institutional arrangements and the control of public expenditure in oecd member countries santiago,...
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Institutional Arrangements
and the Control of Public Expenditure
in OECD Member countries
Santiago, Chile
29 November 2001
Michael Ruffner
Administrator
Organization for Economic Cooperation and Development
From Deficits to Surplus to??
• Strong Economic Growth, until 2000
• Political Commitment to Fiscal Discipline
• Institutional Arrangements for Budgeting Determine Whether Countries are Successful in Controlling Public Expenditures
The Budget
• The Budget is Important
• Comprehensive state where policy objectives are reconciled and implemented in concrete terms
• Budget should be Comprehensive
Schick´s Functions of Budget
• Control of the Aggregates
• Technical Efficiency
• Allocative Efficiency
• Hierarchical
Institutional Arrangements-Key Reforms-
• Requirements for Fiscal Responsibility
• Multi-Year Budget Frameworks
• Top-Down Budgeting Techniques
• Relaxation of Input Controls
• Market-Type Mechanisms
• Accrual Accounting and Budgeting
• Focus on Results
Requirements for Fiscal Responsibility
Explicitly Defined Goals for Budget Policy:– Maastricht Criteria (Euro)– Expenditure “caps” (USA)– Constitutional Amendments (Switzerland)– General Frameworks (Australia/New
Zealand)
Requirements for Fiscal Responsibility = Norms
General Thoughts
• Can not separate Fiscal Framework from system
• Budget reforms have implications for frameworks
• All focus on control of aggregates: short term or long term
• What happens to norms in times of fiscal stress
Maastricht Treaty
• International agreement on 3% Deficit Target – Target includes all levels of government
spending
• Path to deficit target left up to Members– Variety of approaches
• Unclear enforcement mechanism– What will happen when economy sours?
Switzerland
Constitutional Balanced Budget Requirement
• Switzerland is a confederation, weak central authority– Problem of enforcement of rules
• In practice, much like Maastricht treaty fixed deficit target– Does not necessarily include canton/local spending
• Focus on annual deficit, but need long term path to maintain discipline
• Key feature is relatively generous exception for emergencies and other unforeseen events
The United States
Political debate on Deficit, Statutory limit on Debt
• Tried annual fiscal targets, did not work– Strong Congress -- tie their own hands
• Replaced by fiscal rules, no relation to deficit
– Discretionary Spending Caps• Annually appropriated spending (1/3 total)
– Pay-As-You-Go• Mandatory/Entitlement spending (2/3 total)
– Statutory Debt Limit
General Frameworks• New Zealand and Australia: Radically different
from any other country
• Based on “New Public Management”– No input controls
– Performance budget based on outcomes/outputs
– Budget based on accruals
• Annual deficit irrelevant to budget expenditures… Politically relevant, however
• Long term accrued position is relevant– Assets must equal Liabilities
Multi-Year Orientation
• New “Culture” for Budgeting• Good from All Perspectives
– Macro: Lends Credibility and Stability to Fiscal Policy
– Micro: Ministries/Agencies Can Plan Better– Ends “Budgeting Games“– Carry-Overs; Year-End No Long a “Cut Off”
• Warning: Economic Assumptions!
Top-Down Budget Process (1/)
Old: Ministries Send Detailed Requests
and Negotiate with MOF
– Time Consuming; Game-Playing
– Bias for Increased Expenditure
– Hard to Reflect Political Priorities
Top-Down Budget Process (/2)
New: Total Expenditures Agreed and
Divided Among Ministries– Pre-Set Spending Limit for Each Ministry
– Reflects Political Prioritization
– Pre-Set Limits Hamper “Auto” Increases
– Better Decisions -Information Asymmetry,
Easier to Reallocate, Ownership
Managerial Flexibility
• “Deregulation” in the Public Sector• Level of Detail of Budget Appropriations
– Salary, travel, etc.• Central Management Rules
– Staff hiring, offices, etc.• Heads of ministry/agency in best position
to manage resources effectively & efficiently
Market-Type Mechanisms
• Contracting Out– 20% Savings Are Typical
• User Charging– Discipline Demand
• Vouchers– Swedish Schools
• Private-Public Partnerships– United Kingdom
Accrual Accounting and Budgeting
• Cash Basis vs. Accrual Basis
• Makes The True Cost of Government
Services Transparent – Civil Service Pension Expenses– Depreciation of Buildings and Equipment
Accruals, Main Implications
Cash• Managers constrained by “input” of cash
Accruals• Managers must maintain “assets”• Managers focus on liabilities -- know what the
obligation is prior to the cash transaction• Long term sustainability
Accruals, Challenges• Operating balance fluctuations• Difficult for managers to deal with factors
outside their control• Difficult for Parliaments to understand and
communicate to public• “Cooking the Books” is an accrual term• Cash based budgeting is cheap, reliable and
straightforward• Power to Tax not recognised in accrual• More difficult to use with Fiscal Policy
Focus on Results• “Quid Pro Quo” for Increased Flexibility• Outcomes vs. Outputs• Very Difficult in Practice• OECD Guidelines• Move to Performance does not Depend
on Fiscal Framework or Governance Structure
Relations of control
Outcomes
Outputs
Process
Inputs
Costs
Value formoney
Effective-ness
Efficiency
Economy
Strengths and weaknesses of control regimes
Strengths WeaknessesGood for situations
with…
Input
Easy and affordable Strengthens
compliance Facilitates control of
aggregate expenditure
Does not supportefficiency
Can be inflexible Short term
…low confidenceand variablecompetence
Out-put
Facilitates efficiency Accountability
Can distort focus Measurement
problems Costs Information overload
…confidence, soundaccounting andprofessionalism
Out-come
Facilitates re-allocation
Support policyformulation and co-ordination
Long term
Measurementproblems
Accountabilityproblems
Costs Information overload
… the above anddedicated politicians
An outcome focus to budgeting and management - Main motives
• Orientation of Public Sector Production
• Public Awareness
• Reallocation
• Coherence
An outcome focus to budgeting and management - Main implications
• Linking costs, inputs, outputs and outcomes
• Increasing the use of policy evaluation
• Restructuring budget processes
Challenges• Expectations• Resistance• Measurement• Information - a double edged sword• Costing• Co-ordination/coherence• Information overload • Incentives• Being of use to politicians• Limits on capacity
Conclusion
All OECD Member countries are moving in this same direction
– But from Different Starting Positions & at Different Speeds
– It will take longer in countries with entrenched traditions
– The benefits are significant