Session 1 May 28, morning (1)

Overview of Budget and Financial Management

System Laws (BFMSLs) in OECD countries

Topics Covered

1. Objectives of BFMSLs

2. 10 Budget principles and BFMSLs

3. “Models” of BFMSLs in OECD countries

4. BFMSLs, Constitutions and other laws

5. Legal traditions and BFMSLs in OECD countries

6. Law versus Regulation

Objectives of BFMSLs

1. Divide budget and financial management powers between the legislature and the executive

2. Specify responsibilities and accountabilities of the key players in budget and public financial management

3. Provide clear operational rules for budget processes and ensure they have sufficient authority

4. Incorporate budget principles into legal text (see next slide)5. Elaborate on constitutional requirements for the budget

system 6. Reform the budget system—either radically or on a piecemeal

basis7. Contribute to macroeconomic stability 8. Enhance transparency and performance of the budget system

What principles should be included in a budget system law?

1.Authoritativeness

• Classical principles

2. Annual basis3. Universality4. Unity5. Specificity6. Balance

• Modern principles

7. Accountability8. Transparency9. Stability 10.Performance

Different Models for Organizing the Legal Framework of Budget System1

Written Constitution

Unwritten Constitution

Organic Budget Law

Framework Law

Other Laws

Many Budget-Related

Laws

One Main

Budget Law or a few Laws

Multiple Budget Laws

Prim

ary

La

ws

Parliamentary

Regulations

Standing Orders of Parliament

Seco

ndar

y La

ws

Executive Regulations

Executive

Regulations

Executive

Regulations

Executive

Regulations

Executive

Regulations

1. The focus is on laws and regulations for the budget system of central government. Laws pertaining to budget systems of sub national

governments and social security systems, as well as for external audit, are excluded.

EXAMPLES United States Germany Norway United Kingdom France, Spain Most countries Denmark

Constitutional Provisions for Budget and Financial Management (FM)

“Models” in OECD countries:

1. No written Constitution (U.K. is only example)

2. Written Constitution with few provisions for budget and FM (=financial management) (examples: Canada, Japan, Spain, USA)

3. Written Constitution with several budget and FM provisions (Nordic countries, France--see next slides)

4. Written Constitution with detailed budget and FM provisions (Germany--see slide)

Nordic Countries – Constitutional Provisions

France – Constitutional Provisions• Types of Laws. (1) (annual) Finance Acts shall determine the

resources and expenditures of the State following an institutional Act (“Organic Budget Law”). (2) Social security finance Acts shall determine the conditions for the financial balance of social security; in the light of their revenue forecasts, shall determine expenditure targets, under conditions of an Organic Law.

• Order of bills in Parliament. Finance bills and social security finance bills shall be presented first to the National Assembly.

• Timing of Budget Adoption. Should the National Assembly fail to reach a decision on first reading within forty days following the tabling of a Bill, the Government shall refer the Bill to the Senate, which shall make its decision known within fifteen days. Should Parliament fail to reach a decision within seventy days, the provisions of the bill may be brought into force by ordinance.

• Parliament’s Budget Amendment Rights. Bills and amendments introduced by Members of Parliament shall not be admissible where their adoption would have as a consequence either a diminution of public resources or the creation or increase of an item of public expenditure.

• Reversion Budget. Should the finance bill for resources and expenditures for a financial year not be introduced in time for promulgation before the beginning of that year, the Government shall as a matter of urgency ask Parliament for authorization to collect taxes and shall make available by decree the funds needed to meet the commitments already voted.

Germany – Constitutional Provisions• Intergovernmental Relations for the Federation and the Länder,

including for (1) the apportionment of revenues and of expenditures; (2) legislative powers; (3) Federal grants; (4) Budget and Financial administration

• Budget Principles. A federal law establishes principles applicable to both the Federation and the Länder governing budgetary laws.

• Federal budget. Principles include : (1) Universality: All revenues and expenditures of the Federation shall be included in the budget; (2) Balance: the budget shall be balanced with respect to revenues and expenditures; (3) Annual: The budget for one or more fiscal years shall be set forth in a law enacted before the beginning of the first year.

• “Golden Rule”. Revenue obtained by borrowing shall not exceed the total of investment expenditures provided for in the budget (exceptions permissible only to avert a disturbance of the overall economic equilibrium).

• Authority concerning: Interim budget management; Unbudgeted expenditures; Increases in expenditures or decreases in revenue (consent of Federal Government required).

Budget/FM Laws and Other Laws

•Tax Laws. Tax Codes (all laws) or Specific laws e.g., Customs Law, Income Tax Law, VAT Laws....

•Decentralization (or “Local Government”) Laws often to implement Constitution’s provisions for lower levels of government (e.g., France, Indonesia, Japan, Sweden, UK). In federal countries, legislatures at sub-national level adopt budget laws (e.g., Canada, Germany, Switzerland).

•Parliament Acts limit or specify parliament’s role in budget process (e.g., Japan, Korea, UK).

•Fiscal Responsibility Acts Require transparency in budget process (e.g., Australia, India, New Zealand, Nigeria, Latin American countries).

•Public Debt (Loans, Borrowing) Laws may exist, separately from the BFMSL (e.g., Korea, Romania, Sweden, UK).

•External Audit Laws. The Supreme Audit Institution is often established in the written Constitution and has a separate law pertaining to it (e.g., Australia, Germany, Finland, Japan, Norway, Spain)

Density of Constitutional and Statutory Provisions for Budget and FM

ProcessesGERFIN

AUSTRIA

PRT

JPNIRLSWE

NOR

KORAUS

BEL

USADNK

NLDGRC

NZSVK

CANICEUK FRA

CZE HUNITA

SPAIN

0

2

4

6

8

10

12

0 5 10 15 20 25

statutory provisions

co

nsti

tuti

on

al

pro

vis

ion

s

Hierarchy of laws: Case of Spain

1. The 1978 Constitution (as amended)2. Organic laws. Differ from ordinary legislation in two ways: (1) the subject

matter is required by the Constitution; (2) Organic laws require an absolute majority of the Congress in a final vote on the entire bill.

3. European Union legislation. EU Laws take precedence over domestic law.

4. Ordinary laws. These laws require a simple majority of the Congress and the Senate.

5. Decree-Laws. Provisional legislative decisions that the government may issue for urgent matters. They rank as laws, but must be ratified by the Congress of Deputies within a period of 30 days.

6. Legislative decrees. These are dispositions of the government containing delegated legislation, which must be granted by law.

7. Regulations. Three main types: Decrees from the Council of Ministers. Orders from ministers or delegated commissions. Instructions and orders of regulation from inferior public administration

authorities.

Law versus Regulation: Framework, given varying practices in OECD countries