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Fiscal Affairs Department
International Monetary Fund
May 20, 2014
G-20 Budget Institutions: An Update
Outline of Presentation
I.
Background
II. Methodology
III. Trends in Institutional Reform in the G-20
IV. Budget Institutions and Fiscal Performance
V. Priorities for Further Reform
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I. Background:
a. Motivation and Methodology
Motivation
• In the wake of the crisis many G-20 countries faced a large and longterm fiscal consolidation requirement. The paper was motivated by
four key questions:
–
–
–
–
Can budget institutions help support the consolidation process?
Which institutions are particularly important?
Are these institutions in place in the G-20?
What are the institutional reform priorities for each G-20 country?
Methodology
• 12 budget institutions critical to 3 stylized phases of the adjustment
process:
– Understanding the fiscal challenge
– Developing a consolidation strategy
– Implementing the strategy through the budget process
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I. Background:
a. Motivation and Methodology
Methodology cont’d
• Institutions evaluated in 2010 and again in 2013
– Evaluation framework consisting of 52 dimensions to assess institutional
strength
– Set of 10 fiscal indicators used to assess impact of institutions on fiscal
performance
•
Extensive consultations with country authorities
– Feedback taken into account in revising evaluation framework
– Individual country specific factors highlighted in supplement to the paper
•
Some limitations should be acknowledged. In particular:
– The period under analysis is brief, just three years
– Many countries plans for further reforms to their budget institutions not
captured
– The sample of countries, 19 in total, is small
– While there is evidence that budget institutions can help shape fiscal
outcomes, the analysis presented does not necessarily establish causality
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II. Methodology for the Board Paper:
a. 12 Budget Institutions and 10 Fiscal Indicators
Phase of Adjustment
a. Understanding
the Fiscal
Challenge
b. Developing a
Consolidation
Strategy
c. Implementing
through the
Budget Process
Budget Institution
Fiscal Adjustment Indicator
III. Trends in Institutional Reform in the G-20:
a. Reforms by Institution 2010-2013
Gap in Institutional Scores of Emerging and Advanced Countries
Reforms Recommended vs. Implemented
2013 Advanced
Number of Recommendations
2
4
6
8
10
12
14
16
18
Fiscal Reporting
Macro/Fiscal Forecasting
Fiscal Risk Management
2013 Emerging
2010 Emerging
2.0
Institutional Score Change, 2010-2013
0
2010 Advanced
1.5
Indep. Fiscal Agencies
Fiscal Objectives
MTBF
1.0
2010 Recommendations (top axis)
Performance Orientation
Inter-Gov Arrangements
Score Change, 2010-2013 (bottom
axis)
Budget Unity
Top-Down Approach
0.5
Parliamentary Approval
Budget Execution
0.0
0.00
0.05
0.10
0.15
Institutional Score Change, 2010-2013
Institutional reforms focused on strengthening
consolidation planning…
…less focus on reporting, forecasting, risk
management.
0.20
Concern over the growing gap in institutional
strength between advanced and emerging
markets
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III. Overall Institutional Reform Trends:
b. Average Score by Institution
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IV. Budget Institutions & Fiscal Performance:
a. Overall Fiscal Performance
Share of Adjustment Need Addressed
(2010-2015, Percent of Adjustment Need Identified)
Institutional Scores: All
50%
40%
30%
20%
10%
0%
Strong Institutions
Medium Institutions
Weak Institutions
Countries with stronger
institutions overall have
addressed more of their
adjustment need...
…while those with weak
institutions have not tended
to plan or deliver much
Share of Planned Adjustment Delivered
(2010-2012, Percent)
Institutional Scores: Implementing
80%
Countries with stronger
institutions were also better at
sticking to their plans…
60%
40%
20%
0%
Strong Institutions
Source: MAP
Medium Institutions
Weak Institutions
…while those with weaker
institutions delivered less
and had a more varied track
record – some delivered
while others missed by a
wide margin
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IV. Budget Institutions & Fiscal Performance:
b. Understanding the Fiscal Challenge
Absolute Revision to 2009 General Government Debt
(Percent of GDP)
Institutional Scores: Understanding
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Relationship between strength
of understanding institutions
and revisions to fiscal data is
complex…
Strong Institutions
Medium Institutions
Weak Institutions
Average Absolute Year-Ahead GDP Forecast Error
(2004-2012, Percent)
Institutional Scores: Understanding
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
…But countries with stronger
institutions for fiscal reporting,
forecasting, and risk
management saw smaller
forecast errors impacting their
plans
0.0%
Strong Institutions
Medium Institutions
Weak Institutions
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IV. Budget Institutions & Fiscal Performance:
c. Developing a Consolidation Plan
Protection of Capital Expenditure
(Change in Capital Expenditure as a Share of Total Expenditure , 2010-2012)
Institutional Scores: Planning
Timeliness of Consolidation Plans*
(Months b/w Crisis & Plan Announcement)
Institutional Scores: Planning
30
0.0%
25
-0.4%
20
-0.8%
15
10
-1.2%
5
-1.6%
0
Strong Institutions
Medium Institutions
Weak Institutions
-2.0%
Strong Institutions
Medium Institutions
Weak Institutions
*Months since January 2009.
Having strong institutions seems to have
led to earlier adjustment planning
Countries with stronger institutions
protected capital investment during
consolidation
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IV. Budget Institutions & Fiscal Performance:
d. Implementation Through the Budget Process
Deficit Reduction by Subnational Government
(Percent Deficit Reduction, 2009 -2011) Institutional Scores:
Intergovernmental Fiscal Arrangements
Actual Deviation from Approved Budget
(2008-2012, Percent)
Institutional Scores: Implementing
10%
80%
8%
6%
60%
4%
40%
2%
20%
0%
Strong Institutions
Medium Institutions
Weak Institutions
0%
Strong Institutions
Strong implementing institutions helped
ensure budgets were respected and
planned adjustments largely delivered
Medium Institutions
Weak Institutions
Countries with strong
intergovernmental arrangements also
saw bigger falls in subnational deficits
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IV. Budget Institutions & Fiscal Performance:
e. Response to Shocks
a. Negative Macro Shock and Strong Institutions
(Change in General Government Net Debt, Percent of GDP)
Change in Net Debt -% of GDP
6%
Many adjustment plans were
hit by macro shocks...
5%
…but countries with
stronger institutions
compensated with additional
fiscal effort…
4%
3%
2%
1%
… and under-execution of
approved budgets...
0%
Revision of 2010
Debt
Macroeconomic
Error
Change in Fiscal
Effort
Budget Execution
Other*
Revision of 2012
Debt
Change in Net Debt -% of GDP
B. Negative Macro Shock and Weak Institutions
(Change in General Government Net Debt, Percent GDP)
...while countries with weaker
institutions were hit by
revisions to their starting
debt levels and macro
shocks…
6%
5%
4%
...but failed to compensate
with additional fiscal effort…
3%
2%
… and overspent against
approved budgets
1%
0%
Revision of 2010
Fiscal Position
Macroeconomic
Error
Change in Fiscal
Effort
Budget Execution
Other*
Revision of 2012
Fiscal Position
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V. Priorities for Further Reform
Institution
Fiscal Reporting
Advanced
Extend coverage to public sector
Macro-Fiscal Forecasting
Fiscal Risk Management
Emerging
Gen. Gov and eventually public sectorindependent fiscal statistics agencies
Midyear updates, forecast vs outturn
and L-T fiscal projections
Improve reporting of specific fiscal risks
Produce alternative macro forecasts
Establish IFA’s
Independent Fiscal Agencies
Fiscal Objectives and Rules
Rules should accommodate the business cycle and include escape clauses
Medium-term Budget
Framework
Binding multi-year restrictions
Performance Orientation
M-T priorities and separate fiscal
impact of current vs new policies
Comprehensive spending reviews
Intergov’t Fiscal Arrangements
Strengthen inter-gov’t coordination
Fiscal objectives cover all gov’t levels
Budget Unity
Annual budget covers all of central gov’t. Review mandatory exp. regularly
Top-down Budgeting
All rev. and exp. decisions taken by executive during the annual budget process
Parliamentary Approval
Annual budget approved by parliament
top down and restrictions on
parliament’s budget amendment rights
Budget Execution
Restrictions on overspending during budget execution
Annual budget approved by parliament
top down, restrict ions on parliament’s
amendment rights and parliamentary
debate to endorse fiscal strategy
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