II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

were breaking the law when their budgets for 2004 exceeded the maximum general budget deficit of 3% of GDP.

Some EU countries, however, have voluntarily adopted domestic laws aligned with the budgetary directives of the EU. Thus, Spain’s General Act on Budgetary Stability 18/2001 and other laws were adopted largely to allow easier implementation of the EU guidelines in the context of strong regionalism. A second example is Poland which, prior to its EU membership, even modified its Constitution in 1997 to embed the Maastricht maximum debt criterion of 60% of GDP (Art. 216). Poland’s Public Finance Act 1998 elaborates on the constitutional requirement and includes the EU’s 3% budget deficit criterion.

International organisations, such as the IMF and World Bank, in dealing with developing countries, impose conditions in their programmes with member countries. However, these conditions do not have the same force as domestic law, as parliaments are not involved – only governments of the country. Non-compliance with the conditions could lead to non-disbursement of the loan, in accordance with the signed contractual arrangements.

In some developing or transition countries, international organisations have required the adoption of new budget-related laws – or at least the presentation of a new law to Parliament – as part of the loan conditions (e.g. the IMF programme for Tanzania in 2000 required presentation of a new public finance act as a structural performance criterion; the law was adopted in February 2001).13 Although it is clear that the adoption of new law cannot guarantee good budgetary practice, the cases of Denmark and Norway illustrate that new law may not even be a prerequisite to it.

4. Differences in the legal framework for budget processes

This section summarises the differences observed across countries in each of the following four main stages of the budget process: budget preparation by the executive, budget approval by the legislature, budget execution, and government accounting and reporting systems. Country-specific details are provided in the country case studies.

4.1. Budget preparation by the executive

4.1.1. Definition of budget terms

In the Westminster countries and the United States, it is common practice to include in the law itself a list of definitions of the terms used in the law. In contrast, in continental European and Asian OECD countries, budget terms are not explained in the law itself. In part, this reflects traditional approaches to law making. It also reflects that in continental European countries, there are special legal bodies – administrative and constitutional courts – whose role includes

II. COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

interpreting the law in cases of dispute. Jurisprudence – the formal decisions of such bodies – is respected just like statute law.

Legal practice in the Westminster countries allows “schedules” to be attached to the law. These may also be used for elaborating on the definitions or coverage of terms used in the law. For example, schedules to New Zealand’s Crown Entities Act 2004 (which defines various categories of semi-autonomous executive agencies), contain a complete listing of every agency in each category, and delineate which are exempt from certain rules (for investment, borrowing, guarantees, use of own revenues etc.) defined in the law. This practice has the advantage of making the law self-contained. In other countries, separate regulations may be issued to provide such details.

4.1.2. Coverage of the budget: extrabudgetary funds

Although all countries accept the principle of universal coverage of revenues and expenditures in the annual budget, it is rare for a country to adopt explicit legal restrictions against the creation of extrabudgetary funds. Finland is an exception. Its Constitution (Art. 87) specifies that an extrabudgetary fund can only be established by law if Parliament adopts a draft bill with a supermajority – at least two-thirds of the votes cast. Moreover, Finland’s Constitution requires a strong justification for creating a new extrabudgetary fund: its establishment is only permissible if it is vital for performing the essential permanent duties of the State.

The Westminster countries have adopted in the law, the concept of a consolidated revenue fund. This dates back to the United Kingdom’s 1866 Exchequer and Audit Departments Act. In these countries, it is considered a constitutional requirement to pay all revenues into a consolidated fund, out of which all expenditures are to be appropriated. Despite this, as in all OECD countries, certain expenditures are authorised by Parliament outside the consolidated revenue fund. Nonetheless, budgetary coverage is generally greater than in countries whose budget system laws do not specify the use of a consolidated revenue fund.

All OECD countries have established government-owned pension funds, other social security funds and other extrabudgetary funds to perform government functions. Such laws specify the purposes of the fund, its revenue sources, and its governance structures. In most instances a special law has been adopted by Parliament to establish these entities, which, in some OECD countries, are numerous (see fiscal transparency reports found at www.imf.org/external/np/rosc/rosc.asp).

II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

Draft budgets of extrabudgetary funds are usually first approved by the fund’s governing body. Thereafter, there are different models as to whether Parliament also approves the revenues and expenditures:

●Parliament does not approve the budgets of revenues and expenditures of the fund and Parliament is not required to be informed regularly of its revenues and expenditures. In France, during the 1990s, off-budget funds (fonds de concours) – resourced by retained revenues – were used by the executive without parliamentary authority. The 2001 Organic Budget Law explicitly tightened up control of fonds de concours.

●Parliament does not approve the budgets of revenues and expenditures of the fund, but Parliament is informed of revenues and expenditures of extrabudgetary funds. This is common in OECD countries. One example: the revenues and expenditures of the United States social security budgets and the postal service, which are formally considered “off-budget”, are included in the aggregates for monitoring the federal budget.

●Parliament approves the revenues and expenditures of the funds, but separately from those of the annual budget (e.g. France, Korea). This is the case for social security funds in France, which adopted an Organic Law Relating to the Financing of Social Security in 1996. The social security funds’ budgets are presented to Parliament by the Minister of Health, not the Minister of Finance. Unlike the State budget, in adopting the social security funds’ budgets, Parliament does not place legally binding limits on the different categories of social security expenditures. Transfers from the State for covering deficits of the social security funds are approved in the annual State budget.

●Parliament approves the revenues and expenditures of the funds as an integral part of the annual budget estimates. An example is spending from resources of the United Kingdom’s National Insurance Fund (NIF). The expenditure estimates, which are approved by Parliament following budget discussions, include government expenditure funded from non-consolidated revenue fund sources, including notably the various pension and social security schemes funded by the NIF. Although included in tables of aggregate spending approved by Parliament, the NIF-funded spending are non-voted outlays, as they are not included in consolidated fund acts and appropriation acts.

Irrespective of whether extrabudgetary funds’ revenues and expenditures are approved by Parliament separately or in conjunction with the annual budget discussion, for macro-fiscal control purposes, it is important that Parliament is informed of aggregate revenues and expenditures. “General government”, as defined in the IMF Government Finance Statistics Manual (GFS) (IMF, 2001) or the European system of accounts (EUROSTAT, 1996), is used as a

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standard. For monitoring compliance with the Maastricht deficit and debt criteria, the EU uses this broad definition of government. In reporting consolidated fiscal developments to Parliament, some countries’ laws (e.g. France’s Organic Budget Law) explicitly require reporting of the government’s overall fiscal strategy to be based on “general government” as defined in the National Accounts. In contrast, in Westminster countries, the Treasury is free to define the aggregates. In general, these countries voluntarily formulate fiscal policy in terms of “general government”.

For macroeconomic control, it is desirable for extrabudgetary funds to be included in revenue and expenditure control totals. Unfortunately it is rare in OECD countries for a law to prescribe this. In Germany, indeed, the Constitution explicitly allows extrabudgetary funds to be outside the ambit of the control totals needed for implementation of the “golden rule” (Art. 115). This is a grey area, as the same Constitution (Art. 110) requires all revenues and expenditures to be in the budget (Sturm and Müller, 2003, p. 199).14 In Japan, the law allows the use of special funds for entities that are outside the scope of “general government” as defined in GFS. Some government affiliated agencies’ budgets are approved by the Japanese Parliament whilst others are not. In all cases, the quasi-fiscal activities of government-owned finance companies are beyond the scope of expenditure control totals.

4.1.3. Fiscal rules

Ensuring that fiscal policy is used to achieve macroeconomic stability is a concern for all countries. When rules on fiscal aggregates (e.g. those on fiscal balances – deficits or surpluses, total expenditures and government debt) have been adopted, the budget must be prepared and executed according to these rules.

The extent to which fiscal rules have been embedded in law varies considerably (for a discussion on fiscal rules, see Table 3 of Joumard et al., 2004; Banca d’Italia, 2001; Kopits and Symansky, 1998; Dában et al., 2003). In summary, four main situations exist:

●Fiscal rules are not embodied in a law but in government statements

(e.g. Norway, Sweden, United Kingdom). The United Kingdom has operated two fiscal rules in recent years. The first requires that, over the cycle, the government borrows only to invest and not to fund current spending (a “golden rule”). The second requires public sector net debt as a percentage of GDP to be held at a stable and prudent level – currently defined as below 40% of GDP over the economic cycle (the substantial investment rule). Fiscal rules of the government are consistent with the fiscal stability code (which is not a formal law).

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●Qualitative fiscal rules are included in a law. One example is New Zealand, where the Fiscal Responsibility Act, 1994, specifies five important principles to be kept by the government, notably to: 1) reduce total debt to a prudent level; 2) ensure that on average, over a reasonable time period, that total operating expenses do not exceed total operating revenues (this “budget balance” rule allows total debt to be maintained at a prudent level); 3) maintain net worth at a level that provides a buffer against the factors that impact adversely on net worth; 4) manage fiscal risks prudently; and 5) pursue policies consistent with a reasonable degree of predictability about the level and stability of future tax rates. Non-quantitative rules allow flexibility in the setting of annual fiscal targets, especially in the face of any external fiscal shocks that may alter the projected debt or fiscal balance objectives laid out in the medium-term budget strategies.

●Quantitative fiscal rules are embedded in laws of limited duration

(e.g. Canada, the United States). To address high fiscal deficits and rapidly increasing debt, Canada’s Spending Control Act, 1992, was relatively successful in limiting the growth of federal debt, by directly controlling spending (Kennedy and Robbins, 2001). The United States adopted two laws for reducing federal budget deficits during the 1980s and 1990s. The Balanced Budget Act 1985 targeted progressive reductions in the deficit during 1986-90 and a balanced budget in 1991. It complemented the Congressional Budget Act 1974, under which Congress is required to establish non-binding ceilings on budget outlays. The 1985 Act did not achieve its objectives and was replaced by the Budget Enforcement Act (BEA) in 1990. Rather than a deficit ceiling, the BEA established legally binding ceilings on discretionary spending and a “pay-as-you-go” requirement for mandatory spending (see United States country chapter). Although more successful than its predecessor in restraining expenditure and reducing deficits, the BEA was allowed to lapse in 2002 following a few years of non-compliance with the spirit of the law. In Japan, the Fiscal Structural Reform Act, 1997, was quickly suspended when it was clear its objectives were too ambitious in the face the Asian economic crisis, which created a need to loosen fiscal policy.

●Quantitative fiscal rules are included in enduring laws (e.g. Germany, Korea, Spain). Germany’s Constitution specifies that revenue from borrowing shall not exceed total investment included in the budget. Korea’s Budget and Accounting Act, 1961, also establishes a “golden rule”: annual expenditure should be financed by revenue excluding bond proceeds or other borrowings, except in unavoidable circumstances and subject to the prior approval of the National Assembly. Spain’s General Act on Budgetary Stability 18/2001 aims to ensure that central and regional governments prepare draft budgets in accordance with budgetary stability objectives, which are set in a rolling