Introduction to Budgeting
What is budgeting ?
Definition issues
Features and dimensions
To clarify basic concepts
To go beyond techniques
To challenge current views
To allocate resources to spending
• To break down resources into different uses
• Budgeting answers these questions
– What to do with tax payer money?
– How to put public money at the right place ?
– How to align resources with policy goals ?
• The specificity principle and the budget
nomenclature
– Who decides that: the Cabinet or the Parliament?
– With which degree of precision?
• Assumption : limited resources should meet
‘unlimited’ needs
– Prioritization is the keystone of budgeting
– Prioritization sometimes implies to give up
The three PFM layers
Fiscal policy
How much
resources do I
have?
Resources
allocation
Where to put it ?
Operational
Goals
Tools
Players
Sustainability
Structural
balance
Fiscal rules
MTFF
Fiscal statistics
and forecasts
Cabinet: MoF and
PM
Parliament
Fiscal council
Macro-fiscal unit
Economists
Allocative
efficiency
To optimize
spending
distribution
MTBF
Spending reviews
Budget procedure
Budget
classification
Parliament
Cabinet: MoF and
line ministries
Policy analysts
Efficiency
Effectiveness
Spending process Spending
Cash
agencies
The central component related to the two
others
• Budgeting and fiscal policy
– Fiscal expansion are seldom associated with good
budgeting: incremental budgeting
– Fiscal consolidation requires good budgeting in order
to preserve the quality of public spending: the less
resource you have the better you should use it
• Budgeting and operational management
– Operational efficiency/allocative efficiency
– operational efficiency/effectiveness, as a criteria for
allocation
– Don’t waste public money to fund no performing
pollicies/agencies
– Combine two criteria: the need and the capacity
One of the most challenging component of
the PFM system
• No clear metrics to measure allocative
efficiency
– What is the optimal distribution of public spending
• By COFOG function: no clear answer
• By economic items: some points of reference (wage,
investment)
– International benchmarks, for comparable countries
(DEA)
– Historical series: stability or volatility ?
• Politically sensitive
– Political preferences of a government/society
– The pressure of lobbies
– To force governments to choose, to go from implicit to
explicit choices;
To forecast and/or to authorize ?
• Forecast:
– A projection of the likely cost of the past expenditure and of
the already planned new spending decisions
– Technical capacity: how to estimate the cost of the baseline
and the cost of new spending decisions for the year to come
– Sincerity:deliberate underestimation is frequent. Why ?
• Authorize:
– an appropriation is the authorization given by the budget
authority to a spending entity to spend a certain amount of
money for a certain object;
• An authorization to pay and/or to commit ?
• A permission, not an obligation
– Is the budget the only legal basis that authorize to spent?
The legal basis of an expenditure
• The budget law is not the only legal basis of an expenditure
– Is a budgeted but non legislated expenditure possible?
– Is a legislated but non-budgeted expenditure possible?
• Previous ordinary laws and contracts trigger spending:
–
–
–
–
debt interests
Pensions and welfare entitlements,
procurement/investment contracts,
Hiring contract, recruitment decision, wage bill (?)
• “A budget just records but doesn't decide”
• What to do when the budget law says no but an ordinary law
say yes?
• Good and bad solutions
– Indicative appropriation ceilings
– Reserve, virments and supplementary budgets
– The finances law prevail over any other law
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Are revenues also ‘budgeted’?
• Yes, but in a different manner
• Tax and non tax revenues are usually included in
budgets, though in different ways
– revenue figures are always included
– but tax legal provision are not always in the budget
• But most of the times as a forecast, not an
authorization:
– If the budget is not voted on time, tax collection continue
– The actual tax take can be different from the forecast
• A dissymmetry in the legal budget status for tax and
expenditure
• But similar issues in terms of capacity to forecast
and sincerity of the forecasts
Should also loans and borrowings be
‘budgeted’ ?
• Ambiguities, even sometimes conflicting views :
– Yes: loans and borrowings should be approved by the Parliament;
– No: that would introduce confusion and blur the distinction between
budgeting and financing transactions;
• Budget transaction/financing transaction
– budget transactions are definitive and impact the net wealth
– financing transactions are provisional and doesn’t impact the net wealth
– key distinction for a proper definition of budget deficit (GFS)
• The below/above the line presentation reconciles the legal
argument (yes) with the economical argument (no)
• In the same vein, guarantees should also be formally
budgeted, though upon specific arrangements.
Budget coverage
• How to reconcile:
– the economic theory: unity of the fiscal sphere (non market
activities)
– with the institutional arrangements: fragmentation of the
fiscal players;
• One major issue: CG or GG ? (central or general government)
– CG, and its related EBFs, is often the core of the budget
– Social security institutions are fiscal institutions, sometimes
out the CG budget, sometimes within the CG budget;
– Local governments (LG): fiscal autonomy, fiscal federalism;
a wide range of solutions on how to combine CG with LG
• And two technical difficulties:
– Own resources of fiscal entities: gross or net budgeting
– Donor’s funds? The Paris declaration principles
Budget horizon
• Challenging the ‘annuality’ principle:
– budgets should be annual while the bulk of public
expenditures are actually multiannual ?!
• Need for visibility
– for both policy makers and spending managers
– In order to accommodate this rigid spending dynamic
• Multiyear budgeting is the order of the day
– MTBF is the major avenue: see L4
– Other technical arrangements are possible:
• Carry-overs ( with precaution)
• Commitment appropriation
• Biennial budgets based on a distinction between discretionary/nondiscretionary spending (British DEL/AME)
• Notwithstanding these novel developments, annual
appropriation should remain the basis of the
operational management of public spending
Budget instruments
• Formal and material aspects of the budget vary
across countries
• Usually government budget is embodied in:
– One single law (‘budget law’ or ‘finances law’)
– Or, sometimes, a batch of laws (revenues, expenditures etc…
• accompanied by broad political fiscal statement
– No legal authority, but politically the main element
– developing the main features and options of the budget;
• Budget documentation
– Increasing number and complexity of appendixes, reports and
tables
– To make a distinction between informational and legal
documents
A system in constant evolution
• Many technical changes in the last decades
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–
–
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Performance budgeting
Multiyear budgeting
Accrual accounting
Cash and debt management
• But also new managerial, institutional and
political demands
– Accountability
– Transparency
– Participation
• Each country should follow its own pace
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Conclusions
• Budgeting: quite a complex and technical area
• At the cross road between
– politics and management
– politicians and civil servant
• Demanding jobs:
– Non stop work
– Technical skills
– Wisdom, lucidity and courage
• The budgeter's main message to politicians: decide
want you want but be consistent
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–
–
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Resources and expenditures
Means and goals
Short and long term
Speech and action