Reform Trends in OECD Member countries Jón R. Blöndal Deputy Head of Division Budgeting and Management Division Warsaw, 8 February 2005

Agenda Introduce the SBO Reform trends in OECD countries

The SBO

The Working Party of Senior Budget Officials Founded in 1980 “One of the most senior bodies within the OECD.” Forum of senior officials Research and analysis

The SBO Mandate “to improve the effectiveness and efficiency of resource allocation and management in the public sector” “addresses the entire budget cycle, including budget formulation, budget approval (role of the legislature), budget implementation (management, organizational structure), and audit.” “co-operates with non-Members in order to share the results of its work”

SBO Subsidiary Networks Budget Directors (SBO) Parliament Budget Committee Chairmen Financial Management Officials Performance and Results Officials Structure of Government Officials

SBO Regional Networks Budget Directors (SBO) Asia Latin America Africa? MENA? Central & Eastern Europe

Research and Analysis Holistic reviews of individual Member countries’ budgeting systems Comparative analysis of specific budgetary issues across Member countries Comprehensive database of budgeting practices in Member countries

Reform Trends

Key reforms Medium-term expenditure frameworks Economic assumptions Top-down budgeting techniques Relaxing input controls Performance and results Accruals Budget transparency.

Medium-term expenditure frameworks Very few Member countries do this well –A separate track for MTEF and annual budget –New MTEF prepared each year Objectives –Setting of fiscal objectives –Baselines –Reconciling the two Common design features –Same level of detail as budget –Generally 3 years beyond the budget

Medium-term expenditure frameworks (2) Benefits –Enhances credibility –Enables managers to plan better Risks –Can lock in expenditures – hampers annual reallocation –Real vs. nominal –Economic assumptions

Economic Assumptions By far, the most significant fiscal risk Risk management strategies –Full disclosure –Sensitivity analysis –Comparison with private forecasters –Independent boards “Prudency factors” –Canada –The Netherlands

Top-Down Budgeting Techniques One of the most successful reforms in Member countries –Transition is generally difficult (trust is a prerequisite) Benefits –Budget reflects political prioritization –Reduces game-playing –Internal reallocations; less “auto” increases –Information Asymmetry –“Ownership” of Actions

Top-Down Budgeting Techniques (2) “Each minister is his own finance minister” –One minister responsible for each allocation –Inter-ministerial (joint) allocations do not work Level of detail of top-down allocations –One allocation for all activities? –Separate allocation for mandatory and discretionary expenditure? –Separate allocation for operating, transfers and capital expenditures? –Specific programs should not be “ring-fenced”

Relaxing input controls “Deregulation” in the Public Sector –Merging line-items in budgets –Reforming central management controls –Ministries and agencies organizational model Heads of ministry/agency in best position to manage resources effectively & efficiently Strong pre-conditions required –Fully functioning input system already in place –Robust system of internal controls and audit –Professional civil service

Performance and Results “Quid Pro Quo” for Increased Flexibility –New form of accountability, but generally lagging Key Issues –Some activities more easily measured than others –Outcomes versus outputs –“What gets measured, gets managed” (comprehensiveness) –What impact on annual budget allocations? –Information Overload –Lack of interest by ministers and parliamentarians –Reliability and Consistency –Targets

Accruals No consensus in Member countries –Financial reporting versus budgeting –Selected transactions only –The political “matching principle”; impact of parliament Treatment of Unique Assets and Liabilities –Heritage, Military, Infrastructure Assets –Social Insurance Programs Valuation Methodology Accounting Standards-Setting

Budget transparency Three key elements –Timely release of budget data –Effective Role for the Legislature –Effective Role for Civil Society OECD Best Practices for Budget Transparency

Conclusion Budget reforms is a journey, not a destination Too fast vs. too slow

For further information OECD Journal on Budgeting