Institutional Checks and Balances and Budget Process

1. Institutional Checks and Balances and Budget Process Faculty of Economics and Political Sciences Cairo University

2. Risks of hierarchical budgetary arrangements There are nonetheless important risks associated with hierarchical budgetary arrangements. Five main risks can be identified. First, ‘hierarchical’ budget institutions tend to allow for excessive executive discretion in public budgeting, especially in presidential systems, and thus impede the consolidation of institutions of accountability in governmental financial management.

3. Risks of hierarchical budgetary arrangements There are nonetheless important risks associated with hierarchical budgetary arrangements. Five main risks can be identified. Second, unconstrained and unchecked executive discretion in public budgeting tends to undermine the credibility of the budget as an instrument of policy-making and strategic planning.

4. Risks of hierarchical budgetary arrangements There are nonetheless important risks associated with hierarchical budgetary arrangements. Five main risks can be identified. Third, centralized and insulated budgetary systems tend to be less transparent. Lack of transparency makes fiscal discipline and expenditure control harder to achieve, in particular considering the quasi-monopoly of the executive on public financial information.

5. Risks of hierarchical budgetary arrangements There are nonetheless important risks associated with hierarchical budgetary arrangements. Five main risks can be identified. Fourth, while it allows for greater flexibility and decisiveness, especially in times of economic crises, executive discretion in public budgeting tends to undermine the resoluteness of fiscal policy and budgetary management. Parliamentary involvement in the budget process helps strengthen both the credibility and the legitimacy of the budget and ensure that budget priorities adequately reflect policy priorities.

6. Risks of hierarchical budgetary arrangements There are nonetheless important risks associated with hierarchical budgetary arrangements. Five main risks can be identified. Fifth, ‘hierarchical’ budget institutions tend to overemphasize aggregate fiscal discipline over the other goals of public budgeting, constraining the ability of governments to pursue counter-cyclical fiscal policies in bad times.

7. The role of parliaments in public budgeting The role of parliaments in public budgeting varies along the four main phases of the budget cycle. • The four main phases of the budget process are (i) its formulation, (ii) its adoption, (iii) its execution, and (iv) its control. • While parliaments are usually devoid of powers in the formulation of the budget, which is the exclusive prerogative of the executive, they are entrusted with its adoption for the budget to become law. • Henceforth, their power to influence the budget largely rests on the scope of their amendment powers and the executive’s agenda-setting and veto powers. Similarly, while the executive is responsible for implementing the budget, parliaments are tasked with overseeing its execution.

8. Advantages of Parliament’s contribution in budget process. • Parliaments have a key role to play to improve budget transparency. The problem of lack of transparency can be dealt with either by setting standards to be followed, such as procedural fiscal rules and hard budget constraints, or ‘to have independent agencies which provide a check on the accuracy of the budget. In particular general audit offices and legislative budget institutions. • By increasing the scrutiny of the budget, legislative oversight help redress the information asymmetries between the state and society, opening up the budget to public debate and social control. • Legislative scrutiny of the budget promotes greater debate on the facts and analysis underlying policy choices and budgetary allocations.

9. Advantages of Parliament’s contribution in budget process. • Legislative oversight also helps enforce political accountability. Together with other external oversight agencies such as general audit offices, parliaments help ensure that the government is held to account for the manner in which it administers public finances. • Parliaments help enforce government accountability along the different phases of the budget cycle. • parliaments are a key part of broader systems of fiscal control. Therefore, strengthening the institutions of legislative budget oversight contributes to foster the three main dimensions of accountability: (i) Ex ante accountability, ensuring that budget allocations adequately reflect policy priorities; (ii) Concurrent accountability, improving the oversight of the execution of the budget by the executive; and (iii) Ex post accountability, holding government to account for performance and results.

10. institutional arrangements to sustain Fiscal discipline There are three main institutional arrangements that are more conducive to fiscal discipline: • laws which establish ex ante constraints on deficits; • top bottom or hierarchical procedural rules; and • transparent procedures.

11. Institutional arrangements to sustain Fiscal discipline • Procedures which include constraints on the deficit and are more hierarchical and transparent lead to lower primary deficits.’ • Such hierarchical institutions limit the capacity of the legislature to amend the budget proposed by the executive. • For example, the executive veto on legislative amendment proposals tends to neutralize, or at least diminish the amendment powers of parliament. • Other institutional reforms are also believed to promote fiscal discipline, such as two stage budgeting with prior setting of deficit targets, restrictions on amendments of spending proposals, and constitutional limits on deficit spending, debt ceilings or fiscal targets.

12. Four sets of variables condition the ability of parliaments to effectively engage with the budget process: • whether parliament is legally empowered to intervene in budgeting; • whether Parliamentis endowed with the required technical capacities, • whether it possesses the necessary political incentives, and • Whether the Parliaments has Adequate information concerning the activities financed with public funds

13. The budget approval process is influenced by the distribution of budgetary powers between the executive and parliament. Five key institutional variables frame executive-legislative relations in the budget approval stage: (i) the amendment powers of parliament, (ii) the veto powers of the president (package and line item veto powers), (iii) the override powers of parliament; (iv) the location of the reversion point, and (v) legislative process and structures, which include internal rules and legislative capacities, and especially the timing and sequencing of the budgetary process.

14. Fiscal Transparency : Definition, principles, benefits, and Challenges Definition of Fiscal Transparency “Fiscal transparency is defined … as openness toward the public at large about government structure and functions, fiscal policy intentions, public sector accounts, and projections. It involves ready access to reliable, comprehensive, timely, understandable, and inter-nationally comparable information on government activities … so that the electorate and financial markets can accurately assess the government’s financial position and the true costs and benefits of government activities, including their present and future economic and social implications.”

15. The basic Four principles of Fiscal Transparency I. Clarity of Roles and Responsibilities • The government sector should be distinguished from the rest of the public sector and from the rest of the economy, and policy and management roles within the public sector should be clear and publicly disclosed. • There should be a clear and open legal, regulatory, and administrative framework for fiscal management.

16. The basic Four principles of Fiscal Transparency II. Open Budget Processes • Budget preparation should follow an established timetable and be guided by well-defined macroeconomic and fiscal policy objectives. • There should be clear procedures for budget execution, monitoring, and reporting.

17. The basic Four principles of Fiscal Transparency III. Public Availability of Information • The public should be provided with comprehensive information on past, current, and projected fiscal activity and on major fiscal risks. • Fiscal information should be presented in a way that facilitates policy analysis and promotes accountability. • A commitment should be made to the timely publication of fiscal information.

18. The basic Four principles of Fiscal Transparency IV. Assurances of Integrity • Fiscal data should meet accepted data quality standards. • Fiscal activities should be subject to effective internal oversight and safeguards. • Fiscal information should be externally scrutinized.

19. Fiscal Transparency and Budgeting : Basic Concepts Economic classification: The GFSM 2001 refers specifically to a “classification of expenditure by the nature of transaction, that is, whether requited or unrequited, for current or capital purposes, kind of goods or services obtained, and sector or subsector receiving transactions”. used to identify the nature and economic effects of government operations. Though not formally described as “economic” in the GFSM 2001, the classification of revenue into current (tax and non-tax), capital, and grants serves a similar purpose. Functional classification: the international standard for classifying expenditures of government according to broad purposes for which transactions are undertaken. It is generally used to measure the allocation of resources by government for the promotion of various activities and objectives (such as health, education, and transportation and communication).

20. Fiscal Transparency and Budgeting : Basic Concepts Extra budgetary activities: The term generally refers to sets of government transactions that are not included in the annual budget presentation. These may not be subject to the same level of scrutiny or accounting standards as the annual budget. A wide variety of extra budgetary arrangements are used, including extra budgetary funds (such as social security funds) set up under separate legislation that may or may not have a separate annual appropriation. Other examples include commodity funds that use proceeds of commodity aid, specific kinds of revenue for earmarked specific purposes not included in the annual budget, or any other use of public funds that is not appropriated. Contingent liabilities: Obligations that have been entered into, but whose timing and amount are contingent on the occurrence of some uncertain future event. They are therefore not yet liabilities, and may never be if the specific contingency does not materialize. Quasi- fiscal activities (QFAs): Activities undertaken by financial and nonfinancial public corporations, and sometimes by the private sector, at the direction of the government, that are fiscal in character—that is, in principle, they can be duplicated by specific fiscal measures, such as taxes, subsidies, or other direct expenditures, even though precise quantification can in some cases be very difficult. Examples include subsidized bank credit and noncommercial public services provided by a public corporation.

21. Fiscal Transparency and Budgeting : Basic Concepts Line- item budgeting: A general term used to describe a relatively unsystematic budgetary chart of accounts. In addition to standard votes or “lines” for items such as “salaries and wages,” separate lines for new requirements are introduced as they arise, thus giving rise to lengthy, ad hoc forms for appropriating and accounting for spending. Medium- term budget framework (MTBF): A framework for integrating fiscal policy and budgeting over the medium term by linking a system of aggregate fiscal forecasting to a disciplined process of maintaining detailed medium-term budget estimates by ministries reflecting existing government policies. Forward estimates of expenditures become the basis of budget negotiations in the years following the budget, and the forward estimates are reconciled with final outcomes in fiscal outcome reports.

22. Fiscal Transparency and Budgeting : Basic Concepts Program budgeting/program classification: “Programs” are groupings of government activities in relation to specific government objectives. Program classification applies this principle across all government activities. Program budgeting attempts to apply cost-benefit analysis to the allocation decision, allocate expenditures by program, and assess results of programs in relation to objectives. A full system of program budgeting (or subsequent proposals such as zero-based budgeting) has not been successfully realized in any country, in large part because of the high information and complex management requirements of such systems. Appropriations: An authority under a law given by the legislature to the executive to spend public funds for a specified purpose. Annual appropriations are made through annual budget laws. Supplementary budgets/appropriations are sometimes granted subsequent to the annual law if the annual appropriation is insufficient to meet the purpose. “Standing appropriation” is sometimes used for authority extending beyond a single budget year under separate.

23. Fiscal Transparency and Budgeting : Basic Concepts Tax arrears: Taxes due to government but not paid. Other arrears in receipts could arise from nonpayment of loans by government or nonpayment of bills for government services. Tax expenditures: Concessions or exemptions from a “normal” tax structure that reduce government revenue collection and that, because the government policy objectives could be achieved alternatively through a subsidy or other direct outlays, are regarded as equivalent to a budget expenditure. Precise definition and estimation of tax expenditures thus require definition of the normal base as well as determination of the most appropriate way of assessing costs . Earmarked taxes: Taxes raised and allocated to specific expenditure programs, often through an extra budgetary fund. Corruption (political): The misuse by government or political officials of their governmental powers and resources for illegitimate, usually secret, private gains.