Economic Policy Committee The President Medium term expenditure frameworks and performance budgeting: Elements of the Quality of Public Finances Dr. Christian Kastrop President of the Economic Policy Committee, European Union

Economic Policy Committee The President The Quality of Public Finances Quality means improving the growth and employment effects of public resources  Expenditure Side: Focus on long-term growth ("investment in the future")  Revenue Side: Taking negative financing effects into account  Institutions: Modern budget and accounting system It’s important to consider both: Effectiveness & Efficiency Effectiveness:Doing the right things Efficiency:Doing the things right

Economic Policy Committee The President SGP is the fiscal framework of the EMU aims at ensuring budgetary discipline through two main requirements: –Treaty requirement to avoid excessive deficit positions (3% deficit and 60% debt of GDP) –Requirement to achieve and maintain the medium-term budgetary objective (MTO) At first sight clearly quantitative aspects: But improving the quality of public finances can enhance business and growth conditions, while at the same time allowing a better control of the overall public spending at the national level. Quality is an important factor in fulfilling the requirements of the SGP The European Perspective: Quality of Public Finance and the Stability and Growth Pact

Economic Policy Committee The President During the meeting of the European Council in Lisbon in 2000, the Heads of State or Government launched a "Lisbon Strategy" aimed at making the EU the most competitive and the most dynamic knowledge-based economy in the world by 2010 As quality of public finances means improving the growth and employment effects of public resources, it is also a key contribution to the Lisbon strategy The European Perspective: Quality of Public Finance and the Lisbon Strategy

Economic Policy Committee The President  European Commissions Roadmap for Deriving a Conceptual Framework and a Set of Indicators Quality of public finances The way forward (1) Goal Composition, efficiency and effectiveness of expenditure Structure and efficiency of revenue systems Fiscal governance Fiscal position and sustainability Level of expenditure and revenues Public finance policies impacting on market functioning and business environment Layer 1: Public finance processes Layer 2: Public finance outcomes Long-term economic growth Environmental Dimension

Economic Policy Committee The President Layer 1 dimensions of quality of public finances InstitutionsExpenditure Quality of public finances The way forward (2) Long term trends in the composition of public spending Efficiency and effectiveness for individual spending areas (infrastructure, R+D, health, education) Fiscal Rules (debt rules, medium term budgetary frameworks) Performance budgeting and evaluations Efficiency of public administrations (HRM, information and communication technologies) Revenue Tax expenditures Alternative tax bases, tax shifting across tax bases Microeconomic and macroeconomic effects of taxation on personal and corporate behaviors

Economic Policy Committee The President Budget and Accounting System: Starting Point for Efficiency Improvements A modern budget and accounting system must: enable strict priorization provide for a consistent system of reporting on public activities, including purposes, content and costs provide sufficient information concerning the political objectives and strategies as well as the degree to which objectives are met include long term financial consequences of decisions

Economic Policy Committee The President Use of Performance Information The road from incremental budgeting towards results-based budgeting is proving to be long and difficult Results information will never completely replace the discussion on inputs, but will shift the focus Most OECD countries cannot imagine operating a budget system today without PI. Countries evolving their performance approach rather than discarding There is a need for more realistic expectations and greater efforts to get all stakeholders on board

Economic Policy Committee The President EU-Comparison Index of Budgetary Procedures Source: EU Commission, Public Finance Report 2007 The overall total index of budget procedures incorporates amongst others: Budget transparency multi-annual planning horizon process top-down budgeting prudent economic assumption performance budgeting numerical fiscal rules

Economic Policy Committee The President Current Institutional Reforms in Germany Commission on the Modernisation of Federation-Länder Financial Relations (FöKo II): Reform of constitutional rules governing public finances Federal Ministry of Finance is working on a reform of the Federation’s budgetary and accounting system with the aim of improving expenditure efficiency

Economic Policy Committee The President Medium term expenditure frameworks and performance budgeting: Elements of the Quality of Public Finances Dr. Christian Kastrop President of the Economic Policy Committee, European Union