Public Financial Management and its Emerging Architecture Teresa Curristine, Fiscal Affairs Department, IMF

1. Public Financial Management and its Emerging ArchitectureTeresa Curristine, Fiscal Affairs Department, IMF The Exchange Public Financial Management Forum, Abu Dhabi 13-15 May 2013

2. Overview of Presentation 1) What is Public Financial Management? 2) The purpose of this book 3) Trends in key PFM innovations 4) Conceptual framework and levers of reform 5) Individual innovations: Issues challenges and lessons learned- Fiscal Rules, Medium Term Budget Frameworks (MTBF), Fiscal councils, Performance budgeting, 6) Key lessons from the crisis 7) General conclusions and lessons for reforming PFM systems

3. 1) What is Public Financial Management? • In its traditional sense PFM is concerned with established phases of budgeting—formulation, approval, and execution. • Broadened its focus to all aspects of managing public resources • It is an “umbrella” definition, covering a set of systems aimed at producing information, processes, and rules that support fiscal policymaking and provide instruments for its implementation • Sound PFM is about having information, procedures, and rules in place which incentivize and regulate the behavior of politicians and public servants so that they achieve the key PFM objectives. • Key objectives: • maintaining a sustainable fiscal position • effective allocation of resources • efficient delivery of public goods and services

4. 2) Purpose of book • Main motivation: importance of PFM especially now “many governments are now struggling with restoring sustainable public finances: the way governments manage their budget today will have profound economic impact in the years ahead. The crisis highlighted the importance of sound public financial management for generating well-designed fiscal policies and ensuring they are implemented effectively” • Main objectives: • Take stock of innovations developed and adopted in a growing number of countries over the last two decades. • Look at public financial management as an integrated framework in which the elements mutually reinforce each other. • Draw some lessons , particularly in light of recent financial crisis to help reformers has they move ahead .

5. 3) Key Innovations • Fiscal responsibility legislation and fiscal rules: Countries with fiscal rules has risen from 5 in 1990 to 76 in 2012. • Medium Term Budget Frameworks (MTBF): the number of countries with MTBF has increased from fewer than 20 in 1990 to more than 130 in 2008. • Fiscal Councils: from about 6 in 1990 to around 28 in 2013. • Fiscal Reporting: countries reporting at least a financial balance sheet to the IMF has increased from 21 in 2004 to 41 in 2011. • Performance information: since 2007, 80 % percent of OECD countries produce performance information, and in 2011 about 2/3 have a performance budgeting framework. • Since 1999, 111 countries have undergone a “Fiscal Transparency ROSC,” and by the end of 2011, 126 countries had undertaken a PEFA diagnostic assessment.

6. 4) Comprehensive Conceptual Framework • PFM has three types of instruments - information, processes and rules- for changing the behavior of politicians and public servants and outcomes The three instruments form a logical sequence • Information is the essential first step. It rests on the expectation that providing better information to policy makers will produce better outcomes • Processes offer inducements for policymakers to make prudent, effective decisions • Rules prescribe or proscribe certain actions by policymakers or outcomes Each Instrument has its limitations • Information: essential but can be costly, and become an end by itself, and stir conflict • Processes: innovations tend to be dominated by routine and bureaucratic inertia • Rules: can be procedural and/or restrictive

7. 5) The number of countries with fiscal rules rose from 5 in 1990 to 76 in 2012 most countries have more than one rule

8. 5) Fiscal Rules: Challenges and lessons learned Issues and Challenges • Rigidity in adjusting to shock , lack of flexibility • Poor enforcement mechanisms -failure of countries to save in good times. • Incentives to bypass rules and engage in creative accounting • Lack of supporting institutions • During crisis many rules suspended Lessons Learned • Flexibility to adopt to changing economic circumstances • Importance of design features – escape clauses • Need for integrated framework and supporting budgetary institutions • Adopt to countries capacity and specific circumstances • Importance of political commitment • New generation of rules post-crisis, explicitly combine sustainability objectives with more flexibility to accommodate shocks and set budgetary targets in cyclically adjusted terms. But more complex and require greater technical capacity

9. 5) MTBF: Issues and Challenges and Lessons learned Issues and Challenges • Some countries treat MTBF as separate rather than integrated part of budget process • Some countries with indicative frameworks treat out-year ceilings as floors and make overly optimistic projections. • During crisis, difficult to keep to this year’s budget totals let alone future years Lessons Learned • There is no single MTBF model. In deciding on model countries face trade offs between objectives, coverage , specify and certainty • Design features are key for success and need to be adjusted to country circumstances • Binding Frameworks more effective in promoting fiscal discipline but require higher capacity. • Preconditions: need creditable annual budget process, based on prudent macroeconomic assumptions, guided by transparent fiscal objectives, and top down budgeting. • Enforcing credibility of MTBF requires regular updates of medium term projections, adequate safety margins, and firm control over multi-year commitments . • During crisis countries with advanced MTBF used it to show markets how it will implement plans to achieve sustainable fiscal targets in medium term.

10. f 5) The number of countries with fiscal councils grew from 6 in 1990 to 28 in 2013.. 1 3 6 7 20

11. 5) Fiscal Councils: Challenges and Lessons Learned Issues and Challenges • Obtaining and maintaining Independence- walking the independence tightrope • Influencing fiscal policy-and promoting fiscal discipline - Is information enough? • Limited resources Lessons Learned • Wide diversity among councils, adopted to country circumstances • Importance of not just legal but also operational independence • Works better with fiscal rules, helps monitor rules. • Councils need an active media strategy and time to build up their credibility and reputation. • Political support is important as is political and public support for sound public finances • Well defined mandate and technically qualified staff. • Councils seen as a solution but important not to oversell them still too early to disentangle impact on fiscal outcomes

12. Percentage of spending ministries that use performance information in budget negotiations 5) Trends in Performance Budgeting and Management How spending ministries and ministries of finance use performance information

13. 5) Performance Budgeting: Challenges and Lessons Learned Challenges • Improving quality of Performance Information(PI) and receiving relevant information in timely manner. • Aligning incentives to promote performance improvements. • Engaging Politicians to use PI in decision making. • Changing culture and behavior of key actors to focus on results. • Mixed use of PI during the crisis depends on individual countries circumstances move towards spending reviews. Lessons Learned • Importance of leadership at a political and institutional level • Importance of ownership and engaging those in the front line delivering services. • Evolving and adopting performance systems as political and economic circumstances change. • Changing and evolving incentive structures to avoid gaming and performance reforms becoming about compliance.

14. 6) Key Lessons from the Recent Crisis • Pre –crisis innovations not yield excepted results- governments did not save in good times. • Many innovations not well entrenched or fully implemented • Innovations introduced in a piecemeal fashion without understanding links between different reform initiatives and need for supporting reforms. • Rigid systems and rules broke down • Controls insufficiently tight – basics not in place • Information insufficient—Quality, Coverage, Timeliness- government unaware of the true state of public finances • Transparency and Accountability at Risk – governments poor understanding of fiscal risks

15. 7) General Conclusions and Lessons • Modern PFM is a set of increasingly complex processes, rules, and systems, intrinsically linked to one another. • Importance of viewing PFM as an integrated framework . • Context matters and adjusting reforms to individual country circumstances. • Reform prospects influenced by: sequencing of reforms; the impact of context and differing institutional and technical capacities and political economy factors- especially in developing countries where reform architecture is critical. • Reliable, timely, comprehensive information is essential but it may lead to information overload and in some cases not sufficient to change behavior

16. 7) General Conclusions and Lessons • The relative emphasis of PFM has shifted toward fiscal sustainability vis-à-vis efficiency and effectiveness. • Thus, the focus on medium/long term and fiscal risks. • The architectural design identifies constituent elements and provide general considerations. Going beyond that would be pretending to have discovered a magic formula that does not and cannot exist.

17. Thank you

18. Reviews for Public Financial Management and Its Emerging Architecture • This impressive book offers insightful perspectives on the challenges of managing public money and will inspire and inform reform ideas across the globe for years to come. Academics and practitioners alike should keep a copy close at hand. I certainly will. • Matt Andrews • Associate Professor of Public Policy, • Kennedy School of Government, Harvard University ...This [book] couldn‘t come at a better time, as leaders and analysts alike will need better guideposts to help nations achieve more sustainable and rationalized public finances in the tumultuous years to come. Paul L. Posner Director, Public Administration Program, George Mason University ...This timely publication provides an impressive overview of country practices, reforms, and innovations in the area of public financial management and is a rich source for practitioners in public administrations as well as for the academic community and the interested public. Gerhard Steger Director General of the Budget, Ministry of Finance, and Chair, OECD Working Party of Senior Budget Officials This much-needed book seeks to avoid simplistic prescription and fosters awareness of the coherence and context of budget institutions. It is an indispensable guide for postcrisis fiscal designers. Joachim Wehner Associate Professor of Public Policy, London School of Economics and Political Science