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

Objectives of Fiscal Responsibility Laws (FRLs ) and Prerequisites for Success. Ian Lienert April 1, 2010. Three Main Objectives of FRLs. Fiscal stability (long-term debt sustainability and short-term fiscal stability and fiscal rules)

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

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  1. Objectives of Fiscal Responsibility Laws (FRLs) and Prerequisites for Success Ian Lienert April 1, 2010

  2. Three Main Objectives of FRLs • Fiscal stability(long-term debt sustainability and short-term fiscal stability and fiscal rules) • Transparency(of the governments fiscal policy intentions, as well as reports on budget execution) • Accountability (collective responsibility of the government to parliament; not individual accountability within the government)

  3. 1. Fiscal Stability—1 1. Medium-term macro-fiscal stability and annual budget objectives or targets. A FRL may require: • Objectives for key fiscal aggregates (e.g., “reduce debt to a prudent level”). • “Fiscal rules” – numerical targets. The most common fiscal objectives/rules pertain to gross debt, the fiscal balance (perhaps defined “over the cycle”), and aggregate expenditures

  4. 1. Fiscal Stability—2 • Reasonable stability in tax policies (tax/duty rates and tax bases). • Long-term fiscal sustainability and debt analysis. Government debt and fiscal balances interact: medium- and long-term debt sustainability analysis and scenarios are needed. • 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).

  5. 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 .

  6. 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 objectives. 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 balancese.g., for the impact of changing demographics or climate change. 5. A statement of the main fiscal risks as part of annual budget documentation.

  7. 3. Accountability to Parliament and Public (transparency of recent past fiscal developments) By the executive: • In-year fiscal outcomes relative to budgets: monthly/quarterly. • Six-monthly formal review of budget outcomes, which may lead to a pre-budget debate in Parliament. • Annual budget performance reports and financial statements. • 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.

  8. FRLs from around the world

  9. Prerequisites for Success of a Fiscal Responsibility Law (FRL) Messages Get “Basics” Right First Examine what can be done without a FRL Seek buy-in from parliament and the public

  10. 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)

  11. 2. Examine what can be done without a FRL? By the executive: • Improve budget formulation & presentation, execution, cash management, fiscal reporting and accounting. • 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 arrangements.

  12. 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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