II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

mid-1970s (see Nordic country study). In France, the annual budget of the Court of Accounts (although independent from the executive) has been part of the annual budget of the Ministry of Finance.

3.4.2. Content of audit laws

Audit laws spell out the institutional coverage of audits. In addition to auditing all units comprising general government, several are empowered to audit public enterprises. In federal countries, sub-national audit bodies have been established by sub-national laws. In some unitary countries, regional audit offices have been established by law, although they may only audit the accounts of sub-national governments (e.g. regional audit offices in France or the Audit Commission in the United Kingdom).

The types of audit are typically specified in a law. Many countries’ laws now require performance (value-for-money) audits, in addition to regularity and compliance audits. Laws also provide external audit offices with powers to investigate financial mismanagement. Follow-up may be by the external audit office or by the parliamentary committee responsible for pursuing recommendations contained in annual or specific reports of the external audit office.

Constitutions or external audit laws specify reporting obligations. Many countries’ laws require audit reports to be presented directly to the legislature. In most Nordic countries, the external office submits its report to the parliamentary auditors, who in turn submit the findings to plenary sessions of Parliament. In Sweden, the responsible Auditor General submits financial and performance audit reports to the government with the exception of agencies under Parliament. The audit report on the State’s annual accounts is submitted to the government and Parliament. The Advisory Board may submit reports to Parliament. In Korea, a law requires that the reports of the external audit office be submitted simultaneously to the executive and the legislature. In Japan, the Public Finance Act requires the Cabinet (a constitutional body) to submit audited accounts to Parliament, implying that the Board of Audit must first submit its audit report to Cabinet. In summary, there are differences – embodied in the external audit laws – in accountability arrangements. These, along with differences in who appoints the Auditor General (or equivalent), are considerable (Table II.3).

3.5. Sub-national governments

Constitutions usually spell out the relationships between various levels of government and/or Parliaments. Regional governments may or may not have budget independence from central government. An in-depth study of the legal framework for sub-national governments is beyond the scope of this

II. COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

Table II.3. External audit legal frameworks: Selected differences

*Spain: formal appointment by the King upon recommendation of the Court of Accounts. The United States (and Korea): nominated by the President, confirmed by the Senate (Parliament). Germany (and Japan): formal approval by Parliament upon a proposal of the government (Cabinet).

study, which examines three main categories of budget systems characterising sub-national governments:

●Federal countries, with sub-national legislatures adopting budget (system) laws applicable in sub-national jurisdictions. Such law-making capacity is governed by written constitutions at each level of government. These define the roles and responsibilities of regional legislatures and executives in budget processes. Budget-related laws adopted by sub-national legislatures need to be fully consistent with the federal constitution. In federal countries, there are differences in the constitutional distribution of roles and responsibilities in budget matters, the extent of interdependence and collaboration across legislatures, and in the role of concurrent and exclusive jurisdiction of federal and sub-national budget laws (Watts, 2003). State/ provincial budget laws are adopted by regional representative assemblies in various OECD countries, including the states of Australia and the United States, provinces in Canada, Länder in Austria and Germany, and cantons in Switzerland.

●Unitary countries with regional assemblies that have budget law-making capabilities. Some unitary countries are “semi-federal” – the constitution provides legislative powers to regional assemblies in specific areas of competency, including for the local budget. In the case of Spain, all autonomou regions are endowed with law-making capabilities, which are guided by a national framework law. Other unitary countries have adopted a national law that provides parts of the country with budget law-making capabilities. The United Kingdom’s Devolution Act of Scotland 1998 established a Parliament in Scotland with full budgetary law-making powers. Using its powers, the Scottish Parliament adopted its own budget system law, the Public Finance and Accountability (Scotland) Act 2000. In contrast, in Wales, the regional assembly (established by the Devolution Act of Wales 1998) can only make secondary laws applicable to Wales.

II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

●Unitary countries with regional assemblies that do not have law-making capabilities. In such countries, sub-national jurisdictions are subject to national laws that lay out the authority and competencies of central and sub-national governments in taxation, expenditure and borrowing, as well as types of intergovernmental transfers that aim to attenuate horizontal and vertical disparities. In France, the Local Government Code adopted by the National Assembly categorises all laws, including those for budget processes, according to which of the three levels of sub-national government (regions, départements and communes) they apply to. The code is supplemented by the Organic Law on Financial Autonomy of Local Governments 2004. Japan, Korea, the Netherlands and the Nordic countries are other examples of unitary countries – they too have local government acts that specify budget arrangements for regions and municipalities. Some of these countries (e.g. Denmark, Finland and France) possess a few jurisdictions – including offshore islands – that have special autonomy, including for budgeting.

A first important question is whether the laws of a country – whether federal or unitary – require application of nationwide principles for budgeting and government accounting. For federal countries, the example of Germany contrasts sharply with that of the United States. In Germany, the federal Constitution authorises the two chambers of Parliament to adopt a federal law for budget management at all levels of government. Accordingly, the Law on Budgetary Principles was adopted in 1969. It lays out both principles and procedures that apply to every region (Land). There is a requirement for each Land to adopt the same budget and accounting framework as that of the federal government. An intergovernmental co-ordination body, with advisory (but not legal) powers, is established by the law. This body administers the system of interlocking intergovernmental relations. In the United States, the principle of “states’ rights” and budgetary autonomy are interlocked: each of the 50 states is free to determine the way its budget is prepared, adopted, executed and reported. State constitutions and laws contain differing provisions relating to their budgets. There is no requirement to harmonise budget procedures (including establishment of off-budget funds) or require uniformity in accounting.

In unitary countries, laws and/or regulations are adopted to require subnational governments to report to central governments on budget developments. In some unitary countries, the reporting system is facilitated by a nationally imposed central accounting and treasury system (e.g. France). The authority of the central government to establish an accounting system is usually established in law. It is important that the central budget body (e.g. the Ministry of Finance) has authority to ensure that local governments provide periodic reports on budget execution, laid out according to standard accounting norms. In some countries, co-ordination with ministries of the interior (or equivalent) is

II. COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

required, as these ministries have broad responsibilities for co-ordinating relationships with local governments.

A second important question concerns legal arrangements for intergovernmental transfers, since in several countries (e.g. Canada, Japan, Korea, the Nordic countries, Spain), transfers or grants from the federal (or central) government to the sub-national government(s) account for a large portion of the revenues of lower level government. In these and other countries, special legislation has been adopted to specify the various arrangements for intergovernmental transfers (to address horizontal and vertical imbalances), earmarked grants, tax-sharing arrangements, etc. It is beyond the scope of this book to examine the detailed differences between countries in the laws governing fiscal decentralisation.

In both federal and unitary countries, separate legislation applies to borrowing by sub-national governments. In federal countries, sub-national legislatures may have constitutional or legal restrictions on the amount of annual borrowing approved by sub-national legislatures. In the case of Germany (unlike, say, the United States), a law authorises the federal government, with the consent of the Bundesrat, to limit borrowing by any level of government to levels below those approved by sub-national legislatures, should this be necessary to avert a disturbance of macroeconomic balances. In unitary countries, local government laws (e.g. France, Italy, Sweden) may contain a “golden rule” that limits sub-national governments’ borrowing to that needed for investment. In a few unitary countries (e.g. Finland), subnational countries have no constraint on borrowing other than that of the market (Ter-Minassian and Craig, 1997, Table 1).

3.6. Supra-national bodies and international organisations

The 25 EU member countries have been provided with fiscal policy guidelines. The first is what is commonly known as the “Maastricht criteria” – principally that the member countries should ensure that public debt does not exceed 60% of GDP and that the general government deficit does not exceed 3% of GDP. The second – the Stability and Growth Pact – requires that EU member countries’ fiscal balances be zero or positive over the economic cycle. The main question that arises for this study is whether or not these directives are legally binding on member countries. The short answer is that the EU’s quantitative directives do not have the force of law in member countries, since the guidelines are specified in protocols to treaties, and only the treaties themselves are legally binding on member countries (provided countries have revised constitutions or adopted domestic law conferring such powers on the EU, which is the case for most countries). Thus, France and Germany, which have not incorporated the EU Maastricht criteria into any domestic laws, did not consider that they