives. Provide timely and specific feedback on public inputs and how they have been incorporated or not in official policy or advice.
Proportionality: Use a mix of engagement mechanisms proportionate to the scale and impact of the issue or policy concerned.
Sustainability: Institutionalize public participation where appropriate and effective, ensuring that feedback provided leads to review of fiscal policy decisions, and regularly review and evaluate experience to improve future engagement.
Complementarity: Ensure mechanisms for public participation and citizen engagement complement and increase the effectiveness of existing governance and accountability systems.Source: Global Initiative for Fiscal Transparency (GIFT), Guide on the Principles and Mechanisms of Public Participation in Fiscal Policy, March 2016.
161. The starting point for public participation is publication of easy-to-understand economic and fiscal information, including the government’s budget policies. Budget information should be presented in a clear manner that can be easily understood by the general public, including the use of plain language and user-friendly graphics and charts. In addition, making budget data available in free open data format enables external parties to analyze the data and contribute to public deliberation. Establishing a single Fiscal Data Portal as an entry point for all fiscal data can greatly increase the accessibility of fiscal information. An increasing number of countries are publishing a citizen’s guide to the budget (see an indicative outline in Box 3.27).93 Such a guide—which in some countries is only a few pages long and in others runs to 50 pages or more—typically includes a description of the country’s economic and fiscal outlook in simple language, as well as a discussion of key economic and fiscal policies and their distributional impacts on varying income and demographic groups, including an assessment of gender-related issues where relevant. Selected performance information, discussed in Principle 2.3.2, should also be disclosed, as well as information on any changes in tax policies or rates announced in the budget. The key objective is to ensure citizens have a clear understanding of the impact of fiscal and budgetary policies, regardless of their income, education, or geographic location.
Box 3.27.Suggested Outline of a Citizen’s Guide to the Budget
Part One: Introduction—The government’s objectives in publishing the guide; the place of the annual budget in public finance legislation; a very brief description of the coverage of the budget and the budget process, including opportunities for public participation.
Part Two: The Economic Outlook and Government Objectives—Macroeconomic forecasts and the main assumptions underlying the budget; the sensitivity of the fiscal aggregates to variations in key economic assumptions; the government’s national development strategy; and medium-term fiscal policy objectives.
Part Three: The Government’s Accounts and Budget Prospects—Aggregate revenues, expenditures, and the fiscal balance over a medium-term horizon where available, including the broad allocation of spending and sources of revenue, and comparative figures for the previous year; public debt, fiscal risks, and the sustainability of current policies and trends.
Part Four: New Policy Initiatives—A summary of the main budget initiatives; estimates of their fiscal effect and impacts on key policy groups; contributions to meeting the government’s stated policy objectives.
Part Five: Improving the Delivery of Services—An outline of government policies to improve the efficiency and effectiveness of public services, and an assessment of their impact, including performance indicators where relevant.Source: Petrie and Shields (2010).
Levels of Practice for Principle 2.3.3
Basic Practice: Government publishes an accessible description of recent economic and fiscal performance and prospects, as well as a summary of the implications of the budget for a typical citizen.
162. A citizens’ guide to the budget would enable all interested citizens to conveniently obtain key information on fiscal policies and the budget. Basic practice requires that governments publish accessible information summarizing the economic and fiscal projections, as well as the main policy initiatives, with a discussion of their impact on the average citizen. Multiple channels should be used for distribution to ensure access by citizens of all means, education levels, and geographic location, particularly in countries where significant parts of the population do not have easy Internet access. Common distribution channels are web pages; downloadable files from the Internet; newspaper inserts; printed documents available in government offices, public libraries, and educational institutions; press releases; public hearings; and radio and television shows, and some countries are disseminating through smartphones. See Box 3.28 for South Africa example.
Box 3.28.South Africa: Public Disclosure of Fiscal Information
The South Africa National Treasury publishes on its website key policy and program priorities over the coming 20 years and economic and fiscal outlooks covering seven years: two prior years, the current year, the budget year, and three forward years. In addition, the government prepares a four-page citizen’s guide to the budget that is published electronically, in newspapers, and as a pamphlet.Source: South African authorities.
Good Practice: Government publishes an accessible description of recent economic and fiscal performance and prospects, as well as a summary of the implications of the budget for a typical citizen, and provides citizens with a formal voice in budget deliberations.
163. Good practice is achieved when citizens have also a formal voice in budget deliberations in addition to access to economic and fiscal information. The opportunity for citizens to provide inputs can occur at any stage in the budget process before the budget is approved in its final form, and may be directed to line ministries, the ministry of finance, the council of ministers, or the legislature. Such input can be made in a wide variety of forms and events, including verbal or written statements, comments on draft documents, participation in committees, and question and answer sessions with public officials, including those delivering public services. Notification of solicitation of public comments must be made in a timely manner in an open and inclusive manner, and pertinent information should be made available by a government agency before the consultation process starts (See Box 3.29 for the example of Korea). The Open Budget Survey 2017 contains a large number of country examples of public participation in budget preparation and budget implementation by the executive branch, the legislature, and the SAI.
Box 3.29.Korea: Open Discussion of Budget Issues
Korea introduced extensive public participation mechanisms in parallel with budget reforms beginning in 2003, such as the medium-term expenditure framework (MTEF). For example, an Open Discussion for the Public is held over five or six days in May and June of each year to review expenditure ceilings and program priorities for 12 sectors. The discussions are held in a publicly accessible meeting hall and are televised nationally.Source: Korean authorities.
Advanced Practice: Government publishes an accessible description of recent economic and fiscal performance and prospects, as well as a summary of the implications of the budget for different demographic groups and provides citizens with a formal voice in budget deliberations.
164. More evolved institutions make available targeted information on the possible impact of the budget on identifiable segments of the population. Typically, programs, activities, or projects are targeted to different demographic groups, including seniors, children, and mentally or physically disabled, and would also include gender-related budgeting initiatives. Demographic groups might be viewed as including gender, age, socioeconomic status, educational attainment, ethnicity, and geographic location. There is no standard on which to define the number, type, or size of demographic groups for this purpose. However, a program receiving large amounts of budget financing that is clearly targeting a segment of the population should reach out to its target population. See Box 3.30 for the example of Uganda.
Box 3.30.Uganda: Use of Sector Working Groups
The 1995 Constitution mandates the involvement of stakeholders in the formulation and implementation of development plans. The key institution for achieving this mandate is sector working groups, chaired by line ministries and involving stakeholder representatives, including individuals and civil society and private-sector organizations. Stakeholders are identified based on segments of the population most affected by sector activities. In addition, the National Planning Authority, created in 2002—composed of central government, local government, and stakeholder representatives—is designed to be a permanent forum for dialogue between government, civil society, and the private sector in support of national economic development.Source: Government of Uganda.
Dimension 2.4. Credibility. Economic and fiscal forecasts and budgets should be credible.
165. Credible economic and fiscal forecasts and a realistic budget are critical to acquire market and public confidence in the government’s fiscal strategy (see also Principle 2.1.2). It is essential for fiscal transparency that forecasts are backed up with assurances to the legislature and the public about the integrity of the data, and the methods and assumptions used in making the forecasts and preparing the budget. Assurance mechanisms should contribute over time to improving the quality of forecasts and making them more robust. The Code’s principles on the credibility of fiscal forecasts and budgets focus on three key aspects:
An evaluation of the government’s macroeconomic and fiscal forecasts by independent experts helps improve the forecasts’ realism and credibility and contributes to the development of forecasting capacity (2.4.1). The assumptions underlying the forecasts—including the price and production level of natural re-sources—must therefore be accurately presented in the budget documentation and available for scrutiny by independent experts. Transparency in the setting of assumptions will reduce the risk of overly optimistic scenarios being chosen in preparing forecasts of economic growth or inflation.
Once the budget is enacted, any significant modifications to the appropriations should only be allowed after scrutiny and approval by the legislature through a supplementary budget process (2.4.2). The re-course to supplementary budgets should be taken primarily to address the impact of unforeseen and unavoidable circumstances and not to cover for inadequacies in the annual budget formulation process.
A transparent reconciliation of the successive vintages of forecasts and a clear explanation of the reasons behind changes to forecasts (2.4.3) are critical to establishing and demonstrating the credibility of forecasts.
Table 3.5 provides a list of relevant standards, norms, and guidance material related to dimension 2.4 of the Code.
|Standards/Guidance Material||Brief Description|
|PEFA||Includes three related indicators: PI-16 on the medium-term perspective in budgeting; PI-18.4 on rules for budget adjustment by the executive; and PI-21.4 on the significance of in-year budget adjustments. See PEFA (2016b). www.PEFA.org.|
|OECD Best Practices for Budget Transparency||Recommends that the budget should include a medium-term perspective illustrating how revenue and expenditure will develop during, at least, the two years beyond the next fiscal year. Similarly, the current budget proposal should be reconciled with forecasts contained in earlier fiscal reports for the same period, and all significant deviations should be explained. See OECD, 2002. http://www.oecd.org/gov/budgeting/best-practices-budget-transparency.htm|
|International Budget Partnership, Open Budget Survey||The Open Budget Survey conveys standards of good practice through its questions addressing the link between the executive’s budget proposal and information provided on new and existing policy proposals. https://www.internationalbudget.org/open-budget-survey/|
|OECD Recommendations of the Council on Principles for Independent Fiscal Institutions, 2014||Provides guidance on issues to consider in the design and governance of independent fiscal institutions, codifying lessons learned and good practices. http://www.oecd.org/gov/budgeting/OECD-Recommendation-on-Principles-for-Independent-Fiscal-Institutions.pdf|
Principle 2.4.1. Independent Evaluation The government’s economic and fiscal forecasts and performance are subject to independent evaluation.
166. As discussed in Principle 2.1.2, countries are prone to optimistic bias in their macroeconomic and fiscal forecasts. One way to help correct for bias is to introduce an independent evaluation mechanism—for example, in the form of a fiscal council (Beetsma and Debrun, 2016; Debrun and Kinda, 2014; Hemming, 2013a; Hemming and Joyce, 2013; Kopits, 2011). Independent evaluation can help foster transparency over the political cycle, can improve democratic accountability, and discourage opportunistic shifts in fiscal policy (e.g., pre-electoral spending sprees). Independent analysis, assessments, and forecasts can also raise public awareness of the consequences of certain policy paths, thus contributing to a culture of stability that directly addresses fiscal illusion.94 Hence, they can raise the reputational and electoral costs of unsound policies and broken commitments. Finally, an independent evaluation mechanism in the form of a fiscal council can provide direct inputs to the budget process—for example, assessments of structural positions95—thereby closing technical loopholes that allow governments to circumvent numerical fiscal rules.
167. The role of fiscal councils usually includes one or more of the following functions:
Carrying out an independent analysis, review, and monitoring of the government’s fiscal policies, plans, and performance;
Preparing independent macroeconomic and/or budgetary projections, or validating the forecasts made by the government;
Costing of budget and policy proposals; and
Advising policymakers or legislators on policy options.
168. While fiscal councils routinely perform a broad oversight function (the first item listed previously), their functions vary widely from country to country.96 For instance, the Netherlands Bureau for Economic Planning Analysis performs extensive forecasting and costing functions. However, it does not make judgments on the appropriateness of the government’s budgetary plans. In contrast, the Swedish Fiscal Policy Council and the Irish Fiscal Advisory Council engage in normative analysis but do not produce their own macroeconomic forecasts, or the costing of new policy initiatives. Fiscal councils in Australia (the Parliamentary Budget Office) and the United States (the Congressional Budget Office) provide services mainly for the legislature (e.g., estimating the cost of new policies). Some countries have even established a division of labor between different institutions. In Belgium, the Federal Planning Bureau focuses strictly on the provision of macroeconomic forecasts, whereas the High Council of Finance performs an oversight and monitoring function and must provide policy recommendations, including on the distribution of the eventual fiscal effort among central and subnational entities to comply with general government rules. Examples of fiscal councils from the United Kingdom and the United States are shown in Box 3.33.
169. Setting up a fiscal council requires considerable resources and staff skills (Figure 3.3). Even in the United Kingdom, which has a large pool of economists, most of the staff of the Office of Budget Responsibility came from the ministry of finance (HM Treasury). For this reason, it is important to set the remit of the council in line with the resources available (the analysis and review function can be done with relatively few staff, while policy costing and policy advice require far greater resources). For low-capacity countries, establishing a formal council may not be a priority. Some of the required functions (e.g., validation of macroeconomic forecasts) can be performed by a relatively small group of independent experts, either domestic or international, without needing to divert human resources from the ministry of finance.
Figure 3.3.Number of Full-Time Equivalent Staff and Functions of Fiscal Councils
Source: IMF (2013c).
170. To ensure that fiscal councils provide an effective service, it is important that their independence be protected. Fiscal councils in some countries have been weakened by the government after they made critical assessments of the government’s fiscal forecasts and policy. Independence can be ensured through measures such as merit-based selection of staff and clear nonpartisan appointment procedures, long and nonrenewable terms of office, and protection of the council’s funding from executive discretion. The OECD’s Principles for Independent Fiscal Institutions provides further guidance (OECD, 2014b). Independence of the entity con ducting such an evaluation may present assessment challenges. While assessments of legal and institutional measures such as those mentioned previously can assist, often the true measure of independence comes from the institution’s reputation, which depends ultimately on its track record.
Levels of Practice for Principle 2.4.1
Basic Practice: Budget documentation includes comparisons between the government’s economic and fiscal projections and those of independent forecasters.
171. At a basic level, a comparison of the government’s forecasts with alternative forecasts of independent in stitutions would provide some check against optimism bias. For example, the government’s forecasts could be compared with those of the IMF, the World Bank, or regional development banks. In low-capacity environments, where establishing an independent evaluation procedure may not be feasible, such a comparison would be useful for users of fiscal information in judging the realism of the government’s budget forecasts. Comparisons can also be made with forecasts available from other domestic sources, such as the central bank, the supreme audit institution, think tanks, research institutes, private-sector analysts, and academics. See Box 3.31 for the example of Russia.
Box 3.31.Russia: Scrutiny of Government’s Macroeconomic and Fiscal Projections
In Russia, the Accounts Chambers—which is the supreme audit institution—is charged with assessing the government’s Budget Proposal and issues its opinion, including an evaluation of the government’s macroeconomic assumptions, in early October each year as an input into the parliamentary scrutiny of the budget. This evaluation covers the oil price, GDP, and inflation and exchange rate, including comparisons with forecasts of commercial banks and international finance institutes. In addition, the Ministry of Economic Development engages a number of think tanks and research institutes such as the Economic Expert Group and the Academy of Science during the preparation of macroeconomic forecasts.Source: IMF (2014e).
Good Practice: An independent entity evaluates the credibility of the government’s economic and fiscal forecasts.
172. To strengthen the credibility of economic and fiscal forecasts, an independent entity could assess the credibility of the government’s forecasts on their own merits. An external evaluation provides a more targeted assessment of the budget forecasts than a simple comparison to alternative forecasts, as it can examine the assumptions, rationale, cost drivers, and policy inputs feeding into the forecasts. This evaluation should preferably examine (i) the realism of the forecast assumptions, such as GDP growth, exchange and interest rates, and commodity prices; (ii) how these assumptions translate into economic and fiscal projections; (iii) whether they are consistent with historical relationships, trends, and models; and (iv) whether the fiscal forecasts accurately reflect the cost of existing and announced policies. See Box 3.32 for the example of Georgia.
Box 3.32.Georgia: Assessments of the Government’s Macroeconomic and Fiscal Forecasts
The Parliamentary Budget Office (PBO) in Georgia provides regular assessments of the governments’ macroeconomic and fiscal forecasts. The PBO was established in 1997 and has been independent since 2014. As required under its charter, the PBO produces the following reports:
Annual macroeconomic forecasts and evaluations of the government’s forecasts. Since 2016, the PBO has begun publishing independent macroeconomic forecasts three times a year, and its reports include a comparison with, and evaluation of, the government’s published forecasts;
An opinion on the draft state budget, which includes an overview of the government’s forecasts and other indicators included in the state budget;
Monthly, quarterly, and annual reports on budget execution, which analyze deviations of revenues and expenditures from the approved budget;
An annual fiscal policy review and annual review of the public finances of local governments;
Regular analysis of debt sustainability; and
Assessments of the fiscal implications of draft legislation, including providing a view on the reliability of costings of measures included in new legislation.
While the PBO publishes a large volume of relevant fiscal analysis, it does not publish regular and complete assessments of the government’s performance against its fiscal rules. This function is not directly included in its legal mandate, although the PBO has produced a one-off publication on the government’s fiscal rules and provides some limited discussion about fiscal developments in relation to the some of the fiscal rules, primarily the deficit rule, in its publications.Source: IMF (2017b).
Advanced Practice: An independent entity evaluates the credibility of the government’s economic and fiscal forecasts and its performance against its fiscal policy objectives.
173. Under advanced practice the independent evaluation extends beyond an ex ante assessment of forecasts to an ex post assessment of the government’s fiscal performance. This dimension adds greater credence and transparency to a government’s performance reporting. Such an evaluation should assess the government’s actual fiscal performance against its stated fiscal objectives, and, where relevant, compliance with fiscal rules. See Box 3.33 for the examples of the United Kingdom and the United States.
Box 3.33.UK Independent Office of Budget Responsibility and US Congressional Budget Office
The United Kingdom’s independent Office of Budget Responsibility (OBR) produces the official economic and fiscal forecasts of the U.K. government and assesses the government’s performance against its fiscal targets. Twice a year, the OBR publishes five-year forecasts for the economy and public finances. The OBR also conducts analyses of long-term fiscal sustainability and has sign-off responsibility on the U.K. Treasury’s policy costings. It does not provide policy advice nor consider policy options. To demonstrate its lack of bias ex ante, the OBR provides all of its models to the public and performs rigorous ex post forecast evaluations. The OBR was established in 2010 to increase the credibility of the government’s fiscal forecasts and to address optimistic biases in forecasting. Its independence is enshrined in the 2011 Budget Responsibility and National Audit Act. This law also requires a five-yearly independent review of the OBR’s performance. The first such review concluded that the OBR is perceived as politically independent, transparent, accountable, and credible, and that its core reports generally meet or surpass international standards.
The CBO of the United States is an independent agency of the legislative branch that was established in 1974. It is a nonpartisan agency with over 200 professional staff and a broad mandate that includes reviewing the government’s forecasts, producing alternative forecasts, and conducting independent analysis, review, and monitoring of the government’s fiscal policies. It produces costings of the president’s and Congress’ legislative proposals. It also scores the cost of individual and cumulative legislative proposals against the budget baseline.
The CBO presents an alternative fiscal outlook to that given in the president’s annual budget proposal. It prepares baseline budget projections and economic forecasts (for a 10-year period) that help Congress develop its own budget resolution. CBO also produces fiscal sustainability reports with projections that span from 25 up to 75 years. The CBO has a reputation as an objective and credible source of information. Its own forecasting record compares favorably to the governments and to the private sector. The CBO’s costing and scoring of presidential and congressional policy proposals have influenced the debate on these issues.Sources: IMF (2013c); and OECD (2014b).
Principle 2.4.2. Supplementary Budget Any material changes to the approved budget are authorized by the legislature.
174. In general, once the budget is enacted, the legislature should approve significant modifications to the appropriations through a process that allows it to scrutinize the proposed changes. A supplementary budget may authorize (i) an increase of total expenditures when revenues are higher than forecast or additional spending cannot be financed through a reallocation of resource within the initialbudget; (ii) any significant re-allocation of the originally-approved appropriations that would result in altering the character of the original budget; (iii) a new expenditure proposal that was not part of the original budget, or significantly enhances the scale of an existing expenditure, even when financed from savings available elsewhere within the approved budget; and (iv) a decrease of total expenditure and reallocation between items when revenues are less than forecast. Figure 3.3 shows the timing of approval of supplementary budgets by the legislature in a range of countries. In countries where the law permits the executive to make amendments to the approved budget without the approval of the legislature, such amendments should be subject to clear conditions and limits, and regularly disclosed.
Figure 3.4.Timing of Most Recent Supplementary Budget Approval
Source: Open Budget Survey 2015, Question 112 (https://www.internationalbudget.org/wp-content/uploads/OBS2015-Questionnaire-and-Guidelines-English.pdf).
175. Unexpected macroeconomic developments and new emergency policy priorities should be the main reasons to submit a supplementary budget to the legislature. These reasons can include an epidemic outbreak, natural disasters, surge or collapse of commodity prices, or economic and financial crises. The realization of guarantees or other contingent liabilities could also justify the submission of a supplementary budget. In some countries, supplementary budgets may provide ex post legislative approval of reallocations (virements97) within or between spending categories. Some countries adopt several supplementary budgets per year. Overuse of the instrument could reflect poor macro-fiscal forecasts, insufficient knowledge of the cost of public policies, ineffective budget preparation procedures, or the inability of the government to execute the enacted budget, and undermine the credibility of the budget.
176. Ensuring effective control by the legislature of changes to the enacted budget requires rules that vary across countries and include
a legal framework that defines clear limits to the government’s power to increase the total level of expenditure or modify the appropriations approved by the legislature;
rules related to virements clearly define the amount of resources that can be moved within or across approved appropriations without recourse to a supplementary budget;98
a process for the review, approval, and publication of a supplementary budget that follows procedures similar to the annual budget; and
procedures for the presentation of the supplementary budget that follow a similar classification and for-mat to the annual budget, with any changes to the approved budget being clearly identified and described.
Levels of Practice for Principle 2.4.2
Basic Practice: A supplementary budget regularizes expenditure exceeding the approved budget.
177. At a minimum, the executive should seek ex post legislative approval when expenditures have exceeded the authorization granted by the legislature. In some countries, legal frameworks may allow the executive to spend more than the approved budget, subject to clear limits, under certain circumstances—for example, if more-than-expected revenues are mobilized, or in response to natural disasters or other emergencies. Such excesses in expenditure should at least be reported to the legislature for information, or their ex post authorization.
Good Practice: A supplementary budget is required prior to material changes to total budgeted expenditure.
178. Good practice requires that no material increase in total expenditure be undertaken by the executive without prior legislative authorization. Any material changes to the approved budget that result in increasing the aggregate level of authorized expenditure must be scrutinized and approved by the legislature before any new spending can take place. When such mechanisms are not enforced, the executive’s budget proposal may not provide a fair view of the revenue and expenditure plans of the government, and legislative control of the budget is fundamentally weakened. See Box 3.34 for the example of Kenya. As an exception, in the case of countries where the law permits the executive to make amendments to the approved budget, subject to clearly defined limits, without the prior approval of the legislature, the executive should report to the legislature in formation on such changes at least annually.
Box 3.34.Kenya: Authorization by National Assembly of Changes to the Aggregate Approved Budget
In Kenya, any material variation to the approved budget is subject to authorization by the National Assembly. The interpretation of material variation is relatively narrow. It includes increases to aggregate budgeted expenditures, as well as transfers between administrative votes, programs, development and recurrent activities, and economic groupings (e.g., personal emoluments and goods and services). The legal framework (Constitution Article 223, PFM Act Article 44) permits the retrospective authorization of budget increases of up to 10 percent of the aggregate approved budget and requires the parliamentary submission to be accompanied by a statement demonstrating how any additional expenditure relates to the fiscal principles. In practice, parliamentary approvals are sought prior to funds being made available for commitment or payment purposes. The approval takes the form of a supplementary appropriation bill. The number of supplementary bills is limited—generally to one per year following a midyear budget review, but a second if exceptional demands arise.Source: IMF (2016d).
Advanced Practice: A supplementary budget is required prior to material changes to total budgeted expenditure or substantially altering its composition.
179. Advanced practice demands that no change in the approved budget that would fundamentally alter its composition or policy objectives, be carried out without prior legislative approval. All material changes to the approved budget, including reallocations across major policy areas, must be carried out with prior legislative approval through a supplementary budget (see Box 3.35 for Tunisia example). Material reallocations between ministries, major policy areas (e.g., education to transport), or programs can be expected to alter the composition of the approved appropriations, thereby changing the policy objectives set out in the budget. Materiality is often defined in legislation or in rules that define monetary thresholds. As an exception, in the case of countries where the law permits the executive to make amendments to the approved budget, subject to clear limits, without the prior approval of the legislature, the executive should provide the legislature with information on such changes every quarter.
Box 3.35.Tunisia: Legislative Authorization to Changes in Expenditures
In Tunisia, a supplementary budget is presented and approved by the Parliament when increasing total expenditures or significantly changing their composition. Budget modifications (to increase expenditures) are adopted during the year, through legislative or regulatory means. The executive is allowed a few procedures to amend the budget during the year by using the contingency reserve and virements, which are ultimately ratified in the budget law. The government makes regular use of these mechanisms up to a certain amount as authorized under the law. For larger modifications, a supplementary budget law must be adopted. While there usually had been the practice of one supplementary budget per fiscal year, recent years have seen an increase in the number of supplementary budgets adopted throughout the year. This is due to the political instability in Tunisia since 2011 and the volatile economic environment. Two supplementary budgets have been adopted each year between 2011 and 2015. Overspending against the approved budget (including the supplementary budget) is rare and ratified in any case in the Loi de reglement.Source: IMF (2016e).
Principle 2.4.3. Forecast Reconciliation Budget documentation and any subsequent updates explain any material changes to the government’s previous fiscal forecasts, distinguishing the fiscal impact of new policy measures from the baseline.
180. The credibility of a government’s fiscal forecasts depends on the consistency between successive vintages of the forecasts.99 Forecasting is inherently uncertain, and these uncertainties can take several forms. For example, there may be uncertainty about the structural evolution of the economy and unexpected economic events or shocks. There may also be uncertainty about political decisions and future policy measures. In general, while every effort must be made to achieve precision in forecasting, the likelihood of any economic and fiscal variable evolving precisely in line with a point forecast is relatively small. The presence of uncertainty means that forecast deviations between successive vintages are not uncommon. Accountability demands that governments provide a clear explanation of the impact of macroeconomic developments and discretionary government actions on both revenue and expenditure. Moreover, a structured forecast reconciliation can play an important role in shaping external expectations of fiscal strategy by minimizing speculations about the causes of deviation between successive vintages of forecasts.100
181. The budget documentation should provide a comprehensive reconciliation of the government’s medium-term expenditure estimates with those in the previous year’s budget. Observed changes can be broadly decomposed into macroeconomic factors, changes in volume and caseload, the impact of discretionary policies, and classification changes. There should be a clear reconciliation table of the different vintages of forecasts (as indicated in Table 3.6 for total expenditure) which would
begin with the previous year’s medium-term fiscal forecast;
adjust for any accounting or classification changes;
identify the impact of changes in the baseline macroeconomic forecast, due to variations in economic and demographic parameter;
identify the impact of policy decisions taken over the intervening period and in the budget; and
show the new fiscal forecasts over the medium term.
|2014 Budget||2014 Budget Year||2015 BY+1||2016 BY+2||2017||2018|
|Reconciliation in terms of:|
|- Accounting or one-of||−5||−6||−8|
|- Macroeconomic factors||3||4||6|
|- Policy measures||0||5||3|
|2015 Budget||Estimated Actual||Budget Year||BY+1||BY+2|
|Reconciliation in terms of:|
|- Accounting or one-of||2||13||15|
|- Macroeconomic factors||−2||−2||−3|
|- Policy measures||0||−11||−12|
|2016 Budget||Estimated Actual||Budget Year||BY+1||BY+2|
Levels of Practice for Principle 2.4.3
Basic Practice: Differences between successive vintages of the government’s revenue, expenditure, and financing forecasts are shown at the aggregate level, with a qualitative discussion of the impact of new policies on the forecasts.
182. The budget documents should clearly identify changes in aggregate-level forecasts and discuss the impact of the proposed policy changes on these forecasts (see Box 3.36 for the example of Romania). The impact may or may not be quantified separately from other variables. At this level of practice, revisions to the main macroeconomic variables, such as GDP, lags in the availability of fiscal data, and frequent revisions, may be included in the aggregate level of impact but not described. Focusing the analysis only on the aggregates is far from ideal, as it renders the evaluation of fiscal forecasts less comprehensive and informative; however, it is a good starting point. Compensating forecast errors, which may be significant, would remain unidentified, as the driving forces and factors affecting government revenues and expenditures might deviate significantly from one another.
Box 3.36.Romania: Identification of Changes in Aggregate-Level Forecasts
In Romania, the Fiscal and Budgetary Strategy document includes information about the changes in the main economic indicators and in the aggregate fiscal variables. A qualitative discussion of the impact of new policies on the forecast is also provided but not quantitative estimates of their individual costs or yield. Such information lends greater credibility to the recently introduced fiscal rules.Source: IMF (2015f).
Good Practice: Differences between successive vintages of the government’s revenue, expenditure, and financing forecasts are broken down into the overall effect of new policies and macroeconomic determinants.
183. Good practice requires a presentation that distinguishes the fiscal implications of new policy initiatives from the impact of changes in macroeconomic variables. The fiscal implications of new policy changes should be presented separately from the impact of changes in macroeconomic variables to allow the decision makers and citizens to assess the affordability of new policies. Expected developments in the economy, and the risks surrounding that outlook, should be clearly explained to allow stakeholders to consider the possible alternatives to the current fiscal policy. If material deviations occur, an efficient process for evaluating the causes of these changes, describing them clearly in the budget documents, and adjusting budgetary plans accordingly, should be put in place.
Advanced Practice: Differences between successive vintages of the government’s revenue, expenditure, and financing forecasts are broken down into the effects of individual policy changes, macroeconomic determinants, and other factors, such as technical and accounting adjustments.
184. Advanced practice demands that all changes in revenue, expenditure, and financing between the previous and subsequent forecasts are fully explained and quantified. A decomposition of the variations in expenditure, revenue, and financing provides a clear picture of developments in government finances and highlights the main factors driving the changes in the budget balance and the stock of debt (see Box 3.37 for an example from Finland). It also allows analysts to check whether the forecasts are realistic in the light of projected macroeconomic and price developments, as well as the planned discretionary changes in government revenue and expenditure, and to assess whether they are subject to significant upside or downside risks. Such a detailed approach can be very helpful, and even necessary, for budgeting purposes.
185. Forecast determinants should be separated out and presented both at summary level and to assess their individual impact. The explanations provided may include changes in macroeconomic variables such as GDP growth, inflation, and unemployment; revisions to important operational variables and coefficients specific to programs or policy areas (e.g., a lower expected birth rate, or a higher level of immunization); changes to government policy and expenditure priorities; or technical changes in accounting or the reclassification of budget lines.
Box 3.37.Finland: Presentation of Forecast Reconciliations
The budget documentation provides a reconciliation of forecasts for several different budget aggregates:
Spending limits: For each spending limit, changes from previous forecasts are decomposed into the effects of structural changes and price and cost-level adjustments.
Economic survey: A reconciliation of expenditures, revenues, and the fiscal balance is presented for general government, distinguishing changes due to macroeconomic parameters, discretionary spending, technical adjustments, and other factors.
General government fiscal plan: A reconciliation of forecasts, and analysis of deviations from the previous year’s fiscal plan is presented.
Stability program: For the general government’s fiscal balance, deviations from the previous fiscal year’s forecasts are broken down for each government sector into the effects of technical adjustments (revised statistical basis), macroeconomic determinants, discretionary policy measures, and other factors. The forecasts are prepared and reconciled for four years ahead. In addition, divergences in the forecasts of GDP growth, general government net lending, and gross debt are disclosed.