- •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
IV. JAPAN
4. Legal provisions for each stage of the budget cycle
4.1. Budget preparation and presentation by the executive
4.1.1. Institutional coverage of the budget
The PFA applies to the national budget (Art. 1), which is divided into a general account and special accounts (Art. 13), and the budgets of government affiliated agencies. The national budget covers all ministries, commissions, agencies, and some public corporations. The national budget is submitted to the Diet in the form of the general account, 31 special accounts (as of April 2004) and the budgets of nine government affiliated agencies.6 All ministries are included in the general account, but only some ministries are authorised to establish special accounts and government affiliated agencies. Local governments’ budgets are excluded from the application of the PFA – they are governed by the LFA as amended.
4.1.2. Extrabudgetary funds and earmarking of revenues
The budget is fragmented because of the multiplicity of special accounts and government affiliated agencies (Ministry of Finance, 2004, p. 3). Special accounts can be established only by legislation (Art. 13, PFA). The government has initiated the creation of special accounts to carry out specific projects, to administer and manage specific funds, or to administer revenues and expenditures separately from the general account. All special accounts are submitted to the Diet for parliamentary review and expenditures can not be appropriated without the Diet’s authorisation. Each special account generally has its own distinct source of revenues; some accounts can finance imbalances by borrowing or receiving funds from the general account. The government’s loan programme is managed through one of the special accounts – the Fiscal Loan Fund Special Account, which is a main part of Fiscal Investment and Loan Programme (FILP). National pension and health care services have operated as special accounts (for example, National Pension Special Account, Labour Insurance Special Account).
A number of government affiliated agencies have been established under special laws. Whereas the central government provides subsidies to these agencies, which are fully capitalised, the budgets for most of them are not subject to the Diet’s approval. However, nine agencies (seven public financial corporations and two banks), 7 which are closely linked to overall government policies, have their budgets approved by the Diet. Since most of these agencies are not institutional units within “general government” – as defined by the GFS manual of the International Monetary Fund (IMF, 2001b) – they cannot be regarded as extrabudgetary funds. Rather they are quasi-fiscal activities, where the government uses enterprises – either financial or non-financial – for fiscal policy purposes. These enterprises are under the surveillance of line
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ministries. By law, the budget and financial plan of each government corporation is required to be approved by the Finance Minister as well as by the responsible minister.
4.1.3. Definition of budget aggregates
The law does not provide a definition of the various budget aggregates. For the general account, the guidelines for budget requests clearly define, and establish ceilings for, the bulk of the total expenditure for the next year. The difficulty in defining “government” revolves around the extensive use of special accounts, some of which are outside the general government sector.
4.1.4. Fiscal rules
Up until 1975, a version of the golden rule, which limited borrowing to construction bonds issued to finance investment spending, had worked strictly. Thereafter, this was replaced by renewable laws that allowed the government to issue special deficit-financing bonds in addition to construction bonds. The FSRA set a medium-term fiscal target for reducing the government deficit, but this law was suspended in 1998. In 2003, the government’s revised reform and perspective programme aimed at maintaining general government expenditures at no more than the level in FY2002 (about 39% of GDP) and achieving a primary budget surplus by the early 2010s. Although this rule is not legally binding, it has substantial force in the Cabinet, which makes the important decisions for the annual budget.
4.1.5. The timetable for budget preparation and presentation to Parliament
The Constitution only requires Cabinet to prepare and submit a draft budget to the Diet. The PFA specifies that the draft budget is to be submitted to the Diet by the Cabinet during January of the current fiscal year (Art. 27). Most of the provisions for the timetable for the budget process (Box 4) are set out in the PFA, guidelines or regulations.
The Prime Minister and other ministers submit the initial estimates of revenues and expenditures (so-called “budget requests”) to the Minister of Finance. The government Ordinance for Budget, Settlement and Accounting requires budget requests to be submitted by the end of August (seven months before the next fiscal year beginning on 1st April) (Art. 8). Prior to this, ceilings are proposed by the Finance Ministry in consultation with the Prime Minister and the Cabinet Office. The CEFP discusses the content of the guidelines in detail and sends them to line ministries after the Cabinet authorises them.8 The PFA requires the Minister of Finance to co-ordinate budget requests by line ministries, and to prepare the budget proposal to be approved by the
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Box 4. Japan: The timetable for the budget process
●1st April: a new fiscal year starts.
●April to August: preparation of budget requests by line ministries.
●July to August: examination of the guidelines for budget requests by the CEPF and issuance of them by Cabinet.
●End of August: submission of budget requests by line ministries to the Ministry of Finance.
●September to December: scrutiny of line ministries’ budget requests and bilateral discussions with the Ministry of Finance, in order to prepare the draft budget proposal for Cabinet approval.
●Beginning of December: issuance of the guidelines for budget formulation prepared by the Ministry of Finance and approved by the Cabinet.
●Mid-December: presentation of the budget proposal by the Ministry of Finance to the Cabinet. Final negotiations between Finance Minister and each line minister to settle remaining disputes, usually on politically important matters.
●Late December: approval of the budget proposal by the Cabinet.
●Early January: submission of the budget proposal to the Diet.
●March: approval of the budget by the Diet.
Source: Ministry of Finance, 2004.
Cabinet (Art. 18) usually in December. Thereafter, budget documents are prepared by the Minister of Finance and submitted to the Diet by the Cabinet in January based on a Cabinet decision (Arts. 21 and 27).
4.1.6. Approval process within the executive
Unlike in most countries, where budget approval within the executive is determined by internal rules, the law (the PFA) contains a few key provisions relating to Cabinet approval of the budget. Around the beginning of December, Cabinet issues the “General Principles of Budget Formulation” and the Ministry of Finance completes the draft budget in accordance with the PFA requirements. Negotiations take place between the Ministry of Finance and relevant line ministries. After reconciliation, the draft budget is officially approved by the Cabinet at the end of December. The PFA requires the Cabinet to submit the draft budget and additional documents to the Diet during January of the current fiscal year (Art. 27).
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4.1.7. Documents to accompany the budget law
The PFA specifies five areas which must be covered in the budget to be submitted to the Diet (Art. 16). Other articles of the PFA elaborate on these five areas, notably:
●General provisions. There is an emphasis on comprehensiveness, including the provision of ceilings on public bonds as well as on Treasury bills, temporary borrowings, and other liabilities to be borne by the Treasury; the range of expenses for public works; and other matters necessary for budget implementation (Art. 22).
●The revenue and expenditure budget. Estimates are drawn up in the executive according to the binding procedures of the PFA. Detailed revenue and expenditure estimates must be annexed to the budget.
●Continuing expenditures. The expenditures for which there is an exception to the single-year budget principle are stated to include construction and manufacturing (Art. 14bis). The same article limits continuing budget authority to a maximum of five years. Both the scope and duration of such expenditures is subject to the Diet resolution.
●An approved expenditure to be carried over to the following fiscal year.
This arises where the appropriation is not likely to be spent within the fiscal year concerned due to its nature or any reasons after the budget is approved, subject to the Diet resolution (Art. 14ter).
●Future liabilities that could be borne by Treasury (contract authorisation).
This system allows the government to make contracts for projects in which it is necessary to incur a liability within a given fiscal year and make all or part of the outlays in subsequent years. The draft budget must contain an amount for such contracts (Art. 15). The government is required to get advance approval from the Diet for possible future disbursements.
Medium-term macroeconomic framework and fiscal strategy. Although the budget is formulated under the single-year budget principle stipulated by the PFA (Art. 14) and no law requires the presentation of a medium-term budget framework, the government has developed medium-term fiscal planning for providing the basis for economic and fiscal policy decisions in the government. The Ministry of Finance usually releases a “Medium-Term Fiscal Projection” at the end of January when the session in the Diet begins. The Cabinet Office also prepares medium-term scenarios, based on a macroeconomic model. Such projections provide the Diet with information on the medium-term fiscal implications of current budget policies, although it does not place firm ceilings on total or specific categories of main expenditures for the following years.
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New measures versus existing expenditure policies. The PFA does not require a distinction to be made between new measures and existing expenditure programmes of the draft budget. However, in practice, the above-mentioned medium-term projections of the Ministry of Finance are on the basis of unchanged policies,9 whereas those of the Cabinet Office include some policy changes such as structural reforms.
Performance-related information. The Government Policy Evaluations Act 2001 requires line ministries to provide some information on evaluation when they submit their budget request to the Ministry of Finance. Although a lot of information on evaluation is released by each ministry through the year and the overall evaluation report by the Ministry of Public Management is tabled in the Diet, such information is not included in the budget documentation. Nonetheless, the Diet may use performance-related information for making budget decisions.
Tax expenditures, contingent liabilities and fiscal risks. No law requires the government to include a statement of tax expenditures and major fiscal risks in the budget. Nonetheless, the Ministry of Finance usually provides a report on tax expenditures to the Budget Committee of the Diet. The report states how much revenue is reduced by each specific tax expenditure for several years, including the budget year.
Government guarantees are required to be approved by the Diet. Accordingly, detailed information of each contract for government guarantees and indemnities are included in the budget documents. Furthermore, the amounts of obligations and dissolutions (flows) and carryover to the following years (stocks) of each guarantee are reported in the “Statement of Liabilities of the State” and submitted to the Diet with the final annual accounts.
Other information required by law. The PFA requires a considerable amount of supplementary information to accompany the budget (Art. 28), including for corporations under government control (Box 5). In practice, the profit and loss accounts and balance sheets of the 62 largest public enterprises are submitted to the Diet for information.
4.1.8. Budgets of Parliament and other constitutional bodies
Constitutional organisations, notably the two chambers of the Diet, the Supreme Court (and the Board of Audit) prepare their budget estimates differently from line ministries. The PFA provides a special process for these constitutional organisations, giving them the authority to prepare their budget estimates and submit them directly to Cabinet with the Cabinet coordinating all budget proposals (Art. 17).10 The PFA requires the Minister of Finance to make the necessary adjustment on the estimated amount proposed by constitutional organisations subject to the Cabinet decision
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