95. Since the annual budget is almost without exception the main instrument of fiscal policy, the budget process and the information contained in and presented with the budget are central to fiscal transparency. Budget preparation and execution should be open in the sense that information is readily available on how budgets are prepared and executed (for instance, budget circulars and information on the budget process should be available to the public). The Code does not specifically advocate participation of civil society in budget processes, though such approaches are not excluded. Nor does openness imply full disclosure to the public at all stages of the budget process. Transparency in this context is necessarily limited by considerations of market sensitivity, due process in policy formulation, and the costs of providing information to the public relative to the expected benefits.

95. Since the annual budget is almost without exception the main instrument of fiscal policy, the budget process and the information contained in and presented with the budget are central to fiscal transparency. Budget preparation and execution should be open in the sense that information is readily available on how budgets are prepared and executed (for instance, budget circulars and information on the budget process should be available to the public). The Code does not specifically advocate participation of civil society in budget processes, though such approaches are not excluded. Nor does openness imply full disclosure to the public at all stages of the budget process. Transparency in this context is necessarily limited by considerations of market sensitivity, due process in policy formulation, and the costs of providing information to the public relative to the expected benefits.

96. Principles and practices relating to openness of the budget process concern budget documentation, budget presentation, procedures for budget execution, and fiscal reporting. The OECD best practice guidelines, which focus on budget transparency, are most relevant to this section of the Code. Box 14 describes the coverage of the OECD guidelines. As they include much that is already in the Code, this section as a result refers only selectively to them.

OECD Best Practices for Budget Transparency

The OECD issued the OECD Best Practices for Budget Transparency in September 2000. While there is a significant overlap between the OECD best practice guidelines and the fiscal transparency Code, the former focuses solely on central government, and on the budget rather than all fiscal and quasi-fiscal activities.

The OECD best practice guidelines are in three parts.

Part I lists the principal budget reports that governments should produce and their general content: the budget; a prebudget report; monthly reports on budget implementation; a mid-year report; a year-end report; a preelection report; and a long-term report.

Part II describes specific disclosures to be contained in the reports: economic assumptions; tax expenditure; financial liabilities and assets; nonfinancial assets; employee pension obligations; and contingent liabilities.

Part III highlights practices that ensure the integrity of reports: accounting policies; systems and responsibility; audit; and public and parliamentary scrutiny.

Budget Documentation

The budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks.

97. The Code includes good practices relating to: (1) fiscal policy objectives and sustainability; (2) fiscal rules; (3) the macroeconomic framework; (4) identifying new policies; and (5) major fiscal risks.

Fiscal Policy Objectives and Sustainability

A statement of fiscal policy objectives and an assessment of fiscal sustainability should provide the framework for the annual budget.

Fiscal Policy Objectives

98. While the budget has an annual perspective, it should be placed in a wider context. It is important to make a clear statement about the broad objectives of fiscal policy and the sustainability of fiscal policy over the longer term. At the very least, it should be indicated in the budget documentation how the annual central government budget fits in with the government’s broader objectives regarding government or public sector finances, and longer-term deficit and debt targets. This could be a mainly qualitative statement supported by a few key figures, in which case it could be included in the preamble to the annual budget or the budget speech. However, such statements are more helpful if they include quantitative detail on government or public sector finances and the longer-term fiscal outlook, in which case this information should be provided in a background paper that is part of the budget documentation.79

99. The OECD best practice guidelines suggest the presentation of a prebudget report no later than one month prior to the tabling of the annual budget, stating the government’s medium-term economic and fiscal intentions, and highlighting the total revenue, expenditure, the deficit or surplus, and debt.80 Such a report can facilitate legislative and public debate on overall fiscal policy objectives and strategy prior to the finalization of the budget by the executive and presentation of the detailed revenue and expenditure proposals to the legislature. It is by no means suggested, however, that the executive should formulate the whole budget in public. Governments need the space for careful deliberation and decision-making before they expose the full detail of the proposed budget for legislative and public consideration. This is particularly important for tax policy changes. In general, however, the detailed budget proposals should be presented to the legislature in sufficient time to allow careful deliberation before passage of the necessary legislation. The OECD best practice guidelines suggest the presentation of the draft budget to the legislature no less than three months prior to the start of the fiscal year, and approval of the budget prior to the start of the fiscal year.

Fiscal Sustainability Analysis

100. While all countries should provide some indication of the sustainability of fiscal policy, more formal fiscal sustainability analysis would be a demanding requirement for many countries, especially since there are no clear and practical rules for establishing whether fiscal policy is sustainable or not.

101. Fiscal policies are unsustainable if they lead to a buildup of debt to an excessive level, in which case there is a need for change to current policy. However, judgments about excessive debt, and particularly about excessive debt-to-GDP ratios, are hard to make. Economic theory provides little guidance on this. A common approach, therefore, is to rely on a simple rule that specifies, for example, that the debt ratio cannot rise or cannot exceed a specific limit. But this and similar rules are arbitrary, and provide little guidance as to whether a particular debt ratio is a threat to macroeconomic stability, could lead to a loss of fiscal policy credibility, result in higher interest rate premia, etc. This being the case, assessments of fiscal sustainability have to be made on a country-specific basis, relying on particular knowledge about the implications of, and market reactions to, the government’s past and future fiscal policies. In this connection, reporting a country’s sovereign debt rating, and changes to the rating in recent years, provides one useful guide to sustainability.

102. At a technical level, assessments of fiscal sustainability involve decomposing the change in the debt ratio into components reflecting the primary balance (the overall balance excluding interest payments), the interest rate on debt, the growth rate of the economy, and the initial debt stock.81 From a policy perspective, attention is focused on the change in the primary balance required to meet a debt target (starting from a debt ratio which is judged excessive) or to stay under a debt ceiling over a specified time period. This provides an indicator of the fiscal adjustment required for sustainability. Of course, more relevant for a policymaker is the discretionary adjustment that has to be made, so it is important in the short to medium term that likely cyclical movements in fiscal aggregates are distinguished from necessary structural changes.82

103. The OECD best practice guidelines suggest that a long-term report assessing the sustainability of current fiscal policies should be published every five years, with more frequent publication if there are major revenue or expenditure policy changes. The assumptions underlying the analysis and alternative scenarios should be provided. In the longer term, it is important that, in addition to public debt, policy commitments with a future financial impact also be properly taken into account. Especially relevant in this regard are public pension programs, the costs of which will be adversely affected by population aging. One way of doing this would be to look at unfunded public pension liabilities alongside public debt in assessing sustainability.83

104. An alternative means of looking at the longer-term effects of fiscal policy is through the use of generational accounting. This shows the net tax burden on cohorts of individuals over their remaining lifetime. By comparing the net tax burden faced by different cohorts, it is possible to examine the extent to which current policies imply a transfer between generations, and to use this information as a basis for judgments about the sustainability of these policies.84

Fiscal Rules

Any fiscal rules that have been adopted (e.g., a balanced budget requirement or borrowing limits for subnational levels of government) should be clearly specified.

105. Fiscal rules are forms of agreement (usually in law) that restrict the fiscal policy action of government. Examples are a balanced budget requirement, borrowing limits (e.g., on access to central bank financing) for the central government or subnational levels of government, a “golden rule” (that public borrowing cannot exceed public investment), the criteria for fiscal convergence in the Maastricht Treaty, and the “close to balance” requirement of the Stability and Growth Pact. It is necessarily true that any rule adopted by a government must be specified in some form. The transparency issue that arises relates to the clarity with which the rule is defined, and the adequacy of reporting against the rule. The golden rule, for instance, is open to interpretation as to what constitutes public investment and so needs to be supported by a clear budget classification. Obviously, if a fiscal rule is to be durable, there must be some flexibility in its application when a departure from the rule is justified by economic conditions. However, the circumstances under which such a departure is justified should be clearly explained. Reporting on performance relative to a rule should also be consistent with other practices of the Code.85

Macroeconomic Framework

The annual budget should be prepared and presented within a comprehensive and consistent quantitative macroeconomic framework, and the main assumptions underlying the budget should be provided.

106. This is a basic requirement of fiscal transparency. As part of the broader context in which fiscal policy must be placed, its aggregate impact on the economy and its relation to other macroeconomic policies are critical. Most countries have some formal methodology for macroeconomic forecasting and policy formulation, and advanced economies use sophisticated quantitative models to help frame the budget. Information on the macroeconomic framework should be provided in a background paper that is part of the budget documentation. One possibility is that this is combined with the discussion of fiscal policy objectives and fiscal sustainability in a fiscal and economic out-look paper, in which context the macroeconomic framework should be extended to support fiscal sustainability analysis.

Medium-Term Budget Frameworks

107. Many countries already present basic fiscal and economic policy statements. In this connection, a distinction needs to be drawn between statements based on medium-term projections of fiscal aggregates, and those based on integrated, consistent, medium-term estimates broken down by individual spending agencies. The latter is sometimes referred to as a medium-term budget framework, with the former representing a necessary step toward a medium-term budget framework. Box 15 describes medium-term budget frameworks in more detail. They are administratively and politically demanding, and have been implemented mainly in advanced economies. However, some other countries have successfully implemented them.86

Medium-Term Budget Frameworks: Some Lessons from the Experience of Selected OECD Countries

A medium-term budget framework, if applied rigorously, provides a very clear statement of the revenue and expenditure effects of maintaining current government policies, and a mechanism for controlling the introduction of new policies and tracking budget implementation beyond a single year. It provides a transparent basis for accountability of the executive branch, and a necessary foundation for more detailed results-oriented budgeting. Medium-term budget frameworks have been used successfully by Germany, the United Kingdom, and Australia. Experience in these and other countries, however, suggests that stringent conditions have to be fulfilled before the full benefits can be attained.

What is a medium-term budget framework?

The key characteristics of a medium-term framework are as follows:

  • a statement of fiscal policy objectives;

  • integrated medium-term macroeconomic and fiscal forecasts;

  • estimates of expenditure and receipts of ministries and agencies for two to four years beyond the budget year;

  • formal “forward” or “out-year” estimates—the first out-year estimate of expenditure becomes the basis of budget negotiations for the following year; and

  • ministries’ and agencies’ budget appropriations become hard budget constraints.

The forward-estimates process has significant technical advantages both for central agencies and individual spending agencies. For the latter, funding for their programs is given a greater degree of predictability, and the requirement for agencies to maintain multiyear estimates also provides greater clarity of policy at a program level. It should also be noted that, particularly in the United Kingdom and Australia, the establishment of a strong forward-estimates process has been associated with much greater flexibility for agencies in resource use within the aggregate and program ceilings.

Some lessons drawn from experience

The experiences of the three above-mentioned countries suggest the following conclusions with regard to medium-term budget frameworks:

  • fiscal policy objectives and quantitative fiscal targets need to be articulated and defended at the highest level of government;

  • robust revenue forecasts are critical, and the target levels of expenditure must be rigorously related to the macroeconomic prospects over the medium term;

  • budget and forward estimates are better set in nominal terms to ensure that program managers respond to price changes;

  • the framework should be based on clearly defined and fully costed policy proposals; and

  • the medium-term budget framework should be accompanied by strengthened measures to review individual expenditure policies and their institutional delivery mechanisms.

Medium-term budget frameworks provide better, more transparent tools for formulating, assessing, and implementing fiscal policy, but they will only be effective if there is a real, stable, transparent, and well-publicized commitment to fiscal control. Medium-term budget frameworks must also be based on fundamental institutional improvements, sustained political commitment, an appropriately phased introduction of improved forecasting and rigorous costing of programs, and disciplined budget management.

108. An important advantage of a medium-term budget framework for developing countries and countries in transition is that it helps link the capital and current budgets. Without the coordination that results from such a link, the usefulness of budget information is limited, and there is often inadequate provision made for operating and maintenance costs. However, for many developing countries and countries in transition, only an aggregate forecast will be feasible. This will nonetheless provide a useful starting point for considering medium-term changes in budget policy. Best practice is that a comprehensive, rolling medium-term budget framework (covering 3-5 years) should be published as a central basis of fiscal management.87

Identifying New Policies

New policies being introduced in the annual budget should be clearly described.

109. Clear description, including careful costing, of continuing government programs and new policies are vital elements of budget discipline. Countries should include a statement which describes tax and expenditure policy changes being introduced and their expected fiscal effects as part of the budget documentation.88 This allows clear identification of factors causing budget outcomes to diverge from planned spending and thus improves accountability for fiscal policy implementation. It also provides a basis for a disciplined medium-term budget framework. Best practice is that the estimated fiscal effects of all proposed central government legislation, including the cost implications for subnational levels of government, should be made publicly available.89

Major Fiscal Risks

Major fiscal risks should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).

110. Budget estimates and the economic forecasts underlying the budget are subject to a variety of risks, including the effects of variations in the assumptions and parameters underlying the macroeconomic forecasts and individual program estimates, as well as uncertainty over the costs of specific expenditure commitments.90 Best practice is that a statement of fiscal risks should be included in the budget documentation as a basis for assessing the budget’s reliability as a guide to likely fiscal outcomes.91 Box 16 describes what should be covered in a statement of fiscal risks.

Statement of Fiscal Risks

A statement should be provided with the annual budget giving an overview of all material fiscal risks, quantified to the extent possible. Where allowance for a risk has been made in a budget contingency reserve this should be noted. The statement should contain information on risks broken down into the following categories:

  • (1) variations in key forecasting assumptions—the fiscal effects of variations in key assumptions underpinning the macroeconomic forecasts (e.g., the effect on the fiscal deficit of a 1 percent increase or decrease in GDP growth, inflation, interest rates, or the exchange rate from the central rate assumed in the budget forecast); and the fiscal effects of variations in key assumptions underpinning the budget forecasts of revenue and expenditure (e.g., a variation in the effective tax rates, public sector wage increases, or the average number of claimants for social assistance).

  • (2) contingent liabilities—these may include guarantees, indemnities, and warranties; uncalled capital (e.g., in international financial institutions); and litigation against the government.

  • (3) uncertainty about the size of specific expenditure commitments—where provision has been made in the budget for expenditure on an item or activity but there is a greater-than-usual degree of uncertainty about the likely cost, the risk should be disclosed. For example, the government may have given a blanket undertaking to depositors of a specified distressed financial institution that their deposits would be honored. However, at the time of finalizing the budget, the cost of this commitment may still be highly uncertain.

  • (4) other items that have not been included in the budget because of the extent of uncertainty about their timing, magnitude, or eventuality—for example, the government may have announced a general intention to introduce a tax or expenditure policy change, the details of which have not been finalized sufficiently for inclusion in the budget.

Budget Presentation

Budget information should be presented in a way that facilitates policy analysis and promotes accountability.

111. The Code includes good practices relating to: (1) data classification; (2) program objectives; and (3) indicators of the government’s fiscal position.

Data Classification

Budget data should be reported on a gross basis, distinguishing revenue, expenditure, and financing, with expenditure classified by economic, functional, and administrative category. Data on extrabudgetary activities should be reported on the same basis.

112. This is a basic requirement of fiscal transparency. Budget transactions need to be capable of being reviewed from the perspective of their economic impact, the form of appropriation, administrative control, and their purpose. A recording and classification system that meets these needs provides the foundation for the presentation of the budget, final accounts, and other fiscal reports.

Comprehensiveness and Compatibility with GFS

113. The data classification system should comprehensively cover the broadly defined budget. The data classification system should also be compatible with GFS standards for data classification in the sense that distinctions at a transactions level should permit generation of GFS-consistent reports.92 The use of the GFS or another widely accepted classification system is also a basic requirement of fiscal transparency. A classification by administrative category is important for internal control purposes. Classifications and subclassifications should be consistent with the analytical distinctions in the current GFS Manual.93 However, it should be emphasized that the GFS is a reporting standard for fiscal statistics and not an accounting or financial reporting standard. The differences are discussed in Box 17.

Fiscal Transparency and International Standards for Financial and Fiscal Reporting

Efforts are being made to improve accounting and financial reporting standards by a number of governments. The work of IFAC and the proposed revision of the GFS Manual, together with the Code, are further steps toward development of standards that will help improve international comparability of data and contribute to improved fiscal transparency. It is important to distinguish the different objectives of these initiatives, and to coordinate work in all three areas as closely as possible.

IFAC-PSC Study (http://www.ifac.org)

The Public Sector Committee (PSC) of IFAC in May 2000 released its study on financial reporting Governmental Financial Reporting at http://www.ifac.org/Guidance/Pub-Download.tmpl?PubID=960182179426 to help national governments prepare financial statements that provide information on the financial performance and position of the government. The study discusses the principles that are the basis for international public sector accounting and reporting standards now being developed by the PSC as part of its continuing standards project. The PSC has released the first eight International Public Sector Accounting Standards (IPSAS) and a further six exposure drafts that are intended to lead to standards. For the most part, the IPSAS are based on modification of International Accounting Standards designed for the private sector and modified for applicability to the public sector. ED 9, however, proposes to establish requirements for financial reporting under cash accounting. These principles will be of value for most governments that operate a near cash basis system.

GFS revision

The GFS is not an accounting or financial reporting standard, but a standard for analytical reporting of fiscal statistics; GFS looks at economic impact rather than accounting entity performance. It is desirable that government accounts classification and financial reporting standards be developed in a way that is compatible with the generation of such statistical reports, so that a single information system can meet both accounting and fiscal reporting needs. It is also important that GFS fiscal reports be completely reconciled with government budget reports and the final accounts to provide assurance of data reliability and comprehensive coverage of the fiscal accounts. The GFS is being revised and a full draft is available at http://www.imf.org/external/pubs/ft/gfs/manual/index.htm. The revisions recognize the growing importance of accrual concepts for government accounting and aims to harmonize GFS completely with other international financial statistics systems (notably the SNA) that use accrual concepts. The proposed revision would not require that countries adopt accrual accounting: a staged transition is envisaged, and countries could adjust data from their cash accounts, or, in many cases use cash data where differences between cash and accrual are not substantial.

Fiscal transparency

The Code is fully supportive of the application of an accrual basis GFS and IPSAS. It is highly desirable for countries operating on a near cash basis that disclosure of fiscal activity go beyond a simple cash flow report. As discussed below, a number of the basic requirements of the Code stipulate reporting of data that go well beyond pure cash financial reporting standards. Some of these are encouraged under the proposed IPSAS on cash accounting as additional disclosures, others would be adopted in financial statements as a government moves toward an accrual system. The Code, however, is intended to apply irrespective of the nature of the accounting system. The Code emphasizes as basic requirements that (1) all countries report on financial assets and liabilities—introducing some elements of a modified accrual standard; and (2) all countries should aim to have an accounting system that can produce reliable reports on payment arrears. Such reports could be produced at a memorandum level by a cash system. The need to extend to an accruals system—in which accounts payable are automatically recorded as expenditure—should be determined by each country on an as-needed basis.

114. Aside from providing an analytical framework that facilitates assessment of the aggregate impact of government transactions on the economy, the GFS provides a widely accepted standard for an economic classification of revenue and expenditure and adopts the UN Classification of the Functions of Government (COFOG)94 as its functional classification framework. Using these standards of classification facilitates international comparisons of budget statements and provides a basis for tracking the economic impact of the budget. However, neither classification is intended to meet the needs of administrative or program control, which requires a breakdown of major economic and functional categories of expenditure for individual spending agencies or programs.

115. It is important that all military spending is recorded and reported under the defense function, including that which is financed by off-budget or commercial revenue sources. While national security considerations are often used to argue against transparency in this area, a multilateral approach to greater openness could reduce security risks. Security considerations may, however, warrant a somewhat different approach to auditing the details of military spending.95

Consistency with Administrative Accountability

116. The classification system should also allow a clear tracing of responsibility for the collection and use of public funds. Most countries have relatively sound administrative classifications for this purpose, often to subdepartmental levels; in some countries, however, the classification does not allow detailed specification of administrative responsibilities. This is a particular problem in countries in transition where, under the former planning regime, the primary budget allocation was by broad functional category and allocations were made to individual spending units during the year. Many of these countries are changing their classification system to promote administrative accountability.96

Program Objectives

A statement of objectives to be achieved by major budget programs (e.g., improvement in relevant social indicators) should be provided.

117. Transparency and accountability in government require that the budget and accounts be related to objectives and results of government activity, rather than simply to the items on which money is spent as in traditional line-item budgeting. Modern budgeting tries to identify as far as possible the objectives of government activities and to measure outputs and outcomes in relation to these objectives. An important element of early efforts in this direction is the classification of expenditure into “program,” “subprogram,” and “activity” categories, defined with increasing specificity at the more detailed levels in relation to a clearly stated set of objectives.97 Thus expenditure on a “public health” program could be linked to governments’ broad aims of promoting preventative health care, and more specific objectives would be given in, say, an antimalarial subprogram. Classification of government activities by program is now widely practiced, and its further implementation will help improve transparency. However, it must be stressed that a program classification supplements rather than replaces the traditional administrative classification discussed in the preceding section.98 The elements of a program classification will be particularly important for those countries seeking to identify and track expenditure aimed at poverty reduction in connection with Highly Indebted Poor Countries debt relief or a Poverty Reduction and Growth Facility arrangement with the IMF.

118. Recent efforts in advanced economies have emphasized a need to increase the authority and incentives for line managers to achieve agreed results. A number of countries are developing sophisticated systems of results-oriented budgeting and accounting. These efforts are very important for increasing transparency of strategic and operational choices made through government budgets. Best practice is that transactions should be classified by activity or output, and by program or outcome. Detailed financial and nonfinancial information for all outputs/activities and programs/outcomes, together with comparable information for the previous year, should be part of the budget documentation.99 The emphasis is primarily on transparency at an aggregate level, and on putting in place a framework that is conducive to the provision of progressively more detailed information on the impact of budget decisions. Many of the techniques being applied in advanced economies place a heavy demand on administrative resources, and are not therefore appropriate for developing countries or countries in transition. But all countries have the capacity to specify clear objectives for at least the major services provided by the government.

Indicators of the Government’s Fiscal Position

The overall balance of the general government should be a standard summary indicator of the government’s fiscal position. It should be supplemented where appropriate by other fiscal indicators for the general government (e.g., the operational balance, the structural balance, or the primary balance).

119. The current GFS definition of overall balance of government,100 while not adopted universally, provides a widely used reference point for fiscal policy analysis. It aims to identify those transactions of government that result in net borrowing from other economic sectors (and are “deficit or surplus creating” or “above the line”), and provides a focus for analysis of the size of the deficit/surplus and its components, as well as the sources of deficit financing (or “below-the-line” transactions). The overall balance provides an indication of the impact of fiscal policy on aggregate demand. While components of deficit financing indicate more specific consequences of fiscal policy (e.g., the impact of borrowing from the central bank on money supply and inflation and the impact of domestic borrowing on interest rates, investment, and growth).

120. While it is recommended that analysis of the government’s fiscal position should be based on the overall general government balance, there are some qualifications to this. First, practical or constitutional reasons may mean that in many countries the overall balance of central government is the standard measure of the fiscal position. Second, in some situations the central or general government balance should be supplemented by a measure of the broader public sector balance.101

121. Third, the overall balance measure has acknowledged shortcomings in some circumstances. However, these can be largely overcome by providing supplementary information on alternative balance measures to meet particular policy needs. The primary balance should be routinely reported for countries with substantial public debt or deteriorating debt dynamics. The operational balance (the overall balance minus the part of debt service that compensates debt holders for inflation) is often reported when there is high inflation.102 The structural or cyclically adjusted balance (which, in various forms, removes the effects of cyclical fluctuations or exogenous shocks from the overall balance) is used in a number of advanced economies to judge the stance of fiscal policy. There are also circumstances where it might be appropriate to exclude certain items from the overall balance where these items are large and possibly highly variable, and thus make the overall balance a misleading indicator of the macroeconomic impact of fiscal policy and fiscal trends. The overall balance excluding grants and the nonoil fiscal balance are examples.103

122. In addition to the need for such supplementary measures, a further concern about the overall balance is that it is a cash-based indicator which does not properly reflect the impact of balance sheet transactions. It is generally recommended, for instance, that the proceeds from asset sales be treated as financing rather than revenue, negative capital expenditure, or negative net lending.104 More generally, some countries identify an “underlying balance” net of asset sales to remove these proceeds from above the line in a cash presentation of the balance. Similarly, bank restructuring costs, which usually reflect a combination of balance sheet operations (transfer of government bonds or assumption of debt) and quasi-fiscal activities (central bank loans), do not impact the overall deficit in the same way as direct budget support.

123. In an integrated government accounting system, under accrual or modified accrual accounting, it would be necessary to reconcile debt transactions with the operating accounts. Under cash accounting, IFAC recommends that the disclosure of assets and liabilities should be comprehensive and permit such a reconciliation to be made. However, accounting for transactions in this way does not necessarily give a true reflection of their economic impact, which may reflect earlier policies. Thus the need to recapitalize a bank may result from accumulated past quasi-fiscal activities (e.g., directed credit), so that the impact would have been understated in the past but overstated when recapitalization takes place. This point notwithstanding, it is essential for transparency that such transactions be fully identified and made public by the government.

124. Another point of contention is the appropriate way to treat grants. In the current GFS Manual, these are treated as “above the line” or deficit-reducing receipts. However, since these flows are not directly under the policy direction of the recipient government, some argue that they are better treated “below the line” as financing items. To indicate potential issues related to these receipts, in countries with large grant inflows it is common to identify the overall balance inclusive and exclusive of grants.

125. Many of these issues will be addressed by adopting an accrual basis for fiscal reporting since it fully and properly reflects changes in government assets and liabilities. Although a cash overall balance will continue to be used by many countries for some time, the revised GFS Manual will use accrual standards for fiscal reports, in line with other economic statistics standards. Moreover, the need to supplement cash basis financial reporting by at least some elements of accrual reporting is being increasingly recognized. Several countries are adopting an accrual or modified accrual accounting standard.105 In addition to using the overall balance and supplementary indicators for macroeconomic analysis, it is important that these concepts be clearly applied in presenting the annual budget to the legislature and in public discussion. In many countries, budget estimates and the final accounts are presented simply in a cash-accounting format (showing gross receipts and outlays). To provide assurance of the reliability of data in GFS fiscal reports, the overall balance should be reported in budget and accounting reports with an analytical table showing its derivation from budget data.

The Public Sector Balance

The public sector balance should be reported when nongovernment public sector agencies undertake significant quasi-fiscal activities.

126. As emphasized elsewhere, many governments conduct extensive quasi-fiscal activities outside the budget, which are not captured in the conventional measure of the overall fiscal balance. This means that standard measures of the fiscal position can present a distorted picture of the extent of fiscal activity, and can contribute to poorly designed fiscal policies. It can also mean there are incentives to move fiscal activities outside government to make the fiscal position look better than it is. The publication of a statement on the nature and extent of quasi-fiscal activities is therefore a basic requirement of fiscal transparency. However, identification and quantification of quasi-fiscal activities depend critically on high-quality reporting by public financial institutions and nonfinancial public enterprises. Given that improvement in this regard is unlikely to be rapid, an alternative is to establish a system of reporting that covers the broader public sector and to use the public sector balance as an additional measure of the government’s fiscal position. This is clearly appropriate where quasi-fiscal activities are judged to be extensive, and is desirable in any country where the public sector is much larger than general government. Some of the issues involved in reporting the public sector balance are discussed in Box 18. It should be emphasized that reporting the public sector balance does not mean that clear boundaries no longer need to be established between different parts of the public sector, nor does it diminish the need to identify and report on quasi-fiscal activities.

The Public Sector Balance

Public sector quasi-fiscal activities can be conducted through the central bank, public financial institutions, or nonfinancial public enterprises. A relatively narrow extension of the general government balance could be where the main concern is with quasi-fiscal activities of the central bank and public financial institutions. Mackenzie and Stella (1996) suggested that central bank losses could be amalgamated into an adjusted fiscal deficit. Other forms of augmented balance (see, for instance, Daniel, Davis, and Wolfe, 1997) have also been advocated to capture balance sheet transactions such as assumption of debt, and some forms of these are used on a pragmatic basis in some Fund programs. Operationally, however, it is now considered more practicable to encourage broader institutional-based reporting rather than to attempt to derive a hybrid balance concept.

A fully consolidated public sector balance would in principle have the potential to capture many quasi-fiscal activities wherever they are conducted, and to present a more accurate measure of fiscal activity and the macroeconomic impact of government. Consolidated reporting would also facilitate cross-checking of transaction flows between subcomponents of the public sector.

In practice, the overall balance of the nonfinancial public sector is the expanded balance concept of most relevance. In many countries, nonfinancial public enterprises are used for a variety of quasi-fiscal purposes. In such cases the balance of the nonfinancial public sector should be reported, calculated by adding the net balance of public enterprises to government revenue or expenditure. This will be particularly important where nonfinancial public enterprises are large, where government taxes or subsidizes through them, crowds out the private sector through them (e.g., by paying above-market interest or wages), and accumulates debt or lends through them.

Consolidating only the nonfinancial public sector in the overall balance preserves the separate identification of the financing of the government and nonfinancial public enterprises by the central bank and/or public financial institutions. In those countries where the central bank and/or public financial institutions are also involved in extensive quasi-fiscal activity, it may be desirable for some analytical purposes to also calculate and report a fully consolidated public sector balance.

The overall balance of the nonfinancial public sector should be presented alongside the overall balance of general government. This is important for diagnosing the sources of fiscal problems, and for preserving the key distinction between general government and nonfinancial public enterprises, which, while used to some extent to carry out fiscal policy, are usually primarily concerned with commercial objectives. Separate treatment of subsectors also helps reduce the possibility that presentation of a nonfinancial public sector balance could be construed as implying the government is more likely to use nonfinancial public enterprises for fiscal purposes.

On the other hand, the fact that governments own these institutions and have the capacity to direct them to conduct quasi-fiscal activities—whether or not they currently exercise that capacity—argues for the importance of more general reporting of supplementary information on the nonfinancial public sector balance. The application of generally accepted accounting standards (which focus on the ability to control as a criterion for consolidated reporting) to government financial reporting may in the future provide added impetus to reporting on the fully consolidated public sector, with separate reporting by subsector.

Procedures for Budget Execution

Procedures for the execution and monitoring of approved expenditure and for collecting revenue should be clearly specified.

127. The Code includes good practices relating to: (1) the accounting system; (2) procurement and employment; (3) internal audit; and (4) tax administration.

The Accounting System

There should be a comprehensive, integrated accounting system which provides a reliable basis for assessing payment arrears.

128. This is a basic requirement of fiscal transparency. Accounting systems should be based on well-established internal control systems, allow for the capture and recording of information at the commitment stage, generate reports on payment arrears, cover all externally financed transactions in a timely way, and maintain records on aid-in-kind. Best practice is that the accounting system should have the capacity for accounting and reporting on an accrual basis, as well as for generating cash reports.

Internal Control Systems

129. Internal control systems are intended to provide assurance that management’s objectives are being achieved.106 Responsibility for internal control therefore rests with the head of each individual government agency. However, a central government agency might be assigned responsibility for developing a government-wide standard approach to internal control.

130. As defined by INTOSAI, the objectives of internal control systems are to promote orderly, economical, efficient, and effective operations; to safeguard resources against loss due to waste, abuse, mismanagement, errors, and fraud; to adhere to laws, regulations, and management directives; to develop and maintain reliable financial and management data; and to disclose these data in timely reports.107 To be effective, internal controls must be appropriate, function consistently as planned throughout the period, and be cost-effective. A set of guidelines for internal control standards issued by INTOSAI is summarized in Box 19. Internal control systems in all countries should conform to INTOSAI guidelines.

INTOSAI Guidelines for Internal Control Standards

INTOSAI has issued a set of general and detailed standards defining a minimum level of acceptability for a system of internal control.

General standards

  • Specific control objectives are to be set for each activity of the organization, and are to be appropriate, comprehensive, reasonable, and integrated into the organization’s overall objectives.

  • Managers and employees are to maintain a supportive attitude to the standards at all times, and are to have the integrity and sufficient competence to meet the standards.

  • The system is to provide reasonable assurance that the objectives of an internal control system will be met.

  • Managers are to continually monitor their operations and to take prompt remedial action where necessary.

Detailed standards

  • Full documentation of all transactions and of the control system itself are to be provided.

  • Transactions and events should be promptly and properly recorded.

  • Execution of transactions and events should be properly authorized.

  • Key responsibilities at different stages of a transaction should be separated among individuals.

  • Competent supervision is to be provided to ensure control objectives are being achieved.

  • Access to resources and records is to be limited to authorized individuals who are accountable for their custody or use.

131. An example of a government-wide approach to internal control is that taken in France and in countries based on the French administrative system, where there is a clear distinction imposed by law between the public agency requesting a payment, a special unit of the ministry of finance that approves all expenses, and the accounting department of the ministry of finance that makes all payments.108 Other systems also separate the power to authorize commitments from that of making payments, but are more decentralized and emphasize the responsibility of management of each individual government agency for setting a sound control environment.

Assessment of Arrears

132. In addition to being an indicator of serious flaws in fiscal management, a failure to identify arrears—on the payments or receipts side—can be a major impediment to fiscal transparency. To the extent that arrears are unreported, the fiscal position is wrongly stated. Effective government accounting systems should provide enough information to assess the extent of payment or tax arrears.

133. Cash accounting in government understates the real government deficit to the extent that governments have substantial or persistent payment arrears (e.g., to suppliers, employees, and pensioners). Payment arrears are rarely an issue in advanced economies, but are only too common in developing countries and countries in transition, for the reasons given in Box 20. This problem can often arise more from poor budget preparation than from accounting system weaknesses, but a robust accounting system does help to remedy the problem and avoid its recurrence.

Stages of Payment and Payment Arrears

A payment arrear occurs when a bill or other obligation is due for payment but is not paid on or before the due date. To assess arrears, it is necessary to identify both when a bill is due for payment and whether or not actual payment has occurred. In a typical payment process, all accounting systems observe four basic stages:

  • commitment: a prospective expenditure resulting from placement of an order, signing of a contract, or other agreement for the provision of goods or services;

  • verification: confirmation by the authorized receiving agent that an ordered good or service has been received and, thereby, that a liability and due date of payment are recognized;

  • payment issue: issuance of a check or payment order to the supplier of a good or service or to meet a transfer obligation fallen due; and

  • cash payment: payment of cash or transfer of funds to a supplier or recipient’s account after presentation and processing of check or payment order.

In advanced economies, it is customary for many suppliers of goods and services to provide between 30 and 60 days of credit from the verification to the payment-issue stage. That is, bills are “payable” after verification, and “due for payment” after the lapse of whatever credit period is allowed. Cash and modified cash accounting systems record and report expenditure on a “payments issue” (or sometimes on a “cash-payment”) basis. However, with less-developed accounting systems, it is often difficult to get reliable estimates of earlier payment stages and of accounts due for payment. Accrual and modified accrual accounting systems record and report expenditure at the point of verification, and generally maintain more comprehensive records for all stages of payment. It is therefore easier to assess payment arrears from these latter systems.

134. A basic requirement of fiscal transparency is that cash accounting reports should be supplemented by accounts-based reports of bills due for payment to assess arrears.109 Data on arrears would not be generated as a matter of course from a simple cash accounting system, but should be provided in supplementary reports. Therefore, all governments should move toward an accounting standard that facilitates end-period reports on accounts due for payment as well as reports on a cash basis—whatever basis of accounting is used. An accrual or a modified accrual system would achieve this objective, and may be appropriate for some countries.

135. On the revenue side, governments must also account for taxes and other revenue that have not been received on time.110 For example, the stock of tax arrears can be substantial, but it is difficult to know how much of the stock is actually collectible because many countries do not write off bad debts. As with the expenditure side, it is essential that the tax administration and accounting systems recognize and record payments due, and that, to the extent possible, they report the monthly and annual flows of unpaid taxes, penalties, and interest.111

Coverage of Domestic and Externally Financed Transactions

136. The accounting system should bring all public transactions to account in a timely way, and cover both domestic and externally financed transactions. In developing countries with large external aid inflows, it is common that many externally financed transactions are not captured by the government accounting system. Sometimes this occurs as a direct consequence of donor financing arrangements. For example, expenditure may be debited directly to donor agency or trust accounts, and special accounting arrangements may be set up to ensure accountability to the donors, usually at the expense of transparency and accountability in the recipient country. All countries (with donor country support, where appropriate) should develop comprehensive and integrated accounting systems covering public transactions, irrespective of the source of financing. Cash systems can meet this objective, the principal requirement being that special measures should be taken to ensure that all transactions are accounted for in a timely way.


137. A related and very common weakness in accounting systems of many developing countries is that noncash aid is rarely fully recorded. This means that the public accounts do not reveal the true level of resources used nor their allocation by sector, organization, or region. An equally important failing is that assets thereby created or acquired are not recorded in a way that helps to identify long-term operations and maintenance needs. The transfer of such assets to the government when donor financing is completed can then lead to unexpected pressures on the budget. There are also problems with the timely recording and valuation of such assistance, and some measures should be taken to include aid-in-kind transactions to improve transparency. Cash systems are generally unsatisfactory as a means of tracking such transactions, and a full accrual system would be needed to deal with nonfinancial assets in a fully integrated way. It is proposed that all countries maintain at least memorandum-level records of significant receipts of aid-in-kind, showing forecast receipts in the budget and audited receipts with the annual accounts.

Procurement and Employment

Procurement and employment regulations should be standardized and accessible to all interested parties.

Procurement and Tendering

138. Contracting for goods and services, particularly where large contracts are involved, must be open and transparent to provide assurance that opportunities for corruption are minimized and that public funds are being properly used. Similar considerations should apply to contracting out government services or management processes, and to privatization.

139. Appropriate tendering mechanisms should be set up for contracts above a threshold size, and procurement regulations should give independent authority to a tender committee or board and require that its decisions be open to audit.112 Where services formerly provided within government are contracted out to the private sector, these procedures should be subject to the same or similar procurement regulations.113 In this area, the OECD and the World Bank have helped a number of countries establish modern procurement systems, and good progress has been made in countries in transition toward establishing sound and transparent procurement systems. Some countries developed a procurement law based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Procurement of Goods, Construction, and Services.114


140. Procedures governing employment in the public service should be clearly specified and accessible. Any public-service-wide recruitment and pay regulations should be published. Vacancies should be advertised and filled through competition, with clearly defined selection criteria. In a number of advanced economies, significant powers are being delegated to agency heads to set their own recruitment and—within varying limits—pay policies. Clarity and openness of procedures, of course, remain fundamental requirements.

Internal Audit

Budget execution should be internally audited, and audit procedures should be open to review.

141. Effective internal audit by government agencies is one of the first lines of defense against misuse and/or mismanagement of public funds.115 It should be based on a sound internal control environment, and not seen as a substitute for one. Checking by internal auditors also provides valuable material for the review of financial compliance by external audit agencies. The existence and effectiveness of internal audit should be assured by requiring that internal audit procedures be clearly described in a way that is accessible to the public, and that the effectiveness of these procedures should be open to review by the external auditors.

Tax Administration

The national tax administration should be legally protected from political direction and should report regularly to the public on its activities.

142. Tax administration should be, and be seen to be, conducted in a fair and impartial manner, free of political intervention. For this reason, heads of tax administration should be appointed by law, and be given some statutory protection against removal from office and political direction in interpreting tax laws. The statutory appointment of tax commissioners with clearly specified powers over interpretation of tax laws is one approach that helps to provide assurance of integrity. The tax collection process should also be open, and to this end revenue collecting agencies should provide a timely annual report to the legislature on their activities during the year. These reports, as well as covering performance data such as actual collections relative to budget, should provide details of actions being taken to improve compliance with tax laws. A recent development in some advanced countries is a requirement to publish with new or amended tax legislation a statement of the compliance cost of proposed measures.116

Fiscal Reporting

There should be regular budget reporting to the legislature and the public.

143. The Code includes good practices relating to: (1) budget and extra-budgetary outturns; (2) final accounts; and (3) program results.

Budget and Extrabudgetary Outturns

A mid-year report on budget developments should be presented to the legislature. More frequent (at least quarterly) reports should also be published.

Periodicity and Timeliness

144. This is a basic requirement of fiscal transparency. Effective fiscal management depends on timely, reliable, within-year information on the government’s fiscal position. The mid-year budget report should contain a comprehensive analysis of budget implementation, including comparisons for all major revenue, expenditure, and financing items with mid-year figures for the preceding year and mid-year estimates for the budget. There should also be an updated forecast of the budget outcome for the current fiscal year, identifying the main factors causing a deviation between the budget and the expected budget outcome (e.g., changed economic assumptions, new policies, contingencies, changes in the timing of revenue or expenditure). It is a basic requirement of fiscal transparency that this report should be presented to the legislature within three months of mid-year. This is consistent with establishing accountability for appropriate responses to changing economic or fiscal circumstances, and is therefore a basic requirement of fiscal transparency. The OECD best practice guidelines suggest that the mid-year report should be presented to the legislature within six weeks of the end of the mid-year. GDDS standards for periodicity and timeliness of other central government fiscal reports to the public should be followed (each quarter within a quarter of the end of the period). These reports should contain details of revenue, expenditure, the fiscal balance, and financing with breakdowns (debt holder, instrument, currency, as relevant). Reporting of interest payments is encouraged. The SDDS requires that a monthly budget report should be published with a lag of a month, and this is best practice.117 For ease of reference, Box 21 sets out the GDDS and SDDS standards relevant to fiscal transparency.

Fiscal Transparency and Data Dissemination Standards

The fiscal transparency Code and Manual generally adopt identical standards for coverage, periodicity, and timeliness of data dissemination to those set by the SDDS and the GDDS. The Code does, however, deal in addition with dissemination through budget documentation and published audited final accounts, which are not explicitly covered in SDDS/GDDS. It also gives greater emphasis to disclosure of certain elements, such as contingent liabilities. In the terminology used in the fiscal transparency Manual, standards under the SDDS generally correspond to best practice, and the GDDS to basic requirements. The relevant SDDS/GDDS standards are set out in the table below.

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A Covers budget and extrabudgetary funds, showing fiscal balance and main components of deficit/surplus and financing; identification of interest payments is encouraged.

B Breakdown by maturity, domestic/foreign, currency; guaranteed debt (as relevant); quarterly debt service projections encouraged.

C General government as for A. If public sector, may be defined in a variety of ways.

D As for B; but guaranteed debt encouraged; debt service projections not required.

E An encouraged extension of GDDS requirements. Coverage as for C, dissemination within 6-9 months.

145. It is also a basic requirement of fiscal transparency that details of central government debt and financial assets should be published annually, within six months of the end of the fiscal year. However, where public debt is significant, quarterly reporting should be an objective. Financial assets should generally be reported with the same frequency as debt. Information on debt should include the outstanding stock of debt for the current year and two prior years, and debt servicing costs for the same period. Best practice in debt reporting is the SDDS requirement that the central government debt should be reported quarterly, with a lag of a quarter.118 It is also recommended under the SDDS that debt service projections for medium-and long-term debt should be reported quarterly for the coming four quarters and on an annual basis thereafter. Projected repayments of short-term debt should always be reported on a quarterly basis.

General Government Coverage

146. Ideally, quarterly or mid-year reports should cover the general government fiscal position and provide a basis for assessing whether or not the broader fiscal targets that provide context for the budget can be achieved. However, as already noted, many governments will not be able to provide full and timely coverage of subnational levels of government in fiscal reports. But where the fiscal responsibilities of subnational levels of government are significant, an aggregate summary statement of their fiscal position should be published where practicable, if necessary using partial indicators of their fiscal position, such as bank borrowing or bond issues. Best practice is that reliable information on the general government outturn should be published within 12 months of year-end.

Final Accounts

Final accounts should be presented to the legislature within a year of the end of the fiscal year.

147. This is a basic requirement of fiscal transparency. The coverage of final accounts, and their timing, should be specified in the budget law. The final accounts should demonstrate compliance with the budget as adopted by the legislature; they should be reconciled in detail with budget appropriations, and a summary table presented showing the major causes of deviation from the original appropriation; they should be in the same format as the budget, and show any within-year changes to the original budget agreed to by the legislature; and they should also contain comparative information for the previous two fiscal years. As a rule, final accounts for each level of government will be audited and presented only within the relevant jurisdiction. The central government, however, should present a reliable picture of the accounts of subnational levels of government where these activities have a significant fiscal impact, and summarize the fiscal outturn for general government. Best practice is that final accounts of central government should be presented to the legislature within six months of the end of the fiscal year.

Program Results

Results achieved relative to the objectives of major budget programs should be presented to the legislature annually.

148. It is a basic requirement of fiscal transparency that a statement of the objectives of major budget programs be reported. The outputs and outcomes of government programs should then be monitored and the legislature should be provided with a description and assessment of results against program objectives specified in the budget documentation within 12 months of year-end. Comparative information should be provided for the previous two fiscal years. Best practice is that results achieved relative to all performance targets should be independently audited, and presented to the legislature within six months of the end of the fiscal year.

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