Fiscal Politics
Chapter

Chapter 15. Budget Institutions in Low-Income Countries

Author(s):
Vitor Gaspar, Sanjeev Gupta, and Carlos Mulas-Granados
Published Date:
April 2017
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Author(s)
Sanjeev Gupta, Sami Yläoutinen, Brian Olden, Holger van Eden, Teresa Curristine, Tom Josephs, Eliko Pedastsaar and Johann Seiwald 

Introduction

All countries need to ensure fiscal credibility and sustainability. This paper presents a framework of budget institutions needed to support countries’ fiscal efforts at three key stages of policy making: i) understanding the fiscal outlook and challenges; ii) formulating a credible fiscal strategy; and iii) implementing that strategy.1,2 The framework underlying the paper has been applied to a wide range of advanced and emerging economies.

The purpose of this paper is to apply the same framework to seven low-income countries to assess the relative strength of their budget institutions and identify priorities for institutional reform. The low-income countries studied are Bolivia, Kenya, Mozambique, Myanmar, Uganda, Vietnam, and Zambia. As the application of the framework requires a deep understanding of a country’s budget institutions, it was feasible to extend this analysis to only seven aforementioned countries. The results obtained are then compared with those from the G20 advanced and emerging market countries. This comparison of the weaknesses and strengths of country groups’ budget institutions allows a better understanding of where low-income countries lag behind other country groups. The paper further discusses how budget reforms should be sequenced in low-income countries. Since the framework is applied to a small sample of seven low-income countries, the results should be interpreted with caution.

The paper is structured as follows. The second section begins by presenting twelve budget institutions that can support planning and delivery of credible fiscal strategies at three key stages of the fiscal policy-making process. The third section applies the framework to seven low-income countries and compares the status of their budget institutions to the G20 advanced and emerging market countries.3,4 The fourth section presents recommendations for designing and implementing appropriate reform strategy across countries, particularly in low-income countries. Particular attention is paid to prioritization and sequencing of reform efforts.

Budget Institutions for Credible Fiscal Policymaking

While many factors affect public finances, there is considerable literature that argues that the strength of budget institutions has a bearing on fiscal outcomes. A positive relationship between the quality of budget institutions and fiscal outcomes has been demonstrated in numerous studies covering different geographical regions and countries with varying political set-ups and income levels (e.g., von Hagen (1992), von Hagen and Harden (1996), Hallerberg et al. (2009), Hallerberg and Yläoutinen (2010) for Europe; Alesina et al. (1999), de Haan et al. (1999), Filc and Scartascini (2007) for Latin America; Gollwitzer (2011), Prakash and Cabezón (2008) for Sub-Saharan heavily indebted countries; and Dabla-Norris et al. (2010) for low-income countries in general). Generally, the empirical evidence emphasizes the key role played by comprehensiveness of the budget, its medium-term orientation and top-down decision-making in the budget processes.

Strong institutions can improve fiscal performance irrespective of country-specific economic and fiscal prospects. They can do this by highlighting the need for sustainable policies, exposing the full cost of public interventions, emphasizing collective responsibility over sectoral interests, and raising the cost of deviating from stated fiscal objectives. The framework lists 12 budgetary institutions and their key design features that can support planning and delivery of credible fiscal strategies at three key stages of the fiscal policy-making process (Box 15.1):5

  • understanding the fiscal outlook and challenges

  • formulating a credible fiscal strategy

  • implementing that strategy through the budget process

The institutions included in the framework have been identified on the basis of their ability to support planning and implementing a credible fiscal strategy. However, while this framework allows one to analyze shortcomings and related reform needs in countries’ fiscal frameworks, it should not be viewed as a generic guide to budget institution reforms. When applying this approach to low-income countries, attention has to be paid to starting conditions and sequencing of reforms, which depend on country-specific circumstances, including on their capacity to implement them. These issues are taken up in the final section.

Box 15.1Twelve Budget Institutions

  • Understanding the Fiscal Outlook and Challenges

    • Fiscal Reporting

    • Macroeconomic and Fiscal Forecasting

    • Fiscal Risk Management

    • Independent Fiscal Agency

  • Formulating a Credible Fiscal Strategy

    • Fiscal Objectives and Rules

    • Medium-Term Budget Framework

    • Performance Orientation

    • Intergovernmental Fiscal Arrangements

  • Implementing the Fiscal Strategy

    • Budget Unity

    • Top-Down Budgeting

    • Parliamentary Budget Approval

    • Budget Execution

Source: IMF 2014.

Understanding the Fiscal Outlook and Challenges

A clear understanding of the current fiscal position and a realistic view of the medium-term fiscal outlook facilitates a formulation of appropriate fiscal policies. Government’s decision on a fiscal stance depends crucially on the view of the economic outlook, and the more accurate economic forecasts are, the more informed the budget decisions will be. Full awareness of the current state and future evolution of the public finances is particularly important in the face of uncertain macroeconomic and fiscal outlook. In this context, the following institutions are important:

  • Fiscal reporting that provides comprehensive, timely, credible, and transparent information is central to inform decision makers and the public about the state and outlook of the economy. Good practice requires fiscal reporting to be comprehensive and accurate, and include financial statements audited by an independent audit institution and fiscal statistics produced by an independent statistics agency.

  • Macroeconomic and fiscal forecasting that is realistic and credible. In ideal circumstances, macro-fiscal forecasts have a multi-year focus, updated on a frequent basis and cover all fiscal aggregates together with a range of realistic economic assumptions.

  • Disclosure and effective management of fiscal risks allow a government to deal with situations that threaten its fiscal position. This means main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, public-private partnerships, and legal claims) are disclosed in budget documents together with alternative medium-term budget scenarios. Similarly, new risks (contingent liabilities in particular) are subjected to scrutiny and approval as regular budget appropriations. This is particularly important during times of fiscal stress when the temptation to circumvent expenditure restrictions by resorting to guarantees and other contingent liabilities could become stronger.

  • Independent fiscal agencies with a clear mandate can help to support the overall credibility of a government’s fiscal strategy by assessing the integrity of the forecasts and the government’s fiscal performance on a regular basis.

Formulating a Credible Fiscal Strategy

Addressing the fiscal challenges identified in fiscal reports and forecasts requires the formulation of a sound and comprehensive medium-term fiscal strategy. The credibility of that strategy depends in part upon the institutional arrangements which support it. The following four budget institutions are important in this regard:

  • Fiscal objectives and rules. Comprehensive, transparent and stable fiscal objectives connect the medium-term fiscal strategy with numerical targets that will guide future decisions and against which performance can be monitored. Some flexibility, either by accounting for the cycle or by including explicit escape clauses, can enhance the credibility of fiscal rules.

  • Medium-term budget frameworks are crucial to convert those targets into detailed and documented revenue and expenditure plans. Successful medium-term budget frameworks provide binding restrictions on multi-year expenditure and a clear and consistent statement of the government’s medium-term priorities within a total expenditure ceiling. Such frameworks should cover most central government expenditure.

  • Performance-oriented budgeting provides decision makers with information on how the budget contributes to the government’s overall policies. Regular spending reviews can help to provide a strong evidence base for expenditure rationalization.

  • Intergovernmental fiscal arrangements ensure the consistency of the fiscal stance within the different levels of government and allow coordinating and burden sharing of fiscal policy and spending between layers of government.

Implementing the Fiscal Strategy

Even the most robust consolidation plan can be derailed when confronted with the pressures and realities of the annual budget process. Unless supported by strong institutional arrangements for the preparation, approval, and execution of the annual budget, there is a risk that actual expenditure will turn out to be higher than forecast, or actual revenue lower than forecast. Four institutions are central in this regard:

  • Budget unity ensures that central government expenditures are authorized under one decision-making process, which consequently makes the control over budget execution more effective. Most central government expenditure should be covered by the central government budget and authorized annually. Also major tax expenditures should be quantified and published.

  • A top-down approach to budget preparation imposes limits on both aggregate and sectoral spending agreed by the government at an early stage in the budget preparation process. This approach increases the likelihood that the outcome of the annual budget discussions will be consistent with the government’s ex ante fiscal objectives and fiscal plan. This is facilitated by limited earmarking of revenue and by ensuring that all major revenue and expenditure decisions are taken as a part of the annual budget process.

  • Constraints on parliamentary budget approval. While parliament’s formal powers over the allocation of public resources vary greatly across countries, experience suggests that pre-budget or budget orientation debates can help create parliamentary ownership of medium-term fiscal objectives in a range of legislative contexts. The political legitimacy of the overall fiscal strategy is further enhanced when parliament endorses the government’s medium-term fiscal objectives before considering the government’s annual budget proposal. However, greater parliamentary input into the overall fiscal strategy needs to be combined with legislative procedures that promote collective responsibility for its delivery. As in the cabinet, voting on the budget in parliament needs to follow a top-down sequence in which the legislature first approves the main fiscal aggregates, such as the budget balance, total expenditure, and total revenue, before voting the allocation of resources to different sectors, ministries, programs, or line items.

  • Discipline in budget execution that maintains overall fiscal discipline, while recognizing that unexpected events will occur during the course of the budget year. Open-ended or standing appropriations need to be kept to a minimum. Overspending against budget totals should require the government to introduce a supplementary budget and, ideally, propose offsetting expenditure cuts.6 Carry-over of expenditure—enabling budget agencies to exceed annual appropriations—should also be subject to restrictions. To avoid future expenditure room being taken up by binding contracts or future promises, controls on multi-annual commitments should also be in place.

Evaluation of Budget Institutions

This section discusses the extent to which the above-noted 12 budget institutions are in place in seven low-income countries. In this regard, we transform the institutional features of countries’ fiscal frameworks into a set of ratings (see Box 15.2). As the purpose is to provide a general overview of budget institutions in the three country groups, country-specific ratings are not reported in the paper.7 In this context, a few caveats are worth mentioning:

  • The analysis presents only a snapshot of the state of countries’ current budget institutions. Many countries under review are engaged in ambitious reform agendas to strengthen their frameworks. Due to the static nature of the analysis, the discussion does not do justice to these efforts.

  • Each institution included in the framework is assigned the same weight. A case could be made that not all institutions are equally important, particularly from a country-specific point of view. While this is justified, the approach is meant to keep the framework as transparent and simple as possible.

  • Finally, as noted above, the sample of countries under review is small. While the discussion below gives a good overview on the state of these countries’ budget institutions, the results are not necessarily representative of all low-income countries.

Box 15.2Methodology for the Evaluation of Budget Institutions

The 12 budget institutions and their key features described in the previous section are used to evaluate the institutional strength of each country in the sample. Each key feature is translated into a specific evaluation question. The number of questions by institution varies from three to six, and the assessment consists of 52 questions in total. The questions have been formulated in such a way that they are factually verifiable. A country is given a rating of 0 if the criterion is not met; 1 if the criterion is partly met; and 2 if the criterion is fully met. The evaluation questions and basis for each rating are set out in IMF (2014). For every country, the ratings against each question are averaged to produce an overall score of the strength of each of the 12 institutions. Each of the 12 institutions has the same weight in these averages, regardless of the number of questions used to rate the institution.

Based on the institutional scores, the following general observations can be made (see Figures 15.1 and 15.2):

Figure 15.1.Average Scores by Institutions

Source: Authors’ calculations.

Figure 15.2.Range of Scores by Institution

Source: Authors’ calculations.

  • As one might expect, the budget institution scores are lower in low-income countries, compared to emerging market and advanced countries. This applies particularly to the understanding and planning stages, where the largest institutional gaps for low-income countries seem to be.8

  • There seems to be a link between strength of institutions and economic development; institutional scores and GDP per capita broadly speaking move together in the country sample.9

  • Low-income countries score, on average, the lowest among country groups in all categories except three, namely top-down budgeting (slightly higher than emerging), parliamentary approval (tied with emerging) and budget unity (tied with advanced), whereas advanced countries score, on average, higher than others in all other categories.

  • The variance of scores by institution is generally speaking larger for low-income and emerging market countries, compared to advanced countries, indicating large differences between and among countries.10 Particularly for the understanding and planning stages, many low-income countries scored zero on a number of individual institutions, indicating that these countries do not have basic arrangements in place.

Understanding the Fiscal Outlook and Challenges

Most low-income countries in the sample seem to have basic fiscal reporting practices in place which should give them reasonable information about the present financial position. However, arrangements concerning forecasting future fiscal developments and related risks are less robust. These are the areas where the gaps in the G20 advanced countries are also most pronounced (see Figure 15.3):

Figure 15.3.Understanding the Fiscal Outlook and Challenges

Source: Authors’ calculations.

  • Fiscal Reporting: All sample low-income countries produce financial statements which cover at least the budget, and in most countries financial statements are audited by an external auditor. Most countries produce a balance sheet, but generally speaking without including all assets and liabilities. About half of the countries produce financial statistics for central and general government but generally not for the whole of the public sector. In almost all countries financial statistics are produced by an independent office but generally not in line with international standards.

  • Macroeconomic and Fiscal Forecasting: About half of the sample low-income countries publish medium-term forecasts in the budget documents with related assumptions but generally speaking without any quality control through ex post comparison of previous forecasts with actual outturn of key macroeconomic and fiscal aggregates. Also an update half-way through the budget year, with updated projections of key fiscal variables is missing in almost all countries. Long-term fiscal projections are also a rarity.

  • Fiscal Risk Management: Main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, PPPs, legal claims) are not discussed nor quantified in the budget documents. Also alternative medium-term budget scenarios are not produced. In a majority of the countries, the government prepares a medium-term debt management strategy, including analysis of debt-related risks, but without including asset-related risks (for example, changes in the asset values or cash-flow they provide). In almost all countries, parliamentary approval is sought for new guarantees and in very few, for other significant contingent liabilities.

  • Independent Fiscal Agency: With some exceptions, countries do not have independent agencies to assess the credibility of the forecasts and the government’s fiscal performance on a regular basis.

Developing a Credible Fiscal Strategy

Many institutions related to formulation of a fiscal strategy are relatively underdeveloped. Most countries in the sample have taken first steps in introducing some medium-term elements in their fiscal management but many challenges remain to be addressed; fiscal objectives and medium-term budget frameworks receive the lowest scores on average among the low-income countries. Also performance orientation is still at its infancy. Finally, intergovernmental financial arrangements are not clearly specified in many countries (see Figure 15.4).

Figure 15.4.Formulating a Credible Fiscal Strategy

Source: Authors’ calculations.

  • Fiscal Objectives and Rules: About half of the sample countries have specified some type of medium-term fiscal objective and regularly report performance against the stated objective. In very few countries, the objective has been enshrined in the law, and in almost all countries, exceptions to the rule are frequent. Fiscal objectives do not accommodate the impact of the business cycle.

  • Medium-term Budget Framework: About half of the sample countries have some type of multi-year estimates for major categories of revenue and expenditure but they constitute only a non-binding restriction to future budgets. No reconciliation of changes in sectoral allocations from year to year is currently produced. Furthermore, budget documents do not present any consolidated summary of the fiscal impact of proposed new revenue and expenditure measures.

  • Performance Orientation: About half of the sample countries include a program classification for information, and only very few of these form the basis for legislative appropriation. Many countries have established some type of performance targets or objectives but typically these are not systematically monitored. Comprehensive and systematic expenditure reviews are rare among the countries in the sample.

  • Intergovernmental Fiscal Arrangements: About half of the sample countries produce a year-ahead or a medium-term forecast of the budget for the central or federal government but it is typically not broken down into the respective contribution of individual sectors/level of government (budget, social security funds, extra-budgetary funds, local government and state-owned enterprises). A majority of the sample countries have fiscal rules for sub-national governments in place but without centralized sanctions or enforcement mechanisms. Again, about half of the countries have a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

Implementing the Fiscal Strategy

Institutions related to implementing the fiscal strategy emerge as the strongest among the three key stages of the fiscal policy-making process included in the framework. Gaps in relation to the advanced G20 countries still persist particularly in top-down budgeting and budget execution. In particular, while it is common to fix the ceilings at the early stages of the budget process, it is equally common that these restrictions are overlooked at the subsequent stages (see Figure 15.5):

Figure 15.5.Implementing the Fiscal Strategy through the Budget Process

Source: Authors’ calculations.

  • Budget Unity: Low-income countries in the sample receive equal scores on average on budget unity when compared to emerging market and advanced countries. In all of the countries, the budget, unemployment, and social security funds or spending cover at least 80%, and in many, more than 90% of central government expenditure. In all countries more than 90% of the budget spending requires annual authorization by parliament. However, arrangements regarding tax expenditures are less advanced; while most countries produce an annual quantification of tax expenditures, there is no control on their size.

  • Top-down Budgeting: In almost all sample countries, there are ex ante limits on both aggregate and sectoral or ministerial spending provided in budget submissions, but importantly, in about half of the countries these ceilings are rarely respected. In almost all countries less than 10% of central government revenue is subject to earmarking or standing spending commitments. In about half of the countries, major revenue and expenditure decisions are often or sometimes taken outside the budget process.

  • Parliamentary Budget Approval: Typically, the parliament does not endorse a medium-term fiscal target or objective. With some exceptions, there are limits on the legislature’s right to amend the government’s draft budget. In about half of the countries in the sample, the annual budget is not approved in a top-down sequence (i.e., parliament does not first approve an overall annual budget framework for total revenues and total expenditures). Typically, the legislature’s right to amend the executive’s budget proposal is rather limited. In a majority of the countries, there is a legal requirement in place that a budget has to be approved before the start of the fiscal year.

  • Budget Execution: Most sample countries have restrictions in place on over-spending during the execution of the annual budget. In particular, most countries require a submission of a supplementary budget to parliament. Typically, carry-overs are not allowed or the government imposes a ceiling on the size of annual carry-over or on carry-over draw-downs. Contingency arrangements for specific expenditure categories exist in all countries but in some cases access criteria to such funds could be specified more clearly. In most countries, the finance minister (the executive) can defer or cut expenditure, without prior approval of parliament, at least up to a certain limit. Finally, all countries lack comprehensive limits or controls on multi-annual expenditure commitments.

Strengthening Budget Institutions in Low-Income Countries

Prioritizing Reform Efforts

The above discussion suggests that in general low-income countries have substantial shortcomings in their budget institutions, which call for continuous reform efforts. The largest institutional gaps currently can be found from understanding and planning stages of the fiscal policy-making process, although some important challenges remain also in the implementation stage. Higher relative scores in the implementation stage may reflect a tradition of administrative and fiscal centralization among the countries in this group.

However, designing a reform agenda for low-income countries is a balancing act between ambition and realism. On the one hand, the reinforcing nature of the different institutions underlines the importance of taking a comprehensive approach to institutional reform. Indeed, institutional reforms in the above areas need to be coordinated across the budget stages and between branches and levels of government to maximize their impact on fiscal decision-making and performance. The impact of reform at any one stage of the process on fiscal behavior depends on the integrity of the system as a whole. But on the other hand, the design of a reform agenda has to take into account the low capacity of many low-income countries to implement reforms, as well as political economy constraints and weak governance systems. Therefore, it is not realistic to assume that all deficiencies identified above could be addressed simultaneously. Some prioritization and sequencing will be needed.

Indeed, reforms in budget institutions should address particular country-specific problems and should be placed in an appropriate order, i.e., be given the correct priority and sequence. The literature sets out some general principles (e.g., Diamond, 2013; Allen, 2013) but recognizes the difficulty of developing a set of operational rules that is applicable in all countries, in all contexts, and at all times. However, some guidance can be sought from the advanced country experiences.

Most advanced countries have reached decisions about the sequencing of reform in a non-structured fashion, but some important guiding principles can be identified:

  • It is important to distinguish two kinds of sequencing: first, the order in which different initiatives within an overall PFM reform strategy (e.g., establishing a macro-fiscal forecasting unit, a treasury single account, a modern debt management agency) are introduced; and, second, the sequencing of individual tasks and activities within a single component of such a strategy, for example, the steps that are needed to convert the government’s accounting and reporting system from a cash basis to an accrual basis, or to establish and make fully operational a unified revenue authority.

  • Countries should not attempt too many reforms at one time. If too many reforms are attempted simultaneously, they are unlikely to succeed, e.g., because sufficient resources (human and financial) are not available, or the management capacity of the finance ministry is overstretched.

  • Important basic elements of a budgeting system need to be put in place first before more advanced elements are incorporated.

  • Many countries have tended to underestimate the complexity of the reform process and the need for careful handling of the implications for resources and staffing and supporting IT systems. A reform that is demanding in terms of skills and resources—such as introducing an MTBF, an accrual accounting system, or a Treasury Single Account—requires strong leadership, the development of a detailed action plan, a dedicated project management and communications team to implement the reform, and the active management of the human resource aspects of the reform. If these factors are given insufficient attention it is possible, if not likely, that the reform will: i) meet with substantial resistance inside and outside the finance ministry; ii) take longer than expected to implement; iii) cost more than necessary; and iv) deliver less than the full expected benefits, or fail completely.

  • Reforms also need to take into account the views of stakeholders external to the finance ministry. Strong opposition may build up to reforms from line ministries, the president’s office, or consumers of public services. There may also be opposition from managers and staff within the finance ministry.

Priorities for Institutional Reform for Low-Income Countries

In the context of the framework used in this paper, many budget institutions included in the framework can be seen as prerequisites to others. For example, binding medium-term budget frameworks have proved to be a useful and efficient tool for fiscal management in many advanced economies. However, implementing such frameworks is not an easy task: preconditions to a successful binding medium-term budget framework include credible and predictable annual budget, accurate medium-term macroeconomic and demographic projections, medium-term fiscal objectives and rules and a comprehensive, unified, top-down budget process (Harris et al., 2013).

Indeed, low-income countries would need to ensure that the basic PFM systems are in place before attempting to implement more sophisticated arrangements. The analysis presented above shows considerable variance in the strengths and weaknesses of budget institutions across and within the low-income countries. Given what has been discussed above, what institutional reforms should be seen as a priority? Two points are worth emphasizing:

  • The connection between the institutional data presented above and the recommendations for necessary institutional reforms is not unambiguous: in other words, a low institutional score in some area does not automatically mean it should be seen as high priority. An example is the lack of independent fiscal agencies in low-income countries. Due to scarce resources, it is likely that establishing such agencies should not be seen as a priority in many cases.

  • As discussed above, countries should not attempt too many reforms at one time, and instead address the institutional gaps in the basic elements of their budgeting systems before attempting more sophisticated reforms.

Therefore, appropriate reform strategies require country-specific reform programs and any generic advice is bound to be incomplete. With these limitations in mind, one can nevertheless highlight some common areas of institutional shortcomings countries should address.

Understanding the Fiscal Outlook and Challenges

Most low-income countries in the sample seem to have basic fiscal reporting practices in place but arrangements related to forecasting future fiscal developments and related risks are less robust. In order to improve understanding of the current and future fiscal position, low-income countries could consider:

  • Expanding the coverage of their annual financial statements to central government, and ensure that there is a published external audit.

  • Producing financial statistics by an independent office, in line with international standards.

  • Including information about fiscal risks in their budget documentation, particularly in countries where PPPs, for example, are being used.

  • Producing and publishing macroeconomic forecasts alongside related assumptions; and updating the forecasts in line with the budget process.

  • Once the forecasting capacity improves, introducing medium-term forecasts with alternative medium-term budget scenarios, which would provide policymakers with a better sense of the country-specific vulnerability to uncertainty

Formulating a Credible Fiscal Strategy

Many institutions related to the formulation of a fiscal strategy seem to be relatively underdeveloped. While most countries have taken first steps in introducing some medium-term elements in their fiscal management, many challenges remain to be addressed. Where appropriate, low-income countries could consider:

  • Adopting a medium-term objective in countries currently without such objective to provide guidance to fiscal planning, and once such objective is in place, regularly report on the fiscal performance against the stated objective

  • In countries without any medium-term fiscal or budget framework, developing a simple framework, which would provide a projection of the fiscal balance, include estimates of government revenues and spending at a more aggregate level, and at the second stage providing guidelines (envelopes) to line ministries to prepare medium-term spending plans

  • Once the prerequisites, such as solid macro-fiscal forecasting, credible budget, top-down budget process and medium-term fiscal objectives are in place, developing the framework into a more binding direction

  • Ensuring proper interaction between central or federal government and subnational governments, at least by exchanging information regularly on fiscal policy, or ideally putting in place a legal framework for coordinating and sharing the burden of fiscal policy between layers of government

Implementing the Fiscal Strategy

While the institutions related to implementing the fiscal strategy seem to be the strongest among the three key stages reviewed, important challenges remain. These relate mainly to top-down budgeting and budget execution. In this context, low-income countries could consider:

  • Issuing ex ante limits on both aggregate and sectoral or ministerial spending at an early stage in the budget preparation process, making sure that the size of the limits is realistic

  • Changing parliamentary procedures to follow a top-down sequence where the parliament first approves an overall annual budget framework for total revenues and total expenditures and then discusses the allocation within these totals

  • Putting in place appropriate restrictions for overspending during the execution of the budget and gradually introducing limits on multi-annual expenditure commitments

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This chapter is reprinted from OECD Journal on Budgeting, Vol. 15, Sanjeev Gupta, Sami Yläoutinen Brian Olden, Holger van Eden, Teresa Curristine, Tom Josephs, Eliko Pedastsaar, and Johan Seiwald, “Budget Institutions in Low-Income Countries,” ©2016, with permission from OECD.

See Olden et al. (2010), IMF (2014).

Budget institutions can be defined in broad terms as the laws, procedures, and conventions that influence budgetary decision-making and governance.

Advanced G20 countries are Australia, Canada, France, Germany, Italy, Japan, Korea, United Kingdom, and United States; Emerging Market G20 countries include Argentina, Brazil, China, India, Indonesia, Mexico, Russia, South Africa, Saudi Arabia, and Turkey.

Since the purpose is to provide a general overview of budget institutions in the three country groups, country-specific scores are not presented.

For a more detailed discussion, see Olden (2012).

Also virements can be used to make in-year adjustments in budget appropriations.

The ratings are derived from detailed assessments by experts deeply familiar with the institutional setup in these countries.

This should not be interpreted to say that low-income countries have no weaknesses in budget execution. For example, Andrews (2013), based on PEFA scores, found developing countries had the weakest scores in budget execution among different stages of the budget process.

Also, the recent crisis has played an important role in incentivizing the advanced countries to carry out institutional reforms. Reforms have been implemented at a rapid pace in advanced Europe in light of the need for fiscal consolidation in the aftermath of the financial crisis, contributing to a growing gap in institutional strength between advanced and emerging G20 countries (see IMF 2014).

Here one should note that the sample sizes are different between the country groups: low-income countries (7), emerging market (10), and advanced countries (9).

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