IV. FOUR NORDIC COUNTRIES

Box 1. Nordic Countries: The main budget system laws or near-laws1

All four countries:

●Constitutions.

●External Audit Acts.

●Local Government Acts.

Denmark:

●Budget “Guidelines” (issued by the Ministry of Finance).

●Parliamentary (Folketing) Standing Orders.

Finland:

●State Budget Act 1988, with amendments.

●Parliamentary (Eduskunta) Rules of Procedure.

Norway:

●Budget Regulations 1959, with amendments (issued by Parliament).

●Parliamentary (Stortinget) Rules of Procedure.

●Financial Management Regulations 2002 (issued by the King/Cabinet).

Sweden:

●Parliament (Riksdag) Act 1974.

●State Budget Act 1996.

●State Borrowing and Debt Management Act 1998.

1. In addition, borrowing and debt laws have been adopted in Denmark and Sweden.

Source: Mainly Internet sites of ministries of finance, Parliaments and external auditor offices. See, for example, Sweden Parliament (2003). In some cases, the budget laws or regulations are available only in national languages (for example, Denmark Ministry of Finance, 2001).

1.2. Reforms of budget system laws

Budget reforms in Denmark or Norway over the past 20 or so years have been introduced without adopting new laws. Only modifications to the budget regulations of the Ministry of Finance (Denmark) or of Parliament (Norway) have taken place. In contrast, in Finland and Sweden, Constitutions and Parliament Acts (Sweden only) have been modified and State budget acts have been introduced. The main purpose was to provide a legal framework for practices that were already in place, as opposed to being the legal prerequisite needed to usher in, over time, reforms of the budget system. Despite the extensiveness of laws governing the budget processes in these two countries, a number of budget reforms have taken place without changing the formal laws. The government has often introduced reforms by ordinance or decree,

IV. FOUR NORDIC COUNTRIES

on the basis of explicit delegated authority. Even when the new budget system laws were adopted, they were designed to provide flexibility in application.

In 1999, Finland adopted a new Constitution after three decades of constitutional debate (Nousiainen, 2004). A major aim of the constitutional reform was to clarify the roles of the president and of Parliament – quite unrelated to the budget. Another aim – the codification and modernisation of constitutional laws – resulted in a number of budget-related provisions being transferred to the Constitution.3 Some provisions, including the requirement of a super-majority of Parliament for the creation of an extrabudgetary fund, are unique in OECD countries.

Changes in budget system laws coincided with a marked improvement in the macro-fiscal positions in Denmark, Finland, and Sweden although there is not a simple causal relationship. Following a sharp deterioration in the early 1990s, Finland and Sweden cut spending strongly, and there was an economic upturn in Denmark, resulting in the elimination of previously high budget deficits and a reversal of growing public debt. In 2003, all three countries were running surpluses on general government transactions – the only EC countries to be doing so (Denmark Ministry of Finance, 2003, Figure 1). In the case of Denmark, since there is no formal budget system law, the improvement did not stem from there. In Finland, the modifications to the State Budget Act, 1988, during the 1990s were relatively minor – even to this day, the law does not require legally binding medium-term expenditure targets. Rather, the fiscal rule adopted was one endorsed by Cabinet, not by Parliament (IMF, 2003, p. 29).

Sweden’s first-ever State Budget Act was adopted in 1996. One objective of the act was to clarify the authority of Parliament and of the government in budget matters (Sweden Government Commission, 1996). Another objective was to strengthen fiscal discipline, which was weak. Prior to adoption of the law, in 1994-95, a fiscal consolidation programme began, laying the foundation for a marked turnaround in the fiscal position. The main innovation was a new two-stage budget process, in which “top-down” expenditure ceilings are first approved by Parliament prior to the adoption of the detailed budget estimates (Sweden Ministry of Finance, 2003). Parliament also approved an overall rolling expenditure ceiling that is politically binding for the government. Although the new law contributed to the improvement in fiscal discipline, non legally-binding coalition agreements between the Cabinet and one to two political parties regarding medium-term fiscal projections and the measures needed to achieve them, have been decisive for the marked improvement in fiscal performance.

Norway’s situation is quite different, given the petroleum sector. The main macro-fiscal management challenge is knowing how to best manage the

IV. FOUR NORDIC COUNTRIES

government’s oil resources.4 In this context, a 1990 law established the Government Petroleum Fund for managing oil wealth. Long-term scenarios have been prepared by the government, but not because it is legally bound to do so. The use of resources in the future is decided on practical grounds, including the fact that the resources are non-renewable and that Norway’s aging population will place increasing pressure on the national budget (Norway Government, 2001). Government rules, rather than law, have been established to manage the budget inclusive of transfers from the Government Petroleum Fund (see below, as well as OECD, 2004; Norway Ministry of Finance, 2004).

Law has contributed very little to strengthening the performance orientation of budget systems. Some Nordic countries have had a long history of decentralisation of responsibility in budget management. This is especially the case in Sweden where semi-autonomous agencies under ministries are based on long-standing constitutional provisions. The strengthening of the performance orientation of the budget, with decentralised managers responsible for achieving results, has therefore been less of a cultural shock than in countries that have traditionally had a very centralised and hierarchical system of budget management. Finland differs from the other three countries, as it traditionally had a centralised system of budget management before a “cultural revolution” began in the late 1980s (Blöndal et al., 2002, p. 144).

By law (in Finland and Sweden) or regulation (in Denmark and Norway), Parliament has enhanced the flexibility of budget management by ministries and agencies by introducing change in the legal nature of different types of appropriations. In particular, the law allows more use to be made of “flexible” appropriations: time periods for the use of budget authority have been lengthened (multi-annual appropriations) and the usual rigidity of annual appropriations has been loosened by providing more generous end-year carryover of budget spending authority and, under certain circumstances, borrowing from next year’s budget authority.

Concerning transparency and accountability, unlike some Anglo-Saxon countries, the Nordic countries have not adopted fiscal responsibility acts that impose on governments clear and enhanced legal requirements for fiscal reporting to Parliaments. This is partly because these countries have had a long history of openness. To elaborate on constitutional rights of public access to government documents, freedom of information acts have been adopted in all four countries, in several cases for a long time.5 Sweden also has a Freedom of the Press Act, 1978, under which “every Swedish citizen is entitled to have free access to official documents, in order to encourage the free exchange of opinion and the availability of comprehensive information” (Chapter 2, Art. 1). Although Anglo-Saxon countries also have adopted such acts, their adoption is relatively recent (for example, 2000 in the United Kingdom). A more

IV. FOUR NORDIC COUNTRIES

influential reason stems from the different political arrangements compared with the traditional two-party system in Westminster countries. With multiparty coalition governments often in power in Nordic countries,6 the reaching of a coalition agreement is particularly important. In Finland, for example, the 1999 Constitution requires the groups represented in Parliament to negotiate a political and economic programme prior to the nomination of the prime minister and the formation of a government. Thus, coalition agreements between the governing parties – which are public documents – provide the basis for fiscal policy during the life of a Parliament. Concerning the requirements for other disclosures, governments voluntarily provide certain fiscal information, including long-term projections, whereas these are mandated by laws such as fiscal responsibility acts in other countries.

Most Nordic countries have modernised their government accounting systems. Denmark has an accountancy act, adopted in 1984, which refers to the need to account for assets and liabilities, as well as revenues and expenditures. Finland and Sweden also have some generally worded accounting requirements in their State budget acts. In Sweden, all government agencies used full accrual accounting before the State Budget Act was adopted. However, accrual budgeting required the approval of a new law by Parliament. In general, the introduction of accrual accounting was regarded as an administrative matter, being introduced without any modification in existing laws.

In summary, several important budget reforms have been introduced without recourse to law. The tough budgetary decisions that resulted in substantial fiscal stabilisation in the 1990s in Denmark, Finland and Sweden were largely achieved without changing the laws pertaining to budget processes. Strong political commitment to fiscal sustainability, non-legally binding coalition or other forms of political agreements, as well as the suasion effect of the EU’s Maastricht deficit and debt criteria, appear to have been instrumental in attaining macro-fiscal stability objectives. Improvements in allocation and technical efficiency are taking place largely without changes in law. Nonetheless, greater flexibility of budgetary appropriations was introduced by law in Finland and Sweden (but by regulation in Denmark and Norway). In Sweden, the 27 functional expenditure areas, which are important for decision making about allocations, are laid down in law. Thus, although there are a few exceptions, law is perceived to regulate form, not substance. This contrasts with some continental countries, where the reverse is true. Finally, when laws are adopted, they are written in a language that allows for flexibility in implementation.