Objectives of Fiscal Responsibility Laws (FRLs)

Report
Objectives of Fiscal
Responsibility Laws (FRLs)
and Prerequisites for Success
Ian Lienert
April 1, 2010
Three Main Objectives of FRLs
1. Fiscal stability (long-term debt
sustainability and short-term fiscal stability and fiscal
rules)
2. Transparency (of the governments fiscal
policy intentions, as well as reports on budget
execution)
3.Accountability (collective responsibility
of the government to parliament; not individual
accountability within the government)
1. Fiscal Stability—1
1. Medium-term macro-fiscal stability and
annual budget objectives or targets. A
FRL may require:
a. Objectives for key fiscal aggregates (e.g., “reduce
debt to a prudent level”).
b. “Fiscal rules” – numerical targets.
The most common fiscal objectives/rules pertain
to gross debt, the fiscal balance (perhaps
defined “over the cycle”), and aggregate
expenditures
1. Fiscal Stability—2
2. Reasonable stability in tax policies (tax/duty rates
and tax bases).
3. Long-term fiscal sustainability and debt analysis.
Government debt and fiscal balances interact:
medium- and long-term debt sustainability analysis
and scenarios are needed.
4. Need procedures for parliamentary “buy-in”.
Clarification of parliament’s budget amendment
powers; executive’s power to not fully spend
approved budget; contingency reserves (usually not
part of a FRL, but other laws).
2. Transparency: of future Fiscal Policy—1
The FRL may require in annual budget documents:
1. A statement of fiscal policy strategy or
intentions over a medium-term period. This
would be supported by:
 Baseline medium-term fiscal projections, based on
unchanged policies, which identifies available fiscal
space for new policies.
 The impact in the annual budget (and in medium
term) of new revenue and expenditure policies to be
adopted in the upcoming budget .
2. Transparency: of future Fiscal Policy—2
The FRL may also require the following in annual
budget documents:
2. An annual budget policy strategy (BPS) explaining
how the BPS helps to achieve the MT fiscal policy
objectives.
3. Explanations of why the government—even a newly
elected one—is deviating from the previous
(government’s) fiscal intentions.
4. Long-term scenarios of fiscal balances e.g., for the
impact of changing demographics or climate change.
5. A statement of the main fiscal risks as part of
annual budget documentation.
3. Accountability to Parliament and Public
(transparency of recent past fiscal developments)
By the executive:
• In-year fiscal outcomes relative to budgets:
monthly/quarterly.
• Six-monthly formal review of budget outcomes, which may
lead to a pre-budget debate in Parliament.
• Annual budget performance reports and financial
statements.
• Report on how the government has followed up on the
external auditor’s report
External Audit:
• Annual report to parliament on budget performance.
Includes certification of annual accounts (financial
statements) by the external auditor.
FRLs from around the world
Country
1
2
3
4
5
6
Australia, 1998
New Zealand, 1994
United Kingdom, 1998
Main Objectives
Secondary Aims
Fiscal Stability:
Fiscal
lower deficits or
Transparency
run surpluses;
reduce debt
Fiscal stability and fiscal
transparency
Hungary, 2008
Brazil, 2000
Argentina, 1999, 2001,
2004
Fiscal stability
Transparency
7 Colombia, 1997, 2001,
(targets for
2003
8 Ecuador , 2002, 2005 spending, deficits
and/or debt)
9 Panama, 2002
Focus on targets.
10 India, Pakistan, Sri
Transparency
Lanka, 2003, 05
Success?
Yes
Yes
Yes
??
Yes
No
No
No
No
Mixed
Prerequisites for Success of a
Fiscal Responsibility Law (FRL)
Messages
1. Get “Basics” Right First
2. Examine what can be done
without a FRL
3. Seek buy-in from parliament and
the public
1. Get “Basics” Right First
• Good annual budget preparation (realistic
projections for macro variables, budget revenues; top-down
spending ceilings; costing of new policies; clear presentation
of budget: objectives, targets, priorities, risks……)
• Controlled budget execution (firm spending
controls; adequate internal audit; no payment arrears)
• Strong cash management (central control over
government bank accounts; cash flow forecasts).
• Timely and accurate accounts (monthly/quarterly
fiscal reports; audited annual accounts).
• External oversight and evaluation (by external
auditor, parliamentary committees, anti-corruption agency)
2. Examine what can be done without a
FRL?
By the executive:
• Improve budget formulation & presentation,
execution, cash management, fiscal reporting and
accounting.
• Practice fiscal discipline; don’t tolerate “creative
accounting”; sanction misuse of funds.
• Modify Financial Regulations or propose
amendments to the Public Finance (System) Law.
By parliament :
• Amend its internal regulations to improve budget
adoption procedures and its internal organization
arrangements.
3. Obtain buy-in by politicians and the public
International experience with FRLs: the laws themselves do
not buy credibility. Buy-in is needed at three levels:
1. Within the Government:
 Is a top-down spending process “bought” by the
President, other Ministers of the Cabinet?
2. At Parliament:
 What procedures are in place to constrain parliament’s
understandable constituency concerns?
 What happens when shortfalls in revenue or grant
support occur? Should debt rise to finance shortfalls?
3. With the Public and Civil Society:
 Public hearings/consultations increase chances of FRL’s
successful adoption and implementation.

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