Appendix I. Evaluation Framework

I. Understanding the Scale and Scope of the Fiscal Challenge

1. Comprehensive, Timely and Credible Fiscal Reporting

  • a. Do the central government annual financial statements consolidate all central government entities? Scoring: 0=no annual financial statements are produced; 1=annual financial statements cover only the budget; 2=annual financial statements cover all of central government.

  • b. Do central government annual financial statements include assets and liabilities? Scoring: 0=no balance sheet is produced; 1= a balance sheet is produced but not all assets or liabilities are included; 2=a comprehensive balance sheet, which includes nonfinancial as well as financial assets, is prepared.

  • c. Are financial statements audited by an independent supreme audit institution? Does the auditor certify whether the statements represent a true and fair view of the government’s overall financial position? Scoring: 0= no external audit is publicly available; 1=there is a published audit but the external auditor does not issue an overall opinion as to whether the statements represent a true and fair view of the government’s financial position; 2=there is a published external audit in which the auditor gives an opinion as to whether the accounts represent a true and fair view of the government’s financial position.

  • d. Are annual financial statements published and audited in a timely manner? Scoring: 0=financial statements are published more than 6 months after the end of the financial year; 1=financial statements are published but not audited within 6 months of the end of the financial year; 2=financial statements are published and audited within 6 months of the end of the financial year.

  • e. Are government financial statistics comprehensive? Scoring: 0=financial statistics are not produced or cover only central government; 1=financial statistics for central and general government are produced; 2=financial statistics for the whole of public sector are produced.

  • f. Are government financial statistics produced by an independent statistics office consistent with an international standard? Scoring: 0=neither, 1=produced by an independent office or in line with an international standard, but not both; 2=produced by an independent office and in line with SNA93, ESA95, or GFS2001.

2. Robust Macroeconomic and Fiscal Forecasting

  • a. Does the government publish medium-term macroeconomic and fiscal forecasts, inclusive of all major economic assumptions (e.g., GDP, inflation, exchange rate, oil price, unemployment)? Is there a mid-year update that is published? Scoring: 0=no MT projections published or published without assumptions; 1= government’s medium-term projections published with assumptions, 2=both an annual and a midyear update of the projections and assumptions are published?

  • b. Do fiscal projections separately identify the impact of current versus new policies (revenue and expenditure measures)? Scoring: 0=no; 1= for some but not all new revenue and expenditure measures or no consolidated presentation of fiscal impact of new polices; 2= budget documents present a consolidated summary of the fiscal impact of all proposed new revenue and expenditure measures.

  • c. Are long-term fiscal projections (i.e., for at least 20 years) prepared by government and published periodically (i.e., at least every three years)? If yes, do they include the impact of demographic factors? Do they look at a range of demographic scenarios? Do they also look at other factors (e.g., health care costs) affecting long-term fiscal sustainability)? Scoring: 0=no long-term projections published or published infrequently (at intervals exceeding 3 years); 1=government publishes long-term budgetary projections at least every 3 years, but only on the basis demographic variables, 2=comprehensive long-term fiscal sustainability reports are prepared at least every 3 years, and look at either a range of demographic scenarios or utilize one or more additional factors (e.g. health care costs, climate change, etc.).

3. Fiscal Risks Management

  • a. Are main contingent liabilities (guarantees, international commitments, social commitments, PPPs, legal claims) discussed and where possible quantified, in the budget documents? Scoring: 0=contingent liabilities not discussed in the budget documents; 1=some discussion of fiscal risks in budget documents; 2=budget documentation includes a comprehensive and quantified fiscal risk statement.

  • b. Are new contingent liabilities subject to parliamentary approval? Scoring: 0=parliamentary approval is not sought for new contingent liabilities; 1=parliamentary approval is sought for new guarantees only; 2=parliamentary approval is sought for new guarantees and other significant, predictable and quantifiable contingent liabilities.

  • c. Are alternative medium-term budget scenarios presented in the annual budget documents? Scoring: 0=no alternative medium-term scenarios are discussed; 1=alternative medium term macroeconomic scenarios are discussed but their consequences for the major fiscal aggregates are not presented; 2= alternative medium-term scenarios and their implications for the main fiscal aggregates are presented as part of the annual budget documentation.

  • d. Are the risks associated with government assets examined at the same time as those relating to government debt and other liabilities? Scoring: 0=the government does not prepare a medium-term debt management strategy, nor assesses the risks associated with government assets; 1=the government prepares a medium-term debt management strategy, including analysis of debt-related risks, but does not include asset-related risks; 2= the government publishes a medium-term debt management strategy, including analysis of debt-related risks and risks from government assets, including financial assets.

  • e. Are major tax expenditures quantified and made publicly available annually, e.g., presented in the annual budget documentation? Is there a mechanism in place for controlling the size of tax expenditures? Scoring: 0=there is no quantification of tax expenditures and no control on their size; 1=there is periodic quantification of tax expenditures but no control on, or budgetary objective for, their size; 2= there is quantification and annual reporting of all major tax expenditures, and a control on, or budgetary objective for, their size.

II. Developing a Credible Fiscal Consolidation Strategy

4. Clear and Transparent Medium-Term Fiscal Objectives

  • a. Is there a precise and time-bound medium-term fiscal objective? Scoring: 0=neither the precise value nor time period for the fiscal target is is specified (or no objective); 1=either the precise value or time-period is specified; 2=both the precise value and time period are specified.

  • b. Is (are) the fiscal objective(s) comprehensive in scope? Scoring: 0=the fiscal objective covers only the central government budget (or no objective); 1= covers the central government; 2= covers most relevant parts of the general government and the public sector.

  • c. Does the government routinely report on performance against its fiscal objectives? Scoring: 0=there is no reporting against the government’s fiscal objectives; 1= there is periodic, ad hoc reporting of the government’s performance against its fiscal objectives; 2=the government reports performance against its fiscal objectives at least annually.

  • d. Are the fiscal objectives expressed in terms of a permanent numerical fiscal rule? Scoring: 0=no rule or it frequently changes; 1=a rule exists, and has been stable over the past 3 years; 2= the rule has been stable for more than 3 years.

  • e. Are sub-national governments subject to clear fiscal rules and centralized enforcement mechanisms? Scoring: 0=there are no fiscal rules for sub-national governments; 1=there are fiscal rules but no centralized sanctions or enforcement mechanisms; 2=there are fiscal rules and centralized sanctions or enforcement mechanisms in the event of non-compliance.

5. Medium-term Budget Framework

  • a. Is the annual budget prepared within a set of medium-term revenue and expenditure projections? Scoring: 0= there are no medium-term estimates of revenue or expenditure in the budget documentation; 1= budget documentation includes multi-year estimates of major categories of revenue and expenditure; 2=budget documentation includes multi-year estimates for each major revenue category and medium-term costings of expenditure by sector, ministry or program.

  • b. Are there binding multi-year restrictions on aggregate expenditure? Scoring: 0= there are no multi-year objectives or restrictions on aggregate expenditure; 1= there is an explicit multi-year objective for aggregate expenditure but it applies only to the forecast (which can subsequently be revised); 2=there is a binding multi-year restriction on the outturn for aggregate expenditure which remains fixed for at least two years.

  • c. Does the government provide a clear and consistent statement of its medium-term ministerial, sectoral or programmatic priorities within that overall ceiling? Scoring: 0=Detailed medium-term expenditure estimates are mechanistic projections; 1=detailed medium-term expenditure estimates reflect the government sectoral priorities but there is no reconciliation of changes in sectoral allocations from year to year; 2=the government provides detailed medium-term sectoral expenditure estimates with a full explanation of any changes from year to year.

  • d. Do multi-year expenditure restrictions cover the majority of central government expenditure? Scoring: 0=there are no multi-year expenditure restrictions or they cover less than 50 percent of central government expenditure; 1=the medium-term budget framework covers more than 50 percent of central government expenditure; 2=the medium-term budget framework covers more than 75 percent of central government expenditure.

6. Independent Fiscal Agencies

  • a. Is there an independent agencies responsible for producing or evaluating the macroeconomic and fiscal assumptions underpinning the budget? Scoring: 0=no independent projections are prepared; 1=an independent organization prepares either macroeconomic forecasts or fiscal forecasts, 2=an independent organization prepares both macroeconomic and fiscal forecasts.

  • b. Is there an independent agency charged with evaluating the government’s ex ante fiscal objective and/or policy? Scoring: 0=no independent evaluation of the government’s fiscal policy; 1=an independent organization evaluates the government’s fiscal policy, but its advice is confidential to the executive; 2=an independent organization evaluates the government’s fiscal policy and its advice is published.

  • c. Is there an independent agency charged with evaluating the government’s ex post performance against its fiscal targets or objectives? Scoring: 0=no independent ex post evaluation of government fiscal performance; 1=an independent organization evaluates the government’s ex post fiscal performance, but its views is regarded as advisory only; 2=there is an independent organization that is charged with providing an authoritative evaluation (i.e., one that requires follow-up) of the government’s performance against its fiscal targets, objectives or rules.

7. Performance-Orientation of the Budget

  • a. Does the budget include a program classification? Are programs the basis for legislative appropriation of expenditure? Scoring: 0=budget document does not include a program classification; 1= budget document includes a program classification for information but this is not the basis for legislative appropriation; 2=budget documentation includes program classification and this is the basis for legislative appropriation.

  • b. Are there objectives and targets associated with each major expenditure program? Is the achievement of performance objectives and targets monitored at least annually? Scoring: 0=there are no performance objectives or targets for expenditure; 1= performance targets or objectives are established but not systematically monitored; 2= performance targets and objectives are set with systematic reporting on progress on at least an annual basis.

  • c. Are there comprehensive sector reviews on a regular basis? Scoring: 0= expenditure reviews are not part of the budget process; 1=expenditure reviews are infrequent or incomplete (rolling reviews are not complete or comprehensive reviews are ad hoc and/or happen more than every 3 years); 2=all expenditure programs are systematically reviewed on either a comprehensive (at least once every three years) or rolling basis (at least 20% per year).

III. Implementing the Consolidation Strategy through the Budget Process

8. Top-Down Approach to Budget Preparation

  • a. Is a limit on aggregate expenditure and the allocation to broad sectors or to ministries proposed by the Ministry of Finance and approved by Cabinet before the discussion of the detailed allocations? Scoring: 0=there are no ex ante limits on annual spending at the early stages of budget preparation within the Executive; 1=there are ex ante limits on aggregate expenditures; 2= there are ex ante limits on both aggregate and sectoral/ministerial spending provided in budget submissions.

  • b. Are aggregate limits and sector or ministry allocations respected in the preparation of the budget within the Executive? Scoring: 0=ex ante ceilings are not respected; 1= ex ante ceilings are sometimes respected; 2= ex ante ceilings are almost always respected.

  • c. Is earmarking of revenue to expenditure or standing spending commitments relatively limited? Scoring: 0=more than 30 percent of central government revenue is subject to earmarking or standing spending commitments; 1= between 10 and 30 percent of central government revenue is subject to earmarking or standing spending commitments; 2= less than 10 percent of central government revenue is subject to earmarking or standing spending commitments.

  • d. Are all major revenue or expenditure decisions taken as part of the annual budget process? Scoring: 0=major revenue or expenditure decisions are often taken outside the budget process; 1=major revenue and expenditure decisions are sometimes taken outside the budget process; 2=major revenue and expenditure decisions are hardly even taken outside the budget process.

9. Constraints on Parliamentary Budget Approval

  • a. Do institutional arrangements ensure ownership of the medium-term fiscal strategy by the parliament? Scoring: 0=there is no separate budget orientation debate and parliament does not endorse a medium-term fiscal target or objective; 1=there is either a separate budget orientation debate or parliament endorses a medium-term fiscal target or objective strategy, but not both; 2= there is a separate budget orientation debate and parliament explicitly endorses a medium-term fiscal target or objective.

  • b. Are there limits on the legislature’s right to amend the government’s draft budget? Scoring: 0= there are no limits on the right of parliament to amend the draft budget; 1=parliament can introduce fiscally neutral amendments to the budget; 2=parliament can change the composition of expenditures, but not increase the proposed budget deficit, nor total expenditures (alternatively, parliament must approve the government’s proposed budget, without any modification).

  • c. Is the annual budget approved in a top-down sequence? Scoring: 0=parliament does not first approve an overall annual budget framework for total revenues and total expenditures; 1=parliament first approves an overall annual fiscal framework, but subsequent changes in budget aggregates are still possible; 2= parliament first approves an overall annual fiscal framework, then votes on the detailed expenditures within the approved top down constraints on total spending and revenue.

10. Constrained Flexibility in Budget Execution

  • a. Are there restrictions on overspending during the execution of the annual budget? Scoring: 0=the government is not required to go back to parliament before the end of the current fiscal year when spending exceeds annual appropriations; 1= the government is required to submit a supplementary budget to parliament if spending exceeds annual appropriations; 2= in case of overspending against the annual appropriation, the government is required to submit a supplementary budget showing how overspending will be offset through reductions in other appropriations.

  • b. Are there restrictions on carried-over appropriations? Scoring: 0= there are no restrictions on carried-over appropriations; 1=there are restrictions on the types of expenditure subject to carry-over appropriations, but no limit on the size of carried-over balances into subsequent years or draw-down; 2=there are no carry-overs or the government imposes a ceiling on the size of annual carry-over or on carry-over drawdowns.

  • c. Are there contingency arrangements? Scoring: 0=no contingency arrangements: 1=there are contingency arrangements for specific expenditure categories; 2=there is a sizeable general contingency reserve (e.g., 1 to 3 percent of total expenditure) in the annual budget, with clear rules for which expenditure the reserve can be used.

  • d. Is the finance minister (the executive) mandated to defer or cut expenditure, i.e., not fully implement the approved budget? Scoring: 0= expenditures cannot be deferred or cut without prior approval of Parliament; 1= expenditures can be deferred or cut, without prior approval of Parliament, up to a certain limit; 2=budget appropriations can be deferred or cut, without limit.

  • e. Are there limits or controls on a line ministry’s ability to enter into multi-annual expenditure commitments? Scoring: 0=there no limits or controls on multi-annual expenditure commitments; 1=there are limits or controls on some categories of multi-annual expenditure commitments; 2=there are comprehensive limits or controls on all types of multi-annual expenditure commitments.

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1

This paper builds on a 2010 work by Guilhem Blondy, Richard Hughes, Ian Lienert, and Goesta Ljungman which presented the findings from a cross-country review of budget institutions across G-20 countries, a project coordinated by Marco Cangiano and Michel Lazare. An earlier version of this paper was presented at a European Commission DG ECFIN Workshop on “Public Finances in Times of Severe Economic Stress-The Role of Institutions” on November 30, 2011.

2

Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia FYR, Moldova, Montenegro, Romania, and Serbia.

3

The expression “fiscal institutions” refers to the organizational and procedural arrangements through which decisions on fiscal matters are taken, or which provide input into such decision-making. In the context of this paper, the ten fiscal institutions are: I. Understanding the scale and scope of the fiscal challenge – (i) fiscal reporting, (ii) macroeconomic and fiscal forecasting, (iii) fiscal risk disclosure and management; II. Developing a credible fiscal consolidation strategy – (iv) medium-term fiscal objectives, (v) medium-term budget frameworks, (vi) independent fiscal agencies, (vii) performance orientation; III. Implementing the consolidation strategy – (viii) top-down budgeting, (ix) parliamentary budget approval, and (x) budget execution.

4

The study draws from a series of papers prepared by IMF staff on the impact of, response to, and exit from the current economic, financial, and fiscal crisis. See, for example, IMF (2009a), Cottarelli and Viñals (2009), IMF (2010a, 2011a, 2011b).

5

The factual information underpinning these country evaluations was validated with participants at an FAD fiscal institutions seminar for Southeastern European countries held in Ljubljana, Slovenia in June 2011. The results should nevertheless be treated as provisional until officially confirmed with country authorities.

6

Coverage is general government. Source WEO.

7

A positive causality between the quality of budget institutions and fiscal outcomes has been demonstrated in numerous studies covering countries with different income levels, constitutional systems, and geographical locations. See, for example, von Hagen (1992), von Hagen and Harden (1996), Alesina et al. (1999), de Haan et al. (1999), Gleich (2003), and Hallerberg et al (2009).

8

See IMF (2009b, 2010a, and 2010b) for a detailed discussion of the size and composition of fiscal stimulus measures in G-20 countries.

9

See IMF Manual on Fiscal Transparency (2007).

10

European Commission (2010), OECD (2007a) and Guichard et al. (2007) find that countries facing an unfavorable outlook with a high deficit and debt have a higher success rate in their consolidations.

11

IMF (2007) and OECD (2004) both prescribe that statements should be available within six months.

12

IMF (2009a) emphasizes transparent reporting of government interventions in the financial sector as a key precondition to understanding the fiscal position in crisis countries and developing appropriate policy responses.

13

Milesi-Ferretti and Moriyama (2004) and Balassone et al. (2007) show that creative accounting aimed at presenting a better-than-actual fiscal position increases during times of fiscal pressure (such as in the run up to EU accession), and that it often takes the form of inconsistent treatment of stocks and flows.

14

IMF’s Government Finance Statistics (GFS), the UN’s System of National Accounts (SNA), and Eurostat’s European System of Accounts (ESA).

15

See European Commission (2008) pp. 109-115 for a discussion of making a no-policy-change assessment.

16

IPSAS Board recently proposed that reports on the long-term sustainability of public finances become part of government reporting obligations (IPSASB, 2009).

17

See IMF (2005) for a comprehensive discussion of fiscal risks, and Everaert et al. (2009) for a discussion of post-crisis fiscal risk management. See IMF (2007) for reporting arrangements of contingent liabilities.

18

These could include government guarantees, various types of government insurance arrangements, and legal claims against the government.

19

IMF (2007) and OECD (2004) discuss good practice in accounting for and controlling tax expenditures.

21

See Kopits and Symansky (1998), IMF (2009c), and European Commission (2010) for a discussion of design choices in fiscal rules and objectives.

23

European Commission (2010) emphasizes the link between medium-term frameworks and fiscal performance in the EU. Yläoutinen (2004) also found evidence of such links in Central and Eastern European countries during 2000s, following an earlier period of weaker links most likely attributable to the impact of the transition process on the public finances of these countries. Hallerberg and Yläoutinen (2010) confirm the link between fiscal governance and fiscal outcomes in these countries.

24

While von Hagen (1992) did not find that long-term constraints improved fiscal performance for EU-member states, this relationship was established when the study was repeated by Hallerberg et al. (2004), explained by the introduction of multiannual frameworks supporting such constraints in the 1990s.

25

European Commission (2007) finds that the articulation of a fixed spending path promotes fiscal discipline.

26

That a wide coverage of the medium-term budget framework increases fiscal discipline, is supported by European Commission (2006) and de Haan et al. (1999).

27

European Commission (2006 and 2007) and Debrun et al. (2009) find a positive relationship between the presence of a fiscal council and fiscal outcomes.

28

Calmfors and Wren-Lewis (2011), Rogoff and Bertelsmann (2010), Debrun et al. (2009), Wyplosz (2008), and Jonung and Larch (2004) discuss the role of independent fiscal agencies.

29

Larch and Salto (2005) and Jounung and Larch (2004) find strong evidence of such a optimistic bias. Strauch et al. (2004) find that optimistic bias was more apparent during the Maastricht convergence process and that particularly those governments where budgetary targets are based on pre-negotiated contracts seem to have a cautionary bias. European Commission (2007) and Jonung and Larch (2006) demonstrate that the optimistic bias can be traced to weak institutions.

30

European Commission (2007) finds performance budgeting to be associated with successful consolidation. Reddick (2003) and Crain and O’Roark (2004) find a positive impact of performance budgeting on aggregate fiscal performance, but, as pointed out by Robinson and Brumby (2005) the causality is unclear in these studies.

31

Perotti (1998) and Wagschal and Wenzelburger (2008) underline the importance of protecting socially sensitive expenditure to sustaining consolidation effort.

32

Such a link is emphasized by Robinson (2007). However, as pointed out by OECD (2007), enhancing the control over results has not been accompanied by delegation of managerial flexibility in all countries.

33

See OECD (2005b) and Curristine (2007) for a discussion of the role of expenditure reviews in performance budgeting.

34

For a comprehensive review, see Ljungman (2009).

35

Hallerberg et al (2009), Von Hagen (2005) and de Haan et al. (1999) find support for the hypothesis that the comprehensiveness of the budget process improves fiscal discipline.

36

Stapenhurst et al. (2008) looks at the range of models for engaging parliament in the budgeting process.

37

Alesina et al. (1999) and Wehner (2009) demonstrate that limits on parliamentary amendment powers are positively associated with fiscal outcomes.

38

One option to prevent supplementary budgets from being used to exceed spending caps is to agree on an annual supplementary budget provision within the binding spending caps agreed at the start of the government term. Finland has effectively used such an agreed procedure to cover both unexpected additional needs and fluctuations in appropriation levels, and investment in fixed-term stimulus measures during the economic crisis.

39

See Cebotari et al. (2009) for a discussion of the lessons from experience with contingency appropriations.

40

The evaluation’s focus on formal institutions gives an inherent advantage to those countries that codify budget practices through transparent mechanisms, such as organic budget laws, parliamentary standing orders, or published budget regulations over that that rely on established practices or informal “rules of the game.”

41

For Southeastern European countries, this threshold is defined as 40 percent of GDP. For countries significantly below their respective thresholds (Bulgaria, Macedonia FYR, Moldova, and Romania), the illustrative required adjustment is defined as the change in the primary balance between 2011 and 2020 needed to stabilize debt-to-GDP ratio at the end 2012 level by 2030, expressed as a percentage of GDP. Kosovo is excluded from this analysis. The estimates for required adjustment are only for illustrative purposes, not a policy recommendation for any of the countries. They also do not, for example, take into account projected growth of health and pension spending over the next two decades imposed by the population ageing. Further details on the methodology for this calculation are presented in IMF (2010a and 2010c). Source of data is WEO.

42

The assessment for Croatia and Kosovo may be too sanguine given that many state-owned enterprises are not fully covered by fiscal statistics.

43

In the case of Montenegro, while new initiatives are separately identified during the budget process, anecdotal evidence would suggest that this is somewhat less than systematic.

44

Disclosure of fiscal risks is currently limited to the central government of the Federation of Bosnia & Herzegovina.

45

In Bosnia & Herzegovina while medium-term frameworks exist for the State, and the two entities (Republika Srpska and the Federation) they are not consolidated across the different government units.

46

The reconciliation of changes is inadequate in Kosovo, suggesting that the assessment may be slightly optimistic.

47

However, there are some questions regarding the independence of the Croatian fiscal council as it is chaired by the Ministry of Finance.

Fiscal Consolidation in Southeastern European Countries: The Role of Budget Institutions
Author: Mr. Brian Olden, Mr. Duncan P Last, Mr. Sami Yläoutinen, and Ms. Carla Sateriale