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Institutional Arrangements and the Control of Public Expenditure in OECD Member countries Santiago, Chile 29 November 2001 Michael Ruffner Administrator Organization for Economic Cooperation and Development
From Deficits to Surplus to??
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Strong Economic Growth, until 2000 Political Commitment to Fiscal Discipline Institutional Arrangements for Budgeting Determine Whether Countries are Successful in Controlling Public Expenditures
Agenda
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Budgeting in Context Fiscal Frameworks Major Budget Trends Control Regimes
The Budget
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The Budget is Important
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Comprehensive state where policy objectives are reconciled and implemented in concrete terms
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Budget should be Comprehensive
Good Governance
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Accountability Transparency Social Cohesion Rule of law -- Integrity
Schick´s Functions of Budget
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Control of the Aggregates Technical Efficiency Allocative Efficiency
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Hierarchical
Institutional Arrangements -Key Reforms-
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Requirements for Fiscal Responsibility Multi-Year Budget Frameworks Top-Down Budgeting Techniques Relaxation of Input Controls Market-Type Mechanisms Accrual Accounting and Budgeting Focus on Results
Requirements for Fiscal Responsibility
Explicitly Defined Goals for Budget Policy:
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Maastricht Criteria (Euro)
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Expenditure “caps” (USA)
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Constitutional Amendments (Switzerland)
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General Frameworks (Australia/New Zealand)
Requirements for Fiscal Responsibility = Norms
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General Thoughts Can not separate Fiscal Framework from system Budget reforms have implications for frameworks All focus on control of aggregates: short term or long term What happens to norms in times of fiscal stress
Maastricht Treaty
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International agreement on 3% Deficit Target
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Target includes all levels of government spending
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Path to deficit target left up to Members
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Variety of approaches Unclear enforcement mechanism
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What will happen when economy sours?
Switzerland
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Constitutional Balanced Budget Requirement Switzerland is a confederation, weak central authority
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Problem of enforcement of rules In practice, much like Maastricht treaty fixed deficit target
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Does not necessarily include canton/local spending Focus on annual deficit, but need long term path to maintain discipline Key feature is relatively generous exception for emergencies and other unforeseen events
The United States
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Political debate on Deficit, Statutory limit on Debt Tried annual fiscal targets, did not work
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Strong Congress -- tie their own hands Replaced by fiscal rules, no relation to deficit
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Discretionary Spending Caps
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Annually appropriated spending (1/3 total)
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Pay-As-You-Go
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Mandatory/Entitlement spending (2/3 total)
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Statutory Debt Limit
General Frameworks
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New Zealand and Australia: Radically different from any other country Based on “New Public Management”
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No input controls Performance budget based on outcomes/outputs
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Budget based on accruals Annual deficit irrelevant to budget expenditures… Politically relevant, however Long term accrued position is relevant
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Assets must equal Liabilities
Multi-Year Orientation
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New “Culture” for Budgeting Good from All Perspectives
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Macro: Lends Credibility and Stability to Fiscal Policy
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Micro: Ministries/Agencies Can Plan Better
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Ends “Budgeting Games“
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Carry-Overs; Year-End No Long a “Cut Off”
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Warning: Economic Assumptions!
Top-Down Budget Process (1/)
Old: Ministries Send Detailed Requests and Negotiate with MOF
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Time Consuming; Game-Playing
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Bias for Increased Expenditure
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Hard to Reflect Political Priorities
Top-Down Budget Process (/2)
New: Total Expenditures Agreed and Divided Among Ministries
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Pre-Set Spending Limit for Each Ministry
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Reflects Political Prioritization
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Pre-Set Limits Hamper “Auto” Increases
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Better Decisions -Information Asymmetry, Easier to Reallocate, Ownership
Managerial Flexibility
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“Deregulation” in the Public Sector Level of Detail of Budget Appropriations
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Salary, travel, etc.
Central Management Rules
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Staff hiring, offices, etc.
Heads of ministry/agency in best position to manage resources effectively & efficiently
Market-Type Mechanisms
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Contracting Out
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20% Savings Are Typical User Charging
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Discipline Demand Vouchers
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Swedish Schools Private-Public Partnerships
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United Kingdom
Accrual Accounting and Budgeting
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Cash Basis vs. Accrual Basis Makes The True Cost of Government Services Transparent
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Civil Service Pension Expenses
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Depreciation of Buildings and Equipment
Accruals, Main Implications
Cash • Managers constrained by “input” of cash Accruals • Managers must maintain “assets” • Managers focus on liabilities -- know what the obligation is prior to the cash transaction • Long term sustainability
Accruals, Challenges
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Operating balance fluctuations Difficult for managers to deal with factors outside their control Difficult for Parliaments to understand and communicate to public “Cooking the Books” is an accrual term Cash based budgeting is cheap, reliable and straightforward Power to Tax not recognised in accrual More difficult to use with Fiscal Policy
Focus on Results
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“Quid Pro Quo” for Increased Flexibility Outcomes vs. Outputs Very Difficult in Practice OECD Guidelines Move to Performance does not Depend on Fiscal Framework or Governance Structure
Elements of control
Outcomes Outputs Process Inputs Costs
Relations of control
Value for money Outcomes Outputs Process Inputs Costs Effective ness Efficiency Economy
Strengths and weaknesses of control regimes
Input Strengths Easy and affordable Strengthens compliance Facilitates control of aggregate expenditure Facilitates efficiency Accountability Out put Out come Facilitates re allocation Support policy formulation and co ordination Long term Weaknesses Does not support efficiency Can be inflexible Short term Can distort focus Measurement problems Costs Information overload Measurement problems Accountability problems Costs Information overload Good for situations with… …low confidence and variable competence …confidence, sound accounting and professionalism … the above and dedicated politicians
An outcome focus to budgeting and management Main motives
• Orientation of Public Sector Production • Public Awareness • Reallocation • Coherence
An outcome focus to budgeting and management - Main implications
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Linking costs, inputs, outputs and outcomes
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Increasing the use of policy evaluation
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Restructuring budget processes
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Challenges Expectations Resistance Measurement Information - a double edged sword Costing Co-ordination/coherence Information overload Incentives Being of use to politicians Limits on capacity
Conclusion
All OECD Member countries are moving in this same direction
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But from Different Starting Positions & at Different Speeds
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It will take longer in countries with entrenched traditions
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The benefits are significant