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

budget every year.12 Those opposed to embedding quantitative rules in law argue that:

●If fiscal balance and government debt targets are permanently set, policy makers would be deprived from using discretionary fiscal policy. In particular, counter-cyclical fiscal policy – temporary deviation(s) from planned mediumterm quantitative targets for deficits and public debt – can be justified when there are adverse fiscal shocks.

●Credible commitment to medium-term fiscal policy targets requires political agreement. Since the life of a legislature is limited to only a few years, a more effective way (relative to a permanent rule fixed in law) is to reach a non-binding political agreement for medium-term fiscal policy and renew it periodically in the light of evolving economic, social and political circumstances.

●Loopholes can be found in legally binding rules. Financial transactions can be conducted outside the scope of the rules that apply to particular concepts, budget years, and budgetary entities. “Creative accounting” has been used to move transactions for one year to a different year in order to “respect” the rule for that year, or to move budgetary transactions off-budget to circumvent the rule (see Milesi-Ferretti, 2000). Alternatively, allowable exceptions to the rules are abused (e.g.“emergency” spending takes place much more frequently than the law intended).

●Quantitative targets, if embedded in law, need to be enforced by judges. However, it is considered undemocratic that non-elected judges should dictate fiscal policy when economic circumstances demand that the rule be

broken. In practice, judges are seldom called upon to enforce the rules in cases of non-respect,13 raising questions about their enforceability through

legal channels.

●“Permanent” statutory restrictions can be easily changed by temporary laws.14

●Sanctions exist only on paper. For political reasons, it is often too difficult to apply them in practice.15

Stock-related balances – assets and liabilities – may be covered by a separate law or in the budget system law. Until the advent of accrual accounting in government, the norm for budget system law was that only cash-based revenues and expenditures should be covered by the law. Asset and liability transactions received little, if any, attention in legislation. If there was no separate public debt law, accounting regulations may have contained provisions for government asset and liability transactions.

3.7. Accountability

A fiscal responsibility act could distinguish between ex ante and ex post accountability to the legislature. The first concerns what the executive is

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

obliged to provide in the draft budget for parliamentary consideration. The second relates to the information the executive should provide once the budget has been executed. Besides these areas, there are at least two other aspects associated with accountability – notably accountability within the executive and the role of the external audit body. The following responsibilities should be provided for in laws or regulations and, for the external audit agency, in the constitution.

3.7.1. Responsibilities of the political executive to the legislature

The accountability for budget management of the political executive to the legislature should be specified in the law. Whether the responsibility to the legislature is by an individual (e.g. the Minister of Finance) or by the cabinet of ministers depends on whether the constitution specifies, explicitly or implicitly, individual or collective responsibility. Budget-related accountability law(s) need to supplement any constitutional norms, including specifying the requirements that:

●The government, or the Minister of Finance (or equivalent), submits a draft budget to the legislature by a specified date, at least three months before the beginning of the new fiscal year. It may be desirable to specify that the executive has exclusive authority to prepare the initial draft budget.

●The budget must be submitted to the legislature by a date, which could even be specified in the constitution. This date should be sufficiently in advance of the new fiscal year (e.g. at least three months) so that it allows adequate time for the legislature to consider the draft budget. The requirement that the budget is adopted before the beginning of the new fiscal year – and legal provisions providing for the situation should this not be done – is considered particularly important for responsible fiscal management. The constitution could therefore make at least general provisions for the timing of adoption of the annual budget law, with primary law providing the detail.

●Reports to accompany the draft ex ante budget (see below).

●The government, or the Minister of Finance, presents the audited outcome of budget execution to the legislature by a specified date, which should be no later than the presentation of the budget for the following year.

●The legislature may call any government member, political appointee or civil servant to defend, orally or in writing, budget projections and/or outcomes.

3.7.2. Reporting by the executive to the legislature

A budget system law should also specify the scope and contents of ex post budget execution reports and financial accounts, which accompanied by the external auditor’s annual report, by a certain date after the end of the fiscal

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

year. The final date should be prescribed: 12 months is a lenient standard (IMF, 2001b); six months is “best” practice (OECD, 2002a).

Possible minimum legal norms for all budget reporting, derived from the OECD Best Practices for Budget Transparency (OECD, 2002a) and the IMF Code of Good Practices on Fiscal Transparency (IMF, 2001b), are shown in Box III.4.

Other budget information and periodic reports outlined in the OECD best practices could be made a legal requirement. Although included in law, the authorities may choose not to meet the standards immediately. This is the case especially in developing or transition countries, where the capacity of the executive to produce the required reports is limited or parliament does not perceive the need to be provided with detailed information. Even in OECD countries, with performance-oriented budgeting, there is a risk that legislatures can receive too much information, since performance-related information supplements traditional financial information. Judicious choices need to be made before imposing legal requirements such as a requirement for ministries to prepare annual performance reports. A distinction should be made between what parliament needs and the information needs for internal management purposes, with the latter being governed by regulation, not law.

3.7.3. Accountability of budget managers to the political executive

Within the executive, the accountability of budget managers to higherlevel political managers needs to be clearly defined. Embodying this in the law is not necessarily required.

Whether the accountability of civil servants within the executive should be governed by law depends on the degree to which the legislature wants to intervene in budget preparation and execution by the executive branch of government. If, after the basic accountability requirements of the executive are specified in the law, the legislature fully trusts the executive to prepare and implement the adopted budget, it could leave all organisational matters to the executive. In this case, the executive would issue internal regulations to organise itself, including specifying the roles, responsibilities and rights of the civil servants and political appointees serving the political executive.

Any contractual employment agreements between the government as employer and civil servants as employees would be governed by general employment legislation that applies equally to private sector employees. If, however, a political choice is made to provide a special status to civil servants (e.g. provide lifetime employment and benefits in exchange for the loyalty and professionalism needed for government jobs), a civil service law may be required.

Administrative law imposes a constraint on the freedom of the executive to formulate its internal accountability arrangements. Reflecting long-standing

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

Box III.4. Possible minimum legal norms for budget reporting

Budget report(s) (to accompany annual budget)

●A medium-term fiscal strategy, fiscal policy objectives, the budget framework showing expected revenue, expenditure, budget balance and public debt during at least the two years beyond the next fiscal year.

●Clear identification of new policies being introduced in the annual budget.

●Comparative information on actual revenue and expenditure during the previous two years and an updated forecast for the current year, with a commentary on each revenue and expenditure programme.

●Reconciliation with forecasts contained in earlier budget reports for the same period, accompanied by explanations of all significant deviations.

●Identification of revenues and expenditures authorised in permanent legislation. These should be included in the budget aggregates contained in the medium-term fiscal strategy.

●Identification and discussion of the economic assumptions and fiscal risks underlying the projections. Tax expenditures, contingent liabilities and quasi-fiscal activities should be discussed if quantitatively important.

Quarterly (or monthly) reports

●Monthly and year-to-date budget execution reports, to be released within four weeks of the end of each period. A brief commentary on revenues, expenditures and balance should accompany the data.

Mid-year report

●A comprehensive update on budget implementation, released within six weeks of the end of the mid-year period. The report should include an updated budget forecast for the current fiscal year and the following two fiscal years.

●Discussion of the impact of changes in economic assumptions underlying the budget, the impact of any recent political decisions or other circumstances that may have a material effect on the budget.

Year-end accounts and annual report

●Annual accounts should show compliance with the budgeted levels of revenues and expenditures authorised by parliament. The format of the accounts should be identical to the budget presentation. Any in-year adjustments to the original budget should be shown. Comparative information on revenues and expenditures of the preceding year should also be provided.

●The annual accounts should be audited by the external audit body and submitted to parliament within no more than nine months after the fiscal year ends.

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

Box III.4. Possible minimum legal norms for budget reporting (cont.)

●The year-end budget report should contain a comprehensive discussion of the overall budget outcome (compared with targets for key aggregates), as well as for broad categories of revenues and expenditures. In addition to the overall report prepared by the central budget authority (Ministry of Finance), spending ministries’ reports on budget outcomes may be included. If appropriate, the law should require that annual reports include nonfinancial performance information, including a comparison of performance targets and actual results achieved.

tradition, constitutions in some countries require administrative law to specify the obligations and roles of those who are assigned to administer (including the budget system). This is especially the case in countries that distinguish sharply between public and private law. Accordingly, their constitutions require that public law specifies the rights, status, service, and loyalty of members of the public service (e.g. German Constitution 1949), possibly distinguishing between the civil service and the military (e.g. 1958 Constitution of France). If these constitutional requirements lead to civil service laws that impose rigidities (e.g. a uniform remuneration scale), the political or administrative executive may be prevented from exercising the necessary salary flexibility needed for effective budget management. Countries without constitutional or legal norms for civil servant remuneration and other employment conditions are provided with the flexibility to make non-legally binding contracts that specify the accountabilities (responsibilities) of senior bureaucrats to the political executive (generally government ministers).

The legislature may consider that it has a right to control, through law, civil service staff levels and remuneration. If the legislature is more concerned about the outcome of government policies for which it has provided the necessary finance in the context of the annual budget, it will be indifferent as to whether the executive achieves those outcomes by using personnel or nonpersonnel inputs. What counts are the results themselves, not the means employed to achieve the results. In contrast, if the legislature considers that the civil service salary bill is “too high” or there are “too many” or “too few” civil servants, then the legislature may choose to approve, in the context of the annual budget, the levels of the number of civil servants and unit salaries. By adopting a civil service law, or requiring attachments to the annual budget on civil service staff levels, the legislature is able to satisfy its politically determined objectives (an economic rationale for such control is more difficult to find).