Budget%20coherence

1
Budget coherence

• Jim Brumby
• FAD
• Washington DC, Jan 17, 2003

2
Outline

• What is coherence
• What are the major dimensions of coherent
  budgeting
• Where do we see coherence failures

3
Coherent budgeting

• Consistency
• Comprehensiveness
• Substance over form
• Orderly provision of public resources to public
  purposes through time

4
Traditional view of budgeting

• Interest is mainly (macro) economic
• Government as single entity
• All sources of funds are fungible all uses of
  funds must compete equally
• Management of public indebtedness
• Transaction costs and institutions dont or
  barely exist

5
Dimensions

• Macroeconomic stabilization
• Intertemporal
• Coverage
• Financial
• Managerial

6
Coherence breakdowns

• Vested interests like special treatments
• Deals with government commitment problems
• 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
• MTEFs with false accuracy and non-credible
  estimates
• Supermarket trolley budgeting

9
Macroeconomic

• 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
Macro economic context

• Steps to improve reliability or reduce costs of
  underachievement
• 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

• 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
The practice - 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

17
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. The use of GFS as the primary
  reporting basis would hand to the Government on a
  plate the mechanisms which Enron had to strain
  and/or break the rules to achieve.

18
Financial coherence

• Traditionally
• All cash
• Based on funds
• Trust funds
• Consolidated funds
• Based on legal authority
• All input line item driven
• Execution report

19
Financial coherence

• Migration to
• Cash flow statement
• Operating statement
• Balance sheet
• IFAC standard for cash only
• A fully integrated set of accounts

20
Performance coherence

• Macro goals
• Policy outcomes specified
• Outputs contracted
• Financial goals achieved
• Budget actually executed
• Performance and budget incentives reinforce each
  other

21
Outputs and outcomes

• Migration from PB to formal contracting
• Externally focused
• Similar in nature
• Controllable
• Comprehensive
• Measurable
• Informative

22
Output contracting

• Quantity, quality, cost, timeliness
• Production outputs (OcomesYOputsY)
• Payment of benefits
• Procedural outputs (NY)
• Policy advice
• Craft outputs (YN)
• Policing
• Coping outputs (NN)
• Education

23
OECD results budgeting

• 15 publish with budget for most programs
• 6 for some
• 7 for none
• 11 in main budget document
• 5 audited

24
Conclusions

• Coherence is key
• Innovations in institutions
• Coherence requires
• Time
• Capacity
• Coherent advice?