Government Budgeting and Expenditure Management

Principles and International Practice

Salvatore Schiavo-Campo

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317293316
• Edition: 1
• Topic: Economía
• Subtopic: Política económica

The government budget should be the financial mirror of society's choices. Yet most people view budgeting as the epitome of eye-glazing subjects, rarely explained in a way that is understandable to the non-specialist and too often presented without adequate consideration of a country's governance and institutional capacity. Government Budgeting and Expenditure Management fills a gap in the literature to redress these failings and does so in comparative international perspective.

This book provides a comprehensive but pithy and easy-to-understand treatment of public financial management, taking into account a variety of special issues including budgeting in post-conflict situations, at subnational government levels, for military/security expenditures, and in countries with large extractive revenues. Distilling the lessons of budgeting reform in countries at different levels of income and administrative capacity, each chapter gradually progresses from the basic principles to the more technical aspects and then on to implementation issues, using concrete examples and illustrations from around the globe.

Government Budgeting and Expenditure Management is ideally suited as the primary text for advanced undergraduate or graduate courses in government budgeting or public financial management, or as a supplementary text for courses in public finance, public economics, economic development, public administration or comparative politics. With its attention to practical implementation aspects, the book will also be of direct interest to practitioners, policy-makers, and government employee training organizations.

1
The Government Budget

Mirror of Society’s Choices

The power of the prince … immediately becomes limited as soon as he establishes the plan of economy.

(James Steuart, 1767, p. 277)

Introduction

The Meaning of the Budget

The government budget is often viewed as a purely technical assemblage of words and numbers, dull, opaque and best left to bureaucrats and a few powerful politicians. The reality is very different. Nothing is more fundamental to an organized society than the budget of its government. The government is expected to fulfill the various roles assigned by society to the state (see Box 1.1). Those roles are in turn articulated into policy objectives—quantitative objectives (such as reducing the rate of incidence of a disease) and qualitative objectives (such as fostering competition). A very few of these policy objectives can be met in ways that do not require significant direct expenditure, but most cannot be pursued without money. National security, law and order, transport, health, education, etc., do not materialize out of thin air from laws, decrees, resolutions, speeches or fervent wishes. Government requires resources—labor, materials, supplies, equipment, information—to perform its assigned roles. These resources are not free, and the money to obtain them must be provided in the form of taxes and fees by the people, who are collectively the presumptive beneficiaries of government services. The government budget provides the bridge between intentions and realizations, between policy and implementation.

Until comparatively recent times, the notion that the money spent by the rulers is the people’s money was just as radical as the idea that government is “of the people, by the people, for the people.” Indeed, the very word “budget” comes from the Middle English budjet—“the king’s purse”—indicating that the government’s financial resources were deemed to be the personal property of the ruler. Along with the political evolution from absolute monarchy to constitutional government, the meaning of the budget has changed. The government’s authority to levy taxes and spend money is now anchored in its legitimacy—derived from the consent of the people—and approval of the budget is the main form of legislative economic control over the executive branch of government. (In the US, “the power of the purse” was seen as such an important protection against the risk of executive tyranny that it was entrusted to Congress and is enshrined in the very first article of the constitution.)

Unfortunately, in countries with weak institutions or authoritarian regimes, it is still a reality that some of the country’s resources are handled as the personal property of the leader or of the ruling elite.¹ This reality can progressively be dispelled only as the political system evolves toward stronger representative institutions.

Box 1.1 The Roles of the Modern State

Alexander Pope’s clever but misleading ditty “for forms of Government let fools contest; whatever is best administered is best” has long since been superseded by a consensus on the major roles that any modern state is expected to perform.

These are generally understood to comprise ten areas—listed below in the historical order of public acceptance of government intervention. The first three are common to any organized society and the last three have emerged only in the twentieth century:

• Assure internal order, public safety and the rule of law
• Protect the national territory
• Manage relations with other countries and external groups
• Assure minimally adequate internal transport and communications
• Provide basic social services
• Exercise macroeconomic control, particularly for financial and monetary stability
• Protect vulnerable individuals and groups
• Preserve natural resources and the environment
• Enable/strengthen competitive markets
• Enable/foster economic growth and employment.

The bedrock principle of public financial governance is therefore that the executive branch of government may take no moneys from the people, nor make any expenditure from those moneys, except by explicit approval of the people through the legislature as their representative. Thus, when properly understood, the government budget should be the financial mirror of society’s economic and social choices. The budget is much more than a bunch of numbers and words: It is at the very core of a country’s democratic process, and public financial management should therefore reflect all four pillars of good governance—accountability, rule of law, participation and transparency—described later.

The Diversity of International Experience

The vast income, governance and capacity differences between countries demand that the analysis and recommendations on budgeting and expenditure management take into explicit consideration the country context. Forty years ago, Wildavsky (1975) stressed the major differences between formal budgeting in developed countries and the informal and patronage-based systems frequent in poor countries. Schiavo-Campo and Tommasi (1999) argued that it can never be assumed that practices suitable to rich countries with advanced institutions, strong accountability and abundant capacity are suitable to poor countries saddled with governance weaknesses and limited capacity—in particular, the only “best practice” in public financial management is that which suits the circumstances and context of the country.² Throughout this book, too, the discussion of every topic will bring out the distinctions between high-income, middle-income and low-income countries, and the diversity of international experience.

The Nature of the Budget

The Primacy of the Political

A valid premise of budgeting is that budgetary outcomes depend on budgetary institutions. It is important, however, to avoid the fallacy that because institutions matter, only institutions matter. The reality, in all countries and at all times, is that budgeting is also heavily influenced by politics—and properly so.

To budget is to choose, and such choices are inherently political.³ Technical rules can help but cannot determine, for example, whether it is “better” to build a new school in district A or a new clinic in district B. Because in the first case the inhabitants of district B will gain nothing and in the second case the inhabitants of district A will gain nothing, the choice between a school here and a clinic there is a political one—confronting a legitimate need of one group of people against another equally legitimate need of a different group of people. Ditto for deciding “objectively” whether a necessary increase in revenue should come from one kind of tax or another: the economic and financial implications can be estimated, but the burden will fall on different groups. Money is power too, and the budget process cannot be understood without also considering its implications for the power relations in society. (This is a central aspect of the interpenetration between government and society, examined in the case of India by Premchand, 2010.) All budgetary decisions have an impact on the distribution of wealth and opportunities among individuals and groups.

In this light, two opposite views emerge from the economic and political science literature. According to the first view, because budgeting is essentially political, the use of technical methods and solutions for major expenditure decisions is mostly rationalization and pretense. According to the second view, economists, technical experts and government officials use their specialized skills to frame budget options in a manner that predetermines political choices. Both views are oversimplifications, but are useful as book-ends to the reality of the budget process, which lies somewhere in the middle.

The basic choices involved in budgeting have a time dimension, and affect the intergenerational distribution of costs and benefits as well. In aging societies, there is a bias toward services for the elderly, related to their greater propensity to vote and hence having heavier political weight than the young. This leads to a redistribution of resources toward the older generation and away from the new generation. Such an effect is found, for example, in the US, Germany and Japan—although the policy response has differed (see Kluge, 2013, for an elaboration).

In order for the budget instruments to work, there must be a political willingness to budget, i.e., to choose among competing expenditures and revenue sources, and a willingness to choose requires an acceptance of compromises between different priorities held by the various political groups. The best public financial management instruments avail little if the political climate is frozen in irreconcilable differences. The most accountable, transparent, rule-compliant, participatory processes are disabled if the main political actors cannot find any agreement on policies to be pursued and realistic objectives to be achieved—or, worse, if their position is determined exclusively in opposition to the other party’s proposals. The quality of the stove is irrelevant if one is unwilling to cook.

The dominance of the political over the technical is illustrated by the US experience during 2011–16, when the federal budget process imploded from partisan political conflict. The two parties played repeated games of chicken in which they set short-term budget deadlines, went to the brink of defaulting on the government debt and then shut down the government for a brief time in 2013 (Meyers, 2014). No conceivable improvement in the systems and procedures of public financial management (PFM) could ameliorate this political standoff and its fiscal and economic consequences. The link between policy and budget was still manifest, but in a negative sense—in the absence of any compromise policy, the budget was financial driftwood, reflecting no policy at all.⁴

Facing Reality

One often hears the argument that taxes should be cut because they are “the people’s money,” or conversely, the argument that certain expenditures should be increased because they benefit some groups. Such statements are appealing. They are true. And they are meaningless. They are meaningless because, other things being equal, increased spending on “a” means that the money is no longer available to spend on “b,” and reducing the tax on “x” means that tax on “y” will need to go up or that expenditure on “z” can no longer be financed. “There is no free lunch” is the first principle of economics.

In the words of US Supreme Court Justice Oliver Wendell Holmes, inscribed on the Internal Revenue Service headquarters in Washington, “taxes are the price we pay for a civilized society.” We cannot get more than what we pay for. If we want a government, we have to pay for it; if we want more government we have to pay more; if we want lower taxes we have to accept fewer public services.

In principle, a country’s citizens, through their votes and the actions of their elected representatives, first determine what they wish their government to do and then decide how to pay for it. (In practice, as explained in Chapter 6, the two types of decisions are made in an iterative manner and through the annual process of budget preparation.) If the taxes and other revenue collected are insufficient to pay for the desired government activities, the government will need to either cut some activities or finance the resulting fiscal deficit by printing the money, borrowing it from domestic or foreign sources, or simply not paying its bills. All these options carry economic and financial repercussions, although in diverse forms and affecting different groups.

Waste-fraud-and-abuse?

The only way out of these difficult choices is to combat the trinity of “waste, fraud and abuse.” Certainly, there is waste, there is fraud, there is abuse in government operations—just as there is on Main Street and Wall Street. Depending on one’s ideological predilection it is possible to argue that government is inherently more, or less, prone to these failings, but it is usually the case that problems of waste, fraud or abuse are more visible in government owing to the public transparency requirements and media scrutiny that are less applicable to private sector activity. (Box 1.2 offers some egregious examples of both public and private waste.)

But cutting wastefraudandabuse is the mantra of politicians who wish to avoid making hard budget decisions. Those who urge reducing wastefraudandabuse should be required to specify the where and the how to do so, but they rarely do. The problem is that the money wasted–defrauded–abused still ends up in someone’s pocket, and the strength of the vested interests concerned makes it harder to cut wastefraudandabuse than to reduce the quantity or quality of public services or to forgo necessary operations and maintenance expenditure. Wastefraudandabuse are typically the last to go, rarely the first. Moreover, while fraud is clearly defined, whether a particular expenditure is wasteful or abused is often in the eye of the beholder. For example, a government subsidy for petroleum exploration may be viewed as a boondoggle by some or as a justifiable incentive by others. (It does seem peculiar, however, that the US Government gave in 2013 a $3 billion fossil fuel subsidy to an oil industry which had $100 billion in profits in that year.)

Box 1.2 Are waste, fraud and abuse inherent in government expenditure?

Waste, fraud and abuse can occur in all very large organizations, whether public or private.

No government bureaucrat in a developed country has ever managed to buy $16,000 umbrella stands with shareholders’ money (as former Tyco CEO Dennis Kozlowsky did); or “borrow” tens of millions of dollars from their company and then have...