III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

compliance with “desirable” norms promulgated by an international body. Individual countries are best placed to ensure compliance with standards most fitting with their own circumstances.

At best, international organisations require members to comply voluntarily. This is the case for the attainment of the standards set by the IMF – some 50 country reports on fiscal transparency have been published (see www.imf.org/ external/np/rosc/rosc.asp). The OECD has not systematically monitored member countries’ compliance with its best standards. From the outset the OECD stressed that the best practices did not constitute a formal “standard” for budget transparency (OECD, 2002a, p. 7). Similarly, INTOSAI acknowledges that the word “standard” is used synonymously with “guideline” which “keeps the authority for compliance within the domain of each supreme audit institution” (INTOSAI, 1992, p. 23).

3. Principles to support the legal framework of budget systems

From the preceding sections, it can be concluded that, for most aspects of budget processes, there are no universally accepted standards as to which features of budget systems should be included in the law. This section discusses 10 principles (Box III.3) on which budget laws and regulations may be based.

In continental European countries, for a long period of time, several “classical” principles have guided budget processes and the laws associated with them. These are mainly principles associated with ex ante budget processes – budget preparation and adoption. More recently, several Anglo-Saxon countries have embodied in law principles associated particularly (but not exclusively) with ex post budget processes. Stressing the principles of accountability, transparency, stability and performance, there has been a focus on budget reporting requirements, especially the executive’s obligations to report to the legislature on budget results. The 10 principles were derived from these considerations.

All 10 principles are important, but not equally. As discussed below, some are considered to be of constitutional significance and should be included in a country’s constitution. Some are more suitable for statutes relating to budget processes. It is tentatively proposed that three budget-related principles – those of authoritativeness, universality, and accountability – are of sufficient importance that specific provisions should be incorporated in a country’s constitution, which establishes the legislature, the executive, the judiciary, and other constitutional bodies, at both central and sub-national level, and specifies their roles.

3.1. Authoritativeness

The most important of the 10 principles is that of authoritativeness. This asserts that in the budget process, decision-making authority should be

III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

Box III.3. Ten principles for a budget law

1.Authoritativeness: Where decision-making authority lies is specified at each of the stages of the budget process shown in Figure I.1. The supremacy of the legislature in budget matters is an integral part of this principle.

Classical principles

2.Annual basis: Budget authority is provided for a 12-month period. The annual budget is enacted prior to the year to which it refers. All transactions are estimated for their one-year effect.

3.Universality: All revenues and expenditures are included in the budget on a gross basis. Revenues are not earmarked. Expenditures are not offset by revenues.

4.Unity: The budget presents, and may seek approval for, all receipts and payments at the same time, usually in the same document.

5.Specificity: Revenues and expenditures are shown with some detail in the budget estimates. Spending authorisations (appropriations) show legally binding maximum expenditures for particular purposes.

6.Balance: Budget expenditures are balanced by budget revenues and financing. “Balance” is well defined.

Modern principles

7.Accountability: The executive gives an account of how it meets its responsibilities to the legislature. Within the executive, the accountability of budget managers is clearly defined. An independent external audit body reports at least annually to the legislature on budget execution.

8.Transparency: The roles of various State bodies are clear. Timely financial and non-financial information on the budget is publicly available. The terms used in the budget law are clearly defined.

9.Stability: Budget and public debt objectives are framed in the context of a regularly updated medium-term budget framework. The rates and bases of taxes and other charges are relatively stable.

10.Performance: The expected and recent past results of budget programmes are reported in the budget. The principles of efficiency, economy and effectiveness are associated with “performance”.

assigned to the appropriate body of the legislature and the executive. On the basis of its authority, each body may in turn delegate its authority to lowerlevel entities.

III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

3.1.1. The legislature’s authority to approve the budget and receive reports on budget execution

In all democratic countries and in non-democratic countries with legislatures (e.g. China), the national legislature is supreme in matters concerning public money. However, the meaning of the “supremacy of the legislature” in budget matters needs to be qualified. Generally it is confined to meaning that the elected representatives of the people have the authority

– exercised through the legislature’s law-making function – to:

●Approve the annual budget. The budget system law should specify that the budget must be approved before the new fiscal year begins.

●Oblige the executive to prepare reports on budget execution. This enables parliamentary “control” to take place.

The legislature, as the organ of supreme authority, should specify in law the periodic reports on budget execution that the executive must provide during the budget year. In a principal-agent model, with the legislature as the principal and the executive as agent, the executive is delegated with the task of implementation and preparation of periodic reports. The legislature should set out a requirement in law that its “agent” prepare annual report(s) on budget execution after the fiscal year is completed. The law should require these reports/accounts to be audited by an external office serving the interests of the legislature, the (elected) body representing citizens.

3.1.2. Which aspects of budget authority could be included in the constitution?

It is difficult to establish legally binding norms as to the extent of the legislature’s “supremacy”. This depends on a number of factors affecting the power struggles between the executive and the legislature, including the form of government, the electoral system, and legal culture. However, at a minimum, it is proposed that it is desirable for a constitution to specify that:

●All taxation should be based on law, which implies that tax revenues cannot be collected and spent without the authority of the legislature. The principle of universality implies that the constitution should also specify that all non-tax revenues should also be based on law. The annual budget is often used as an occasion for parliaments to approve changes in tax and other revenue laws, in order to achieve the budget’s revenue estimates. If tax laws do not provide permanent authority for the government to levy and collect the projected budgetary revenues, the annual budget law should renew such authority for another 12-month period.

●All government expenditure is based on law. A universally accepted democratic value is that the executive has no authority to commit public money for expenditure without the knowledge of the elected representatives

III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

of the people. Hence the law should require the approval of total annual expenditure by the legislature in the annual budget, consistent with the agreed fiscal policy strategy, as well as its approval of some of the details of the expenditure in appropriations acts (see principle of “specificity” below).

The balance of budgetary powers between the executive and the legislature is also a constitutional question. There are at least two areas where this balance could be specified in a constitution. First, the extent to which the legislature can modify the executive’s proposed draft budget. Second, the extent to which the executive can modify and/or reduce the legislature’s approved budget. There are no internationally agreed legal standards in these areas. If not included in the constitution, primary law should govern the following important areas:

●The legislature’s amendment powers. One extreme is to provide unlimited power to the legislature to amend the budget. However, the principle of stability requires that fiscal policy be framed in the context of a mediumterm strategy, designed to assure monetary policy formulators and markets that there will be no radical changes in short-term fiscal policy. If it had unlimited amendment powers, an irresponsible legislature could derail a well-justified medium-term fiscal strategy. At the other extreme, law could deprive the legislature of all amendment rights. However, this would not be in accordance with the democratic principle of allowing the people’s elected representatives decision-making powers on expenditure. If all budgetmaking power is concentrated in a few members of the political executive, citizens may object to a power that is exercised by such a small number of people (usually the cabinet of ministers). Thus, should a constitutional choice be made that very limited or no amendment powers will be afforded to parliament, the principle of democracy would require an accompanying constitutional provision that the government must have the confidence of parliament. With such a provision, parliament and/or citizens could show their discontent with budget decisions by bringing down the government.

●Delegation of authority for flexible implemention of the budget. Parliament may choose to delegate authority to the executive to make “minor” changes in the approved budget expenditures, should the need arise. Should the legislature decide that such flexibility is desirable it may, for example, provide the executive with a small unallocated budgetary reserve that may be spent under the authority of the Minister of Finance (or equivalent). As the reserve is used, the minister may transfer budget authority from the reserve to a specific budget line, without returning to the legislature – at least for small amounts. There are no international norms is this area. In general, the more sizeable the change, the higher the level of authority that is needed for approval. The law should require that large changes be approved by the legislature and that the executive reports regularly and in

III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

full on all changes in budget appropriations that it makes under delegated authority from parliament. At year end, a full reconciliation between the opening authorisation, final authorisation and actual spending should be required by law.

●Cancellation of expenditure authority. To ensure that “its” budget is adopted, the legislature may limit the executive’s power to cancel or postpone specific budget appropriations. The principle of “supreme legislative authority”, if taken literally, would force the executive to spend every dollar budgeted, i.e. each line item in the appropriations law would be a lower limit as well as an upper limit. If this principle dominates, all reductions or postponement of budget authority would require approval of the legislature. Such legal restrictions would introduce rigidity into the budget process. This

principle also does not recognise that, in executing the budget, unexpected surprises such as revenues being lower than projected, are normal.6 A

possible norm is this area would be for the law to allow the executive to cut budget authority by a certain percentage before returning to parliament. Only larger cuts or postponements of budgetary authority over a certain threshold would need approval of the legislature. Alternatively, the law could provide the executive with unlimited power to impose spending ceilings below appropriations should economic circumstances dictate such action. Whatever option is chosen, accountability requires regular reporting to parliament. Such reporting requirements should be embodied in law.

Individual countries may choose to incorporate in constitutions more or fewer budget-related provisions than those discussed above. The borderline between “constitutional rules” for budget systems and “statutory provisions” is not distinct. Even if the borderline was distinct, it is unlikely that a given country would modify its constitution solely to meet internationally agreed standards for budget law. Only issues of extremely high political importance are placed on the agenda of constitutional change.

3.1.3. Authoritativeness, legal instruments and functional responsibilities

If only a few of the budget principles should be included in the constitution, which budget principles should feature heavily in primary law? Which should be primarily confined to regulations – of the executive or of the legislature? These questions are examined by considering the major concerns of the legislature with regard to budget processes, which are first, the rules governing the legislature’s budget approval processes and second, its need for budget execution reports from the executive. The legislature should ensure that primary law specifies the necessary principles and procedures.