Session 3
May 28 afternoon (1)
Legal framework for
Budget preparation and
adoption of annual
budget law by Parliament
in OECD countries
Topics Covered
Legal framework in OECD countries for
1. Budget preparation within the
Executive.
2. Submission of draft annual budget law
& content of accompanying documents
to Parliament.
3. Adoption of annual budget law by
Parliament.
Budget preparation within the Executive
•Budget preparation process and calendar within
the Executive—no need to specify in the BFMSL
Nonetheless, Japan’s and Korea’s BFMSLs include provisions for some
steps prior to budget submission to parliament.
•These steps can be covered by Government or
MOF Regulations and the Annual Budget Circular for
preparing draft budget for approval at technical and political levels.
Key for the BFMSL:
•Fiscal rules, if considered necessary.
•Date of submission of draft budget law to Parliament.
•Format of draft budget law (especially the appropriations
structure).
•Documents accompanying draft annual budget, including
the Medium-Term Framework.
What Does the BFMSL cover?
Is the “annual budget” a law?
OECD practices vary:
1. Yes, the annual budget law covers “all”
revenues and spending, e.g., France (2001 Organic
Budget Law relates to “State” transactions, which are less than
40% of general government spending).
2. Yes, but the “budget law” is limited to spending:
it is an Appropriations Act. Usually just a single Act (e.g.,
Canada, UK, etc.), although there are12 Appropriations Acts in
USA and 23 in the Netherlands.
•
Coverage of Appropriations Acts exclude
“mandated expenditures in some countries.
These can be very large, e.g., 2/3rds in USA Federal
budget.
Fiscal rules—Are they included in
law in OECD countries?
Fiscal “rules” impose limits on deficits, spending etc. There
are varying OECD practices regarding fiscal rules.
1. Not included in law. E.g., Sweden (target=2% surplus,
2006); UK: (a) Net debt=40% of GDP over cycle; (b) a golden rule.
2.
Qualitative rules in law. E.g., NZ: “reduce debt to a prudent
3.
Quantitative rules in (limited-duration) laws. E.g., USA:
level”, “operating revenues and expenses in balance”
(i) Balance Budget Act 1985—targeted the deficit; largely a failure;
(ii) Budget Enforcement Act 1990. Ceilings on discretionary
expenditures. Worked well until a fiscal surplus, then circumvented;
BEA allowed to lapse in 2002.
4.
Quantitative rules in “permanent” laws. E.g., Golden
rules: Germany’s Constitution; Laws in Spain & Korea.
Date of submission of draft budget
to Parliament—OECD countries
Duration of appropriations
• Permanent appropriations. Spending for which
“permanent” authority is provided by a law other than the
annual appropriations act., e.g., Social Security Laws.
• Multi-year appropriations. Spending authority provided
for a period longer than 12 months. E.g., (1) Biennial budgets –
Slovenia and some USA States; (2) specific expenditures e.g., capital
projects of USA federal budget.
• Annual appropriations that do not impose legally
binding upper limits. France’s OBL distinguishes fixed and
“evaluated” spending; this provision allows, for example, debt
servicing to be “evaluated” and paid irrespective of budget projections.
• Annual “fixed” appropriations. Impose legally-binding
ceilings on spending. The Constitution and the State Budget Act in
Finland and the State Budget Act in Sweden distinguish fixed from
flexible or multi-year appropriations.
• Borrowing from next year’s appropriations may be
allowed in law e.g., Sweden.
Carry-over of annual appropriations
• Several OECD countries’ laws allow some
carry-over of annual appropriations—usually
more liberal provisions are made for capital spending
• However, there are usually restrictions,
which are often specified in law:
OECD Survey 2007
Appropriations for Spending –
but at what stage?
The BFMSL specifies the basis of the appropriations:
• “Budgetary authority”.
E.g., USA: “authorises the federal
government agencies to incur legally binding obligations and the Treasury
Department to make payments for designated purposes”.
• Commitment (“obligation”) stage. Binding limits on
spending commitments—when the government enters into
contractual arrangements requiring payment in the future. E.g., France
: appropriations are for commitments, as well as for cash. Parliament adopts
two lines for each budget program.
• Accrual stage. A few OECD countries, notably Australia,
Denmark, NZ, UK adopt budgets on an accrual basis – when the
economic transaction occurs, not when payment is made.
• Cash stage. Appropriations are for spending at the cash
stage (“outlays” or “disbursements”), when payment is actually
made (electronically, check issuance).
Appropriations Structure – How
detailed? Which classification?
This is a particularly important issue for the BFMSL.
• Most OECD budgets are by “Ministry” and “Agency”. The
budget law is administered by “budget managers – holders of budget
authority – in “budget entities”. This is an administrative classification.
• Input-based budgets include economic classification of
spending. Appropriations are detailed by the nature of
spending e.g., salaries, goods and services, transfers, capital
spending. Sometimes very detailed e.g., Germany—whose 1969
Budget Principles Law also requires a budget annex with a cross-matrix of
economic and functional classifications.
• U.S. Code allows Congress to change budget titles in
annual appropriations laws. This contrasts to most countries, where
appropriations structure is fixed, often being specified in law.
• Output-based budgets are by “program”, “output”
outcome. OECD countries with performance-based budget systems
adopt annual budgets on this basis. This is the major reason why the OBL
in France was changed.
Revenue classification and
Revenue Measures
• The revenue classification can be specified in law.
e.g, in France. However, some countries choose not to
specify this in the BFMSL.
• Most OECD budgets use a revenue classification
close to international standards. e.g., revenue is
classified by various types of taxes, nontax revenues
• “Finance/Tax Laws” are adopted separately from
“Appropriations Acts” in some OECD countries, “the
budget” is enacted by two separate laws, e.g., a “finance
law” in UK.
• Tax Laws or “Codes” may be changed by the annual
budget law. E.g., France and its ex-colonies
Net or Gross Appropriations?
• In principle, all appropriations should be on a gross
basis. This is usually the case in OECD countries.
• Net appropriations provide incentives for spending
ministries to raise (and spend “own” revenues). A few
OECD countries (e.g., UK) appropriate on a net basis, but
parliamentary authority is needed for agencies to spend “excess”
revenues.
• VAT revenues. Revenue estimates in the budget are usually net of
reimbursements, requiring appropriations for VAT refunds.
• The BFMSL is a vehicle for clarifying the basis of
appropriations and any earmarking arrangements.
Documents accompanying the
budget—Legal Requirements
OECD countries’ BFMSLs vary considerably:
•Requirements established in considerable detail.
E.g., Germany & France. In USA, the documentation requirements are
very extensive: the executive must present analytical perspectives,
historical tables, and detailed appendices—these are used by the
appropriation sub-committees of the legislature to amend proposed
spending programs in detail (footnotes are quasi legally binding).
•Briefly elaborated in the budget system law.
Sweden’s Parliament Act and its State Budget Act contain a few
requirements for budget documents.
•Not required by a law. Westminster countries’ governments
traditionally decided the content of budget documentation and the form of
the estimates. In recent years, fiscal responsibility laws in Australia, UK,
and NZ have specified the content of pre-budget and budget reports.
Canada has not adopted such a law.
Documents accompanying the
budget—Example of France
The 2001 Organic Budget Law requires (for
1st Tuesday of October):
•A report on the economic, social and financial
situation, which is an update of the pre-budget report (see below). It contain the main
hypotheses and projection methods of the variables underlying the budget projections and the
economic and fiscal outlook for at least four years following the budget year, including the
revenues, expenditures and fiscal balance of general government.
•A detailed account of the previous year’s budget
execution. Missions and programs are assessed on the basis of performance indicators.
•Explanatory annexes, including: (1) Detailed evaluation of the impact of all taxes,
by category of tax; (2) the impact on revenues, expenditure and the fiscal balance of changes in
budget presentation from that of the previous year; (3) details of revenues, current expenditure
and capital expenditure; (4) estimates of revenues foregone by tax exemptions; (5) annual
performance reports for each program; and (6) details on special accounts permitted by law.
•Written responses by the government of questions asked by
Parliament.
•A pre-budget report, to be presented in May-June. This is a
report on the orientation of fiscal policy – to provide Parliament with an
early view of the government’s thinking on the direction of fiscal policy and how France intends to
meet its “European commitments” (EU fiscal rules).
Adoption of annual budget law by
Parliament—Legal Requirements
Issues
1. Timetable for adoption
2. Approval of Medium-Term Framework
3. Budget Amendment Powers (spending)
4. Non-adoption of budget by beginning of
year
Timetable for budget adoption
The two most important dates for the BFMSL
are: Dates of (1) submission of draft budget to parliament; and (2)
adoption of budget bill by parliament (and entry into law).
• Many
countries’ laws (or even Constitutions)
require adoption of annual budget before
beginning of fiscal year. e.g., constitutions of France,
Germany, and Korea.
•Time/processes in Parliament is usually
specified in Parliament’s (internal) Regulations
France’s 1958 Constitution is one exception, as is USA’s Congressional
Budget Act 1974, which elaborate on internal procedures/timing.
•A few countries’ BFMSLs specify budget adoption
procedures e.g., Germany: annual budget laws take precedence
over non-budget laws; submission is to both chambers simultaneously
(c.f., Bundestag 1st for other laws).
Approval of Medium-Term Framework
•Laws generally do not require Parliament to
approve the MTF. Sweden’s State Budget Act 1996 allows the
government to propose expenditure ceilings to Parliament that become
binding for the years beyond the budget year. In November, prior to
approving the detailed annual budget, the Swedish Parliament
approves an aggregate multi-year expenditure ceiling.
Spain’s General Budget Act 47/2003 requires the establishment of
legally binding ceilings on total expenditures.
•Most Parliaments review the MTF, which is
provided in the documentation accompanying
draft annual budget law. In UK, spending reviews are
conducted, but this is not a legal requirement, c.f., President Sarkozy’s
spending review ongoing in France.
Budget Amendment Powers (spending)
OECD Parliament’s can amend government’s
proposed budget, but in about 45% there are
restrictions imposed in law:
•Moderately severe. e.g., France and Germany, total expenditures may
only be raised (or total revenues reduced) if there are offsetting measures which
leave the budget deficit unchanged.
•Very severe. E.g. Australia, Canada and New Zealand, Parliament must
adopt the proposed budget as a whole unless changes are very minor or total
expenditures are reduced. Spain’s Constitution requires prior consent of the
executive when Parliament’s amendments would result in an increase of
appropriations or a decrease in revenues. In Korea, there are also severe
constitutional restrictions.
“Unrestricted” countries Parliaments may have
less formal constraints. E.g., Coalition (or other inter-Party)
Agreements of the governments in Denmark. Finland, Germany,
Netherlands, Sweden.
Non-adoption of budget
•Constitutions or Laws in OECD countries usually
provide provisional budget authority in a new budget year
should the legal or conventional deadlines for budget adoption not be
respected e.g., Constitutions of Denmark, Finland, France, Germany, Korea,
Spain, Sweden) and Law in Japan
•The executive is generally authorized to continue to
operate government on the basis of the previous
year’s budget. However, in some countries e.g., Finland, law allows
interim approval on the basis of the government’s proposed budget.
•Interim legal authority for budgetary in the early
months of a new fiscal year is always required in the
U.K. This authority is granted without parliamentary discussion.
•Nearly all OECD countries have legal provisions to
prevent a government shutdown. Exception: USA congress may
decide not to adopt a “continuing resolution”.