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 balancerevenues-expenditures
• Govt Savingcurrent 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
Financial corporations
Nonfinancial corporations
General government
Nonprofit Institutions Serving Households
Households
PNFC
PFC
State governments
Central government
Local governments
Social Security accounts
Extra Budgetary accounts
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 Governments 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