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.
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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.
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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.
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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).
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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.
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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
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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
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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.
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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
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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.
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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.
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