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

Agenda Budgeting in Context Fiscal Frameworks Major Budget Trends Control Regimes

The Budget The Budget is Important Comprehensive state where policy objectives are reconciled and implemented in concrete terms Budget should be Comprehensive

Good Governance Accountability Transparency Social Cohesion Rule of law -- Integrity

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

Outcomes Outputs Process Inputs Costs Elements of control

Relations of control Outcomes Outputs Process Inputs Costs Value for money Effective- ness Efficiency Economy

Strengths and weaknesses of control regimes

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

OECD Internet Site The OECD Journal on Budgeting