Issue paper 2: Prioritisation and Fiscal Responsibility PRIORITISATION AND FISCAL RESPONSIBILITY: HOW TO INVOLVE POLITICIANS IN EXPENDITURE MANAGEMENT 1 Introduction All governance systems confront the tension between short term political interests, often dictated by electoral cycles, and the longer term need for fiscal stability and service delivery in line with governments’ stated policy priorities. Imprudent expenditure plans may be adopted in a bid to attract voter support without due consideration of the longer term consequences, or hard decisions which may be politically unpalatable may be postponed. Political expediency may promote unproductive capital investment, with the result that sector budgets become permanently distorted from the allocations consistent with implementing policy priorities. Developing countries are littered with white elephants and still-born projects which were never viable nor in the broader public interest. Furthermore, reprioritisation in the context of a shrinking resource envelope may stir up political conflict, prompting those who are threatened with the loss of resources to take counter-measures in order to protect their budgets. Yet it is neither possible – nor desirable – for budgeting and financial management to be completely insulated from political influence. The challenge is to manage the interface between budgeting and politics by designing and implementing institutional and legal frameworks which will improve the quality of political participation and promote fiscal responsibility. This issue paper will summarise the various approaches used in OECD countries in their public sector reform initiatives, and will explore to what extent similar institutional controls and incentives could be established in developing countries. It focuses on “governance” or “constitutional” frameworks (i.e. the macro-institutional settings in which budgetary decisions are taken) rather than ongoing “political” decision-making which takes place within these frameworks1. 2 Interface between the political and budgeting processes In a democratic system, the role of government, its objectives, policies, priorities and the specific programmes it runs are fundamentally political and not managerial issues. Since budgeting is about resourcing government’s strategic objectives and priorities, it has a considerable policy dimension (especially in resource allocation during budget preparation) but also has technical or managerial elements (financial management in executing the budget). 2.1 Setting policy priorities: Role of Cabinet and individual ministers Political decision-makers should be held responsible for the authority conferred on them. While institutional arrangements vary from country to country, in general Cabinet is collectively accountable for the objectives of the government as a whole, for policy coordination across government, and for legitimising budget decisions which reconcile competing claims on limited public sector resources. Ministers are individually accountable for programmatic decisions in budget formulation. The main responsibility of Cabinet and ministers is achieving allocative efficiency (i.e. ensuring that public resources are directed toward government’s priorities and that the most effective mix of services is produced in order to attain desired outcomes). 1 I am indebted to Alex Matheson for this observation. 1 Issue paper 2: Prioritisation and Fiscal Responsibility 2.2 Legislative oversight: Role of Parliament and the legislatures The executive should be accountable to Parliament for implementing the budget as approved by Parliament and for effective and efficient expenditure. In developing countries, especially, Parliaments tend not to exercise effective fiscal oversight, merely rubberstamping the actions of the executive. 2.3 Civil society Even today, the decisions surrounding budget making and implementation are often shrouded in a veil of secrecy. In developing countries, the budget process, rather than being a focus of public debate and scrutiny, is often non-transparent with virtually no input from the organs of civil society. 3 Why should political involvement be encouraged? In many countries political office bearers have been either marginalised from the budget process, or significant political involvement has resulted in electoral spending cycles, maldistribution of investment resources or even outright corruption. If the short-term political mind-set can engender such negative consequences, why should politicians be involved at all? This paper would argue that many of these problems such as the “short-termism” of political players are symptomatic of institutional failure i.e. the lack of accountability and control mechanisms. If such mechanisms were put in place, creating an appropriate incentive regime for political players, there could be significant advantages of political participation in enhancing the allocative efficiency of the budget process and legitimising prudent fiscal behaviour. Many countries have a history of budgeting as a process driven by technocrats, with minimal political involvement and parliamentary oversight. Yet – in the interests of increased allocative efficiency – the importance of political input is indispensable. When elected officials do not resile from difficult trade-offs and buy into the need for longer-term sustainability, then the formal budget is likely to be more than just a politically acceptable wish list. Conversely, when politicians avoid difficult decisions in the budget process, this results in the formal budget allocating more resources than the government is likely to have at its disposal. It is then the informal budget implemented by civil servants – which does respect the inexorable budget constraint – which will determine what service delivery actually happens. Besides inefficiency, this undermines accountability and the democratic process, since specifying unrealistic budgets is in effect an abdication of political power to bureaucrats. Under conditions of fiscal stress, treasury – in the absence of directives from political heads – may initiate across-the-board cuts to ensure that aggregate budget constraints are met. These cuts may not be consistent with allocative efficiency or resource allocation according to government’s priorities. It must also be borne in mind that government’s decisions on the inputs it will deploy in order to generate service delivery outputs are never apolitical. In some cases, aggregate fiscal discipline may be compromised due to strategic over-commitment which refers to operational inefficiency resulting from chronic imbalances in expenditure components. For example, a long-term fiscal imbalance due to an excessive wage bill, which leads to government dissaving, may only be resolved through the exercise of political will. 2 Issue paper 2: Prioritisation and Fiscal Responsibility While politics and the sensible stewardship of public resources may often conflict in the short run, in the long run they are both absolutely essential in achieving the goals of government in a sustainable and legitimate manner. Ideally, both politicians and the public should realise that unconstrained and unprioritised expenditure will ultimately undermine these goals. The central issue therefore is establishing appropriate institutional and legal frameworks to ensure that political involvement is harnessed to promote reprioritisation, while maintaining fiscal discipline. Budget reform should ideally address not only the efficacy of public sector managers in attaining operational efficiency in service delivery, but should also consider the interface between budgeting and politics to ensure outcomes which are allocatively efficient and fiscally responsible. In other words it must be systemic. 4 Incentives and political behaviour The behaviour of politicians and their short time horizons are often a reflection of the incentives that they face. The problem is known generically as the “tragedy of the commons”. When a resource is owned in common, each user, acting in her own interest, will over-exploit the resource, even though it would be in the collective interest to restrict use of the resource to a level more sustainable in the long term. The budgeting analogue of this incentive problem has each individual minister trying to demand the largest possible claim on the common public resource pool, even though she may prefer government as a whole to maintain aggregate fiscal discipline in the interest of long term sustainability. It is in the interest only of the Minister of Finance to ensure aggregate constraints are not violated. As Brumby (1998:5) points out, this may or may not be valued by the Prime Minister and the electorate, which creates room for opportunistic behaviour. But the perverse incentives of the “tragedy of the commons” do not only weaken the budget constraint. They also serve to impede the redeployment of public resources from lower to higher priority uses. While Ministers may in principle want budget allocations that reflect the priorities of government as a whole, as individuals they are aware that if they release resources for reprioritisation these may not be returned to their budget. On the other hand, if they do not reprioritise and simply demand more resources, not only are their current allocations assured, but their future budgets may even increase (Schick, 1998:9). Because risk averse agents tend to dislike a loss of a certain amount more than they would value a gain of the same amount, there tends to be a systematic upward bias in public expenditure, not necessarily offset by increased taxes. Ministers – under this incentive regime – would never support a decrease in budget, but would always support increases (Brumby, 1998). The sort of opportunistic budgeting described above leads to budgetary constraints being undermined since restraint is in no individual Minister’s interests. The repertoire of opportunistic budgeting techniques also includes under-estimating or hiding the costs of programmes, displacing payments to future fiscal years, use of credit instead of cash, labelling current expenditure as capital expenditure etc. Schick (1998:69) points out that without opportunism there would be no need for strong rules to suppress such behaviour. But with opportunism, such rules may yield unintended outcomes as agents seek to circumvent the rules – unless these are reinforced by external constraints. 3 Issue paper 2: Prioritisation and Fiscal Responsibility Another problem is often fiscal policy based on fiscal discipline might not be time consistent2. For instance, on the assumption of office, a new government might declare its commitment to fiscal prudence. But in the run-up to elections, it might be in its interest to deviate from its own stated policy, and embark on politically popular spending sprees, designed to win votes. Therefore stated policy may not be credible, precisely because of government’s ability to “change its mind”. Budgetary institutions are the rules – both formal and informal – according to which budgets are formulated, approved and implemented. Reform experiments have attempted to restructure budgetary institutions in order to create incentive regimes that would extend the time horizon of politicians, promote time consistency in policy, encourage fiscal discipline and resource allocation decision-making which is in the interest of their broader constituencies. Furthermore, reforms have attempted to refocus political debate from the minor details of budgeting to the significant policy changes in resource allocation, and to promote co-ordination in political decision-making to achieve whole of government goals. The ultimate objective is to change behaviours, not just procedures or institutional configurations. But there is growing recognition that how the institutions and processes of budgetary management are structured can influence budgetary outcomes (Campos and Pradhan, 1996). Congruence between formal arrangements, the informal arrangements which determine what happens in practice and intangibles like “political culture” is crucial. In an increasingly integrated global economy, international competition for investment has placed growing emphasis on the quality of fiscal governance. In order to raise their credibility on international markets, many governments – in both the developed and developing world are re-examining the role of internal constitutional devices such as public accounts committees. The other important factor influencing the behaviour of the polity is the information available to them. Any attempts at improving the quality of the interaction between politics and public resource allocation systems must ensure that the real trade-offs at the heart of budgetary politics are as widely understood as possible. 5 Institutional mechanisms to re-orient political involvement This section reviews the various institutional devices employed in OECD countries to fashion incentive regimes that would promote fiscal accountability and help to align narrow sectional interests with government’s overall objectives. 5.1 Institutional arrangements for decision-making Vitally important is the establishment of a clear and predictable budget cycle with early involvement of the Prime Minister, Minister of Finance and other Ministers in setting priorities. The sequence of decision-making in public resource allocation exerts a major influence on the outcome of the process. Reallocation requires the imposition of the aggregate budget constraint and the resource envelope for each sector or spending agency before individual Ministers compile their budget estimates. As pointed out by Schick (1998:99), 2 A policy is time inconsistent when a future policy decision that forms part of an optimal plan formulated at an initial date is no longer optimal from the viewpoint of a later date even though no relevant new information appeared in the meantime. (Blanchard and Fischer, 1989: 592). 4 Issue paper 2: Prioritisation and Fiscal Responsibility reallocation decisions must be made and enforced at the top, else they will not be made at all. Secondly, these decisions should be made early in the process before spenders develop “entitlements” to their claim on resources. If these decisions are deferred until later in the process during bilateral negotiations between Ministries/departments and the treasury, there is a danger that the outcome might evince little reprioritisation and that the unguided bids from departments might not be reconciled with the aggregate constraint. The role of a strong central agency (such as the Cabinet Secretariat, Office of the President or the Prime Minister, planning or coordination units therein) in underpinning this process by planning submissions to Cabinet, providing germane information, enforcing an agreed format for Cabinet submissions and monitoring the implementation of Cabinet decisions cannot be over-rated. The Ministry of Finance would also play a major role enforcing sectoral aggregates in Cabinet discussions and bilateral negotiations with departments, as well as assessing the fiscal impact of spending proposals. While the above process ensures the collective accountability of the Executive for intersectoral co-ordination of spending in support of over-arching government objectives, once the aggregate sector allocations are made, countries like New Zealand have then devolved decisions on allocations within sectors to the appropriate Ministers. Some of the advantages of this devolved decision-making structure are: It focuses Government decision-making on major policy issues It attenuates conflict between spending agencies and budget controllers about details It reduces the information needed at Cabinet level It provides Ministers with an incentive to reprioritise within a given budget constraint rather than to fight shifts in funds through fear that their resource pool will be diminished (Schick, 1998:17). With the increased authority to make allocative decisions within sectors, there is tighter individual accountability for Ministers to remain within their global budgets. These include multi-year budgeting, base-line projections of future authorised expenditure, and rules for assessing the fiscal impact of proposals. These will be explored in greater detail below. Devolving spending responsibility without concomitant fiscal accountability mechanisms could compromise fiscal discipline. An innovation that has been pioneered in Australia is the portfolio budgeting system. In this system, budgets are allocated to portfolios. Ministers may reprioritise expenditure within these portfolios, with the proviso that any proposals for increased spending be offset by increased savings from within the portfolio (Wileman and Holmes, 1993: 26). Portfolio budgeting could increase individual ministerial accountability by forcing difficult decisions that were previously made centrally. The increased transparency would also permit Ministers to monitor each other’s behaviour in fiscal matters especially for any tendency to by pass procedures. Another of the early reforms was the introduction of annual ministerial reviews to understand government’s overall performance and the critical choices facing them. 5.2 Pre-commitment and enforcement mechanisms Because fiscal restraint is unlikely to be durable in the absence of political will, it is important to create incentives for politicians to buy-in to fiscal discipline. In other words, the (shortterm) costs of deviating from fiscal discipline should exceed its short-term benefits. Only under these circumstances will the political calculus lead to time consistent behaviour. 5 Issue paper 2: Prioritisation and Fiscal Responsibility One mechanism which has been implemented to increase the time-consistency and credibility of policy announcements on fiscal discipline has been through medium-term fiscal targets established through constitutional or legal frameworks. The vaguer the terms in which legislation is framed, the greater the effective delegation of authority to those who administer the legislation. Conversely, the more explicitly targets are articulated, the less discretion can be exercised in the future to deviate from prudent fiscal policies. Examples would include the Maastricht deficit convergence criteria, constitutional restrictions on aggregate expenditures in Indonesia, and in the United States, the Gramm-Rudman-Hollings Act of 1985 and 1987, the Omnibus Budget Reconciliation Acts of 1990 and 1993 and the Balanced Budget Act of 1997. The American laws promote deficit reduction by setting caps on government investment, consumption and other forms of discretionary spending. When annual budgets exceed these limits, the law precipitates automatic sequestration which means across-theboard cuts in discretionary spending (Brumby, 1998). Another mechanism aims at enhancing credibility of policy by increasing transparency of fiscal policy changes and fiscal outcomes through improved financial reporting. The New Zealand Fiscal Responsibility Act of 1994 contains “Principles of Responsible Fiscal Management” which require that spending, taxation and debt be maintained at “prudent levels”. Any deviation from the principles must not only be explained, but the Minister of Finance is also required to explain how and when government will revert to the principles. The “Budget Policy Statement” imposes an obligation on government to announce their fiscal intentions for the next three years, as well as consistency with “Principles of Responsible Fiscal Management”. In this case the constraint on government behaviour may derive from the monitoring role of financial markets, parliament and civil society rather than any legally binding constraint. These targets should be realistic enough to be credible, but also have some degree of flexibility. Sweden has delineated the following criteria for selecting targets. They should be Difficult to manipulate. Incur a political cost when violated. Be flexible enough to deal with fluctuations in economic activity Be easy to communicate to the public (Brumby, 1998). It is important to note that fiscal rules are not likely to be self-enforcing. Treasury should be empowered to enforce the aggregates despite opposition from spenders (e.g. it could be empowered to veto spending decisions which would compromise the aggregate constraints). In return for control over aggregates, treasuries often cede to spending agencies control over line items (such as personnel or procurement) which they had traditionally exercised. 5.3 Medium term expenditure frameworks The fiscal targets described above automatically tend to focus the attention of politicians and markets on the intertemporal implications of spending decisions taken today. Another important instrument for ensuring that politicians adopt a longer-term perspective and consider the sustainability of proposed spending plans over time is the medium term expenditure framework (MTEF). In general, MTEFs revolve around baseline projections of existing and authorised policies over a three to five year period. Any new policy proposals are then evaluated relative to the baseline forward estimates. Each year, the forward estimates, after revision in the light of programme changes and changing economic conditions are rolled 6 Issue paper 2: Prioritisation and Fiscal Responsibility forward, and become the authoritative starting points for initiating the next annual budget cycle. This imposes fiscal responsibility and supports Government decision-making by ensuring that all new policies are costed comprehensively to reveal explicit and implicit costs, encouraging the integration of planning and budgeting and highlighting the fiscal implications in the future of programmes and other sustainability considerations. MTEFs encourage inter-sectoral coordination as well as reprioritisation, since public resources can often only be redeployed in the medium term. Instead of getting bogged down in the detailed estimates, Cabinet attention is focused strategically on any proposed adjustments to the forward estimates. Political agreements on the first principles embodied in the forward estimates mitigate budget conflict by ensuring that the entire budget is not rehashed every year. International experience also suggests that the hardness of the aggregate budget constraints is enhanced when aggregate budget constraints are cascaded down into sectoral constraints. The credibility of MTEFs is further improved when projections are made publicly available, since any departure would immediately come under public scrutiny. Australia publishes an annual Fiscal Strategy Statement, the US an Economic and Budget Outlook and New Zealand publishes a Fiscal Strategy Report. It should also be borne in mind that the introduction of an MTEF per se is not likely to be a universal panacea. Ultimately the effectiveness of an MTEF depends on how it is implemented. When MTEFs were implemented in the 1970s, unrealistic forward projections resulted in overspending. Also the use of real rather than nominal projections had much the same effect. In addition, spending agencies assumed that MTEF forward estimates established an entitlement to future resources, and even in economic downturns when expected revenue collections did not materialise, it was difficult to adjust these claims on resources downwards. Unless the MTEF is integrated with an explicit service delivery plan into a medium term delivery and expenditure framework (MTDEF) to provide the operational context for political involvement, MTEFs could in fact disempower politicians. If an MTEF is to be more than just a numbers game, a medium-term projection of the costing of the current package of service delivery, it is vital that the a package of the desired outputs (types and levels of service delivery) be specified over the medium term. This would be accompanied by explicit quantifiable targets and reflect policy priorities. This would represent the political input into the medium term planning process. An MTEF tied to an explicit delivery plan could permit the synchronised delivery of services to maximise their impact on common objectives. 5.4 Parliamentary oversight Increasingly, budgetary aggregates are being scrutinised by parliamentary finance committees whereas programmes are being scrutinised in sectoral committees, each subject to a hard budget constraint. Public Accounts Committee and the Office of the Comptroller and AuditorGeneral play an important role in enforcing better accounting standards, ensuring spending complies with appropriation bills and in promoting ministerial accountability. Instead of merely auditing financial information, increasingly the Auditor-General’s Office in many 7 Issue paper 2: Prioritisation and Fiscal Responsibility countries has been empowered to assess performance: the efficiency and effectiveness of public expenditure3. But for Parliament to exercise its oversight role effectively and initiate corrective action, it is important that it has access to the relevant information. Much effort has gone into revising budget formats to provide more information in an accessible manner to Parliament on expected costs, expenditure, outputs and outcomes. The legislature can support its oversight of the implementation of improved policies by requiring an ex post reconciliation of actual expenditure by sector and program, and by requiring spending agencies to report publicly on outputs and outcomes. 5.5 Role of civil society oversight Another dimension of political involvement in the budget process is the institutions which mediate between the politicians and the polity (broader civil society). The way these institutions are structured generates incentive structures which in turn influence the way political entrepreneurs behave. The multi-tiered principle-agent relationship4 between shareholder-board-manager-worker in a private company is analogous to the relationship between the electorate-parliament-Cabinet-the Minister-public manager. Civil society organisations can therefore play a monitoring role, which would – given adequate information and institutional capability – help ensure that politicians’ incentives are congruent with the broader community. Besides legislation which makes full disclosure of financial performance and non-financial performance mandatory, other mechanisms to improve transparency include: Citizen’s Charters (such as in the UK), use of client surveys to solicit and publicise citizen’s perceptions of the quality of service delivery, and the independent scrutiny of fiscal information by bodies outside the public sector. The international experience reviewed above suggests that reprioritisation and fiscal responsibility can be achieved in a medium term budget process through a combination of added accountability for Ministers and increased flexibility in intra-sectoral allocations, traded off against staying within the budget aggregates. This configuration at political level is mirrored by the devolution of managerial accountability and authority at managerial level. Getting the balance right is crucial. Too much flexibility and too little control, accountability and fiscal restrain could create an institutional environment vulnerable to corruption and overspending. Too little flexibility and too much control could conversely undermine service delivery. 6 How relevant are these innovations for developing countries? In developing countries the pathologies described in the introduction are often even more acute. Politically high profiled strategic plans – instead of being achievable statements of 3 Alex Matheson has pointed out that in many cases the Comptroller and Auditor-General already has the power to audit other dimensions of performance beyond the financial. The nature of reporting to Parliament has however tended to be mainly in financial terms, and this has in turn limited the attestation of the Comptroller and Auditor-General. 4 The principal agent problem refers to a situation in which the principal relies on the agent to perform an action which is in the principal’s interest, but which is costly to the agent. If there is information asymmetry and the principal cannot effectively monitor the agent, the agent would have an incentive to behave opportunistically. For instance voters elect politicians to act in their interests, but politicians may instead act in their own personal interests. Similarly civil servants may act in their own interests rather than in that of their political head. The problem of the principle is to design an incentive regime that aligns the interest of the agent with that of the principle, so that the agent – acting in her own interest – will carry out the wishes of the principal. 8 Issue paper 2: Prioritisation and Fiscal Responsibility government’s intent – are often unrealistic exercises in political rhetoric, bearing only tenuous relation to actual service delivery. Governments in developing countries may be tempted to promise in their plan what they cannot pay for in their budgets and hence what they will never deliver. The formal budgets, which are tabled before Parliament, may themselves degenerate into mere wish-lists, where governments consciously authorise more spending than it will actually undertake so that it can create the impression that it is responding to the demands of electorates for social upliftment. Conversely, formal budgets may be unrealistic in the sense that they under-estimate actual expenditure, and the true spending situation often becomes known – and authorised by Parliament – after the fact. Furthermore, political corruption is often non-negligible, and the need to induce fiscal accountability even more immediate, given the characteristic dearth of resources in these countries vis-à-vis the needs and aspirations of their citizens. In developing countries budgets are often frequently revised during the course of the year in response to the vicissitudes of the politics and economic instability. Government’s actual spending may depend more on the availability of cash rather than any pre-set plan. Furthermore, budget documents may not accurately reflect government’s financial condition (Schick, 1998). The discussion of the interface between political and budgeting processes in section 2, presupposes that budgetary institutions are embedded within a democratic framework. In developing countries democratic processes are often non-existent, or fragile. Parliamentary oversight may be weak, with Parliament merely acting as a rubber stamp. The organs of civil society may not be robust enough to engage in any meaningful way with the executive around budgetary issues. Under these conditions, how possible is it for developing countries to emulate the institutions of their developed counterparts? The evolution of budgetary institutions depends on countryspecific circumstances such as particular political and managerial cultures, levels of capacity etc. Institutional frameworks cannot be transplanted from one setting to another and still function effectively. This means that countries cannot slavishly replicate these formal practices without considering the informal arrangements which underpin them. Nevertheless, valuable lessons may be drawn for developing countries. This section will explore what these principles are. 6.1 Preconditions for reform In order to put in the types of accountability mechanisms described above, it is necessary that prior conditions be met to underpin these structures. As Schick (1998) points out, it is important to get the basics in place before embarking on ambitious budget reform strategies: proper external controls need to be in place before devolution of managerial authority, the annual budget needs to be credible before embarking on an MTEF. 6.2 Information The mechanisms described above are information intensive and create a demand for information. Information is needed on the cost of existing policies, the cost of proposed changes, as well as on service delivery outputs and outcomes. These need to be presented in accessible budget formats. Budgeting systems, financial management information and accounting systems and performance systems must be set up to supply the appropriate information. The absence of well-functioning systems leads to untimely information of poor quality. Political decisions, by their very nature, are not routinised the way managerial operations often are and performance information can influence decision outcomes, but not determine them. Many OECD countries have instituted different forms of programme 9 Issue paper 2: Prioritisation and Fiscal Responsibility evaluation. But candid in-depth programme evaluation carries political risk when perceived as finding fault with government. 6.3 Research and administrative capacity of Parliament and the Executive A strong central agency (such as the Cabinet Secretariat, Office of the President or the Prime Minister, planning or co-ordination units therein) could play a potentially important role in developing linkages and information flows across line ministries. This would however call for a different skills profile. Increased emphasis would be placed on policy analysis skills. Similarly, the research capacity skills base of parliamentary researchers should be expanded if they are to support the parliamentary committees in performing their oversight role. 6.4 Political risk of reform Because reforming the interface of politicians with the budget process requires that the lines of political vis-à-vis managerial accountability be clearly delineated, and requires supporting reforms in the budgeting, financial management and information systems, it is likely to be associated with substantial political risk. This is particularly true in the early years of reform when the costs of transition are being borne, but the benefits have not yet manifested themselves. Managing this risk is likely to be a challenge in developing countries. This especially true in developing countries where the Finance Ministry is weak or has to compete with other central planning agencies. 6.5 Getting the basics in place versus governance frameworks As noted above, there is a compelling set of arguments that developing countries should first get “the basics” of financial management and control in place, before embarking on more sophisticated budgetary devices. An equally cogent counter-argument points out that if the underlying cause of bad budgeting practice is due to deficient governance structures, then getting the basics in place on a technical level will not necessarily result in appreciably better budget outcomes5. For instance, if the fundamental issue is that the Executive has unchecked power, then the solution would also have to entail creating appropriate checks and balances, deepening transparency and creating political contestibility. A pragmatic approach would seem to suggest that both the basic technical and governance issues need to be addressed to improve the efficacy and efficiency of public expenditure in developing countries. The focus then falls on the sequencing of such reforms to ensure that they are feasible both in terms of political realities and implementation. 7 Concluding remarks Clearly while the potential benefits of the accountability mechanisms described above are considerable, the institutional, informational and capacity requirements to implement them successfully are onerous. The extent to which developing countries are positioned to emulate these innovations depends very much on the quality of current budgeting and financial management practice in those countries. It also depends crucially on the ability of developing countries to devise phased implementation plan that will synchronise the capacity building with an appropriate sequencing of reforms. Bibliography Blanchard, O.J. (1989) Lectures on Macroeconomics, MIT Press, Cambridge, Massachusetts 5 I am indebted to Alex Matheson for making this point in response to an earlier draft. 10 Issue paper 2: Prioritisation and Fiscal Responsibility Brumby, J. (1998) Budgetary Devices that Deliver, presentation to Oxford Policy Management, Oxford, 23 October 1998 Campos, J and Pradhan, P (1996) “Budgetary Institutions and Expenditure Outcomes: Binding Governments to Fiscal Performance”, World Bank Policy Research Working Paper 1646, Washington, DC. Lister, S. (1996) Linking Planning and Budgeting, Mokoro Ltd, Oxford, UK, draft of unpublished paper Schick, A (1998) A Contemporary Approach to Public Expenditure Management, Economic Development Institute of the World Bank, Washington DC Holmes, J. And Wileman, T. (1993) Reform in the Australian Public Service, 1983 – 1996, Office of the Auditor-General of Canada, http:/www.oag-bvg.gc.ca Areas for further research: The length of this paper, as per its terms of reference, precludes the coverage of the following topics which should, however, be given more attention. These could be incorporated into the current paper, or could constitute areas for further research. Much more attention needs to be paid to whether it is possible to use OECD experiences as templates for restructuring institutions in developing countries. MTEFs vis-a-vis the MTEDF (i.e. medium term expenditure and delivery frameworks) and the role of net budgeting in promoting prioritisation, the need for forward estimates to precede annual budgets, sectoral discretionary vs non-discretionary expenditures Under the section on fiscal targets, there could be a fuller discussion on permanent vis-avis annually reset targets as well as single as opposed to multi-year targets. Capping of entitlements is another fiscal rule which could be examined. More attention should be paid to the role of information and transparency in incentivising politicians than was possible given space constraints. 11