The Economy: Public Expenditure Management and Budgeting

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The Ministry of Finance (MoF) recently held a Budget 2019 workshop which was seemingly aimed at improving the national budgeting process for the next fiscal year, 2019, and onwards.

At that forum, it was reported in sections of the press that the Finance Minister posited that in the absence of robust budget institutions and evaluation systems a successful budget remains evasive. The Honorable Minister further challenged budget officers of the respective units and government agencies to provide solutions to recurring sectoral problems.

The Minister’s detailed presentation at that forum is available in the public domain, in the press and on the MoF website, however, it must be highlighted that in the essence of the Minister’s presentation and the core objective of that workshop must be highly commended for not only recognizing and acknowledging the inherent weaknesses in the national budget process and public financial management, but also seeking to address these problems and strengthen the framework in achieving greater effectiveness.  It is therefore expected that budget 2019 will be much improved from the previous years.

The national budget is the main instrument through which the government collects resources from the economy, in a sufficient and appropriate manner; and allocate and use those resources responsively, efficiently and effectively. Public expenditure management is one instrument of government policy. The basic goals of this aspect of government policy are achieving macro-financial discipline, strategic priorities and functional application. These are three complementary and interdependent objectives (Todorovic & Djordjevic, 2009).

Reforming Public Expenditure Management in Developing Countries

Long-term sustainability of institutional reform always demands local ownership, political buy-in, and a degree of comfort among those responsible for implementing reforms. Without the active co-operation of budget managers and key staff members in both the core ministries and the line ministries, and without the support from the top political leadership, budget reforms have generally remained largely a paper exercise to satisfy donor demands.

The sequencing and time period of the reform process should be very carefully considered to ensure that it fits the absorptive capacity of the system over time and not cause reform fatigue. Moreover, it is important to understand that periodic reassessments of actual costs and benefits of specific budget reforms and mid-course adjustments are necessary for sustainable reforms. It is not difficult to introduce budget reforms; simultaneously, merely introducing reforms is not the goal.  Rather, the goal is to help permanently achieve improvements in expenditure control, strategic resource allocation, operational effectiveness and public financial integrity (World Bank, 2005).

Code of Good Practices on Fiscal Transparency  

  • Clarity of roles and responsibilities

 

The government sector should be clearly distinguished from the rest of the economy, and policy and management roles within government should be well defined such that, the government sector should correspond to the general government, which comprises the central government and lower levels of government, including extra-budgetary operations. Government involvement in the rest of the economy (e.g. through regulation and equity ownership) should be conducted in an open and public manner on the basis of clear rules and procedures which applies in a non-discriminatory manner.  Clear mechanisms for the coordination and management of the budgetary and extra-budgetary activities should be established, and well-defined arrangements, inter alia, other government entities (e.g. the central bank, and state-controlled financial and non-financial enterprises) should be specified.

 Clear legal and administrative framework for fiscal management

Fiscal management should be governed by comprehensive laws and administrative rules applying to budgetary and extra-budgetary activities. Any commitment or expenditure of government funds should have a legal authority. Taxes, duties, fees and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application. More importantly, ethical standards of behavior for public servants should be clear and well publicized.

Budgeting and Budgetary Institutions

Good institutional design of the budgeting process is an important prerequisite of good fiscal performance. Such institutions should be designed to reduce the adverse effects of the principal-agent relationship between voters and politicians. The environment within which the budgetary process evolves strongly affects accountability and competitiveness, which are strengthened by ensuring that the budget is comprehensive, transparent and understood as a management exercise and not just a legal requirement.

The common pool problem of public finances can be reduced by centralizing the budgeting process – that is, by introducing institutional mechanisms that force the actors in the process to take a comprehensive view of the costs and benefits of all public policies. Depending upon a country’s political system, this goal can be achieved by means of the delegation approach or the contracts approach.

Therefore, the institutional reform of the budgeting process is an essential part of a policy aimed at achieving better fiscal outcomes. This does not mean, however, that a change in legal and procedural rules mechanically produces better results. In practice, institutional reforms are often the result of an acute fiscal crisis, of times when there is widespread awareness of principal-agent and common pool problems of public finances and a general recognition of the need for change. Better institutions, therefore, help to make this awareness more durable and thus serve as a commitment device for good fiscal performance. 

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