Public Finance Reform in Slovakia Roland Clarke World Bank Ministry of Finance Slovak Republic September 6, 2005

Overview Objectives of Public Expenditure Management systems Rationale and difficulties of Reform Institutional vs. technical reform Achievements and challenges in Slovakia Conclusion: the elements of success

Three Objectives of Public Expenditure Management Systems Macrofiscal discipline and stability Avoid public finance crises Support economic growth and stability Entry to EMU: adoption of Euro Strategic allocation of resources Match government policy with programs, objectives Resources flow to programs, aligned with budget priorities Information flows for informed decision making Technical efficiency Getting the most from each Koruna spent Improving service delivery

Why were reforms necessary? Policy Development (particularly in area of social welfare) unrelated to resources Short term focus (annual budgets) Emphasis on controlling details not on policies No incentives in the system for managers to be efficient Previous systems were unsustainable

Experience of Reforms: technical and institutional WB has supported budget reforms in many countries of Eastern Europe and Central Asia Sometimes slow or not very successful because of: Lack of ownership Belief that reform is technical rather than institutional and political Lack of institutional basis and lack of capacity Impatience: changing institutions takes time

Changes in budget roles Before Reform Ministry of Finance Issues broad guidance at start of process, with cost increases Cutting spending requests across the board Heavy involvement in line item totals No idea of out-year implications Line Ministries Develop requests in vacuum Request is wish list; incentive to ask for more, hoping that after cuts will have enough Little discretion to allocate funds in own budget Little incentive to focus on current programs, reallocate Minimal policy content in budget request Low likelihood of getting budget levels during year After Reform Ministry of Finance I ssues broad guidance with multi-year sector ceilings at start of process (cabinet approved) Cuts spending requests only if above ceiling, leave most details to line ministry (though with recommendations) Little involvement in setting line item totals, Clearer picture of future implications of current choices Focus more on policy and objectives, performance assessments Line Ministries Clear resource framework for planning Request must prioritize between current and new programs Wide discretion to allocate funds in own budget Potential for larger policy content in budget request Higher likelihood of receiving budget levels during year

Achievements in Slovakia so far Firm macroeconomic basis to the budget – not just good models but new institutions (external review, restructuring of FPI) more important Medium term approach: policies costed over 3 years. Institutional changes lock in out year estimates of budget. Reorganised MOF: focus on policy (fiscal policy, expenditure priorities, debt policy) and not processes and technical details Establishment of Treasury and Debt and Liquidity Management Agency Sectoral ministries becoming responsible for outputs and outcomes (process is slower as it requires institutional and organisational changes within all agencies) Overall increased transparency and accountability in the whole process

Challenges for the future Linking policy making to budgeting in all chapters Stronger mechanisms for prioritization at the centre of Government Deepening of the results oriented (programatic) approach Internal reorganisation of chapters for to achieve the above Development of accounting reform

Slovakia’s achievements in context Still some way to go to meet OECD best practice… ….but now among the most advanced of the EU accession countries. One of the most rapid reform processes (starting 1998 and accelerating in 2002) Important to maintain momentum

Conclusion: conditions for success Strong leadership and political commitment Emphasis on institutional as well as technical aspects of reforms Recognition that the process is slow Effective communication of the rationale for the reforms and their benefits