- •Table of Contents
- •Foreword
- •OECD Journal on Budgeting
- •Board of Advisors
- •Preface
- •Executive Summary
- •Sharp differences exist in the legal framework for budget systems
- •Public finance and legal theories do not explain inter-country differences in budget system laws
- •Political variables and legal culture help explain the inter-country differences
- •Norms for budget systems have been issued and many should be in budget system laws
- •Budget system laws are adopted to strengthen the powers of the legislature or the executive
- •Country studies reveal a multiplicity of reasons for adopting budget-related laws
- •Conclusions
- •1. Introduction
- •2. Budget processes
- •2.1. Budgeting: a five-stage process
- •Figure I.1. The roles of Parliament and the executive in the budget cycle
- •2.2. How are the different legal frameworks for budget systems organised?
- •Figure I.2. Different models for organising the legal framework of budget systems
- •3. Can economic theory explain the differences?
- •3.1. New institutional economics
- •3.2. Law, economics and public choice theory
- •3.3. Constitutional political economy: budgetary rules and budgetary outcomes
- •3.4. Can game theory help?
- •4. Can comparative law explain the differences?
- •4.1. Families of legal systems and the importance of the constitution
- •Box I.2. Purposes of constitutions and characteristics of statutes
- •4.2. Absence of norms for constitutions partly explains differences in budget system laws
- •4.3. Hierarchy within primary law also partly explains differences in budget-related laws
- •Box I.3. Hierarchy of laws: The example of Spain
- •4.4. Not all countries complete all steps of formal law-making processes
- •Box I.4. Steps in making law
- •4.5. Greater use is made of secondary law in some countries
- •Table I.1. Delegated legislation and separation of powers
- •4.6. Decisions and regulations of the legislature are particularly important in some countries
- •4.8. Are laws “green lights” or “red lights”?
- •5. Forms of government and budget system laws
- •5.1. Constitutional or parliamentary monarchies
- •5.2. Presidential and semi-presidential governments
- •5.3. Parliamentary republics
- •5.4. Relationship between forms of government and budget system law
- •Table I.2. Differences in selected budgetary powers of the executive and the legislature
- •Figure I.3. Separation of powers and the need to adopt budget-related laws
- •Notes
- •Bibliography
- •1. Introduction
- •Figure II.1. Density of legal framework for budget systems in 25 OECD countries
- •Table II.1. Legal frameworks for budget systems: 13 OECD countries
- •2. Different purposes of the legal frameworks for budget systems
- •Box II.1. Purposes of budget system laws
- •2.1. Legal necessity?
- •Figure II.2. Budget reforms and changes in budget laws
- •2.2. Budget reform: when is law required?
- •2.3. Elaborating on the budget powers of the legislature vis-à-vis the executive
- •3. Differences in the legal framework for the main actors in budget systems
- •3.1. Legislatures
- •3.2. Executives
- •Box II.2. New Zealand’s State Sector Act 1988
- •3.3. Judiciary
- •3.4. External audit offices
- •Table II.3. External audit legal frameworks: Selected differences
- •3.5. Sub-national governments
- •3.6. Supra-national bodies and international organisations
- •4. Differences in the legal framework for budget processes
- •4.1. Budget preparation by the executive
- •Table II.4. Legal requirements for the date of submission of the budget to the legislature
- •Box II.3. France: Legal requirements for budget information
- •4.2. Parliamentary approval of the budget
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting systems
- •Box II.4. Finland: Legal requirements for annual report and annual accounts
- •Table II.5. Legal requirements for submission of annual report to the legislature: Selected countries
- •Notes
- •Bibliography
- •1. Have standards for the legal framework of budget systems been drawn up?
- •1.1. Normative and positive approaches to budget law
- •1.2. Limited guidance from normative constitutional economics
- •2. Who should set and monitor legally binding standards?
- •2.1. Role of politicians and bureaucrats
- •2.2. International transmission of budget system laws
- •2.3. International organisations as standard setters
- •Box III.1. The OECD Best Practices for Budget Transparency
- •Box III.2. Constitutional norms for external audit: Extracts from the INTOSAI “Lima Declaration”
- •2.4. Monitoring standards
- •3. Principles to support the legal framework of budget systems
- •Box III.3. Ten principles for a budget law
- •3.1. Authoritativeness
- •Table III.1. Stages of the budget cycle and legal instruments
- •3.2. Annual basis
- •3.3. Universality
- •3.4. Unity
- •3.5. Specificity
- •3.6. Balance
- •3.7. Accountability
- •Box III.4. Possible minimum legal norms for budget reporting
- •Box III.5. Ingredients of legal norms for external audit
- •3.8. Transparency
- •Box III.6. Ingredients of legal norms for government agencies
- •3.9. Stability or predictability
- •3.10. Performance (or efficiency, economy, and effectiveness)
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Canada: Main budget system laws
- •1.2. Reforms of budget system laws
- •Box 2. Canada: Main provisions of the Spending Control Act 1992
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Roles and responsibilities of sub-national governments
- •Box 3. Canada: Major transfers from the federal to the provincial governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 4. Canada: Key steps in the annual budgeting process
- •Box 5. Canada: Major contents of the main estimates
- •4.2. Budget process in Parliament
- •Box 6. Canada: The budget approval process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. France: Main budget system laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •Box 3. France: Key features of the Local Government Code
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •4.2. Budget process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Germany: Main budget system laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •Box 2. Germany: Public agencies
- •3.2. Role and responsibilities of sub-national governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •4.2. Budget process in Parliament
- •Box 3. Germany: Budget processes in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit17
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Japan: Main budget system laws
- •1.2. Reforms of budget system laws
- •Box 2. Japan: Main contents of the 1997 Fiscal Structural Reform Act
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •Box 3. Japan: Grants from central government to local governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 4. Japan: The timetable for the budget process
- •Box 5. Japan: Additional documents attached to the draft budget
- •4.2. Budget process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Korea: Main budget system laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •Box 3. Korea: Major acts governing the fiscal relationship across government levels
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 4. Korea: Legal requirements for the timetable for budget preparation and deliberation
- •Box 5. Korea: Other documents annexed to the draft budget
- •4.2. Budget process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 2. New Zealand: Fiscal responsibility (legal provisions)
- •Box 3. New Zealand: Key steps and dates for budget preparation by the government
- •Box 4. New Zealand: Information required to support the first appropriation act
- •4.2. Budget process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Nordic Countries: The main budget system laws or near-laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and powers of the actors in the budget system
- •3.1. The constitutions of the four countries
- •Table 1. Nordic countries: Age and size of constitutions
- •3.2. Legislatures
- •Table 2. Nordic countries: Constitutional provisions for the legislatures
- •3.3. The political executive
- •Table 3. Nordic countries: Constitutional provisions for the political executive
- •3.4. Ministries and executive agencies
- •3.5. Civil service
- •3.6. Sub-national governments
- •4. Constitutional and other legal requirements for budgeting
- •4.1. Authority of Parliament
- •Table 4. Nordic countries: Constitutional provisions for the authority of Parliament
- •4.2. Timing of submission of the annual budget
- •4.3. Non-adoption of the annual budget before the year begins
- •4.4. Content of the budget and types of appropriations
- •4.5. Documents to accompany the draft budget law
- •4.6. Parliamentary committees and budget procedures in Parliament
- •4.7. Parliamentary amendment powers, coalition agreements, two-stage budgeting and fiscal rules
- •4.8. Supplementary budgets
- •4.10. Cancellation of appropriations and contingency funds
- •4.11. Government accounting
- •4.12. Other fiscal reporting and special reports
- •Table 5. Nordic countries: Constitutional requirements for external audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. Spain: Main budget system laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 2. Spain: The timetable for the budget process (based on the fiscal year 2003)
- •Box 3. Spain: The major content of medium-term budget plans
- •Box 4. Spain: Additional documents attached to the draft budget
- •4.2. Budget process in Parliament
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. United Kingdom: Main budget system laws
- •1.2. Reforms of budget system law
- •Box 2. United Kingdom: Reforms of the budget system in the past 20 years
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •Box 3. United Kingdom: Executive agencies and other bodies
- •3.2. Role and responsibilities of sub-national governments
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •4.2. Budget process in Parliament
- •Box 4. United Kingdom: Budget processes in Parliament
- •Table 1. United Kingdom: Format of appropriation adopted by Parliament for Department X
- •4.3. Budget execution
- •Table 2. United Kingdom: Transfers of budgetary authority
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •Box 5. United Kingdom: External audit arrangements
- •Notes
- •Bibliography
- •1. Overview
- •1.1. The legal framework governing budget processes
- •Box 1. United States: Main federal budget system laws
- •1.2. Reforms of budget system laws
- •2. Principles underlying budget system laws
- •3. Legal basis for the establishment and the powers of the actors in the budget system
- •3.1. The executive and the legislature
- •3.2. Role and responsibilities of sub-national governments
- •Box 3. United States: Major transfers between different levels of government
- •4. Legal provisions for each stage of the budget cycle
- •4.1. Budget preparation and presentation by the executive
- •Box 4. United States: Key steps in the annual budget process within the executive
- •Box 5. United States: Other information required by law
- •4.2. Budget process in the legislature
- •Box 6. United States: Legal and internal deadlines for congressional budget approval
- •4.3. Budget execution
- •4.4. Government accounting and fiscal reporting
- •4.5. External audit
- •5. Sanctions and non-compliance
- •Notes
- •Bibliography
III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?
be used for some aspects of budget preparation, and especially, budget execution. For example, the legislature may specifically wish to control, in primary law, the extent to which the executive may modify the adopted annual budget (law) without returning to the legislature to obtain additional approval (e.g. for transfers or cancellations of annual appropriations) and propose a supplementary budget.
3.2. Annual basis
This principle requires the budget and medium-term projections to be provided annually. A law should specify the fiscal year. It should also specify that the budget document, as presented to parliament, should provide estimates for budget outcomes of previous years, the estimated outcome for the year on which the projections are based. The law could specify that the legislature approves first the annual aggregates for revenues and expenditures (and possibly also the medium-term aggregates proposed by the government7) before approving the detailed appropriations of expenditure.
Although law should specify that budget authority is provided for a 12month period, the nature of that authority, and any exceptions, should also be specified. In particular, the law should specify:
●Whether taxation and other revenue levying authority is permanent or for 12 months only.
●Whether some expenditure authority is provided permanently (e.g. entitlement programmes are approved by specific laws). A budget system law could define various categories of appropriations, according to whether the annual limits are legally binding or whether they can be surpassed because contractual or other legally binding arrangements require payment irrespective of budget estimates (e.g. for debt servicing).
●End-year carryover of budgetary authority.
●Borrowing from the following year’s (anticipated) budgetary authority.
3.3. Universality
This principle states that all revenues and expenditures are to be included in the budget on a gross basis. The principle of comprehensiveness is of sufficient importance that some elements of it should be included in the constitution.
It is desirable for the constitution to specify (at least) the principles associated with local government’s independent revenue levying powers and expenditure authority. This will depend importantly on whether a federal or unitary government is also specified in the constitution. In federal countries, the degree of budgetary autonomy provided to sub-national governments should be specified. Primary law should elaborate on constitutional provisions for
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III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?
central-local government budgetary relations, including any revenue-sharing arrangements and systems of intergovernmental transfers. Intergovernmental co-ordination mechanisms or bodies should be established in law, to co-ordinate nationwide budgetary objectives, policies and procedures.
Either the constitution or a budget law should incorporate the principle of revenue pooling by specifying the establishment of a consolidated revenue fund into which all budget revenues are paid and out of which all budget expenditures are made. Such a concept is given effect by a single treasury account, usually held at the central bank. Details of the operation of the single treasury account (which may have sub-accounts for specific expenditures) could be placed in regulations. In federal countries, where each level of government is provided with budgetary autonomy, each level would have a self-contained consolidated revenue fund, out of which sub-national expenditures would be paid.
Law is needed to ensure that nationwide fiscal strategies are publicly available. When sub-national governments are significant, their combined fiscal position should be consolidated with central government and resulting accounts and strategies be published. This is needed so that the central budget authority is fully informed of past and future nationwide fiscal developments, including fiscal risks at all levels of government (including any implicit guarantees that the central government would bail out a sub-national government that defaults on its borrowing obligations). An intergovernmental financial relations law would, inter alia, specify the co-ordination body responsible for consolidating all budgets and for formulating nationwide budgetary policies. A law should specify that the main aggregates of the consolidated government budgets (revenues, expenditures, balances and financing) are clearly identified and split between the central and various subnational governments (even though each level of government – inclusive of their various extrabudgetary funds – may have budget-making autonomy). Arrangements for consolidating “general government”8 budget data – both ex ante and ex post – should be specified in law.
Exceptions to the universality principle need to be included in a budget system law or separate laws, especially for:
●Extrabudgetary funds. In order to safeguard the principle of universality, it
is important for governments and legislatures to limit severely the creation of extrabudgetary funds.9 If needed, each such fund should be established
by a separate law that specifies the fund’s governance structure(s) and its obligatory reporting requirements (both ex ante and ex post) to the legislature. The law could provide legal authority to collect earmarked revenues and allow the special fund to use them for specific purposes (e.g. social security payments).
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●Exceptions to gross recording. On the revenue side, budgetary projections should only be allowed to be shown on a net basis (e.g. budgeted VAT revenues may be shown net of reimbursements of VAT paid on inputs) if this is provided for in the law. On the expenditure side, any offsetting with revenues should have a legal basis – and only if there is a clear justification. Some argue that a government agency should be authorised to retain revenues it raises itself and use them for its own purposes, as this is the most effective way of maximising revenues from such a source. In particular, with revenue retention, the agency is provided with strong incentives to project expected revenues realistically in the annual budget and to ensure that all projected revenues are collected as projected. Instead of parliament approving gross expenditure in the annual budget (with fees detailed in the budget’s non-tax revenue estimates), net expenditure would be approved by the legislature in the budget (with revenues retained by the agency approved as negative expenditures). Any spending of revenues collected in excess of the budget’s projections should require parliamentary approval.
3.4. Unity
This principle requires the budget to present all receipts and payments at the same time. However, revenues and expenditures approved in the annual budget law by parliament may only be a subset of total revenues and expenditures in the fiscal strategy underlying the annual budget. This is mainly because of the exceptions to the principle of universality such as autonomous sub-national governments, net appropriations or extrabudgetary funds. A law should therefore require the executive to prepare, as part of the annual budget documentation for parliament, a table showing how the revenue and expenditure aggregates (preferably on a national accounts basis) in the macrofiscal strategy relate to the revenues and expenditures to be approved in the annual budget.
3.5. Specificity
This principle states that revenues and expenditures are approved in some detail in the budget. On the revenue side, the law should define the broad categories of revenues. The IMF Government Finance Statistics Manual
(IMF, 2001a) could be used as a guide for this. It categorises various kinds of tax revenues, other revenues (fees, property income, etc.), social contributions, and grants.
On the expenditure side, a law should specify the categories, basis, nature and duration of appropriations. A budget system law should:
●Distinguish between fixed appropriations – legally binding maximum expenditures for a 12-month period – and unlimited appropriations, which
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may be exceeded because of other laws or contractual arrangements (e.g. laws requiring social benefits to be paid to households, debt contracts that specify that the government must service its debt) irrespective of budget estimates. The law should require that periodic reports to the legislature justify why unlimited appropriations exceed indicative amounts.
●Specify the basis for appropriations: cash, accrual, or commitment (or obligation). The law may allow (or require) both cash-based and accrual (or commitment) expenditure estimates to be approved in the annual budget law.
●Distinguish between net versus gross appropriations (see exceptions to gross recording above) – and identify earmarking of revenues for particular purposes.
●Identify multi-year and/or appropriations of unlimited duration. Certain expenditures – such as investment projects that require long-term planning horizons – are better approved on a multi-year basis, at least for expenditure commitments (annual cash limits could also be imposed in the budget law).
3.6. Balance
3.6.1. The balanced budget principle
This principle states that budget payments should equal budget receipts. In order for this principle not to be merely a cash-based accounting statement, it is important to distinguish: 1) cash receipts from revenues, and 2) cash payments from budget authority to spend. In economic terms, the principle states that expenditures10 are balanced by budget revenues and financing. The law should define revenues, expenditures and balance, with the legislature approving the limits on the first two.
3.6.2. Fiscal rules
A considerable literature on fiscal rules has developed (see, for example, Kopits and Symansky, 1998; Banca d’Italia, 2001; Schick, 2003). Such rules are perceived to be needed for macroeconomic stability – a stable price level, stable economic growth and minimisation of exchange rate fluctuations. Commitment to firm fiscal targets is needed so that fiscal policy is consistent with monetary policy objectives. In particular, the level of government debt needs to be contained and monetary financing of fiscal deficits avoided. Some commentators propose that fiscal rules should be embodied in law, or even in constitutions.11 The proponents of this view argue that the authority of constitutional law is necessary to ensure that the legislature adopts a disciplined
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