Objectives of Fiscal
Responsibility Laws (FRLs)
and Prerequisites for Success
Ian Lienert
April 1, 2010
Three Main Objectives of FRLs
1. Fiscal stability (long-term debt
sustainability and short-term fiscal stability and fiscal
rules)
2. Transparency (of the governments fiscal
policy intentions, as well as reports on budget
execution)
3.Accountability (collective responsibility
of the government to parliament; not individual
accountability within the government)
1. Fiscal Stability—1
1. Medium-term macro-fiscal stability and
annual budget objectives or targets. A
FRL may require:
a. Objectives for key fiscal aggregates (e.g., “reduce
debt to a prudent level”).
b. “Fiscal rules” – numerical targets.
The most common fiscal objectives/rules pertain
to gross debt, the fiscal balance (perhaps
defined “over the cycle”), and aggregate
expenditures
1. Fiscal Stability—2
2. Reasonable stability in tax policies (tax/duty rates
and tax bases).
3. Long-term fiscal sustainability and debt analysis.
Government debt and fiscal balances interact:
medium- and long-term debt sustainability analysis
and scenarios are needed.
4. Need procedures for parliamentary “buy-in”.
Clarification of parliament’s budget amendment
powers; executive’s power to not fully spend
approved budget; contingency reserves (usually not
part of a FRL, but other laws).
2. Transparency: of future Fiscal Policy—1
The FRL may require in annual budget documents:
1. A statement of fiscal policy strategy or
intentions over a medium-term period. This
would be supported by:
 Baseline medium-term fiscal projections, based on
unchanged policies, which identifies available fiscal
space for new policies.
 The impact in the annual budget (and in medium
term) of new revenue and expenditure policies to be
adopted in the upcoming budget .
2. Transparency: of future Fiscal Policy—2
The FRL may also require the following in annual
budget documents:
2. An annual budget policy strategy (BPS) explaining
how the BPS helps to achieve the MT fiscal policy
objectives.
3. Explanations of why the government—even a newly
elected one—is deviating from the previous
(government’s) fiscal intentions.
4. Long-term scenarios of fiscal balances e.g., for the
impact of changing demographics or climate change.
5. A statement of the main fiscal risks as part of
annual budget documentation.
3. Accountability to Parliament and Public
(transparency of recent past fiscal developments)
By the executive:
• In-year fiscal outcomes relative to budgets:
monthly/quarterly.
• Six-monthly formal review of budget outcomes, which may
lead to a pre-budget debate in Parliament.
• Annual budget performance reports and financial
statements.
• Report on how the government has followed up on the
external auditor’s report
External Audit:
• Annual report to parliament on budget performance.
Includes certification of annual accounts (financial
statements) by the external auditor.
FRLs from around the world
Country
1
2
3
4
5
6
Australia, 1998
New Zealand, 1994
United Kingdom, 1998
Main Objectives
Secondary Aims
Fiscal Stability:
Fiscal
lower deficits or
Transparency
run surpluses;
reduce debt
Fiscal stability and fiscal
transparency
Hungary, 2008
Brazil, 2000
Argentina, 1999, 2001,
2004
Fiscal stability
Transparency
7 Colombia, 1997, 2001,
(targets for
2003
8 Ecuador , 2002, 2005 spending, deficits
and/or debt)
9 Panama, 2002
Focus on targets.
10 India, Pakistan, Sri
Transparency
Lanka, 2003, 05
Success?
Yes
Yes
Yes
??
Yes
No
No
No
No
Mixed
Prerequisites for Success of a
Fiscal Responsibility Law (FRL)
Messages
1. Get “Basics” Right First
2. Examine what can be done
without a FRL
3. Seek buy-in from parliament and
the public
1. Get “Basics” Right First
• Good annual budget preparation (realistic
projections for macro variables, budget revenues; top-down
spending ceilings; costing of new policies; clear presentation
of budget: objectives, targets, priorities, risks……)
• Controlled budget execution (firm spending
controls; adequate internal audit; no payment arrears)
• Strong cash management (central control over
government bank accounts; cash flow forecasts).
• Timely and accurate accounts (monthly/quarterly
fiscal reports; audited annual accounts).
• External oversight and evaluation (by external
auditor, parliamentary committees, anti-corruption agency)
2. Examine what can be done without a
FRL?
By the executive:
• Improve budget formulation & presentation,
execution, cash management, fiscal reporting and
accounting.
• Practice fiscal discipline; don’t tolerate “creative
accounting”; sanction misuse of funds.
• Modify Financial Regulations or propose
amendments to the Public Finance (System) Law.
By parliament :
• Amend its internal regulations to improve budget
adoption procedures and its internal organization
arrangements.
3. Obtain buy-in by politicians and the public
International experience with FRLs: the laws themselves do
not buy credibility. Buy-in is needed at three levels:
1. Within the Government:
 Is a top-down spending process “bought” by the
President, other Ministers of the Cabinet?
2. At Parliament:
 What procedures are in place to constrain parliament’s
understandable constituency concerns?
 What happens when shortfalls in revenue or grant
support occur? Should debt rise to finance shortfalls?
3. With the Public and Civil Society:
 Public hearings/consultations increase chances of FRL’s
successful adoption and implementation.