Objectives of Fiscal Responsibility Laws _FRLs_ - PFM blog

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					    Objectives of Fiscal
 Responsibility Laws (FRLs)
and Prerequisites for Success

           Ian Lienert
          April 1, 2010
   Three Main Objectives of FRLs

1. Fiscal stability (long-term debt
  sustainability and short-term fiscal stability and fiscal
2. Transparency (of the governments fiscal
  policy intentions, as well as reports on budget
3.Accountability (collective responsibility
  of the government to parliament; not individual
  accountability within the government)
              1. Fiscal Stability—1
1. Medium-term macro-fiscal stability and
   annual budget objectives or targets. A
   FRL may require:
a. Objectives for key fiscal aggregates (e.g., “reduce
   debt to a prudent level”).
b. “Fiscal rules” – numerical targets.
The most common fiscal objectives/rules pertain
  to gross debt, the fiscal balance (perhaps
  defined “over the cycle”), and aggregate
              1. Fiscal Stability—2
2. Reasonable stability in tax policies (tax/duty rates
   and tax bases).

3. Long-term fiscal sustainability and debt analysis.
   Government debt and fiscal balances interact:
   medium- and long-term debt sustainability analysis
   and scenarios are needed.

4. Need procedures for parliamentary “buy-in”.
   Clarification of parliament’s budget amendment
   powers; executive’s power to not fully spend
   approved budget; contingency reserves (usually not
   part of a FRL, but other laws).
2. Transparency: of future Fiscal Policy—1

The FRL may require in annual budget documents:
1. A statement of fiscal policy strategy or
  intentions over a medium-term period. This
  would be supported by:
  Baseline medium-term fiscal projections, based on
   unchanged policies, which identifies available fiscal
   space for new policies.
  The impact in the annual budget (and in medium
   term) of new revenue and expenditure policies to be
   adopted in the upcoming budget .
2. Transparency: of future Fiscal Policy—2
The FRL may also require the following in annual
   budget documents:
2. An annual budget policy strategy (BPS) explaining
   how the BPS helps to achieve the MT fiscal policy
3. Explanations of why the government—even a newly
   elected one—is deviating from the previous
   (government’s) fiscal intentions.
4. Long-term scenarios of fiscal balances e.g., for the
   impact of changing demographics or climate change.
5. A statement of the main fiscal risks as part of
   annual budget documentation.
3. Accountability to Parliament and Public
 (transparency of recent past fiscal developments)
 By the executive:
 • In-year fiscal outcomes relative to budgets:
 • Six-monthly formal review of budget outcomes, which may
   lead to a pre-budget debate in Parliament.
 • Annual budget performance reports and financial
 • Report on how the government has followed up on the
   external auditor’s report
 External Audit:
 • Annual report to parliament on budget performance.
   Includes certification of annual accounts (financial
   statements) by the external auditor.
             FRLs from around the world
          Country          Main Objectives      Secondary Aims       Success?

1   Australia, 1998                              Fiscal Stability:     Yes
2   New Zealand, 1994           Fiscal          lower deficits or      Yes
3   United Kingdom, 1998    Transparency         run surpluses;        Yes
                                                   reduce debt
4  Hungary, 2008                Fiscal stability and fiscal             ??
5  Brazil, 2000                        transparency                    Yes
6  Argentina, 1999, 2001,                                              No
7 Colombia, 1997, 2001,   Fiscal stability   Transparency              No
   2003                    (targets for
8 Ecuador , 2002, 2005 spending, deficits                              No
9 Panama, 2002            and/or debt)     Focus on targets.           No
10 India, Pakistan, Sri                      Transparency             Mixed
   Lanka, 2003, 05
  Prerequisites for Success of a
  Fiscal Responsibility Law (FRL)

1. Get “Basics” Right First
2. Examine what can be done
   without a FRL
3. Seek buy-in from parliament and
   the public
        1. Get “Basics” Right First
• Good annual budget preparation (realistic
 projections for macro variables, budget revenues; top-down
 spending ceilings; costing of new policies; clear presentation
 of budget: objectives, targets, priorities, risks……)
• Controlled budget execution (firm spending
 controls; adequate internal audit; no payment arrears)
• Strong cash management (central control over
 government bank accounts; cash flow forecasts).
• Timely and accurate accounts (monthly/quarterly
 fiscal reports; audited annual accounts).
• External oversight and evaluation (by external
 auditor, parliamentary committees, anti-corruption agency)
2. Examine what can be done without a
By the executive:
• Improve budget formulation & presentation,
  execution, cash management, fiscal reporting and
• Practice fiscal discipline; don’t tolerate “creative
  accounting”; sanction misuse of funds.
• Modify Financial Regulations or propose
  amendments to the Public Finance (System) Law.
By parliament :
• Amend its internal regulations to improve budget
  adoption procedures and its internal organization
3. Obtain buy-in by politicians and the public
International experience with FRLs: the laws themselves do
   not buy credibility. Buy-in is needed at three levels:
1. Within the Government:
 Is a top-down spending process “bought” by the
  President, other Ministers of the Cabinet?
2. At Parliament:
 What procedures are in place to constrain parliament’s
  understandable constituency concerns?
 What happens when shortfalls in revenue or grant
  support occur? Should debt rise to finance shortfalls?
3. With the Public and Civil Society:
 Public hearings/consultations increase chances of FRL’s
  successful adoption and implementation.

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