Budget coherence

1. Budget coherence Jim Brumby FAD Washington DC, April 9, 2003

2. Outline • What are the dimensions of coherence • Where do we see coherence failures • What are some of the emerging mechanisms to bolster coherence

3. Understanding ‘coherence’ • What it requires • Consistency: incentives and information • Comprehensiveness • Substance over form • Ability to process • Why budget coherence is required • Orderly provision of public resources to public purposes through time • Requires ex ante, operational and ex post coherence

4. Traditional (economists) view of budgeting • Allocation, distribution and stabilization • Presumption of institutions • ‘Government’ as single entity • All sources of funds are fungible; all uses of funds compete equally • The budget is implemented • Aggregate constraint is real • No role of transaction costs and distorting institutions

5. Dimensions of coherent budgeting • Characteristics • Intertemporal consistency (time) • Completeness of relevant disclosure (type) • Comprehensiveness (space) • Relevance • Performance • Macroeconomic stabilization • Financial management • Policy outcomes

6. Coherence breakdowns • Vested interests ‘like’ special treatments • Pressure for non-sustainable finance • Tragedy of the commons problem • Special funds • Mediated budget laws • Management systems rewarding BMBs • Hard for government to be credible at any point because of its future power • Needs devices to ‘tie its hands’

7. Developing countries problems • Unrealistic planning and budgeting, resulting in • Cash rationing (cash box budgeting) • Informal systems (hidden budgeting) • Lack of credibility (repetitive budgeting and deferred budgeting)

8. Developing countries • Special funds • Payment arrears • Low effective accountability: hoarders rewarded • MTEFs with false accuracy and non-credible estimates Too much low quality or low relevance information Tendency for supermarket trolley budgeting

9. Macroeconomic coherence • Analysis of sectoral balances per Mundell-Fleming • Overall fiscal balance=revenues-expenditures • Govt Saving=current revenues-current expenditures • Spans all levels of government

10. GFS/SNA • Government performs different functions from rest of economy • Measuring (not estimating/imputing) gross flows of payments to/from government (i.e. cash) • Economic and functional classification (COFOG) Statistical approach to support analysis

11. Improving macroeconomic coherence • Steps to improve reliability or reduce costs of failing to achieve growth (e.g. Canada) • Transparency: independent review; comparison; sensitivity analysis (15 OECD)

12. Intertemporal issues ‘Contracts’ exist which exceed annual focus • Large projects • Enduring commitments (entitlements) • Incentives to mislead • Implied commitments • Explicit liabilities • Implicit liabilities • Contingent liabilities

13. Dealing with time coherently • One year snapshot of cash very partial • From cash to accrual • From less to more information, especially on fiscal risks • ‘Commitment’ to higher quality information • From narrow to broad coverage • Development of IBC

14. Intertemporal budget constraint • ‘Comprehensive’ concept – tax gap for sustainability; generational accounting; CNW • CNW= RNW + PV(revenue-expenditure) • Sensitivity: Budget at risk models • Period

15. More intertemporal coherence • 64% OECD countries provide some MT forward projection of activity • A few now provide LT projections – 50 years or so • 4 countries provide pre-election outlooks • Shift to accrual accounting • 8 now using some accrual; 5 committed to move to full accrual budget, and 3 some additional

16. Projection of fiscal pressure Australia: Intergenerational Report, Budget 2002-2003

17. Coherent budget coverage • Numerous devices ‘test’ comprehensive coverage in space • Decentralization • External loans and grants • Extra budgetary funds • Autonomous agencies • Tax earmarking/user charges • Social security funds • QFAs • Two conflicting approaches for coverage: • Ownership & control versus public purpose

18. What is the coherent entity View from GFS Public sector Private sector Nonfinancial corporations Financial corporations General government Nonprofit Institutions Serving Households Households PNFC PFC Central government State governments Local governments Social Security accounts Budgetary accounts Extra Budgetary accounts

19. What is the coherent entity • View from IFAC – Ian Ball: • “GFS does not report on all the entities under the control of Government, and is therefore seriously deficient as an accountability instrument. To adopt GFS as the basis of reporting is to facilitate the manipulation of results through transactions with those entities which are under the Government’s control, but outside the reporting entity.”

20. How can coherent budgeting support performance • Performance and budget incentives reinforce each other • Macro goals are clear: • Reinforced by fiscal rules • Financial goals achieved: • Budget actually executed • Policy delivery accountability: • Policy outcomes specified • Outputs contracted

21. Financial coherence • Traditionally: • All cash • Based on funds: • Trust funds • Consolidated funds • Based on legal authority not on economic or financial substance • All input line item driven • Execution report

22. Financial coherence • Migration to accruals: • Cash flow statement • Operating statement • Balance sheet • IFAC standard for cash only A fully integrated set of accounts

23. Outputs and outcomes • Migration from PB to formal contracting • Externally focused • Similar in nature • Controllable • Comprehensive • Measurable • Informative • Quantity, quality, cost, timeliness

24. OECD results budgeting • 15 publish with budget for most programs • 6 for some • 7 for none • 11 in main budget document • 5 audited

25. Conclusions • Coherence is multidimensional • Innovations in institutions • Coherence requires • Time • Capacity • Coherent advice