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

3.9. Stability or predictability

A law should require the budget and public debt objectives to be framed in the context of a regularly updated medium-term budget framework. Commitment of a government to such a framework requires that the rates and bases of taxes and other charges are relatively stable. Thus, when the annual budget estimates are presented to the legislature, a law should require that projections for the years after the budget year should also be presented. Such a medium-term fiscal framework allows the legislature to consider the 12-month budget projections in the light of the longer-term strategy for fiscal policy – the overall balance, total revenues and total expenditures. The law could require the medium-term projections to be formally adopted by the legislature. In particular, the legislature can signal a strong commitment to responsible fiscal management, if it adopts each year updates of its own legally binding medium-term limits on aggregate spending.

A law could also require parliamentary approval of the budget aggregates and the detailed estimates, possibly in two quite distinct stages. First, the balance, total revenues and total expenditures could be adopted. At a second stage (which could be several months later),18 law could require the detailed appropriations of expenditure to be approved. The adoption of separate laws for different expenditures (multiple appropriation laws), or separate budgets for current and capital expenditures (a dual budget system), runs counter to the principle of budgetary unity.

3.10. Performance (or efficiency, economy, and effectiveness)

Budgetary performance has been increasingly stressed in many countries. In general, efficiency is viewed as the paramount criterion for the evaluation of human interaction (Brion, 1999, p. 1043). However, efficiency has been criticised by legal scholars, who argue against its usage as a legal principle.19

If a country has the willingness and capacity to implement a performanceoriented budget system, it should aim for the higher norms embodied in the OECD Best Practices for Budget Transparency. In particular, a law would require the executive to present past and projected performance-related information to the legislature in the context of the presentation of the annual budget and also require budget managers to report on performance to the legislature after the budget is executed. Such a budget system may require changes in the external audit law, or in administrative or employment laws.

Notes

1.Although the reform of the State’s “Financial Constitution” had a domestic origin, the French authorities were keenly aware of reforms – and accompanying laws – that had taken place in Anglo-Saxon countries.

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

2.The Brazilian Ministry of Planning, Budget and Management acknowledges the influence on its own law from the EU Maastricht criteria and the fiscal stabilityresponsibility acts in New Zealand and the United States. See http://federativo. bndes.gov.br/Destaques/docs_Pagina_LRF/Ingl0599.ppt.

3. For example, Tanzania adopted a new Public Finance Act in 2000 to replace a 1962 Ordinance, heavily influenced by the Exchequer and Audit Departments Acts of the United Kingdom, which, as in Tanzania today, contained both budget execution and external audit in a single act. By contrast, the United Kingdom, in an effort to separate to the Auditor General more fully from the executive, adopted a new National Audit Act in 1983.

4.Chevauchez (1999) notes that the IMF Code of Good Practices on Fiscal Transparency (IMF, 2001b) was initiated by the United Kingdom Chancellor of the Exchequer during the 1996 annual meeting of the IMF. In 1998, the IMF published its code of good practices, which also included minimum standards – abandoned in later versions of the manual accompanying the code (IMF, 2001a). The OECD developed its best practices in 2000 (OECD, 2002a). These are somewhat more demanding standards applicable to more advanced countries’ budgetary systems.

5.Box 4 of the manual to the code (IMF, 2001c) summarises OECD guidelines on the characteristics of transparent regulations. However, as indicated in OECD country surveys of regulatory reform (see OECD, 2002b), the transparency of secondary law, i.e. regulations, is highly dependent on the clarity of primary law.

6.To limit this risk, the law could require deliberately conservative revenue projections.

7.Law could specify that the legislature approves medium-term expenditure ceilings. A few months after such approval, the approved ceiling for year (+2) would automatically become the starting point for the budget projections for year (+1) of a new budget preparation cycle.

8.As defined in the IMF Government Finance Statistics Manual (IMF, 2001a) or in national accounts.

9.The restricting of extrabudgetary funds could be incorporated in law. For example, the Constitution of Finland requires a supermajority of Parliament for the creation of any new extrabudgetary fund.

10.Under accrual accounting, a distinction is made between expenses and expenditures. The terms used in budget system laws would have to be consistent with the accounting system adopted.

11.For example, in the United States, Buchanan (1997) argued that a constitutional requirement for a balanced budget was necessary to control the burgeoning federal government budget deficit.

12.Proponents in the United States also argue that the federal government should follow the precedent of 49 of the 50 states, whose constitutions contain some kind of “balanced budget” rule. They cite evidence that a state’s general fund surplus is higher in states that have constitutional rules applying to ex post budget balances (Bohn and Inman, 1996). A closer examination of this assertion reveals that in only 36 states are there constitutional references to balanced budget rules (Briffault, 1996, p. 8) and that some states apply the rule only to the budget presented to the legislature. Detractors note that the only state without any constitutional budget rule (Vermont) has a very good record regarding budget balances.

13.Kopits and Symansky (1998) report that, in Germany, the constitutional rules are often not realised and rarely attract a judicial challenge. Similarly, although most

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

of the 50 states of the United States have some form of a “balanced budget” requirement in their constitutions, these are frequently broken by using offbudget funds or other “creative accounting” techniques. Briffault (1996) reports that there were no legal challenges during 1978-96. For the only two cases in the 1970s, the challenge was not to the non-compliance with the balanced budget rule per se, but ancillary aspects.

14.Several countries use the annual budget as an occasion for changing previous budget-related laws. In Japan, although the Public Finance Act 1947 requires a balanced budget except for construction expenditure (which may be financed by special bonds), during 1975-96 the government overrode this restriction when adopting the annual budget law, by allowing bond issues for general budget financing. In 1997, a Fiscal Structural Reform Act was adopted. This restored the 1946 legal provision and fixed a quantitative target for the fiscal deficit in 2003 equal to 3% of GDP. However, the 1997 law was abrogated in 1998 when it was clear that the quantitative rules could not be respected.

15.The non-compliance with the Maastricht criteria by France and Germany in their 2004 budgets is an example. When the general government deficits of these two countries exceeded the 3% limit, financial sanctions, in the form of noninterest bearing deposits and their eventual confiscation, should have been applied.

16.Tax expenditures are tax privileges to non-government legal entities that reduce government revenues and which have a similar impact to that of providing a direct subsidy to the beneficiary entity.

17.Quasi-fiscal activities are government financial policies that are carried out by non-government entities (e.g. public goods or services provided by public enterprises at prices below market; subsidised credit by State-owned banks).

18.One legal norm would be to require parliamentary approval of the government’s proposed fiscal strategy at an early stage of the budget preparation, e.g. seven to eight months before the fiscal year begins. Only at a later stage, e.g. one to two months before the fiscal year begins, would parliament approve the detailed estimates.

19.Kirstein, 1999, cites a number of studies in which legal scholars argue against the usage of efficiency as a legal principle in Germany.

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ISSN 1608-7143

OECD Journal on Budgeting – Volume 4 – No. 3 © OECD 2004

PART IV

Case Studies

of Selected OECD Countries

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OECD Journal on Budgeting – Volume 4 – No. 3 © OECD 2004

Canada*

*This chapter has benefited from comments from: Yvon Besner, Laura Danagher, Catherine Foskett, Mike Joyce, Bob Mellon and John Morgan (Treasury Board); Peter Devries (Department of Finance); Basil Zafiriou (Office of the Auditor General); John Mayne (consultant to the OECD and former OAG staff member); and OECD colleagues including Deborah Roseveare of the Economics Department.