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Session 3 May 28 afternoon (1)

Session 3 May 28 afternoon (1). Legal framework for Budget preparation and adoption of annual budget law by Parliament in OECD countries . Topics Covered. Legal framework in OECD countries for Budget preparation within the Executive.

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Session 3 May 28 afternoon (1)

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  1. Session 3May 28 afternoon (1) Legal framework for Budget preparation and adoption of annual budget law by Parliament in OECD countries

  2. Topics Covered Legal framework in OECD countries for Budget preparation within the Executive. Submission of draft annual budget law & content of accompanying documents to Parliament. Adoption of annual budget law by Parliament.

  3. Budget preparation within the Executive Budget preparation process and calendar within the Executive—no need to specify in the BFMSLNonetheless, Japan’s and Korea’s BFMSLs include provisions for some steps prior to budget submission to parliament. These steps can be covered by Government or MOF Regulations and the Annual Budget Circular for preparing draft budget for approval at technical and political levels. Key for the BFMSL: Fiscal rules, if considered necessary. Date of submission of draft budget law to Parliament. Format of draft budget law (especially the appropriations structure). Documents accompanying draft annual budget, including the Medium-Term Framework.

  4. What Does the BFMSL cover? Is the “annual budget” a law? OECD practices vary: Yes, the annual budget law covers “all” revenues and spending, e.g., France (2001 Organic Budget Law relates to “State” transactions, which are less than 40% of general government spending). Yes, but the “budget law” is limited to spending: it is an Appropriations Act. Usually just a single Act (e.g., Canada, UK, etc.), although there are12 Appropriations Acts in USA and 23 in the Netherlands. Coverage of Appropriations Acts exclude “mandated expenditures in some countries. These can be very large, e.g., 2/3rds in USA Federal budget.

  5. Fiscal rules—Are they included in law in OECD countries? Fiscal “rules” impose limits on deficits, spending etc. There are varying OECD practices regarding fiscal rules. • Not included in law. E.g., Sweden (target=2% surplus, 2006); UK: (a) Net debt=40% of GDP over cycle; (b) a golden rule. • Qualitative rules in law. E.g., NZ: “reduce debt to a prudent level”, “operating revenues and expenses in balance” • Quantitative rules in (limited-duration) laws.E.g., USA: (i) Balance Budget Act 1985—targeted the deficit; largely a failure; (ii) Budget Enforcement Act 1990. Ceilings on discretionary expenditures. Worked well until a fiscal surplus, then circumvented; BEA allowed to lapse in 2002. • Quantitative rules in “permanent” laws.E.g., Golden rules: Germany’s Constitution; Laws in Spain & Korea.

  6. Date of submission of draft budget to Parliament—OECD countries

  7. Duration of appropriations • Permanent appropriations. Spending for which “permanent” authority is provided by a law other than the annual appropriations act., e.g., Social Security Laws. • Multi-year appropriations. Spending authority provided for a period longer than 12 months. E.g., (1) Biennial budgets – Slovenia and some USA States; (2) specific expenditures e.g., capital projects of USA federal budget. • Annual appropriations that do not impose legally binding upper limits.France’s OBL distinguishes fixed and “evaluated” spending; this provision allows, for example, debt servicing to be “evaluated” and paid irrespective of budget projections. • Annual “fixed” appropriations. Impose legally-binding ceilings on spending. The Constitution and the State Budget Act in Finland and the State Budget Act in Sweden distinguish fixed from flexible or multi-year appropriations. • Borrowing from next year’s appropriations may be allowed in law e.g., Sweden.

  8. Carry-over of annual appropriations • Several OECD countries’ laws allow some carry-over of annual appropriations—usually more liberal provisions are made for capital spending • However, there are usually restrictions, which are often specified in law: OECD Survey 2007

  9. Appropriations for Spending – but at what stage? The BFMSL specifies the basis of the appropriations: • “Budgetary authority”.E.g., USA: “authorises the federal government agencies to incur legally binding obligations and the Treasury Department to make payments for designated purposes”. • Commitment (“obligation”) stage.Binding limits on spending commitments—when the government enters into contractual arrangements requiring payment in the future. E.g., France : appropriations are for commitments, as well as for cash. Parliament adopts two lines for each budget program. • Accrual stage.A few OECD countries, notably Australia, Denmark, NZ, UK adopt budgets on an accrual basis – when the economic transaction occurs, not when payment is made. • Cash stage. Appropriations are for spending at the cash stage (“outlays” or “disbursements”), when payment is actually made (electronically, check issuance).

  10. Appropriations Structure – How detailed? Which classification? This is a particularly important issue for the BFMSL. • Most OECD budgets are by “Ministry” and “Agency”.The budget law is administered by “budget managers – holders of budget authority – in “budget entities”. This is an administrative classification. • Input-based budgets include economic classification of spending. Appropriations are detailed by the nature of spending e.g., salaries, goods and services, transfers, capital spending. Sometimes very detailed e.g., Germany—whose 1969 Budget Principles Law also requires a budget annex with a cross-matrix of economic and functional classifications. • U.S. Code allows Congress to change budget titlesin annual appropriations laws. This contrasts to most countries, where appropriations structure is fixed, often being specified in law. • Output-based budgets are by “program”, “output” outcome.OECD countries with performance-based budget systems adopt annual budgets on this basis. This is the major reason why the OBL in France was changed.

  11. Revenue classification and Revenue Measures • The revenue classification can be specified in law. e.g, in France. However, some countries choose not to specify this in the BFMSL. • Most OECD budgets use a revenue classification close to international standards. e.g., revenue is classified by various types of taxes, nontax revenues • “Finance/Tax Laws” are adopted separately from “Appropriations Acts” in some OECD countries, “the budget” is enacted by two separate laws, e.g., a “finance law” in UK. • Tax Laws or “Codes” may be changed by the annual budget law. E.g., France and its ex-colonies

  12. Net or Gross Appropriations? • In principle, all appropriations should be on a gross basis. This is usually the case in OECD countries. • Net appropriations provide incentives for spending ministries to raise (and spend “own” revenues).A few OECD countries (e.g., UK) appropriate on a net basis, but parliamentary authority is needed for agencies to spend “excess” revenues. • VAT revenues.Revenue estimates in the budget are usually net of reimbursements, requiring appropriations for VAT refunds. • The BFMSL is a vehicle for clarifying the basis of appropriations and any earmarking arrangements.

  13. Documents accompanying the budget—Legal Requirements OECD countries’ BFMSLs vary considerably: Requirements established in considerable detail.E.g., Germany & France. In USA, the documentation requirements are very extensive: the executive must present analytical perspectives, historical tables, and detailed appendices—these are used by the appropriation sub-committees of the legislature to amend proposed spending programs in detail (footnotes are quasi legally binding). Briefly elaborated in the budget system law. Sweden’s Parliament Act and its State Budget Act contain a few requirements for budget documents. Not required by a law.Westminster countries’ governments traditionally decided the content of budget documentation and the form of the estimates. In recent years, fiscal responsibility laws in Australia, UK, and NZ have specified the content of pre-budget and budget reports. Canada has not adopted such a law.

  14. Documents accompanying the budget—Example of France The 2001 Organic Budget Law requires (for 1st Tuesday of October): A report on the economic, social and financial situation,which is an update of the pre-budget report (see below). It contain the main hypotheses and projection methods of the variables underlying the budget projections and the economic and fiscal outlook for at least four years following the budget year, including the revenues, expenditures and fiscal balance of general government. A detailed account of the previous year’s budget execution. Missions and programs are assessed on the basis of performance indicators. Explanatory annexes, including: (1) Detailed evaluation of the impact of all taxes, by category of tax; (2) the impact on revenues, expenditure and the fiscal balance of changes in budget presentation from that of the previous year; (3) details of revenues, current expenditure and capital expenditure; (4) estimates of revenues foregone by tax exemptions; (5) annual performance reports for each program; and (6) details on special accounts permitted by law. Written responses by the government of questions asked by Parliament. A pre-budget report, to be presented in May-June. This is a report on the orientation of fiscal policy– to provide Parliament with an early view of the government’s thinking on the direction of fiscal policy and how France intends to meet its “European commitments” (EU fiscal rules).

  15. Adoption of annual budget law by Parliament—Legal Requirements Issues Timetable for adoption Approval of Medium-Term Framework Budget Amendment Powers (spending) Non-adoption of budget by beginning of year

  16. Timetable for budget adoption The two most important dates for the BFMSL are: Dates of (1) submission of draft budget to parliament; and (2) adoption of budget bill by parliament (and entry into law). Many countries’ laws (or even Constitutions) require adoption of annual budget before beginning of fiscal year. e.g., constitutions of France, Germany, and Korea. Time/processes in Parliament is usually specified in Parliament’s (internal) Regulations France’s 1958 Constitution is one exception, as is USA’s Congressional Budget Act 1974, which elaborate on internal procedures/timing. A few countries’ BFMSLs specify budget adoption procedures e.g., Germany: annual budget laws take precedence over non-budget laws; submission is to both chambers simultaneously (c.f., Bundestag 1st for other laws).

  17. Approval of Medium-Term Framework Laws generally do not require Parliament to approve the MTF. Sweden’s State Budget Act 1996 allows the government to propose expenditure ceilings to Parliament that become binding for the years beyond the budget year. In November, prior to approving the detailed annual budget, the Swedish Parliament approves an aggregate multi-year expenditure ceiling. Spain’s General Budget Act 47/2003 requires the establishment of legally binding ceilings on total expenditures. Most Parliaments review the MTF, which is provided in the documentation accompanying draft annual budget law. In UK, spending reviews are conducted, but this is not a legal requirement, c.f., President Sarkozy’s spending review ongoing in France.

  18. Budget Amendment Powers (spending) OECD Parliament’s can amend government’s proposed budget, but in about 45% there are restrictions imposed in law: Moderately severe. e.g., France and Germany, total expenditures may only be raised (or total revenues reduced) if there are offsetting measures which leave the budget deficit unchanged. Very severe. E.g. Australia, Canada and New Zealand, Parliament must adopt the proposed budget as a whole unless changes are very minor or total expenditures are reduced.Spain’s Constitution requires prior consent of the executive when Parliament’s amendments would result in an increase of appropriations or a decrease in revenues. In Korea, there are also severe constitutional restrictions. “Unrestricted” countries Parliaments may have less formal constraints. E.g., Coalition (or other inter-Party) Agreements of the governments in Denmark. Finland, Germany, Netherlands, Sweden.

  19. Non-adoption of budget Constitutions or Laws in OECD countries usually provide provisional budget authority in a new budget year should the legal or conventional deadlines for budget adoption not be respected e.g., Constitutions of Denmark, Finland, France, Germany, Korea, Spain, Sweden) and Law in Japan The executive is generally authorized to continue to operate government on the basis of the previous year’s budget. However, in some countries e.g., Finland, law allows interim approval on the basis of the government’s proposed budget. Interim legal authority for budgetary in the early months of a new fiscal year is always required in the U.K. This authority is granted without parliamentary discussion. Nearly all OECD countries have legal provisions to prevent a government shutdown. Exception: USA congress may decide not to adopt a “continuing resolution”.

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