Implementation of Budget and Accounting Reforms in France

1. FAD seminar on the implementation of the budget and accounting reforms in France The budgetary aspects of the reforms Xavier Hürstel Deputy director to the Budget Directorate Washington - December 7th 2007

2. 1. Background to the Government budgeting and accounting reform 2. Main goals and aspects of the reform 3. Public management reform 4. Conclusion Outline

3. Government spending has registered uninterrupted increases and has doubled in 20 years. The government wage bill and debt service charges represented 58% of government expenditure in 2002 versus 48% in 1990. In 30 years, French public debt has increased threefold, and twofold in the last 20 years In 20 years, the French public deficit has exceeded 3% of GDP in one year out of two despite criteria imposed by the stability and growth pact 1. The deteriorating situation of French budget  Diminishing room for manoeuvre prompted policy makers to reassess budgetary reform

4. But it is subject to manifest shortfalls and has demonstrated its limitations : • - Difficulties in restraining government spending trends • - Difficulties in measuring and improving productivity of public services • - Unsuccessful attempts to introduce improvements : impossibility of moving beyond the classification of expenses by nature • The 1959 OL has a satisfactory track record: • - 45 annual budgets executed • - Within the framework of an optimized parliamentary procedure • - By permitting the transition to the Economic and Monetary Union 1. Reasons for reforming the 1959 organic law on budget bills

5. Results in other countries demonstrate the critical role of budgetary reform in the reform of the State • The main OECD countries have launched budgetary reforms, • driven by needs largely shared from one country to another : • - Improved efficiency of administration ; • - Quality of services provided to users ; • - Transparency in measuring Government actions. 1. A successful track record of reforms in other countries

6. 36 bills were tabled over 40 years in an attempt to modify the organic law of 2 January 1959 • The 1 August 2001 OL (LOLF) benefited from a favourable political environment and political consensus: • - A parliamentary initiative • - A non-partisan political agreement (transcending traditional political divisions) • - Consensus with the Government 1. A favourable environment and unprecedented political consensus

7. In 1996, the Government agreed to organize, in both houses of Parliament, a budget policy debate in the spring to ensure the active involvement of members of Parliament in drafting the budget bill even before the sending of the budget ceiling letters setting the expense limits of the various ministries. This debate is specifically provided for under article 48 of the LOLF. Since 1999 and the adoption of the euro by France, the Government must notify the European Commission every year of the stability programme conveyed in December. In accordance with article 50 of the LOLF, a “multi-year programme for public finances” must accompany the budget bill. This offers Parliament a means of expressing an opinion indirectly on the content of the stability programme and provides it with greater information. 1. Recent reforms of the budget review process

8. Within the framework of the LOLF, the budget is no longer based on a classification of expenses according to their nature (operating, investment, intervention expenditure etc.) but rather on public policy (security, culture, healthcare, justice, … etc) The Parliament and the citizenry can in this way better evaluate the total resources deployed towards public policies 2. First goal : to produce a clearer, more transparent and complete budget that reflects public policies

9. Major government policies divided into 34 missions • A mission is created at the Government’s initiative and may be pursued at a ministerial or Interministerial level. • It is in turn divided into programmes. • Parliament votes on the budget according to mission. It can modify appropriations between programmes belonging to the same mission. 2. Missions, programmes and actions : a three-tiered Government budget architecture

10. 132 programmes establish the framework defining the implementation of public policy • The programme constitutes the unit of parliamentary authorization. It represents an overall control total and maximum budget line, is subject to the authority of a single ministry, and covers a coherent set of actions. • Its implementation is assigned to a manager, appointed by the minister concerned. This programme manager can modify the budget appropriations by action or nature, exemplifying the principle of fungibility. Budget appropriations in the appendix of the Budget bill constitute non-binding general guidelines. • Each programme is associated with specific objectives and results targets. 2. Missions, programmes and actions : a three-tiered Government budget architecture

11. 605 actions define the purpose of the budget appropriations : • A non-binding programme budget breakdown for information purposes, the action provides greater details on the intended purpose of appropriations. 2. Missions, programmes and actions: a three-tiered Government budget architecture

12. Mission Programme Programme Programme Action Action Action Action 2. The new budgetary architecture Parliamentary discussion and vote Authorization Execution Management

13. National Education and Research • Higher education and university research • Student life • Multidisciplinary scientific research • Research in the field of environmental management and resources • Spatial research • Research strategy and oversight Ecology • Research in risk and pollution Economy, Finance and Industry • Energy research • Industrial research Equipment • Research in transportation, infrastructure and housing Defence • Dual research (civil and military) Culture • Cultural and scientific research Agriculture • Higher education and agricultural research 2. Example : Research and Higher Education Mission

14. Before : 30 chapters Title III - Service resources Personnel - service payroll Retired personnel - pensions and allowances Active and retired personnel -social contributions Departmental equipment in operations Operating subsidies Sundry expenditures Title IV - Public intervention Political and administrative interventions Social programmes - aid and solidarity Title V - Government expenditures Administrative and other facilities Title VI - Government capital grants Cultural and social programmes After : six programmes 2. Example : Justice Administrative jurisdiction The judicial system Prisons and correctional administration Legal protection for minors Access to justice and legal aid Support for judicial policy and related organizations

15. To better monitor the use of public funds, the LOLF provides for a dual presentation of the budget appropriations for each programme: • - By purpose (actions) ; • - By nature of expenditure (personnel, operating, capital, intervention expenditure, … etc). Expenditures are classified by budget titles and, within titles, by category. This breakdown of programme budget appropriations is a non-binding guideline except for personnel expenses, which are limited, by virtue of the principle of asymmetrical fungibility : - A maximum wage bill per programme ; - A maximum total number of employees per ministry. 2. A dual presentation of appropriations by nature and purpose

16. 2. Presentation of appropriations fortified by a matrix budget approach Classification by nature 7 titles and 18 expense categories set by Article 5 The programme: framework for finding specific appropriations Intervention Financial Interest Operating CAPEX Allowances Personnel expenses expenses transaction expenses for public expenses authorities expenses The mission: framework of the budget line vote Programme X Programme X Action n°1 Action 1 Action n°2 Action 2 Action n°3 Mission A Mission A Action 3 Programme Y Programme Y bydestination Action n°1 Action 1 Action n°2 Action 2 Classification Action n°3 Action 3 Programme Z Programme Z Mission B Mission B Action 1 Action n°1 Action n°2 Action 2 A detailed budget for actions presented in the budget bill appendices

17. Annual performances plan (PAP) : - A strategic presentation - A presentation of appropriations (including a summary of prior years) 2. For each programme

18. Zero-based budgeting (“first-Euro justification of appropriations”) Cost analysis of actions Linking of operators to programmes in the 2008 budget draft : 649 operators contribute to 71 different programmes Integration of tax expenditure in the programmes 2. A more transparent and complete budget

19. Annual performances plans (PAP) : components of zero-based budgeting (“first-euro appropriation justification”) 2. For each programme

20. Annual performances plans (PAP) - Cost analysis of actions : Details for comprehensive services and support functions A forecast breakdown of these expenditures by action 2. For each programme

21. Annual performances plans (PAP) : information on operators (when available) 2. For each programme

22. One of the major objectives of the reform of public management is to promote government transition from a resource-based culture to a result-based culture to ensure that every euro spent is more useful and effective. Performance, i.e. the ability to achieve predefined objectives, is the cornerstone of the new budgetary framework. In consequence, parliamentary debates are no longer focused solely on budget appropriations and their justifications, but also on public policy strategies and objectives. 2. Second goal : to produce a performance-based budget

23. 2. The performance dimension of the budget • For each programme there exists a strategy, objectives and quantified performance indicators. • These components are included in annual performance plans (PAP) appended to the Budget bill. • Each indicator is assigned a value for the year of the budget bill and a medium-term target (1-4 years). Under the authority of the minister concerned, the programme manager proceeds on this basis. This manager reports to Parliament on the results upon examination of the budget review act in the annual performance report (RAP).

24. Annual performances plans (PAP) : - Presentation of the programme and different actions - Performance objectives and indicators 2. For each programme

25. 2. The virtuous chain A PROGRAMME A COMMITMENT to achieve results The annual performance plan (PAP) The REPORT on results The annual performance report (RAP) Virtuous chain: corrective actions taken according to results

26. 2. Annual performance reports(RAP) Presented on 1 June N+1 Based on the model of PAP to facilitate readability and comparisons The first year of RAP concerned the 2006 budget act In particular, RAP present : • The execution of expenditures versus appropriations voted • Performance variances (objectives met or not) • Variances from cost analysis Parliament is provided with all useful information before reviewing the 2008 budget draft (fall 2007)

27. 2. Cross-cutting policy documents(DPT) Addressing cross-cutting issues other than through interministerial missions Coordination of objectives and indicators under the management of the lead ministry A lead ministry (ex. Equipment for road safety DPT) Partnership programmes (ex. police, gendarmerie, higher education) Cross-cutting policies A different vector of analysis from that applied to develop ministerial programmes Presentation of interministerial policies to parliament Eleven DPT retained (civil security, overseas territories, road safety, delinquency prevention, fight against global warming, external action, town policy, French policy for development, fight against exclusion, land settlement, youth professional integration)

28. Autonomy • - Globalization of appropriations within a given programme • - The fungibility of appropriations between budget titles and actions, subject to maximum wage bill. • - A maximum ministerial headcount (FTE basis) that can be allocated among the programmes: a non-binding amount per category of employment. • - Fewer ex ante compliance controls (development of internal controls, management control, evaluations, …). • Accountability • - To commit to objectives and report on actions. • - To report on results of activity and expenditures. 2. The LOLF introduces a new management approach based on a combination of autonomy and responsibility

29. Multi-year planning for public finances (central government, regional & local governments and social security funds) : incorporated within the budget act in the form of a report (similar to the Stability and Growth Pact). Parliamentary debate on budget policies (three months before the presentation of the budget): principal options concerning tax policy. Report on all tax and social security contributions and a debate before presenting the general budget bill and the social security budget bill. 2. Modernizing procedures for optimizing public governance

30. 2. Increased powers for Parliament The first parliamentary debate conducted on the basis of LOLF principles was held in fall 2005 (2006 Budget Act). A discussion on the total appropriation budget accompanied by votes on appropriations by mission. Until 2004 • 6% of appropriations were subject to specific votes in the course of the budget debate. • 94% of the expenditures – the “current services appropriation” – were renewed on the basis of a single vote. Starting in 2005 • All appropriations are debated in Parliament and voted on per mission.

31. Expanded parliamentary powers to introduce amendments. Better budget execution controls and more investigative powers. 2. Increased powers for Parliament

32. 2. More transparent, effective budgetary oversight Option of carrying forward appropriations henceforth limited to 3% of the initial appropriations. The earmarking of appropriations early on in the budget bill presentation phase (ex ante visibility of available funds). The rule governing the application of surplus receipts (for 2006, allocated to reduce the budget deficit). With the LOLF, three major innovations have strengthened Government budgetary oversight :

33. The reform of financial controls and the implementation of ministerial budget and accounting controllers meet new needs resulting directly from the LOLF. • With application effective January 1st 2006, the new financial control procedures address a threefold objective: • - To ensure compliance with parliamentary authorizations ; • - To provide information on financial risks ; • - To regulate budgetary execution, when necessary. An approach based on good budgetary management (and no longer ex ante controls). 2. New methods for exercising financial control

34. The absence of performance criteria in the 1959 OL A budget system that was exclusively resource-based: results-based criteria were not included in the budget process. No information provided to Parliament on : The objectives of public action The effectiveness and results of public spending. The LOLF introduces performance measurement criteria in the budgeting process : In exchange for increased autonomy, program managers are responsible for their program steering and meeting their objectives: moving from a resource-based culture to a results-based culture ; Each program has objectives (five on average), indicators (an average of 2 per objective) and targets. 3. The LOLF introduces a performance-based management approach Yesterday Today

35. The choice of measuring performance in providing and managing services: on this basis, indicators must focus on what can be accomplished with specific resources. • Objectives and indicators on which the programme manager can exercise little influence must be avoided. • A methodological guide was produced to describe performance measurement . • An approach shared with parliament, the Audit Court and the Interministerial Programme Audit Committee. 3. The French approach to a performance-based system

36. Point of view Categories of objectives Examples of objectives Examples of indicators % of graduates finding a job within six months of obtaining their diploma Socioeconomic effectiveness Improve the professional placement of young graduates Citizen User Service quality Accelerate legal decisions Average duration of court decisions; average length of time of pending judgments Taxpayer Management efficiency Cost per taxpayer Reduce the cost of managing taxes 3. The performance-based approach in France • A methodological guide was produced to describe performance measurement: • An approach shared with Parliament, the Audit Court and the Interministerial Program Audit Committee. An approach based on a benchmark of the best international practices. • Objectives seeking to improve the effectiveness of spending (“spend better”) measured by indicators (target results of 1-5 years) and identifying action levers on which the program manager can exercise influence Three performance analysis criteria: a necessary equilibrium between the point of views

37. Resources Activities Products(*) Results(**) Effects(**) Benefit for USERS: Service quality Benefit for CITIZENS: Socioeconomic efficiency Benefit for TAXPAYERS: Effective management of resources General objectives: Socioeconomic impact dependent on several factors, for example the unemployment rate (*) : Goods produced, services delivered (**) : Modification of the economic, social, environmental, cultural, healthcare reality The results are attributable to a programme manager, not the effects 3. Performance objectives occupy a specific place in the production chain

38. Exercise an impact on policy formulation • Modification of the system, beneficiaries, conditions of access, duration • Exercise influence on procedures for implementing the system by the administration • Ability to make a selection between different policy mechanisms, organization method adopted to implement the policy, implementation process, resource allocation choices 3. Defining performance objectives = an approach seeking to identify action levers

39. 3. Definition of performance objectives is based on certain principles

40. 3. Refinement of approach to performance measurement • Reducing the number of objectives to become more strategic : • In Budget Act 2008, 621 objectives, and 1276 indicators • Increased focus on results : • Indicators increasingly measure results, not inputs • Objectives that can be attributed : • not too distant in relation to the program • Increased focus on efficiency : • Indicators increasingly measure results, not inputs

41. 3. The virtuous chain of performance management provided for by the 2001 OL Annual Performance Plan Annual Performance Review Initial assessment Analysis of results Performance-based management Define/redefine objectives, indicators, targets, action levers Implementation Results Formalization of objectives in the APP at the national level and in the POB at the operational level

42. Political decisions are more global, due to : zero based budget : discussions between Budget Directorate and spending ministries are focused on their outstanding disagreements political decisions are taken by mission or programme (allow more fungibility) Then, within that global frame, Budget Directorate and spending ministries discuss on details the budget preparation is improved Thepay and workforce controls (a maximum wage bill per programme and a maximum number of employees per ministry) makes staff reducing easier (example : 5,000 job cuts forecasted in the 2006 budget and 10,000 carried out) Political decisions are owned by each ministry(budgetary decisions for 2008 budget draft taken by a Government seminar in July 2007) Conclusion Why LOLF is a better means than the 1959 OL to re-establish public finances balance :

43. Why move to multi-annual budgeting? • Weaknesses of the current, annual system • Structural reformsare difficult to reconcile with an annual system and there is no guarantee they will be implemented • Focus on in-year control leads to micromanagement of spending • A time-consuming approach which leaves little time for strategic analysis of expenditure • Clear advantages of multi-year approach • Locks-in a trajectory for the public finances : a prior political commitment to a framework for future spending decisions • Provides visibility to managers : in particular to facilitate long-term structural reforms • International experience is encouraging : UK, Netherlands, Sweden operating multi-annual systems for over a decade. Ceilings have generally been observed with knock-on benefits for Governments’ fiscal credibility

44. Multi-year budgeting: The French approach • Clear medium-term fiscal objectives • Reduce debt-GDP ratio from 64% in 2006 to below 60 % by 2012 • Restore balance by 2012 at the latest compared to 2.4% in 2006 • Implies a halving of real growth rate of overall public expenditure from 2.25% to 1.1% per year over the next 5 years and a maximum rate of growth for central government to the level of inflation • Multi-year budgets for the whole central Government budget (c. 35% of total public expenditure) • Should cover all the budget (better fiscal discipline) • 3 year allocations with the first exercise covering 2009, 2010 and 2011– might be reviewed every 2 years (in 2010) • A comprehensive review of public policies : RGPP • Aims to improve the effectiveness of public policiesin meeting citizens’ needs through a 3-year programme of modernisation and structural reform • 21 audit teams made up of govt and outside experts looking at range of ministerial and cross-govt issues reporting in April 2008 • Within thecontext of ahigh-level commitment to replace only one of every two retiring public employees

45. www.performance-publique.gouv.fr