Download Budget Processes in Poland

Budget Processes in
Poland
Promoting Fiscal and Economic Stability
Mark Hallerberg
Jürgen von Hagen
Budget Processes in
Poland
Promoting Fiscal and Economic Stability
Mark Hallerberg
Jürgen von Hagen
Warsaw 2006
Reviewed by:
Prof. Jacek Rostowski
Dr. Vesselin Dimitrov
Graphic Designer:
Jacek Ebert
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CONTENTS
Contents
Introduction........................................................................................ 5
I.
Effective Fiscal Institutions: A Framework for Analysis.................... 7
The Budget Process ...................................................................... 8
Delegation................................................................................. 10
Contracts ...................................................................................12
Institutional Design of the Budgeting Process ...............................13
Centralisation and Flexibility of Budgetary Policies .......................16
Ex Ante Controls .........................................................................17
II.
The Polish Budget Process .......................................................... 21
Ex Ante Controls--Limits on Debt in the Constitution
and Public FinanceLaw ............................................................... 21
Multi-annual Targets and Accounting Standards ......................... 22
Decision-making Process within the Cabinet ............................... 24
Parliament and President ........................................................... 26
Budget Transparency and Monitoring ......................................... 29
Implementation ......................................................................... 30
Subnational Fiscal Policy ............................................................ 32
III
Polish Fiscal Performance Since 1998 .......................................... 34
IV
Assessment of Problems, Comparison with Other Countries,
and Recommendations for Better Performance ........................... 34
Comparison with New Members of the European Union.............. 35
Comparison with the EU 15........................................................ 37
V
Recommendations ..................................................................... 47
Scenario 1: Continued Minority and/or Coalition Governments
A Stabilisation Pact for Fiscal Stability ........................................ 47
Scenario 2: One-Party Majority Governments the Norm .............. 50
Additional Reforms that Should Be Undertaken Regardless of
the Form of Fiscal Governance that is Appropriate to Poland ....... 52
VI
Conclusion ................................................................................ 54
Endnotes .......................................................................................... 56
Bibliography...................................................................................... 59
Appendix .......................................................................................... 59
3
LIST OF FIGURES AND TABLES
List of Figures and Tables
Tables
1. Long-Term Planning Index ............................................................ 24
2. Structure of Negotiations in Government ...................................... 25
3. Strength of Finance Minister......................................................... 26
4. Impact of Parliamentary Amendments on the Government
(Per-cent Change in the Government Draft) .................................. 28
5. Parliamentary Stage of the Budget Process .................................... 29
6. Informativeness of the Budget Process .......................................... 30
7. Strength of the Implementation Stage ........................................... 32
8. Effects of Fiscal Institutions on the Budget Balance in
Contract States and Poland, 1998-2004 ....................................... 43
Figures
1. Number of Amendments in Parliament on the
Government’s Budget Draft ......................................................... 27
2. Comparison of Central and East European Countries,
Gleich and von Hagen (2002) Index .............................................. 37
3. Public Sector Efficiency and the Strength of Fiscal Rules ................ 38
4. Delegation Index, Latest Data (2004 for EU-15 and 2006
for Poland) .................................................................................. 39
5. Contracts Index, Latest Data (2004 for EU-15 and 2006
for Poland) .................................................................................. 42
6. Budget Balance and Minority Governments in Poland ................... 44
7. Levels of Expenditures and Revenue .............................................. 45
8. Transparency Index, EU15 + Poland .............................................. 46
Introduction
1
Poland’s phase as a transition economy is almost complete. Seventeen
years after the fall of Communism, the country is a full member of the
European Union. Inflation is low, and economic growth is again healthy. New
challenges face a new government. As Anne Krueger, First Deputy Managing
Director of the IMF, noted recently in a speech in Poland, the new members
of the European Union should tackle two issues--how to maintain economic
stability and how to raise the potential growth rate by making the economy
more resilient to economic shocks.2
Fiscal policy plays an important role in addressing both challenges. Indeed,
Polish public finances did not do well during the last shock to its economy
and have yet to fully recover. When economic growth slowed to 1% in 2001,
Poland’s budget balance slipped from a relatively healthy -1.6% of GDP
in 2000 to almost -5% in 2003. Growth has since rebounded to over 5%
in 2004, but five years after the beginning of the economic slowdown the
general government deficit is still relatively high.
traditional explanations
Something is amiss. Traditional discussions of fiscal policy in Poland have
focused on three explanations. The first is the role of personalities. The
assumption is that the budget performance is good when the right people
are in government. Other persons at the head of government may care less
about fiscal policy. The second is an extension of the first, with a focus
on the informal networks behind the personalities. The list of people who
work behind the scenes, rather than the formal institutional relationships,
explain outcomes. The third considers the role of the party system and its
reorganisation.3 Instead of a consideration of those in power, this explanation begins with a study of the parties and their policies. Parties then get
elected and occupy the office that make decisions, so the appropriate focus
is on parties rather than personalities or informal networks.
role of fiscal
institutions
More recent work both in Poland and abroad has considered the role of
fiscal institutions. Bratkowski and Rostowski (2005) stress that the poor
quality of Polish institutions is a principal reason why the government
regularly runs budget deficits. International organisations have similarly
commented on the need for formal institutional reforms. To quote some
of the documents produced on Poland this past year, ”reform of public
expenditure is still needed,”4 “gradual recovery in the offing, but lack of
fiscal reform,”5 and “staff...doubted the durability of fiscal consolidation
without fundamental expenditure reform.”6
While the common comments from these international observers are of
use, it is in Poland’s own, domestic interest to get its fiscal institutions in
5
INTRODUCTION
shape. Indeed, such institutions will help future governments abide by the
country’s constitution, which is designed to prevent the overall debt level
from going above 60% of GDP.
desirability of good fiscal
institutions in poland
Good institutions promote the two objectives of economic stability and
an increase in the potential growth rate, objectives that all Polish governments regardless of their political stripe support. The nature of the internal
debate is related to the need to strengthen fiscal institutions. A focus on
strong personalities in a debate about fiscal policy is usually a sign that the
underlying institutions are weak. If the institutions are performing well,
there is much less reason to focus on the individuals that run them. Thus,
the internal debate in Poland about whether the “right” people run fiscal
policy suggests that the institutions are in need of reforms. The focus on
the party system in the internal debate is also relevant for an institutional
discussion. The reason is that the organisation of the party system affects
the type of government in place--minority, one-party majority, or multi-party majority. As is argued below, the type of government preconditions the
set of fiscal institutions that are most appropriate for Poland.
This report considers the state of Polish fiscal institutions. It begins by
laying out a framework to analyse fiscal institutions and fiscal rules based
upon evidence from other countries. The key theoretical issue that confronts
all governments is what the literature refers to as the “common pool resource
problem.” Taxes represent the common pool, and decision-makers have an
incentive to consider the full implications of their spending decisions but
only part of the tax burden. The way budgets are made affects the scale of
this problem.
The report presents a set of best practices for promoting sound fiscal
policy based on evidence from many academic studies. It then evaluates the
structure of those institutions and rules in Poland today. In the third
section, it discusses and evaluates Poland’s fiscal performance since 1998,
which corresponds to the introduction of the new Constitution in 1997.
It also compares the Polish system both to its cohort that joined the European
Union in 2004 and to the EU-15. Finally, it presents recommendations for
reforms based on the best practices provided in the first section.
Effective Fiscal Institutions:
A Framework for Analysis
7
common pool
resource problem
A fundamental characteristic of modern public finances is that governments
spend money drawn from a general tax fund on policies targeting specific
groups in society. The fact that the group of those who pay for such policies
(the general tax payer) is larger than the group of those who benefit from them
implies a divergence between the net benef its accruing to the targeted
groups and the net benefits for society as a whole.8 This incongruity is called the
common pool problem of public finances (von Hagen and Harden, 1996). It
causes the targeted groups and the politicians representing them to demand
more spending on such policies than what is optimal for society as a whole.
Thus, the common pool problem leads to excessive levels of public spending.
Putting the argument into a dynamic context, one can show that it also
leads to excessive deficits and government debts (Velasco 1999, von Hagen and
Harden, 1996.) This tendency for excessive spending, deficits and debt
increases with the number of politicians drawing on the same general tax
fund, a point empirically confirmed by Perotti and Kontopoulos (1999).
Ideological and ethnic divisions or ethno-linguistic and religious fractionalisation of societies increase the tendency of people one side to neglect the tax
burden falling on the other side, making the common pool problem more severe.
Thus, empirical studies showing that such schisms result in higher spending
levels, deficits and debt confirm the importance of the common pool problem (Roubini and Sachs 1989; Alesina and Perotti 1995; Alesina et al. 1997;
Annett 2000). The common pool problem also looms large behind vertical fiscal
relations within countries. Transfers from the central to local governments
imply that residents in one region benefit from taxes paid by residents in other
regions. Bailouts of over-indebted local governments are a special form of
such transfers.
centralisation versus
fragmentation
At the heart of the common-pool problem of public finances is the externality
that results from using general tax funds to finance targeted public policies.
Individual politicians perceive that an increase in spending on targeted policies
will provide their constituencies with more public services at only a fraction
of the total cost. The resulting spending and deficit biases can be reduced if
politicians can be made to take a comprehensive view of the costs and
benefits of their decisions. This is the main role of the budget process. The
budget process consists of the formal and informal rules governing budgetary
decisions of the executive and legislative branches of government.
A centralised budget process contains elements that induce decision
makers to internalise the common pool externality by taking a comprehensive
view of their decisions. A fragmented budget process fails to do that.
7
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
In this context, centralisation refers to the internal organisation rather than
the geographical structure of budgetary decisions. Centralisation of the
budget process requires that all conflicts between competing claims on public
finances are resolved within its scope.
sources of fragmentation
Four deviations from this principle are particularly important sources of
fragmentation.
•The first is the use of off-budget funds allowing policy makers to make
financial decisions without being challenged by conflicting distributional
interests.
• The second are non-decisions, which make budgetary expenditures
dependent on developments exogenous to the budget process, such as the
indexation of spending programs and open-ended welfare appropriations.
Non-decisions degrade the budget process to a mere forecast of exogenous
developments.
• The third deviation is an insufficient separation between non-financial
and financial laws in the legislative process. Non-financial laws should
create the authority for a government to spend public funds on certain
policies, they should not affect the current government budget. Financial
laws, i.e., the budget bill, should determine how much money is spent on
a given set of policies during the year. Where this distinction is blurred,
policymakers can change the budget outside the budget process and
circumvent the rules governing the latter.
• The fourth deviation results from unreported contingent liabilities such
as guarantees for the liabilities of public or private enterprises or financial
institutions. Contingent liabilities imply that the ex-post distribution of
public funds can differ significantly from the distribution negotiated
in the budget process. While they cannot be avoided in the context of
government budgeting, they should be properly accounted for to avoid
budgetary surprises.
Transparency is another important prerequisite of centralisation. It requires
that the budget documents are comprehensive and that expenditures are
clearly attributed to the relevant spending making units within the government.
Lack of transparency creates opportunities for collusion among self-interested
policy makers and prevents decision makers from developing a comprehensive
view of the consequences of their decisions.
The Budget Process
Budgeting processes can be divided into an executive planning stage, a legislative approval stage, and an executive implementation stage. Each involves
different actors with different roles. The executive planning stage usually begins
about a year before the relevant fiscal year and ends with the submission of
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
a draft budget to the legislature. It involves the setting of budget guidelines, the
bidding for budget appropriations from the various spending departments,
the resolution of conflicts between the spending interests in the executive, and
the drafting of the revenue budget. The legislative approval stage includes the
process of making parliamentary amendments to the budget proposal, which
may involve more than one house. This stage ends with the passing of the
budget law. The executive implementation stage covers the fiscal year to which
the budget law applies. During this stage deviations from the budget law can
occur, either formally by adopting supplementary budget laws in parliament,
or informally by shifting funds between chapters of the budget law and by
overrunning the spending limits provided by the law.
stages of the budget process
and centralisation
Institutional elements of centralisation primarily concern these stages, with
different elements applying to different stages.
executive stage
At the executive planning stage, the purpose of such elements is to promote
agreement on budget guidelines (spending and deficit targets) among all
actors involved, ensuring fiscal discipline. Elements of centralisation at this
stage should foster consistent setting of such guidelines and ensure that
they constrain executive decisions effectively. A key element concerns the
way conflicts are resolved. Uncoordinated and ad hoc conflict resolution
involving many actors simultaneously promotes logrolling and reciprocity
and, hence, fragmentation. Centralisation is increased if conflict resolution
is the role of senior cabinet committees or the prime minister.
At the legislative approval stage, elements of centralisation control the
debate and voting procedures in the legislature. Because of the much larger
number of decision makers involved, the common pool problem is even
larger in the legislature than in the executive. Fragmentation is rampant
when there are no limits to the changes that parliament can make to the
executive’s budget proposal, when spending decisions are made in legislative committees with narrow and dispersed authorities, and when there is
little guidance of the parliamentary process either by the executive or by the
speaker of the legislature. Centralisation comes with strengthening the executive’s agenda-setting power by placing limits on the scope of amendments,
controlling the voting procedure, and raising the political stakes of a rejection
of the executive’s budget, such as by making it equivalent to a vote of no
confidence. Centralisation can also come with strengthening the roles of
the speaker and the financial committee in the legislature.
legislative stage
implementation
At the implementation stage, elements of centralisation ensure that the
budget law effectively constrains the spending decisions of the executive.
One important element is strengthening the finance minister’s ability to
monitor and control spending flows during the fiscal year. Other important
elements are strict limitations on changes to the budget law during the year.
9
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
Throughout the budget process, greater transparency promotes better fiscal
outcomes. It makes it easier for policymakers to understand the consequences
of their actions, and it increases the accountability of politicians to voters.
Empirical studies (Alt and Lassen 2003; Tanzi and Schuknecht 2000, Chapter
8) have found that countries with more transparent fiscal institutions have
lower levels of debt.
evidence on the importance
of centralisation
Reviewing elements of centralisation in Organisation for Economic Co-operation
(OECD), Latin American, and Asian countries reveals that centralisation
leads to better fiscal performance. Based on a survey of Latin American and
Caribbean budget directors, Alesina et al. (1999) contend that countries
with more hierarchical budget systems have smaller deficits than countries
with more collegial-based systems. Strauch (1998), in his examination of
budget processes in the American states, similarly finds that numerical restrictions on the allowable size of the deficit lead to tighter fiscal discipline.
Lao-Araya (1997) reaches a similar conclusion for East Asian countries in
the mid-1990s, while Gleich (2002) and Yläoutinen (2005) do the same for
European Union accession countries.
Centralisation in practice follows one of two basic approaches. The first is
based on delegation. Under this approach, participants in the budgeting
process who are assumed to have a more comprehensive view of the budget
are vested with special strategic powers. The second approach is based on
contracts. Under this approach, binding agreements are negotiated among
all participants, without giving special authority to any one.
Delegation
role of finance minister
under this approach
In the delegation approach, the budgeting process vests special authority in
a “fiscal entrepreneur” whose function it is to set the broad parameters of
the budget and to ensure that all other participants in the process observe
these constraints. To be effective, this entrepreneur should have the ability to
monitor the other members of the executive and to use selective punishments
against possible defectors. Among the cabinet members, the entrepreneur
is typically the finance minister. Since the finance minister is not bound by
individual spending interests as much as the spending ministers are, and since
the finance minister typically is charged with drafting the revenue budget, it is
plausible to assume that the finance minister takes the most comprehensive
view of the budget among the members of the executive.
In practice, delegation can take a variety of forms. In the French model,
the finance minister and the prime minister together determine the overall
allocations of the spending departments. These targets are considered
binding for the rest of the process. Here, the finance minister has a strong
role as agenda setter in the budgeting process. The U.K. model, in contrast,
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
evolves as a series of bilateral negotiations between the spending departments
and the finance minister in which the latter bases bargaining power on superior
information, seniority, and political backup from the prime minister.
Under the delegation approach, drafting the budget proposal is mainly the
responsibility of the finance ministry, which monitors the individual bids,
negotiates directly with the spending departments, and approves the bids submitted to the final cabinet meeting. Unresolved conflicts between spending
ministers and the finance minister are typically arbitrated by the prime minister.
delegation and the different
stages of the budget process
At the legislative stage, the delegation approach lends large agendasetting powers to the executive over parliament. One important instrument
here is to limit the scope of amendments parliamentarians can make to the
executive’s budget proposal. In France, for example, amendments cannot be
proposed unless they reduce expenditures or create a new source of public
revenues. In the United Kingdom, amendments that propose new charges
on public revenues require the consent of the executive. Such restrictions
make the budget constraint felt more powerfully.
A second element concerns the voting procedure. The French government,
for example, can force the legislature to vote on large parts of or the
entire budget in a block vote, with only those amendments considered that
the executive is willing to accept. In the United Kingdom, the executive can
make the vote on the budget a vote of confidence, considerably raising the
stakes for a rejection.
A final element concerns the budgetary authority of the upper house.
Where both houses have equal budgetary authority, as in Italy or Belgium
through the early 1990s, finding a compromise is a necessary part of the
budgeting process. This tends to weaken the position of the executive
because it now faces two opponent bodies. The executive may be strengthened by limiting the budgetary authority of the upper house, as in France and
Germany, where the lower house prevails if an agreement between the two
chambers cannot be reached. In the United Kingdom, the upper house has no
budgetary authority at all, leaving the executive with only one chamber to
deal with. The position of the executive can also be strengthened by giving
the finance minister veto power over the budget passed by the legislature,
as in Germany and Spain. Finally, the position of the upper house was
weakened in both Italy and Belgium as part of a series of fiscal reforms to
avoid exactly this problem.
At the implementation stage, centralisation requires that the finance minister be able to monitor and control the flow of expenditures during the year.
This may take the form of requiring that the spending departments obtain the
finance minister’s authorisation to disburse funds during the year. The finance
11
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
minister’s authority to impose cash limits during the year is another control
mechanism. Monitoring spending flows during the year requires a unified
system of financial accounts that enables the finance minister to watch the
inflow and outflow of resources. Effective monitoring and control is also important to prevent spending departments from behaving strategically—that is,
from spending their appropriations early in the year and demanding additional funds later under the threat of closing down important public services.
Furthermore, centralisation requires tight limits on any changes in the original
budget law through the modification of appropriations once the fiscal year
has begun. One example is the requirement that transfers of funds between
different chapters of the budget be authorised by the finance minister or parliament. The same applies to transfers of funds between different fiscal years.
Although carryover provisions have obvious efficiency gains, their use should
be limited and strictly monitored to ensure that the finance minister can keep
track of a spending department’s financial position. Another example is to
restrict the use of supplementary budgets. Where supplementary budgets during the fiscal year become the norm, as in Italy and Belgium in the 1980s
and Germany in the 1990s, one cannot expect that policy makers will take the
constraints embedded in the original budget law seriously.
Contracts
importance of binding fiscal
targets under this approach
Under a contract approach, the budgeting process starts with an
agreement on a set of binding fiscal targets negotiated among the members
of the executive. Emphasis here is on the bargaining process as a mechanism to reveal the externalities involved in budget decisions and on the binding
nature of the targets. In contrast to the hierarchical structure created by
delegation, the contract approach relies on a more equal distribution of
strategic powers in the executive. A prime example is the Danish budgeting
process, which, since 1982, has started with negotiations among the cabinet members to fix spending limits for each spending department. These
spending limits are often, but not necessarily, derived from medium-term
fiscal programs or the coalition agreement among the ruling parties.
In Ireland, for example, coalition agreements since 1989 have included
medium-term fiscal strategies to reduce the public debt, which have provided
the background to the annual negotiations over budget targets.
The finance ministry’s role under this approach is to evaluate the consistency
of the individual departments’ spending plans with these targets. As in the
Netherlands, for example, the finance minister usually has an information
advantage over the spending ministers in the budget negotiations but no extra
strategic powers. Conflict resolution involves senior cabinet committees and
often the leaders of the coalition parties in the legislature.
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
At the legislative stage, the contract approach places less weight on the
executive’s role as an agenda setter and more weight on the role of the
legislature as a monitor of the faithful implementation of the fiscal targets.
Institutionally, this means that the contract approach relies less on the
executive branch of government controlling parliamentary amendments
and more on the legislature’s ability to monitor the fiscal performance of
the executive. One important element is the legislature’s right to request
information from the executive. This element can be strengthened by setting
up committees whose authorities reflect the authorities of the spending
departments and by giving committees a formal right to request information
from the executive and to call witnesses from the executive to testify. The
Danish parliament, for example, has all three of these rights, while the German
parliament has only the first and the U.K. parliament has none of the
three.
fiscal contracts and the stages
of the budget process
At the implementation stage, the contract approach resembles more
closely the delegation approach in emphasising the monitoring and control
powers of the finance minister. At the same time, there are also additional
mechanisms that are included in fiscal contracts to deal with unanticipated
growth shocks. These mechanisms determine ex ante, how the government
will respond to revenue and expenditure shocks. This eliminates the need
for re-negotiations if and when shocks occur. Belgium, for example, has
the “golden hamster” rule that states that any revenues collected above the
amount forecast must be used to reduce the debt level. Sweden has a rule
for expenditures that vary directly with the health of the economy.
Institutional Design of the Budgeting Process
While the delegation approach relies on hierarchical structures within
the executive and between the executive and the legislature, the contracts
approach builds on a more even distribution of authorities in government.
In democratic settings, hierarchical structures typically prevail within political parties, while relations between parties are more even. This suggests
that the key to the institutional choice between the two approaches lies in
the number of parties in government.
delegation, contracts and
types of governments
In the parliamentary systems found in Europe, delegation is the proper
approach to centralisation for single-party governments or governments
where the ideological profiles of any coalition partners is quite close , while
contracts is the proper approach for multiparty majority governments and
for minority governments. There are two reasons for this statement.
First, members of the same political party are more likely to have similar
political views regarding the basic spending priorities than members of
different political parties. Spending ministers in a one-party government can,
13
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
differing enforcement
mechanisms
therefore, be fairly sure that the finance minister holds more or less the same
spending preferences as they do. Disagreement will be mainly a result of the
common pool problem, that is, the perceived cost of distributive policies. In
a coalition government, in contrast, cabinet members are likely to have
more diverging views regarding the distribution of government spending
over different groups of recipients. Agreement on a budget therefore
involves a compromise between the coalition partners. For a coalition
government, delegation of strategic powers to the finance minister would
create a new principal-agent problem. A strong finance minister might
abuse his or her powers and unduly promote the political interests of his
or her own party. The same principal-agent problem does not arise in the
contracts approach, because the contracts are negotiated by all cabinet
members. Thus, governments formed by two or more parties are more likely
to opt for the contracts approach.
Second, delegation and contracts rely on different enforcement mechanisms for the budget agreement. In one-party governments, the ultimate
punishment for a spending minister reneging on the budget agreement is
dismissal from office. Such punishment is heavy for the individual minister
who overspends but generally light for the government as a whole. It can be
used because the prime minister is typically the strongest cabinet member in
one-party governments and has the authority to select and replace cabinet
members. In coalition governments, in contrast, punishments cannot be
applied easily to defecting ministers. The distribution of portfolios is set by
the coalition agreement. Therefore, the prime minister cannot easily dismiss
intransigent spending ministers from parties other than his or her own,
since that would be regarded as an intrusion into the internal party affairs
of coalition partners.
The most important punishment mechanism in coalition governments is
the threat of breaking up the coalition, if a spending minister reneges on the
budget agreement. This punishment is heavy for the entire coalition, as it
leads potentially to the death of the government rather than the dismissal of
a single individual. The point is illustrated by the fact that fiscal targets are
often part of the coalition agreement. The credibility of this enforcement
mechanism hinges on two important factors. The first is the existence of
alternative coalition partners. If other potential partners exist with whom
the aggrieved party can form a coalition, the threat to leave the coalition
is clearly more credible than if no alternative coalition partner is available.
The second factor is the expected response of the voters, as a coalition may
be broken up with the anticipation of new elections.
differing punishment
mechanisms
The different enforcement mechanisms also explain the different relations
between the executive and the legislature in the legislative phase of the
budgeting process. Single-party governments typically arise in two-party
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
settings such as pre-1994 New Zealand, the United Kingdom, or the United
States, where each party is large and party discipline is low. Although the
ruling party enjoys a majority, the main concern in the legislative stage of
the budgeting process is to limit the scope of defections from the budget
proposals by individual members who wish to divert government funds to
their electoral districts. Multiparty coalitions, in contrast, typically arise in
settings where parties are small and relatively homogeneous and party discipline is strong. In that situation, defections from the budget agreement
are a weaker concern, but each party involved in the coalition will want to
watch carefully to be sure that the executive sticks to the coalition agreement.
The delegation approach, therefore, typically makes the executive a much
stronger agenda setter in parliament than the contracts approach, while the
contracts approach gives more monitoring powers to the legislature.
credibility of
fiscal targets
Finally, the commitment to fiscal targets embedded in the contracts approach is not credible for one-party governments. Consider a single-party
government with a weak prime minister and a weak finance minister. Assume
that this government announced a set of fiscal targets at the outset of the
budgeting process and that some spending ministers renege on the
agreement during the implementation phase. Other cabinet members
cannot credibly threaten the defectors with dissolving the government,
since they would punish themselves. Absent a credible threat, the entire
cabinet would just walk away from the initial agreement.
To summarise, the contracts approach is more likely to be found in
countries where coalition governments are the norm, while the delegation
approach is more likely to be found in countries where the government is
typically formed by a single party. It should be noted that contracts are
also appropriate for minority governments, and this includes governments
that have difficulties maintaining discipline in parliament.. While the coalition partners negotiate and set the fiscal contract in the case of majority
governments, one or more opposition parties agree to a contract with the
government party or parties in the case of minority governments. The most
effective way to guarantee a fiscal contract in that case is to make it legally
binding. The targets then become the legal status quo, and it takes a majority of parliament to overturn them. Fiscal contracts written under Swedish
minority governments represent the classic example. Note as well that this
method is especially useful when party discipline is weak. It may be possible
to get a majority to pass a given set of fiscal targets, and those will probably
remain in place if the governing party (or parties) has difficulties keeping its
parliamentary members behind the coalition in the future.
role of electoral
institutions
Electoral institutions strongly influence the number of parties in government. Intuitively, if there are fewer parties, there is a higher chance that
one party can win an absolute majority, and an absolute majority is
15
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
a virtual certainty in two-party systems. Several studies indicate that the
number of parties in a given system is strongly and positively correlated with
district magnitude (e.g., Duverger 1954). Plurality rule encourages the
emergence of two-party systems, and they are consequently most likely to have
one-party majority governments. Proportional representation allows for
more variation in district magnitude but is consistently characterised by
multiparty coalition governments.
The correlation between electoral institutions and the number of parties in government then suggests that countries with proportional representation should be more likely to adopt a contracts approach, while countries
with plurality rule should opt for the delegation approach, if they adopt
centralising institutions at all. Hallerberg and von Hagen (1998) show that
this hypothesis is confirmed among the EU states.
Centralisation and Flexibility of Budgetary Policies
Centralisation of the budgeting process mitigates excessive spending and
deficits that result from the common pool problem of public budgeting.
Because centralisation emphasises strict adherence to fiscal targets, one
might suspect that it implies rigidity of budgetary policies—that it reduces
the scope for reaction to unforeseen events during a fiscal year. If so, there
could be a trade-off between achieving a higher degree of fiscal discipline
and achieving a desirable degree of macro-economic stabilisation.
strong finance minister
and flexibility
rainy day funds
However, flexibility to react to unforeseen events can be achieved at the
implementation stage in a number of different ways without working
against centralisation. The key is a strong role of the finance minister in
the implementation of the budget assuring that the finance minister can
effectively co-ordinate the budgetary responses to such events and minimise
any deviations from the targets. Only where the finance minister is weak in
the implementation, a trade-off between flexibility and adherence to the
targets arises. For example, the Swedish government adopted a budgeting
process in the early 1990s that allows spending departments to charge
expenditures against future budgets or to transfer unused appropriations
to the next year. Both transfers are possible, however, for only a limited
number of years. Because the charges and transfers must be budgeted in
the following year, the provision combines flexibility with transparency and
gives both the legislature and the finance minister the ability to control the
flow of expenditures.
An alternative way to achieve flexibility is the creation of a “rainy day fund”—
an unspecified appropriation that can be used for emergencies. An example
is the (Contingency) Reserve included annually in the U.K. budget. The
purpose of the Reserve, which amounts to 2 to 4 percent of the budget
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
total, is to deal with unanticipated expenditures without overrunning the
aggregate targets imposed on the spending departments. According to
a rule introduced in 1976, a refusal by the finance minister to charge an
expenditure against the Reserve can be overruled only by the entire cabinet. An allocation made from the Reserve does not increase a spending
department’s baseline allocation for the subsequent budget planning
processes. Again, the critical point is to budget the fund annually and to submit
spending out of this fund to the same rules of expenditure management as
ordinary spending. We will evaluate whether Poland has such funds and, if
so, what rules structure their use.
To see whether delegation and contracts tend to reduce a government’s capacity to react appropriately, Hallerberg and von Hagen (1999)
estimate the cyclical elasticity of government deficits in the 15 EU
states. On the basis of panel data, they find that centralisation in itself does
not change the cyclical elasticity. In fact, countries with a strong finance
minister are characterised by a larger cyclical elasticity than both countries
with centralisation achieved through contracts and countries with rather
fragmented budgeting processes. An intuitive interpretation is that a strong
finance minister can react more quickly to economic downturns and upswings
than the spending ministers. Also important, there is no indication of
a trade-off between macro-economic stabilisation and mitigation of
excessive spending in the design of a budgeting process.
Ex Ante Controls
constitutional constraints
and balanced budget
Before moving on to a discussion of Polish fiscal institutions, it is also
important to consider more generic fiscal rules. It is often thought that the
most straightforward approach to controlling the performance of policy
makers is to subject them to ex ante controls, constitutional constraints on
budgetary aggregates. In practice, such constraints impose quantitative limits
either on deficits or on spending. Balanced budget constraints mandated
by the constitution are often used as a mechanism to limit the borrowing
of subnational governments. Most state governments in the United States
are subject to a balanced-budget requirement of some sort, and many state
constitutions require public referenda on increases in tax rates. Such constraints seem attractive because they are simple, easily understood, and very
visible. The historical events leading to the imposition of such constraints
in the United States and in Canada suggest that they are often the result of
the desire of disgruntled taxpayers to impose constraints on the spending
profligacy of their elected representatives.
It is interesting, therefore, to see how successful such constraints are. The
experience of American state governments is very instructive. Almost all
state governments have some constraints on either the size of the deficits
17
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
they can run or the size of the public debt they can issue. These constraints
come in varying degrees of strictness, ranging from requirements that the
governor’s budget proposal be balanced to outright bans on realised revenues falling short of realised expenditures.
american experience
evidence from the
sub-national level
stability and growth pact
in the european union
Strauch (1998) reports empirical results indicating that strict balanced-budget constraints effectively limit the size of the annual balance on
the government’s current account (total less investment spending).
Eichengreen (1990) shows that the stringency of balanced-budget constraints has a significant and negative effect on a state’s debt ratio. However,
Eichengreen considers only the level of “full faith and credit” debt, that is,
debt that is fully and explicitly guaranteed by the state government. Von
Hagen (1991) takes a broader perspective and includes other types of
public debt in the empirical analysis, such as debt issued by public authorities.
He finds that the stringency of numerical constraints has no effect on the
total debt.
The two results are easy to reconcile: They suggest that states subject to
stringent numerical deficit constraints tend to substitute debt instruments
not covered by the legal rule (resulting from off-budget activities) for full
faith and credit debt. Kiewiet and Szakalay (1996) find a similar effect by
showing that where more restrictive borrowing constraints are imposed on
the state government, municipal governments tend to incur larger debts.
Von Hagen and Eichengreen (1996) show in a cross-country comparison
that in countries where subnational governments are subject to stringent
statutory borrowing constraints, the central government tends to have
a higher debt ratio. This indicates a third substitution effect: where
subnational governments are not allowed to borrow on their own
authority, they tend to pressure the central government to borrow on their
behalf. Furthermore, Strauch (1998) shows that constitutional expenditure
limits, which are found in many U.S. state constitutions, do not constrain
spending effectively. Instead, they induce a shift from the current to the
investment budget.
The important insight from these studies is that ex ante controls on fiscal
choices constrain politicians more effectively in the short run than in the
long run. In the long run, policy makers find ways around such controls.
Since it is impossible, in practice, to impose rules that cannot be circumvented, and since the individual citizen’s incentive to monitor policy makers’
behaviour and turn to the courts to enforce the rules is weak, the effectiveness
of ex ante controls seems limited. To the extent that creative practices to
circumvent them reduce the transparency of public finances and of the
relevant decision-making processes, such controls may actually reduce the
voter’s ability to monitor the performance of the elected politicians and,
therefore, aggravate rather than mitigate the principal-agent problem.
EFFECTIVE FISCAL INSTITUTIONS: A FRAMEWORK FOR ANALYSIS
As in other principal-agent relationships, a solution to this problem is to
rely on an outside authority that enforces ex ante rules effectively. The
European Monetary Union (EMU) furnishes a good example of enforcing
budgetary rules for Poland through an international organisation.9 In the
Maastricht Treaty first, and the Stability and Growth Pact later, the EMU
states signed agreements committing them to a set of fixed targets. These
countries have to submit annual Stability and Growth Programs explaining
their governments’ strategies to meet these targets. After reviewing these
reports and the relevant data, the European Commission issues judgments
of the countries’ fiscal stance, which become the basis for the European
Council’s assessment and possible recommendations. Before the start of
EMU on January 1, 1999, external enforcement power was based on the
threat of exclusion from the monetary union. Today, it is based on the threat of
public reprimand for fiscal profligacy and the possibility of financial fines.
But the success of the European approach has been limited so far. When the
Maastricht process started in 1992, the average debt ratio of the European
Union (EU) states stood at 60 percent of GDP and in 1998, it was over 75
percent. A closer look reveals that this increase was driven entirely by fiscal
developments in Germany, France, Spain, Italy, and the United Kingdom,
which did not commit itself to EMU. It is probably no coincidence that the
first four countries are the largest among the twelve EMU states, given that
the role of external political pressures such as admonitions brought by the
European Commission are not strong enough to coerce internal politics in
large countries. Note also that the European Commission, in its assessment
of the fiscal criteria for EMU membership, has treated the large countries
with considerable lenience. Germany and France in particular have repeatedly
exceeded the deficit ceiling of 3% of GDP. All this suggests that the effectiveness of outside actors in enforcing ex ante fiscal rules depends critically on
the importance of international organisations in domestic politics, which is
plausibly a function of the size of the country.
implications for
poland
This discussion has clear implications for Poland. The exclusion of the
country from EMU may be an effective instrument ex ante assuming that
Poland would want to join at some point, but the general ineffectiveness
of the Stability and Growth Pact suggests that it will not help once Poland
joins the eurozone. Over the medium- to long-term, the European Union
will not provide a solution to Poland’s fiscal needs. It is important that
the country put in place effective institutions to manage its affairs and to
promote domestic fiscal stability whether Poland decides to apply for eurozone membership or not.
19
The Polish Budget Process
The following section traces the state of Polish fiscal rules and fiscal
institutions. After discussion of the debt limit written into the Constitution,
it progresses through the various stages of the budget process. It begins
with multi-annual planning. It then considers the decision-making process
within the government and, after the government has submitted its draft,
the process within parliament. The data come mostly from interviews with
policy-makers and economists at Polish institutions. We supplemented
this material with interviews of journalists, former policy-makers, academics, and non-governmental economists. All people interviewed were told
that their identities would not be revealed in this report. We also surveyed
the relevant literature in both English and Polish, which included relevant
publications from international organisations such as the European
Commission, the International Monetary Fund, and the Organisation
for Economic Cooperation and Development.10 In each case, we review
whether Poland has institutions in place that promote the centralisation
of the budget process, and, based upon the methodology discussed above
and in the Appendix, we calculate the extent to which the country uses
centralising mechanisms that best fit a truly centralised system. We will
then use these scores in the following section both to compare Poland with
other countries and to suggest future avenues for reform.
Ex Ante Controls--Limits on Debt in the Constitution and
Public Finance Law
constitutional limit
on debt
The most important fiscal rule, and one that is unique among central and
East European countries, appears in the Constitution and concerns the debt
level. The overall objective is to assure that the debt level does not go
above 60% of GDP, or, if it does so, that it quickly moves below this level. The
Public Finance Act establishes three rules to reinforce the Constitutional
limit. If the debt level is above 50% of GDP but not as high as 55%, the
deficit may not be higher the following year. In particular, according to
the Public Finance Act, the deficit by revenues ratio cannot increase. This
applies to local governments as well. If the debt level is at least 55% but
not 60% of GDP, the debt level the following year cannot be higher.
Finally, if the debt level is 60% or greater, the government at all levels must have
a balanced budget or surplus the following year. It should be noted that the
definition of debt levels is the domestic one, and is not the same thing as the
definition at the European level in the form of the ESA 95 accounting standard.
So far, this rule has not been applied, so there is no experience with it in practice.
In addition to providing details on the operationalisation of the Constitutional limit on debt, the Public Finance Act establishes many of the rules
THE POLISH BUDGET PROCESS
and practices discussed below. The version implemented in 1998 represented
a major revision of the way Poland made its budgets. The most recent
version came into force on January 1, 2006. Compared to the changes in
the 1998 document, the revision was minor.11
Multi-annual Targets and Accounting Standards
multi-annual
targets
Multi-annual targets appear in four forms, with the first three intended
for a domestic audience. The “Debt Management Strategy” considers
projections of the debt burden as a percent of GDP while the “Justification
for the Budget,” which the government includes as part of the budget
draft that it sends to parliament, includes deficit targets for the following
three years. The Ministry of Finance’s Department of Financial Policy and
Statistics writes them. The third target is one that the current Prime
Minister, Kazimierz Marcinkiewicz, has set publicly, which is that the budget
deficit should not exceed 30 billion zloty per year.12
For a European audience, the Ministry of Finance prepares Poland’s Convergence Programme. The EU requirements for the Programmes are that they
also go three years into the future, and, unlike the domestic plans, they
include figures for expenditures and revenues in addition to projections on
deficits and debts. The accounting standards are somewhat different. In
the Convergence Programme, figures are in accrual terms, they follow the
ESA 95 standard, and they consider general government, which means that
they include local government accounts and pension funds in addition to
the central government. In contrast, the accounting system for the annual
budget is in cash terms, it follows a Polish methodology, and includes only
central government accounts.
accounting considerations
of pension liabilities
These relatively minor accounting differences can have potentially a significant
impact on the date Poland qualifies for Economic and Monetary Union.
Most significantly, there is an on-going dispute between the Polish government and the European Commission on the way ESA 95 calculates pension
fund balances. In 1999, Poland reformed its pension system. The reform
included the establishment of an Open Pension Funds system, where the
government puts money in what amount to private pension accounts,
alongside the pre-existing Pay as You Go (PAYGO) system. According to
ESA 95, funds that go into the Open Pension Funds system from state
coffers count as public expenditure. Successive governments have argued that
Poland is being punished for initiating pension reform and have asked
that payments to the Open Pension Funds not be counted because they
do not fuel current consumption.13 EUROSTAT ruled against the Polish
interpretation in Fall 2004 but allowed a transitional period through
March 2007 where the government could count its Open Pension Funds as
a unit of general government. Once the transition period ends, moving the
21
THE POLISH BUDGET PROCESS
classification from general government to the financial institutions sector
will increase the general government deficit. To get a sense of the magnitude
of the change, the general government deficit in 2005 was 2.9% of GDP, or
just below the Maastricht criterion on deficit levels, but would have been
4.7% in the same year had there been no transitional period.14
state road fund
One additional difference in accounting standards has implications more
for parliamentary oversight and control (discussed later) than for whether
or not Poland will qualify for EMU at some future date. The State Road
Fund was created on January 1, 2004. Its revenue comes from a one of two
taxes on petrol and is used to build and maintain highways. Both revenues
and expenditures do not appear in the state budget, but they do appear in
budget15 calculations done for the Convergence Programme.16 Conversely,
there are some special research units that appear in the state budget but do
not count under ESA 95 as well as some transactions that count as revenues
or expenditures in Poland but only as “market operations” under ESA 95.17
In terms of multi-annual budget budget planning, the figures for the
Convergence Programme and “Justification of the Budget” are generally
consistent despite these differences, with the latter including additional
indicative deficit levels that are computed the same way as they would be
done for the Convergence Programme. Because the two are not prepared
at the same time, with the draft budget appearing several months before
the Convergence Programme, the figures in the latter sometimes require
updating. The department that prepares the Programme is also not
the same one that prepares the annual budget. The macro-economic
framework used to compute future figures comes from the Ministry of
Finance, and it includes estimates for economic growth, inflation, and
unemployment.
consistency of
figures
While some effort goes into drafting these targets, they amount in practice
to nothing more than forecasts. They are indicative only and are not set in
law, so there is no obligation for governments in future years to follow them.
The documents that go to parliament represent explanatory statements only.18
There is also no hierarchy of targets that would suggest how an overall figure
would affect specific ministries. The evaluation of the fiscal rules later in the
report will discuss the operation of these plans in practice.
Decision-making Process within the Cabinet
The current decision-making process within the government on the budget
is generally as follows. The Ministry of Finance produces revenue estimates
in the spring before the next budget year. It then computes rough budgetary
guidelines, establishes a proposed deficit level, and provides estimates for
“rigid” spending, with these estimates all extending forward one year only.
THE POLISH BUDGET PROCESS
Table 1. Long-Term Planning Index
Rule
Description
Score
Multi-annual Target
Debt/Deficit
2
Planning Horizon
Three Years
2
Nature of Plan
Updated based on Macroeconomic Framework
4
Degree of Commitment
Indicative
2
Sum, Long-term Planning
10 of 16 (62.5%)
Multi-Annual Target: 4-Total Budget Size; 2- Spending or Taxation 0; None; Planning Horizon: 4- Five years;
3- Four Years; 2- Three Years; 1- Two Years; 0- None; Nature of Plan: Updated Based on Consistent Macroeconomic Framework; 3- Updated, but Not Based on Consistent Framework; 2- Fixed Forecast; 1- Ad Hoc
Forecast; 0- No Forecast; Degree of Commitment: 4- Legal; 3- Political; 2- Indicative; 1- Internal Only.
weakness of
finance minister
The Ministry of Finance then asks line ministries about their spending needs
for the following year. The figures the line ministries submit are, in aggregate,
usually higher than they should be if they are to be consistent with the deficit
level. Negotiations then begin bilaterally between the Ministry of Finance
and the line ministries, and they proceed through the end of summer. Around
the beginning of September, matters are finalised, with either the deficit
level increased, line ministry proposals cut, or some combination of the two.19
The role of the finance minister is a rather weak one in the process. While there
are bilateral negotiations, the minister has no special powers. In particular,
he is not an agenda-setter who proposes the size of the budgets for each
ministry (as one finds in France, for example) and he has no veto right to
cut a specific ministry’s request (as one finds in Germany). Given this weak
structural position, the minister of finance is effective only when he has
the full support of his prime minister in political battles within the cabinet.
When he does not have such support, he must either accept that he will
lose some of the budget battles or be prepared to resign. Indeed, recent
Polish fiscal history includes a troubling number of resignations after finance ministers lost the fiscal argument in cabinet. Marek Belka, for example,
resigned in protest in July 2002 after the spending ministers agreed to 2.5
billion zloty more than he wanted (Zubek 2006a, 7).
As weak as the finance minister may seem to be institutionally, the
position is likely to erode further. Prime Minister Marcinkiewicz announced
on November 4, 2005, that the government plans to move partially to
output-based budgeting in 2007 and fully in 2008. Under this system, the
Prime Minister’s Office, and not the Finance Ministry, will draft and control
the state budget. The Finance Ministry will continue to be responsible for
monitoring and controlling expenditure.20
We present below two tables to summarise the formation of the budget as
well as the strength of the finance minister, which is based on Hallerberg,
23
THE POLISH BUDGET PROCESS
Strauch, and von Hagen (2001 and 2006). The first column indicates the
general constraint on the government. The highest score is given to countries
that consider both expenditure and deficit targets. Poland has a deficit
target only. In terms of agenda-setting, the highest score goes to countries
where the Minister of Finance proposes the spending levels for each line
ministry, while the lowest score goes to countries where the Minister collects
bids. The budget norm category how developed the respective targets are,
with a focus on the deficit only leading to the lowest score. The structure of
negotiations concerns whether the Minister of Finance negotiates bilaterally
with the line ministers, in which case the country receives the highest score,
or whether all cabinet ministers are involved, in which case the score is zero.
The Polish system falls in between, with a mix of bilateral negotiations and
full cabinet negotiations in some cases. Out of a possible score of 16, which
represents the most centralised structure of negotiations, Poland receives
a score of 7.33.
Table 2. Structure of Negotiations in Government
Rule
Description
Score
General Constraint
Debt/Deficit
2
Agenda-Setting
FM Proposes Initial Targets,
Cabinet Can Override
2
Budget Norms
Debt/Deficit, some Specific
1.33
Structure of Negotiations
Multilateral
2
Sum, Negotiations
7.33 of 16 (46%)
General Constraint: 4- Size of overall budget, expenditure cap, and deficit target; 3- Golden Rule; 2- Deficits
and Debt; 1- Overall Size 0 None; Agenda-Setting: MF proposes, no individual vote on budget bid; 2- Spending
Minister can ask for individual vote on bid, cabinet can override MF; 0- MF collects budget bids; Budget Norms;
4- “broad” 2.66 “broad” and “specific” 1.33 “specific”; 0- expenditure/deficit only; Structure of Negotiations;
4- MF bilateral only; 2- multilateral; 0- all cabinet ministers involved.
The second table focuses just on the Finance Minister, and is based on the
coding scheme that appears in Hallerberg, Strauch, and von Hagen 2001.
There is therefore some overlap with the first table, which includes the
Minister in addition to other factors. In this table, each attribute is simply
scored a “4” if it exists and a “0” if it does not. The Polish Finance Minister
receives as score of only 8 out of 24, which represents in percentage terms
a score of 33% of possible points.
Parliament and President
Once the government has agreed on its budget draft, it sends it to the
Polish Parliament, which has four months to approve the budget. The lower
house, the Sejm, is the more important of the two houses. It receives the
budget draft first. It cannot propose a budget independent of the government.
THE POLISH BUDGET PROCESS
Table 3. Strength of Finance Minister
Rule
Description
Score
Initial Negotiations Bilateral
Yes
4
Ministers Can Ask for Cabinet Decisions on
their Budget Bids
Yes
0
There are Bilateral Negotiations at All
Yes
4
Minister has Special Powers (Veto Proposals,
Must Approve Changes, etc.)
No
0
Full Cabinet Resolves Disputes
Yes
0
Full Cabinet Can Override the Finance Minister
Yes
0
Sum, Strength of Finance Minister
8 of 24 (33%)
Bilateral negotiations both initially and at all and ministerial special powers are scored a 4 if yes, 0 if no.
Remaining answers scored 0 if yes and 4 if no.
importance of budget
balance figure
The key figure from the government is the budget balance figure. According
to the Constitution, Parliament cannot change this number, but it is free to
propose changes in the composition of expenditures.21 Amendments must,
therefore, be neutral with regard to the budget balance, which means that the
Sejm can raise expenditures beyond what the government proposed so long as
it includes corresponding revenue increases. Amendments are not technically
limited. They are, as a rule, generally voted on before a vote on the full budget.
Twice during the government 1997-01, however, the Minister of Finance did insist
that there first be a vote in the Public Finance Committee on the level of expenditures. The intent was to preclude any parliamentary changes to revenues.22
erosion of fiscal discipline
in parliament
It seems clear that the level of discipline in parliament on budgetary matters
has eroded in the past few years. One indication of this is that, in recent
years, private bills with sizable budgetary implications have appeared on
several occasions when the government lacked a majority in parliament.23
This happened first under the AWS in 2000-1 and then under the successor SLD-UP-PSL government. In the run-up to the past election in 2005,
private member bills passed parliament that had real budgetary consequences. Those bills included changes to the curtailment of early retirement for
miners, indexation of pension, and rebates to value-added tax on construction
and refurbishment (IMF 2005a; Polish press reports). The current PiS
government entered office with a minority of seats in parliament, and it
has similarly had problems with private member bills. The most notable
bill that passed increased the level of spending for families.24 The table
below displays the number of parliamentary amendments to the government’s budget. One should keep in mind governments usually propose
some amendments themselves. Nevertheless, there has been a clear increase
over time in Sejm amendments.
25
THE POLISH BUDGET PROCESS
Figure 1. Number of Amendments in Parliament on the Government’s Budget Draft
250
200
150
100
50
0
1998
1999
2000
2001
Sejm
2002
2003
2004
2005
2006
Senate
Source: Own compilation based on data available at http://www.sejm.gov.pl.
There are also some questions in practice about the effectiveness of offset
rules. It would seem that, in aggregate, the potential changes to the government’s budget are not large. The Table below indicates the total amount
of changes the parliament made as a percent of the government’s proposed budget. Only once did Parliament change as much as 1% of what the
government wanted on either the expenditure or revenue side, and the
change represented a revenue increase (in 2004). Moreover, the table
illustrates that revenue increases accompanied any expenditure increases in
aggregate, which suggests that the offset rule functioned as it should.
loose rules on definition of
offsets in parliament
senate can amend but
does not have final say
Yet the rules concerning what constitutes an acceptable offset are loose,
and they do represent a potential problem. For example, the planned
reserve for debt servicing in October 2005 was 5.3 billion zloty. After the PiS
assumed office, the new government’s Finance Minister, Teresa Lubińska,
reduced the figure 200 million zloty. The Public Finance Committee did not
believe her, and this included members of her own party, who proceeded
to cut debt servicing 350 million zloty instead and to approve amendments
to the budget for that increased spending by this amount. The change in
debt servicing costs is the most recent example, but in principle any “estimate” can be rewritten without real cuts in spending.
Before moving on, one should also discuss two additional actors in the
budget process, the Senate and the President. The Senate also considers the budget and can make amendments to it. Elections to the Senate
are less proportional than to the Sejm, and this means that the party that
receives the most votes is more likely to control a majority of seats. The SLD
controlled a majority under the previous government, for example, while the
THE POLISH BUDGET PROCESS
Table 4. Impact of Parliamentary Amendments on the Government (Percent Change in
the Government Draft)
1999
2000
2001
2002
2003
2004
2005
2006
Expenditure
.003%
.02%
-.36%
.62%
.48%
.88%
.46%
.50%
Revenue
.004%
.02%
.35%
.79%
.60%
1.28%
.55%
.58%
Source: Own compilation based on data available at http://www.sejm.gov.pl. The figures for 2000, 2004
and 2006 include governmental amendments proposed after delivering draft budget to the Sejm.
PiS today has exactly half of the 100 seats. It is common for governments
to use Senate amendments to try to modify the budget in its favour. Yet it is
the lower house that has the final say--the Sejm votes on the Senate’s amendments, and those that the Sejm accepts become law.25
president does not
have formal role
The President does not have a formal role in the budget process. While he
can veto normal legislation, he cannot veto the budget. According to Article
224 of the Constitution, he is required to sign the budget seven days after
he receives it from the Sejm. This rule applies to interim budgets as well.
Where the President does have relevance is the case when the parliament does
not pass the annual budget within four months after the government has
submitted it. The President then has the power to call new elections, but he
is not obligated to take this step. The most recent budget took more than
four months to pass, but, counter to speculation in the press, President
Kaczynski chose not to call new elections.
weak centralization of budget
process in parliament
The following table presents our calculations for the level of centralisation
of the budget process in parliament. Poland receives a score of 6 out of
a possible 16.
Budget Transparency and Monitoring
most, but not all,
special funds included
The more informative the budget, the easier it is to understand the priorities of
the government. One would like to see all relevant figures and categories, such
as special funds and loans, appear in the budget draft. Moreover, the more frequently the government makes budget figures available during the implementation of the budget, the more likely it is that necessary corrections can be made.
Most special funds are included in the budget draft. As mentioned in the
section on multi-annual plans, the most prominent fund not included is
the National Road Fund. The National Health Fund similarly receives its
revenues mostly from contributions to health insurance, and it too is off-budget,
although some transfers from the State Budget to the National Health Fund
are clearly included.26 There are also some agencies that do not appear in
the budget. In general, the number of such off-budget items has declined in
27
THE POLISH BUDGET PROCESS
Table 5. Parliamentary Stage of the Budget Process
Rule
Description
Score
Amendments Limited
No
0
Amendments Offsetting
Yes, cannot affect deficit
2
Amendments Can Call Fall of Government
No
0
Expenditures One Vote
Not Chapter by Chapter
0
Global Vote on Total Budget
Yes
Sum, Parliament
4
6 of 24 (25%)
Amendments Limited: 4- Yes; 0- No; Amendments Offsetting: 4- any expenditure increases require expenditure cuts elsewhere; 2- expenditure increases require corresponding expenditure cuts and/or revenue increases;
0- no. Amendments Can Cause Fall of Government: 4- Yes; 0- No. Expenditures in One Vote; 4- Chapter by
Chapter; 0- Not Chapter by Chapter Global Vote on Total Budget: 4- Yes; 0- No.
some transparency
frequency of
reporting
the budget. In general, the number of such off-budget items has declined in
recent years, but the amount of money they receive has also increased. The
budget is published in one document, which facilitates the comparison of
different items. When respondents were asked to rate the overall transparency of the budget and given the choices of hardly transparent, not fully
transparent, and fully transparent, respondents chose the middle score of
not fully transparent. Government loans are included in the budget draft.
Including direct links to government accounts facilitates an understanding
of the underlying assumptions used to estimate some spending categories.
Here the budget draft is relatively weak, with deficit figures appearing in
national account terms only in the background document and serving only
as indicative figures. Finally, to promote transparency in parliament, it is
helpful to have votes run chapter by chapter so that parliamentarians are
aware of the level of spending across different categories. The parliament
has votes on amendments, but once the amendments are decided, there is
only a global vote on the total budget.
In terms of reporting, there are no relative scores to compute, but it is
clear that it is better to have information more frequently. The Finance
Ministry makes figures available approximately every month with a twoweek lag. Those figures are reported at the central government level, ministry
level, and chapter level. Revenues are also available both as a total and by
source (i.e., according to which tax). Subnational governmental figures,
in contrast, are available every quarter with a ten-week lag. Social security funds
are not readily available, but the Finance Ministry receives reports semi-annually
with a four-week lag. While the formal requirements seem to be up to standard, at least one international organisation has suggested improvements. The
International Monetary Fund, in its most recent public discussion of Article IV
consultations, commented that, while the statistics provided area “adequate”
for their purposes, “the quality and timeliness of quarterly national accounts
and the general government accounts need improvement (IMF 2005a,1).”
THE POLISH BUDGET PROCESS
Table 6. Informativeness of the Budget Process
Rule
Description
Score
Special Funds
Most
2
Budget one Document
Yes
4
Transparency Assessment
Not Fully Transparent
2
National Account Link
Possible
1.33
Government Loans Included
Yes
4
Sum, Informativeness
13.33 of 20 (67%)
Special Funds: 4- Yes; 3- Yes, but Annexed to Budget; 2- Most; 1- Some 0 None Budget One Document: 4- Yes;
2- Recent Yes; 0- No Transparency Assessment 4- Fully Transparent; 2- Not Fully Transparent; 0- Hardly Transparent National Account Link: Direct Link Provided; 2.66- Provided in Separate Document; 1.33- Possible;
0- Not Provided; Government Loans Included: 4- Yes; 0- No.
Implementation
The budget can be superbly designed, but fiscal discipline can nevertheless
falter if it is not faithfully implemented. The fiscal history of Europe is rife with
examples of politicians who promised consolidations but allowed matters to
slip during its execution.
importance of deficit target
at the implementation stage
The fiscal rules at the implementation stage in Poland are meant to guarantee
the deficit target that is included in the annual budget. This target has legal
status, as does the figure for the total amount of expenditure. This means that,
during good times when revenue are higher than forecast, the revenues simply
count against the deficit. Both in 2004 and 2005, higher revenues led directly
to lower deficits. If during the course of the budget year it becomes clear that
the target will be exceeded, the government has one of three choices--make
cuts in expenditures itself, or go to parliament either to raise revenues or to
change the deficit target and expenditure target in the form of a supplemental
budget. While there are some spending categories that are dependent on the
state of the economy, he most likely cause of an increasing deficit is lower than
forecast revenues. Because the accounts are on a cash basis, the government
can literally run out of money.
finance minister and
budget implementation
At least on paper, the Finance Minister is a strong player during the implementation stage. He can block expenditures mid-year. While he cannot set
explicit cash limits, he must approve all disbursements of funds. So long as he
receives the approval of the Public Finance Committee of the Sejm, he can also
reallocate spending across chapters, and such transfers are possible only
with his approval. There are provisions for carrying over unspent funds to
the following year, which do not require the finance minister’s approval, but
for accounting purposes the money is considered to have been spent in the
year for which it was budgeted.
29
THE POLISH BUDGET PROCESS
financial reserves
In addition to the role the Finance Minister plays, there are two types of
reserves that can cushion any shock. The first type are targeted and can
only be used for specific purposes, such as the reserve fund for debt
service. These reserves can be substantial in practice, with one fund equivalent to 1% of GDP. The second type is general. The Prime Minister has an
account with approximately .1% of GDP he can use to deal with unanticipated
developments. As discussed in the section on parliament, parliamentarians
can, and do, change the level of the reserves.
The system seems to work when there are only minor changes that need to
be made. In a typical year, the Finance Minister makes on the order of 20-30
changes that the Public Finance Committee considers, and as a rule those
changes are approved. Small cuts in spending are not an issue. When there
is a larger shock, however, the system appears to break down. The finance
minister does not usually have the political backing to make the necessary
changes. In May 2001, for example, there was an economic downturn that
led to large revenue shortfalls. The Finance Minister at the time, Jaroslaw
Bauc, proposed spending cuts that amounted to about 1% of GDP, but the
cabinet simply rejected the changes. Revenues declined again, and again
the cabinet rejected a renewed attempt of the Finance Ministry to rein in
spending. Because the deficit target was clearly going to be exceeded, the
government had no choice but to go to parliament with a supplementary
budget that increased the budget deficit target.
reluctance to return
to parliament
This “solution” is often the last thing the government wants to do. Several people noted in interviews that governments try to avoid as much as
possible going back to parliament for a supplementary budget. “All bets
are off” what the parliamentarians will do if they have a chance to rework
the budget. Supplementary budgets have been introduced only twice in the
last decade, in 1997 and in 2001, and in both cases the sense was that fiscal
discipline slipped as a result.
In the analysis section of the report, we will discuss an alternative way to
manage the implementation of the budget that should be more robust than
the current system during economic downturns.The table below categorises
the strength of the budget process at the implementation stage. Poland receives a score of 13.66 out of a possible 24 points.
Subnational Fiscal Policy
The bulk of this report focuses upon central government institutions and
performance, but it is important to remember that general government
outcomes determine the figures that the European Commission uses
to evaluate the development of Polish finances. Substantial problems
at the subnational level can also become drains on central government
THE POLISH BUDGET PROCESS
Table 7. Strength of the Implementation Stage
Rule
Description
Score
Finance Minister Block Expend
Yes
4
Finance Minister Set Cash Limits
No
0
Finance Minister Disbursement
Approval
Yes
4
Transfers
Limited, Require FM Approval
1.6
Budget Changes
No Changes Allowed
4
Carryover Provisions
Not Limited
Sum, Implementation
0
13.6 of 24 (57%)
Finance Minister Block: 4 Yes; 0- No. Finance Minister Cash Limits: 4- Yes; 0- No. Finance Minister
Disbursement Approval: 4- Yes; 0- No; Transfers: 4- Only within Departments, Require Finance Minister Consent, or not Allowed; 3,2- Only within Departments; 2.4- Only within Chapters; 1.6- Limited, Require Finance
Minister Approval. 0.8- Limited; 0- Unlimited; Budget Changes: 4- No Changes Allowed; 0- Changes Allowed;
Carryover Provisions: 4- Carryovers Not Possible; 2.66- Limited, Require Finance Minister Approval; 1.33Limited 0- Unlimited.
resources, as Belgium and Italy discovered in the 1980s when their centralgovernments bailed out insolvent localities.
In Poland, there are three types of subnational governments. The gmina is
the basic unit of local government. Another level of local government, the
powiat, was first created after 1998. There are also sixteen voivodships.
There are fiscal rules that structure to some degree what the local level can
do. The Public Finance Act requires that the local government debt level not
exceed 60% of their revenues, while annual debt payments cannot exceed
15% of annual revenues. As mentioned earlier, this amount is reduced to
12% if the public finance debt in the previous year was greater than 55% of
GDP.
revenue resources for
subnational governments
The Public Finance act is also quite specific about the revenue sources available
to local governments. They get fixed percentages of specific taxes. A given
gmina for example, gets 39.34% of the revenue from the personal income
tax from persons registered in the gmina, while it also gets 6.71% of the
receipts from the corporate income tax. This rigidity can potentially cause
problems if local governments need to raise revenues to meet their legal
spending obligations but they lack the ability to adjust their tax base. So far,
however, we do not sense that this has been an issue. The past few years, the
aggregate subnational government sector has either been in balance (2004)
or run a slight deficit (between .2% and .5% of GDP).
31
Polish Fiscal Performance
Since 1998
Assessment of Problems, Comparison with Other Countries,
and Recommendations for Better Performance
comparisons with
other countries
recommendations
for reform
This section analyses the effects of the Polish budgetary process. It begins
with a comparison of the Polish fiscal system first with the other new Member
States of the European Union. Poland moved from having one of the worst
systems among this group in the 1990s to one of the best in 2001, but
it has recently slipped downwards somewhat. We then consider whether
Poland has fiscal rules compatible with a contract form of fiscal governance,
such as multi-annual expenditure targets, or with a delegation form of
fiscal governance, which measures the strength of the finance minister.
When compared with the EU-15 on both of these dimensions, Poland
consistently finishes at the bottom in terms of the fitness of its fiscal
system--it has neither the types of institutions that reinforce the use of
fiscal contracts nor the strong finance minister one expects under delegation.
The section then compares these results on Poland’s fiscal institutions with
a review of recent Polish fiscal history. The evidence indicates that the
country’s fiscal health is especially vulnerable to external shocks.
After assessing the recent performance of Polish finances, we introduce and
discuss two sets of recommendations for reforms that depend upon the form
of government in place. If there are either coalition or minority governments,
fiscal contracts would be the most appropriate institutional path. Indeed,
under the current Constitution there have been regular minority governments,
and the country as of Spring 2006 has a minority government in place
under the political party PiS. Sweden experienced significant fiscal slippage
in the early 1990s under institutional rules similar to those in Poland today.
It has also had regular minority governments. It introduced signif icant
reform in the mid-1990s, including most prominently multi-year fiscal targets
that have legal status. Sweden has since then run consistent fiscal surpluses,
and it may serve as a useful model for Poland to follow so long as the form
of government remains the same.
A second set of recommendations is more speculative, and it concerns what
the country should do if regular one-party majority governments become
the norm. The Sejm has debated the introduction of a plurality electoral
system to replace the current use of proportional representation. This
change would probably reduce the number of parties in parliament, and
the system would resemble the United Kingdom, where plurality electoral laws contribute to regular one-party majority governments. Poland
POLISH FISCAL PERFORMANCE SINCE 1998
would then benef it from a much stronger Finance Minister in the budget
process.
Strengthening the power of the government vis-ă-vis parliament and
increasing overall transparency are additional recommendations that do
not depend upon the preferred form of fiscal governance in place.
Comparison with New Members of the European Union
The first standard for evaluation is to compare Poland with what some
would argue is its relevant peers--the ten countries in Central and Eastern
Europe that just joined the European Union or that are likely to join next
year, in 2007. We do not have data available that is either as detailed, or as
recent, as the data we have for the West European countries that compose
the EU-15, but there have been a few studies that provide comparative
measures. Gleich and von Hagen (2002) consider the effectiveness of fiscal
rules in this set of countries. They note that multi-annual planning was not
in place in these countries, and they propose a somewhat different methodology for computing the centralisation of the budget process, which has
thirteen measures all ranging from 0 to 4. Those scores are then weighted
and averaged.
comparison with central
and eastern europe
The first consideration is whether there is any fiscal rule in place, such as
a balanced budget requirement. Poland today has limits on public borrowing in its Constitution, and it scores a 2. The second is the sequence of the
budgetary draft. This one is arguably the most difficult one to compute. As
indicated earlier in this report, the Finance Minister does circulate a document
with the deficit target in place, which suggests a top score of 4. Spending
ministers have time to respond to the circular with individual budget bids,
however, and they can change the budget balance figure (and have changed
it in practice). There are some targets in place, so the score is a middle
one of 2. For the third item, which considers whether the Finance Minister
negotiates bilaterally or whether he merely collects budget bids, interviews
in the Finance Ministry suggest that, while there are bilateral negotiations,
the Minister does initially collect bids after establishing the deficit target and
much discussion is not bilateral. The score here is therefore a middle one of
two. Finally, in terms of who settle disputes, recent practice makes it clear
that the full cabinet makes the final decision, which again leads to a score of
zero, or the most decentralised possibility.
Poland does better when calculating the legislative components. Its upper
house, the Senate, has only weak prerogatives on the budget, and it receives
a 2 on the strength of the second chamber. Parliament cannot change the
deficit target, which means that it receives the highest score on the constraints
on the legislature to amend the government’s budget. The sequence of votes
33
POLISH FISCAL PERFORMANCE SINCE 1998
includes only a vote on budget aggregates, which leads to a score on this
item of zero. On the relative power of the executive, the President can call
new elections if parliament does not adopt a new budget, which again leads
to a score of 4. Finally, it is assumed that for Central and East European
countries, strong presidents in the budget process weaken the centralisation
of the budget as presidents have their own constituencies that demand cultivation. The Polish President has no role in the budget other than to sign
what Parliament passes and to dissolve Parliament if it does not pass the
budget within four months, so this item is also scored a 4.
The final set of indicators consider implementation, and again Poland is
pretty strong. For three of the four items--flexibility to change the budget
(supplementary law is required in Poland), transfers of expenditures (they
require Finance Minister approval), and procedures when the deficit deteriorates (Finance Minister can block expenditure), the scores are the highest
at 5. Only for carry-over provisions, which are unlimited in Poland, does the
country score a zero.
poland ranks today near
the middle of the pack
The Graph below compares Poland in 1997, 2001, and 2006 to the remaining
countries as they were in 2001-2. The country is in the top three in 2001 but
slips somewhat and is in the top four in 2006. The main difference between
Poland’s score in 2001 and 2006 is the Finance Minister’s role during the
preparation of the budget draft. In 2001, the Finance Minister was considered
more powerful than in 2006, which meant that the country was near the
top of the rankings but fell down to roughly the middle.27 The IMF (IMF
2005c) made similar calculations for 2003, and they ranked Poland slightly
higher, with the country tied with Estonia as tied for the highest quality fiscal
institutions among accession countries.28 They also assumed that the Polish
Finance Minister was stronger than what we were told in our interviews. It
should be noted that there is a big jump after the new Constitution and
new Public Finance Act are put in place in 1997-8. Poland originally had
one of the weakest set of fiscal institutions according to this index. Even the
middling score for 2006 leaves the country noticeably better off than
countries at the bottom of the scale, such as Romania or Hungary.
While we do not have more recent data for the other nine countries so that
we could update the empirical work done in other studies, those studies
produce robust results that are strongly suggestive that the fiscal institutions had an important effect on fiscal performance. For the time period
1994-8, Gleich (2003) finds that this centralisation is strongly correlated
with better fiscal discipline. Yläoutinen (2005) updates the empirical study
and finds broadly similar results for the time period 1998-2002, as does the
IMF (2005c) when looking over the period 1997-2003.
These differences fiscal institutions may have an effect on more than just
the budget balance. By making policy makers adopt a comprehensive view
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 2. Comparison of Central and East European Countries, Gleich and von Hagen
(2002) Index
Romania
Hungary
Poland 97
Bulgaria
Lithuania
Slovakia
Czech Rep
Poland 06
Slovenia
Poland 01
Latvia
Estonia
0
1.7
3.4
5.1
6.8
8.5
Source: Hallerberg, Strauch, and von Hagen (2006), which is based on Gleich (2003); and own calculations
for Poland in 2006 based upon evidence presented in this report.
of the costs and benefits of individual public policies, centralisation is likely
also to promote efficiency of public spending. In a recent empirical study,
Schuknecht and Tanzi (2006) develop estimates of public sector efficiency
in a number of EU accession countries and emerging market economies.
They are interested in how much a given public sector produces given its
cost. They provide a detailed methodology for computing the efficiency,
which includes an examination of both public sector inputs and outputs,
and they score all of the recent member states to the European Union as
well as some emerging market countries and the two likely accession countries
29
(Bulgaria and Romania). We would expect that more “fit” fiscal rules should lead to a more efficient use of the government’s resources. While we
have only ten countries, the graph below is highly suggestive that an increase in the fitness of fiscal rules leads to a more efficient public sector. The
correlation between the two is .47.
better fiscal rules lead to
a more efficient public sector
Comparison with the EU 15
The first section of this report indicated that there are two alternative
packages of fiscal rules that address the common pool resource problem.
Under the f irst, Delegation, the Finance Minister is vested with strategic
powers in the budget process. In the ideal system, he is the agenda-setter
during the formation of the budget. He negotiates bilaterally with the spen-
35
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 3. Public Sector Efficiency and the Strength of Fiscal Rules
.95
Public Efficiency Score
Slovakia
Latvia
.9
Estonia
Slovenia
Romania
Hungary
.85
Lithuania
Czech Rep
Poland
.8
Bulgaria
.75
5
6
Public Sector Efficiency
7
8
9
Fitted values
Data on fiscal rules based on calculations for this report, while data on public sector efficiency come from
Schuknecht and Tanzi (2006), Table 3.
ding ministers, and there are no individual votes on a specific ministry’s
request before the full committee. Parliament should be generally weak so
that it does not weaken the fiscal discipline that the Finance Minister introduces. At the implementation stage, the Finance Minister again has specific
powers. He can block expenditure mid-year, and changes to the allocations
in the budget require his approval. In contrast, medium-term budget plans
are not particularly relevant.
poland has the weakest
delegation institutions
The graph below calculates a “delegation” index for the EU-15 and for
Poland. It adds together the Negotiation, Parliament, and Implementation
subindices, with rules for scoring the various attributes presented in the
Appendix and the individual scores for Poland calculated and discussed in
the previous section. It also normalises the scores, so that a country with
a 0 has no institutional features one would expect under delegation while
a country with a score of 1 has all of them. As one can see, the strongest
institutions under delegation are found in the United Kingdom and France.
Poland, in contrast, easily has the weakest delegation institutions among
the group, with a total score of .43.
To a large extent, this finding is not a surprise. As the first section indicated,
we do not expect to find strong finance ministers in countries that have
regular multi-party coalition governments and/or minority governments.
Under such situations, there will be players in the budget process whose
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 4. Delegation Index, Latest Data (2004 for EU-15 and 2006 for Poland)
Poland
Neth
Belgium
Finland
Spain
Denmark
Portugal
Germany
Austria
Lux
Italy
Sweden
Greece
Ireland
France
UK
0
0.225
0.450
0.675
0.900
Source: Hallerberg, Strauch, and von Hagen (2006) for the EU-15 and own calculations for Poland in 2006
based upon evidence presented in this report.
assent is required who have different policy preferences than the Finance
Minister, and they will refuse to delegate strong powers to the Minister.
It turns out, in fact, that Poland represents an axiomatic case to illustrate
this point. One simply has to examine the number of finance ministers who
have been in office the past few years and the reasons for their departure.
In the past seven years, there have been nine different finance ministers.
Jarosław Bauc repeatedly failed to get his cabinet colleagues to agree to
spending cuts when the economy slowed in 2001, and for his efforts his
Prime Minister fired him for reportedly not making clear the fiscal mess
early enough.31 Marek Belka resigned in July 2002 after the cabinet refused
to stick to his proposed spending limits. Grzegorz Kolodko resigned after
Prime Minister Miller sided with his Economics Minister, Jerzy Hausner, over
his Finance Minister on tax matters. For the remainder of the term under
the previous government, Hausner’s assent meant that the Finance Minister
was not even the strongest minister on budgetary and economic matters.
The first Finance Minister under the current government, Teresa Lubińska,
lasted less than three months in office.
37
POLISH FISCAL PERFORMANCE SINCE 1998
a stronger finance minister
in poland is unlikely
the fm’s position should
not be weakened further
The point of this discussion is that a marked strengthening of the role of
the Finance Minister in Poland is unlikely given the underlying political
dynamics. The Finance Minister needs the Prime Minister’s support in key
internal battles in order for delegation to function effectively, and there has
to be a sense that he is making sometimes painful decisions for the good of
the government, and for the good of the party in power. The fact that the
current Finance Minister, Zyta Gilowska, simultaneously holds the position
of Deputy Prime Minister does not guarantee that she will be able to set
fiscal policy in the government; indeed, having the same formal position did
not make a difference for Finance Minister Kolodko in his internal battles
with spending ministers under the previous government. Moreover, the fact
that Minister Gilowska comes from a different political party than the rest
of the ministers suggests that she will not have political backing when tough
decisions need to be made.
Although this analysis suggests that a real strengthening of the Finance
Minister’s position is both unlikely, and unlikely to work if attempted,
we also would not support a further weakening of her position. We have
real concerns with the plans under the current government to weaken the
Finance Minister still further. The intent of the current government is to
introduce performance-based budgeting by 2008. While the details of how
performance-based budgeting will work in the Polish case are not clear
at this time, the overall thrust of this type of reform is generally to evaluate the effectiveness of public spending in performing certain tasks. Zerobased budgeting, where one considers how spending could be allocated
most efficiently ignoring past spending levels, is one approach, others
emphasize regular checks of the goals of all government programs and the
extent to which these goals are actually met. Experiences in states following the
delegation approach (e.g., the UK) and the contract approach (e.g., the Netherlands) to the budget process suggests that exercises can go a long way to
promoting greater accountability on the part of spending departments and
increasing government efficiency. It forces them to justify why they deserve
to receive funding. It is important, however, that such exercises complement
rather than replace the rules aiming at centralizing the budget process.
Our understanding is that the introduction of a performance-based approach
in Poland will include moving the responsibility to formulate the initial
draft budget from the Finance Ministry to the Prime Minister’s Office. This
scenario is ominously reminiscent of the transfer of power from the Finance
Ministry to the Chancellor’s office under the Kohl government in Germany.
There was less oversight of budget decisions as well as an incomplete consideration of the costs of additional spending. This transfer to the Chancellor’s
Office contributed to a marked decline in German fiscal performance in
the early and mid-1990s (Strauch and von Hagen 1999), and it is precedent
that should not be followed in Poland.
POLISH FISCAL PERFORMANCE SINCE 1998
Given that Poland has had either a coalition government or a minority
government (or both) since the passage of the new Constitution in 1997,
a fiscal contract approach would be the most appropriate way for Poland
to centralise the budget process. The experience with fiscal targets has not
been positive. The SLD-UP-PSL coalition, for example, negotiated what
Zubek (2006a) refers to as a “fiscal contract” when it assumed office,
which included multi-annual budget targets. Within months of setting
these targets, however, the cabinet had decided to violate them. Recently
Prime Minister Marcinkiewicz made a pledge to keep to a 30 billion zloty
deficit target in the coming years. There exist no sub-targets to reach this
goal. Moreover, one can question whether the goal itself is ambitious.32
poland has the weakest
contract institutions
Poland looks no better in comparative perspective. Below is a graph that
compares the fitness of multi-annual fiscal targets, which are an essential
part of use of fiscal contracts, in the EU-15 plus Poland. Indeed, a quick
comparison of this graph with the previous one indicates that many countries with weak “delegation” rules have conversely strong “contract” rules.
The Netherlands, for example, finishes last among the EU-15 in terms of
delegation but second according to the contracts index. It also has regular
multi-party coalition governments, and a contracts-based approach is the
appropriate form of fiscal governance for this country. For Poland to have
similarly fit institutions, given its regular coalition and minority governments,
it should score as well as Belgium, Finland, or the Netherlands. Poland again
finishes last according to this index. This is troubling, and is something that
should be changed.
One might reasonably ask whether differences in the scores of this index
translate into different fiscal policy outcomes. Below is a regression for the
countries where one would predict fiscal contracts would perform the best,
that is, in places where the are multi-party coalition governments or minority
governments that need one or more opposition parties to push through
legislation. The years we consider are 1998-04, which correspond to the
first year under Poland’s current Constitution and the last year for which
we have data. The dependent variable is the budget balance according to
the ESA 95 accounting standard, with all data coming from the European
Commission. The analysis includes the changes in GDP to reflect what is
happening with the business cycle. A dummy variable indicates whether
there was an election in a country in a given year, while the Delegation and
Contract indices are those reported earlier in this report.
The results strongly indicate that states with stronger fiscal institutions
that are consistent with Fiscal Contracts have higher balances. A country
with all of the institutions in place will have a budget balance that is, on
average, 3.5 percentage points higher than a country that has none of
these institutions. This table also suggests how institutional reform could
39
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 5. Contracts Index, Latest Data (2004 for EU-15 and 2006 for Poland)
Poland
Greece
Ireland
UK
Spain
Italy
France
Denmark
Austria
Sweden
Portugal
Germany
Finland
Neth
Lux
Belgium
0
0.25
0.50
0.75
1.00
Source: Hallerberg, Strauch, and von Hagen (2006) for the EU-15 and own calculations for Poland in 2006
based upon evidence presented in this report.
poland would benefit from
strengthening contract
institutions
benefit Poland. If Poland were to improve its current budget process to an
institutional structure similar to Belgium today, the regression suggests that
it would improve its average budget balance substantially. While it is true
that this regression is based on relatively few cases and years for lack of data,
and, hence, should not be over-interpreted, these results are consistent with
a substantial body of empirical research based on countries from all around
the world and on longer samples that finds the same thing—a higher value
of the contract index in countries with coalition or minority governments
is associated with better fiscal discipline (e.g., Hallerberg, Strauch, von
Hagen 2001, 2006).
The question then concerns which version of contracts to put in place. The
nature of the fiscal contract depends upon whether there are majority or
minority governments, with legal, multi-annual contracts suggested under
minority governments. Indeed, such governments have been common in
Poland. The past two began as majority governments but fell into minority,
while the government that entered office in Fall 2005 began life in minority.
These governments did manage to survive, and to pass adequate budgets,
POLISH FISCAL PERFORMANCE SINCE 1998
Table 8. Effects of Fiscal Institutions on the Budget Balance in Contract States and
Poland, 1998-2004
Variable
Coefficient (Std Error)
P Value
Balance t-1
.70** (.11)
.00
Change in GDP
.28** (.11)
.00
Election
-1.02 (.59)
.08
Contract Index
3.50* (1.56)
.025
Delegation Index
-.33 (2.04)
.88
Constant
-3.13 (1.77)
.077
N=56, r-squared=.71. Panel-corrected standard errors. Data from the European Commission (2005).
* <.05, **<.01.
a history of minority
governments
due largely to idiosyncratic political conditions. After the AWS-UF coalition
collapsed in mid-2000, Balcerowicz’ Union of Freedom nevertheless continued to back the government on budget votes. Similarly, the SLD fell into
minority as the number of independent Members of Parliament increased.
Given that the electoral rule is based on the votes political parties receive, the
independents would lose their positions after the next elections. If they
blocked the budget, they were essentially pushing forward the time when
they would lose their offices. The current government has used a similar
tactic in the run-up to passage of the 2006 budget. Polls of how people
would vote indicated that the two small parties that supported the PiS government on budget issues--the Polish Families League and Self-Defence--would lose seats if there would be early elections while the PiS would gain
seats, and this fact gave the PiS a strong negotiating position before passage
of its government’s first budget.
Nevertheless, the track record until minority governments is not good. While
the SLD used the weak position of the independents to gain the support
of the independents without the need of budget concessions when passing
the annual budget, but it still had problems maintaining fiscal discipline
in the run-up to the 2005 because of its inability to stop private-member
bills. Three episodes are both illuminating and troubling. In the first case,
two private member bills from the government’s own party and a citizensubmitted bill were the basis for granting early retirement benefits to miners
in July 2005. The second case concerned the reimbursement of VAT for building
materials. While two private member bills provided the basis for the legislation, all parliamentarians present voted for the bill. The President then
vetoed it, but the Sejm overrode it with all but three members supporting it.
The President then signed it in August 2005. Finally, a private member bill
on the indexation of pensions passed 393-4 at about the same time.33 These
laws all had fiscal implications either immediately or in the near future.34
fiscal discipline declines
under minority governments
41
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 6. Budget Balance and Minority Governments in Poland
0
-1
-2
-3
-4
-5
1998
1999
2000
2001
Gen Govt Balance
2002
2003
2004
2005
Govt Bal Cycl Adj
Figures from European Commission (2005b), are represented as percentage of GDP, and are in ESA 95
terms. The shaded areas represent the time when there was a minority government in office.
The aggregate evidence supports this impression that fiscal discipline
has become lax especially under minority governments. The graph above
compares the the general government balance and the cyclically adjusted
balance since 1998. The shaded area indicates the period of time that there
was a minority government in office in Poland. This graph suggests two
issues about minority governments in Poland. First, the budget balance
worsens noticeably at the beginning of such governments. Second, even
taking into consideration cyclical factors, the balance remains stubbornly
in negative territory. Robust fiscal rules should function well under both
minority and majority governments, and we will provide detailed recommendations below.
Another way to examine these results is to look at the volatility of the
components of the budget balance. The following graph compares expenditures and revenues as a percent of GDP. Expenditures declined initially
and have been relatively flat since 2000, remaining between 45 and 46%
of GDP. Revenues, in contrast, have experienced a similar pattern but with
a steeper drop from 1999 to 2001, then more continuity from 2002 on as
revenues remained in the 41% to 42% range. The stability is fairly remarkable
given the changes in economic fortunes over time. After falling to a rate of
about 1%, real growth picked up to almost 4% in 2003 and over 5% in 2004.
The budget aggregates did not change in any noticeable way to reflect that
change in economic fortunes. Once again, we suspect that the minority
governments in place were not able to make appropriate adjustments on
both sides of the budget, expenditures and revenues.35
POLISH FISCAL PERFORMANCE SINCE 1998
Figure 7. Levels of Expenditures and Revenue
Percent of GDP (ESA95)
50
48
46
44
42
40
1996
1998
2000
2002
Expenditure
2004
2006
Revenue
Data for 1997-2004 from the AMECO database, European Commission; data for 2005 from the Convergence Programme the Polish Government submitted in January 2006. All figures are in ESA95 terms.
Figure 8. Transparency Index, EU15 + Poland
Portugal
Italy
Poland
Greece
Denmark
Belgium
Austria
UK
Spain
Ireland
Sweden
Germany
France
Lux
Finland
Neth
0
0.25
0.50
0.75
1.00
Source: Hallerberg, Strauch, and von Hagen (2006) for the EU-15 and own calculations for Poland in 2006
based upon evidence presented in this report.
43
POLISH FISCAL PERFORMANCE SINCE 1998
compared to the EU-15,
transparency is low
The third item to consider is the level of fiscal transparency. In this case, we
do not expect differences across countries where Delegation is appropriate
and those where Fiscal Contracts would function best. Greater transparency
in all countries allows policy-makers to evaluate the full tax implications
of their spending decisions, and it should help minimise the common pool
resource problem. The graph below indicates that, while Poland does not
finish last on this dimension, it also has no reason to feel overly sanguine.
Poland’s fiscal transparency is about at the same level as Portugal, Greece,
and Italy. Once again, the level should be much higher. The Dutch are again
instructive and worthy of emulation.
Recommendations
How can Poland improve its fiscal institutions to improve fiscal performance
and make public finances more resilient to shocks? Our recommendations
for reform follow from the problems we have diagnosed.
While stronger than in some Central and East European countries, fiscal
institutions in general in Poland are weak. The most effective type of reform
depends upon the type of government in office. Poland today has a one-party
minority government that relies on the support of two small opposition
parties to pass legislation. Moreover, Poland has had regular coalition
governments and/or minority governments under the current constitution.
One reason for this is the use of proportional representation as the electoral
system. While there is an electoral threshold that keeps the smallest parties
of parliament, the system does still allow several parties to gain legislative
seats, and no single party in Poland has managed to win enough seats to
govern on its own.36 Our first scenario assumes that the form of government remains the same. The use of fiscal contracts in the form of multi-annual expenditure targets would work well.
It is possible that the form government could change in the future, however,
and we therefore develop a second scenario. Fiscal contracts would not be
appropriate if there would be regular one-party majority governments in
office. Instead, delegation to a strong finance minister with strategic
powers in the budget process would represent a better way to ensure fiscal
discipline. One-party majority governments would be expected if the electoral
system were changed from the current use of proportional representation
to a plurality system.37 This scenario may be less likely given the current political
climate, but it is one that nevertheless should be considered.
Scenario 1: Continued Minority and/or Coalition Governments
A Stabilisation Pact for Fiscal Stability
recent experience under
minority government
The current government has reached agreement on a Stabilisation Pact with
the Polish Families League and with Self-Defence.38 It is meant to provide
Prime Minister Marcinkiewicz with a stable parliamentary majority for one
year. It includes 144 draft acts that the parties plan to pass. The agreement
includes passage of the 2006 Budget, which has already happened, and
a promise to adopt the 2007 Budget. There are no explicit fiscal targets or
limits in this Stabilisation Pact.
Evidence from minority governments in West European countries suggests
that such Stabilisation Pacts are common, and they can prove quite useful
as well in promoting and enforcing fiscal discipline if they are used as a binding
45
RECOMMENDATIONS
fiscal contract. Sweden implemented a new system in the mid-1990s that
would be especially appropriate for the Polish case. Prior to 1994, Sweden
had a fairly decentralised budget process. It had regular minority governments, and it had become fairly common for an opposition party essentially
to hold the government hostage on budgetary matters and to swing to the
government’s side only after spending had increased for policies that party
cared most about. There were also frequent private member bills that received
consideration, and there were occasional “unholy alliances” of the left and
right to defeat the government on budgetary matters. These problems all
contributed to budget deficits above 9% of GDP in the early 1990s. Sweden
then undertook a series of serious fiscal institutions reforms, and its fiscal
performance has been among the best in the European Union, with budget
surpluses today the norm.
lessons from the swedish
experience
The Swedish system functions as follows. At the very start of the budget
process, the government negotiates a set of spending targets in twenty-seven
policy frames that then sum up to a total budget and are collectively known
as the general government fiscal guidelines. These negotiations involve the
cabinet members together with the leaders of the parties supporting the
coalition. The aggregate spending limits are for a total of three years, and
they carry legal status once they pass. Importantly for a minority government, they mean that they remain in place until a majority of parliament
changes them in a future year. The opposition can propose changes, but it
must propose a complete alternative to the government’s proposal. Moreover, all proposed changes go through Sweden’s Finance Committee only.
Once the overall caps have been put in place, the government then proposes
how money within the caps is to spent. Proposals must sum to the caps that
parliament has already passed.39
This system is not as foreign to Polish practice as one may first think. The
Sejm’s Public Finance Committee is the clearing house for all amendments
to the budget. The government also sets the deficit target that the Parliament
cannot change. Yet the Swedish system does differ from current practice in
Poland in important ways. Most critically, it includes multi-year legal spending
limits. These are especially effective when governments lack a parliamentary
majority. A regular pattern in Polish politics is that a government enters office
after winning an election. It then experiences defections both from within
its own ranks as well as defections of coalition partners.40 As its parliamentary power shrinks, it needs to make more and more compromises to stay
in power, and the compromises undermine fiscal discipline. The multi-year
aspect of the Swedish model means that governments could pass relatively
tough spending caps that remain the law even if the government weakens
over time. This means that it takes a majority to agree on a different set of
expenditure caps to replace what is already in place.
RECOMMENDATIONS
The second key component of this model is its focus on expenditures. Once
the caps are agreed, any increase in one area of spending would require
corresponding cuts in another. Matters are more loose in Poland today,
where new revenues can just as easily be introduced, and where there have
been several laws introduced mid-year that had clear budgetary effects. The
use of the expenditure frames would force a consideration of the trade-offs
inherent in increasing spending in any one dimension and would make more
transparent the nature of the budgetary decisions.
importance of
expenditure caps
How should such a system be introduced in practice in Poland? Consistent
with the broad themes we discuss here, the International Monetary Fund
has recommended that the new government adopt a Fiscal Responsibility
Law that would include an expenditure rule to supplement the debt rule in
the Constitution. They also suggest three-year rolling budget projections
(IMF 2005a, b). While this is not necessarily a bad idea, we prefer a more
political solution that arises from the underlying political dynamics of the
system over a constitutional amendment. In Sweden, the government and
one or more opposition parties agree to what amounts to a fiscal contract
that they then write into law. In the Polish case, we propose a Stabilisation Pact for Fiscal Stability. This Pact would be multi-annual, preferably
for three years, focused on expenditures, and enshrined into Polish law. If
the Pact fell apart because of differences among the parties, or if political
parties began to splinter and party discipline weakened over the life of the
government (which is common), it would still take a majority in parliament
to change its terms.
usefulness of multi-annual,
legal expenditure caps
The Pact would also change the structure of the budget process in important
ways. Specifically, the annual budget process would start with negotiations
among all cabinet members and the leaders of the coalition parties on a set
of binding spending limits for all spending departments of the government
and possibly also for the main sub-departments. These limits would have
to be consistent with the multi-annual targets laid out in the Pact and the
current macroeconomic projections for the following year. They could be
given additional force by requiring the Sejm to vote on them at this early stage of the budget process. Furthermore, an explicit reserve fund for
coping with unexpected shocks would be created in the budget. The finance
minister would be given the instruments necessary to strictly enforce the
budget, including the sole authority to draw on the reserve fund and a rule
requiring the finance minister’s consent for any carry-overs of budgetary
funds between years.
implementation of such
a pact in Poland
Note that such a Pact does not introduce multiannual budgets, which
would require a change in the Polish constitution. What is would do is
to place the annual budget into a multiannual planning and decisionmaking framework. While the actual budget laws would remain of an annual
47
RECOMMENDATIONS
nature and, therefore, the possibility remains to revise and change the
fiscal targets every year, experience from many countries suggests that such
a multiannual framework is a powerful institutional tool, first, because
changing the targets frequently would be much more visible and politically
sensitive than in the absence of a multiannual framework, and, second,
because the internal dynamics of coalition and minority governments work
towards sticking to the targets, as deviating from them requires new negotiations and agreements among all relevant actors.
This objective is admittedly ambitious, and it may take time and political
effort to develop a system as detailed as the Swedish one. An initial step
to be considered immediately could be for the government and relevant
parties in the opposition to agree on an annual Stabilisation Pact. This
would introduce the same changes in the annual decision making procedures
without the need to embed the fiscal targets in a multi-annual framework.
Therefore, it would still be a significant first step forward.
Indeed, the PiS government agreed to a short-lived Stabilisation Pact in
Winter 2006, which indicates some practical experience with the concept.
There would be two differences with the Pact that the PiS signed with two
small parties and a Pact that would promote better fiscal performance.
First, there would need to be explicit expenditure limits for the different
categories of spending negotiated at the outset of the budget process.
Second, as is the case for Sweden, they would have legal status. That way,
if political support for the Pact collapses during the budget year, it would
still take a majority of parliament to overturn the pre-existing caps. The
precedence for these types of Pacts comes from Denmark. Danish parties
have agreed to annual, rather than multi-annual, fiscal contracts since the
early 1980s, and they have had consistently good fiscal performance since
their adoption.40 These first steps would be possible without changing the
Constitution or the Public Finance Law.
Scenario 2: One-Party Majority Governments the Norm
budget institutions if the
electoral law is changed
The party system affects the likelihood of having a given form of government.
If there are only two parties in parliament, one of them usually has a majority,
while if there are many parties in parliament it is rare that any one party
can find a majority. The electoral system, in turn, affects the party system.
Neto and Cox (1997) indicate that proportional representation is a necessary, but not sufficient, condition for a system with multiple parties. One
could get a party system like the Netherlands, where there are many parties in parliament, but it is also possible to get a more bipolar one like in
Austria through the middle 1990s. The Polish example is similarly a good
case in point. Poland has proportional representation with a threshold
that parties must meet to gain seats. While a multi-party system is possible
RECOMMENDATIONS
under the electoral rule, there was period of time, 1993-01, when it appeared
that the party system was evolving into a bipolar one with left versus right.
The evolution into a two-party system was never complete, however, and
the system today is more turbulent and more multi-party (Zubek 2006b).
Minority and/or coalition governments then follow from the composition
of the party system. It is possible that the Polish system could swing back
to the more bipolar one found in the late 1990s. Moreover, one institutional reform the political parties have debated in 2006 would encourage this
development--a change from the current electoral system to straight plurality would move Poland closer to a two-party system similar to the United
Kingdom’s over time, and one-party majority governments would be likely.
strengthen the finance
minister under this scenario
Under this scenario, the appropriate set of reforms focuses on the role of
the Finance Minister.42 Institutionally, the previous section showed that the
Polish Finance Minister is weaker than any Finance Minister from the EU
15. A series of steps would strengthen the Minister’s position. The British
case is again instructive. The Chancellor of the Exchequer proposes the
expenditure levels for the different ministries, and he negotiates bilaterally
with spending ministers. As a rule, a small committee of ministers without
portfolios or simply the Prime Minister settles any disputes--the full cabinet
almost never votes on budget issues. During the budget’s implementation,
he can make unilateral cuts to expenditures as needed. Similarly, the Prime
Minister would need to be strong enough to back his Finance Minister in
any cabinet disputes.
In comparison to his British counterpart, the Polish Finance Minister does
have some of these powers, yet the position under this scenario should be
strengthened. Full votes in cabinet on the budget would no longer take
place, for example, and negotiations would be firmly bilateral. As noted
before, the current plans are to weaken the Finance Minister’s position in
the next few years by transferring the initial formation of the budget to the
Prime Minister’s Office. This would clearly represent a move in the wrong
direction. The Prime Minister is not that strong despite institutional reforms
in the mid-1990s (Zubek 2006b, 99) and does need to be strengthened, but
the strengthening should be to supplement the Finance Minister rather than
to supplant him.
Given that Poland does not now have regular one-party majority or an
electoral system that would encourage them in the future, the first scenario
is the appropriate one today. This second scenario should be kept in mind,
however, if conditions change.
49
RECOMMENDATIONS
Additional Reforms that Should Be Undertaken Regardless of
the Form of Fiscal Governance that is Appropriate to Poland
Tighten Rules on the Passage of (Budget) Legislation in the Parliament
Even if multi-year legal expenditure targets are difficult to impose in the
short-term, tighter rules on the passage of legislation that has budgetary
consequences in Parliament are desirable immediately. The recent examples
provided above concerning the retirement age of miners, the reimbursement
of VAT, and the indexation of pensions all indicate that bills with clear
budgetary implications have passed once the budget was in place. As Goetz
and Zubek (2005) indicate in their study of the making of laws in Poland,
this is a phenomenon that extends beyond the budget. The rules governing
the passage of legislation are more generally decentralised, and they encourage ministers to push bills that benefit a relatively narrow constituency
at the expense of general-benefits legislation. In the terminology presented
here, such bills exacerbate the common pool resource problem discussed in
Section I of the report.
reforms for the
parliamentary stage
Concretely, we propose three revisions to the way Parliament deals with the
budget: (1) amendments cannot change the reserve nor projected interest
outlays; (2) introduction of a strict separation of financial and non-financial
laws; and (3) amendments should be truly offsetting, i.e., proposals to
increase spending in one area must be accompanied by proposals to cut
spending in other areas (excluding debt service and interest spending). There
are additional changes that can be undertaken that constitute first steps
that any government can take, and that would not require any revision of
the Constitution.
Strengthen the role of the finance minister in the implementation
Since dealing with large shocks was a problem in the past, the reform should
aim at improving the government’s ability to cope with fiscal shocks more
effectively. One important element would be to give the finance minister the
right to impose spending limits and spending cuts during the year. Another
important element would be the finance minister’s ability to set monthly or
quarterly cash limits for the spending departments.
Improve the executive planning stage
Introduce spending targets at the level of individual ministries and for the
government as a whole, and a target for the budget balance consistent with
these targets and a revenue forecast. Publish these targets and make sure
that there are not multiple targets as currently.
RECOMMENDATIONS
Improve transparency
Some items in the annual budget are transparent, but much more can be
done. All special funds should be included in the budget. This means most
prominently that The National Road Fund should again be in the budget.
National accounts calculations should also appear prominently in the draft
budget.
reforms for
executive lanning
While our index indicates that Poland ranks near the bottom in fiscal transparency, we are not alone in calling for measures to open up the budget
process. Misiąg (2005b) notes that the State Budget does not cover all
the expenditures and revenues that are executed by the budget entities. It
also does not include all of the institutions subordinate to the government
administration. A recent newspaper article reiterated the argument from
the revenue side, noting that over half of the state’s resources do not
appear in the budget. The article also noted that the government is preparing
a reform that would make the budget more transparent, and we would
applaud efforts in this direction.43
51
Conclusion
This report discusses the evolution of Polish fiscal institutions and fiscal
performance since the new Constitution in 1997. It provides data for each
step of the process, including the formation, passage, and implementation
of the budget. It argues that a centralisation of the system is needed because
of what the literature calls the common pool resource problem. Policymakers have an incentive to worry about the benefits and costs of a spending decision on their constituencies only. The full tax implications of their
decisions should be included when any decision is made. More centralised
budget processes encourage the consideration of the full tax burden and
reduce the scale of the common pool resource problem.
importance of centralisation
of the budget process
There are two ways in practice to centralise the process, delegation to
a strong finance minister and fiscal contracts. One can create an index to
measure how well a given country fits an “ideal” delegation or contract
model. It is clear that Poland today fits neither model--when compared
to European Union members prior to the most recent enlargement, the
country finishes last when benchmarked according to both delegation and
contract indices.
The report also argues that the type of government determines the appropriate path to take. Countries with one-party majority government should
go the delegation route, while countries with regular minority or coalition
governments should choose fiscal contracts. Poland in recent years has had
repeated minority governments, and fiscal contracts would work well in
the Polish context. We also considered a second scenario where the party
system became more consolidated and where one-party governments became
the norm. The finance minister is weak especially during the formation of
the budget, and his position should be strengthened in this case.
The focus on institutions is in contrast to more traditional ways of viewing
Polish finance, which consider the importance of personalities, informal
networks, and party systems. It is important to think about the relationship
between these explanations and the one provided here. Personalities are
most relevant when institutions are weak and individual actions can have
a comparatively big effect on the budget. Party systems matter, but they
matter in the way discussed here--they affect whether delegation or fiscal
contracts are more effective at centralising the budget process.
Such a centralisation can serve several important goals for any Polish government. They promote economic stability. They also set clear guidelines
for how the government will respond during the next economic downturn.
Public finances weakened when economic growth slowed in 2001-02,
CONCLUSION
which is not unexpected, but finances have not rebounded to the extent one
would predict. Recoveries in the future should be more rapid. There is also
a heated debate domestically about whether it is desirable for Poland to join
Economic and Monetary Union in the next few years. If there is a consensus
to do so, it will be easier to get the budget deficit (in particular) under 3%
of GDP to qualify. We would like to stress, however, that these reforms are
most beneficial to Poles, and should be undertaken regardless of whether
or not the country decides it wants the euro.
53
Endnotes
1
We would like to thank Bartłomiej Osieka for terrific research assistance and Randall Stone and Hubert Tworzecki for their help in identifying relevant people to
interview in Warsaw.
2
“A ‘Continuous Adventure’: The Pursuit of Stability and Growth in Modern Economies.” Public Lecture at Koźminski Business School, Warsaw, Poland, January 30,
2006.
3
See Dąbrowski 1993.
4
OECD 2005, Economic Outlook No 79, November.
5
European Commission. 2005. European Economy. No. 5. Economic Forecasts,
Autumn.
6
IMF 2005a.
7
Parts of this section summarise arguments that first appeared in other work, such
as Hallerberg and von Hagen (1999), Hallerberg, Strauch, and von Hagen (2001
and 2006) and especially von Hagen (2002).
8
Note that the strength of this argument depends in no way on the assumption of
stable relations between interest groups and individual politicians working in their
interest. In fact, it applies even more forcefully in settings where politicians are
political entrepreneurs constantly looking for new groups they can include in their
constituencies, which is often the case in new democracies. Such entrepreneurs
are even less likely to pay attention to the implications of their policies for society
as a whole, which is the source of the common pool problem.
9
A second possibility could be the International Monetary Fund. Stone (2002)
indicates that the Fund played an important role in creating incentives for reforms
soon after Poland became a democracy, but it has not played this role more recently.
10
We are especially grateful to Bartlomiej Osieka for his research assistance in
Warsaw and for his work with Polish-language documents.
11
Article 216.5 of the Constitution: “It shall be neither permissible to contract loans
nor provide guarantees and financial sureties which would engender a national
public debt exceeding three-fifths of the value of the annual gross domestic product. The method for calculating the value of the annual gross domestic product
and national public debt shall be specified by statute.”
12
Warsaw Voice, February 20, 2006. The 2005 Convergence Plan Update, published in
January 2006, refers to this value as a “budgetary anchor.”
13
Poland Business Report Weekly, September 30, 2004.
14
2005 Convergence Programme Update, Published January 2006.
15
Money spent on roads did appear in the budget before the creation of the State
Road Fund.
16
Interview, Finance Ministry of Poland.
17
For example, some of the research units are public/private in nature and, because
more than 50% of revenues come from market activity, they do not show up under
ESA 95. Similarly, 98% of profits from the National Bank go to the state budget, but
any profits from exchange rate markets are excluded under ESA 95. The state debt
level calculated for domestic purposes used to include state guarantees to firms in
its calculations as well, but this is no longer the case. This change lowered the debt
level about 1.5% of GDP according to an official at the Ministry of Finance.
18
Oversight of the Convergence Programme is even According to a parliamentary
ENDNOTES
official, the Public Finance Committee of the Sejm has never discussed the figures
in the Convergence Programme.
19
A third option--raise revenues--is generally not considered at this stage. New taxes
require parliamentary approval, and at this stage the actors focus on the expenditure side of the budget.
20
The statement is available at http://kprm.gov.pl/tanie_panstwo.pdf . The person
at the Prime Minister’s Office who is responsible for preparing the output-based
components of the budget for 2007 is a former Finance Minister, Teresa Lubińska,
who resigned from her former office in January 2006.
21
Article 220 of the Constitution of Poland states that “[t]he increase in spending or
the reduction in revenues from those planned by the Council of Ministers may not
lead to the adoption by the Sejm of a budget deficit exceeding the level provided
in the draft Budget.”
22
Interview with Sejm staff member.
23
There is some controversy over the question to what extent these bills affected the
budget of the year in which they were passed; for more information on each bill,
see footnote 34. The broader point is that, if they took effect the same year, they
would indicate an even greater loss of budgetary discipline than if they did not;
see our discussion above. In cases where they came into effect the following year,
these events indicate an increase in fragmentation of the Polish budget process.
24
It should be noted that the PiS did promise a family payment in the election campaign, but the level of that payment was set in a private bill.
25
It is a matter of dispute how much influence the Senate ultimately has on budget
matters. The raw numbers would make it appear that the Senate is important-In 2006, for example, the Senate made 31 amendments to the budget, and the
Sejm accepting all but one of them. Yet it is unclear what to make of this statistic.
Senators may anticipate the reaction of the Sejm and propose only amendments
that are likely to pass.
26
ZUS 2005, 58-9.
27
As discussed below, Finance Ministers resigned in 2001 and 2002 over budget
matters, including one resignation when the Finance Minister failed to gain cabinet
backing for his initial draft budget. These precedents may explain why officials
who answered surveys for the Gleich (2003) and Yläoutinen (2005) studies would
rank the Finance Minister stronger than she is ranked according to people interviewed
for this report.
28
The IMF (2005) used Gleich and von Hagen’s (2002) coding with one exception--they excluded the question on the strength of the upper house.
29
The calculations for public sector efficiency are based on scores for administration,
human capital, health, distribution, stability, and economic performance. See
Schuknecht and Tanzi (2006) for more detail.
30
It may be of interest to readers that the position of the French Finance Minister
has weakened the past few years, which is also a period when fiscal discipline
slipped. See Hallerberg, Strauch, and von Hagen 2006.
31
Business Week, September 10, 2001.
32
The IMF (2005c) commented after a November 2005 staff visit that the 30 billion
zloty target is not that ambitious.
33
The ease with which these amendments changed spending provides evidence to
rebut a widely-held belief that spending is too “rigid” in Poland to be changed
quickly. See also Markiewicz and Siwińska-Gorzelak (2003), who argue that the
55
ENDNOTES
rigidity hypothesis is a myth.
The laws specified that these benefits became law at different times. The indexation
of pensions began 14 days from the announcement, the reimbursement of VAT
entered force in January 2006, and the law on early retirements takes effect beginning in January 2007.
35
The clear structural break in the series in 2000-1 has implications for the calculation of any elasticies of revenues and expenditures based on growth rates. Real
growth is 4-5% through 2000, and both revenues and expenditures as a percent of
GDP decline. Growth returns to the same level the past few years, yet expenditures
and revenues hardly change.
36
The electoral threshold used in the 2005 elections was 5% for a single party and
8% for a coalition of parties.
37
Both the PiS and the PO have discussed changing the electoral system to one that
would move it away from proportional representation towards plurality. Warsaw
Voice, March 23, 2006.
38
The report had been sent to print before PiS, the Polish Families League and Self-Defence signed the coalition agreement, however, this does not change the conclusions of the report.
39
Originally, the overall spending caps passed in the spring and the detailed spending
bills passed in the fall. There were complaints from parliamentarians that they
were spending too much time on budget matters, and the system was reformed so
that the votes are close together. The overall caps still pass first, but the individual
spending levels then pass shortly thereafter.
40
Under the previous government, there were also expulsions of party members.
Regardless of why parliamentarians left a given party, the effect is the same.
41
See Hallerberg (2004) for a detailed discussion.
42
There is precedence in Poland for this move--Dimitrov et al. (2006, Chapter 8)
present evidence that governments in the late 1990s strengthened the role of the
finance minister, in fact, at a time when the party system was most bipolar, which
is consistent with the argument presented here.
43
Warsaw Voice, March 15, 2006.
34
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59
Appendix
Table 1: Construction of centralisation indices
Weighting factors
Institutional characteristics
A. Long-term Planning
1. Multi-Annual Target
a. Total Budget Size
b. Spending or Taxation
c. None
2. Planning Horizon
a. Five Years
b. Four Years
c. Three Years
d. Two Years
e. None
3. Nature of Plan
a. Updated Based on Consistent Macro-eco
nomic Framework
b. Updated, but not Based on Consistent
Framework
c. Fixed Forecast
d. Ad Hoc Forecast
4. Degree of Commitment
a. Legal
b. Political
c. Indicative
d. Internal only
B. Structure of Negotiations
1. General Constraint
a. Size of overall budget, expenditure cap,
and deficit target
b. Golden Rule
c. Deficits and Debt
d. Overall Size
e. None
2. Agenda-Setting
a. MF Proposes, No Individual Votes
on her Bid
b. Cabinet Member Can Ask for Vote
on Her Bid, Cabinet Overrule MF
c. MF Collects Bids
3. Budget Norms
a. “Broad”
b. “Broad” and “Specific”
c. “Specific”
d. Expenditure/Deficit Only
4. Structure of Negotiations
a. MF Bilateral Only
Index
Sub-index
Item
Numerical
coding
0,33
0,25
4,00
2,00
0,00
0,25
4,00
3,00
2,00
1,00
0,00
0,25
4,00
3,00
2,00
1,00
0,25
4,00
3,00
2,00
1,00
0,25
0,25
4,00
3,00
2,00
1,00
0,00
0,25
4,00
2,00
0,00
0,25
4,00
2,66
1,33
0,00
0,25
4,00
APPENDIX
Weighting factors
Institutional characteristics
b. Multilateral
c. All Cabinet Members Involved
C. Legislation
1. Amendments Limited
a. Yes
b. No
2. Amendments Offsetting
a. Yes
b. No
2. Amendments Lead Potentially to Fall of
Government
a. Yes
b. No
4. Expenditures Pass in One Vote
a. Chapter by Chapter
b. No
5. Global Vote on Total Budget
a. Yes
b. No
D. Implementation
1. MF Can Block Expenditures
a. Yes
b. No
2. Cash Limits
a. Yes
b. No
3. MF Have Disbursement Authority
a. Yes
b. No
4. Transfers
a. Only within Departments, Require MF
Approval
b. Only within Departments
c. Only within Chapters
d. Limited, Require MF Approval
e. Limited
f. Unrestricted
5. Budget Changes
a. No Changes Allowed
b. Changes Allowed
6. Carry-over Provisions
a. Not Allowed
b. Limited, Require MF Approval
c. Limited
d. No Limits
Index
Sub-index
Item
Numerical
coding
2,00
0,00
0,25
0,20
4,00
0,00
0,20
4,00
0,00
0,20
4,00
0,00
0,20
4,00
0,00
0,20
4,00
0,00
0,25
0,17
4,00
0,00
0,17
4,00
0,00
0,17
4,00
2,67
0,17
4,00
3,20
2,40
1,60
0,80
0,00
0,17
4,00
0,00
0,17
4,00
2,66
1,33
0,00
61
APPENDIX
Table 2: Index for central and East European Countries
Construction of the Index: Institutional Arrangements and their
Index Parameters
Weighting factors
Institutional characteristics
A. Preparation
Index
Sub-index
Item
Numerical
coding
0,33
1. Existence of statutorily mandated fiscal
rules
a. Balanced budget rule
0,25
4,00
b. Limits on public borrowing
2,00
c. No legal limits on borrowing
0,00
2. Sequence of budgetary decision-making
0,25
a. MF sets forth aggregate and specific
budget targets in initial budget circular
b. MF proposes, cabinet decides on
targets for budget aggregates and
spending limits are assigned to each
ministry before spending ministries
develop budget requests
c. MF proposes, cabinet decides on
targets for budget aggregates before
spending ministries develop budget
requests
d. Budgetary targets are set on the basis of preliminary budget requests
e. No budget targets are determined
4,00
3,00
2,00
1,00
0,00
3. Compilation of the draft budget
a. Finance ministry holds bilateral
negotiations with each spending
ministry
b. Finance ministry only collects budget
requests and compiles summary for
cabinet session
4. Members of executive responsible for
reconciling conflicts over budget bids
a. MF or PM can veto or overrule cabinet decision
b. Senior cabinet committee, then whole council of ministers or cabinet
c. Executive collectively (e.g. council of
ministers or cabinet)
B. Legislation
5. Relative power of the upper house
vis-_-vis the lower house
a. No budgetary power vested in upper
house or unicameral parliament
b. Lower house has prerogatives
c. Both houses have equal rights (e.g.
joint sittings)
6. Constraints on the legislature to amend
the government’s draft budget
0,25
4,00
0,00
0,25
4,00
2,00
0,00
0,33
0,20
4,00
2,00
0,00
0,20
APPENDIX
Weighting factors
Institutional characteristics
Index
Sub-index
Item
a. Deficit provided in the draft budget
cannot be exceeded, or individual
amendments have to indicate offsetting changes
b. No restrictions
4,00
0,00
7. Sequence of votes
0,20
a. Initial vote on total budget revenues,
expenditures, and the deficit
b. Final vote on budget aggregates
4,00
0,00
8. Relative power of the executive vis-_-vis
the parliament
a. Cabinet can combine a vote of confidence with a vote on the budget
b. Draft budget is executed if parliament
fails to adopt the budget before the
start of the fiscal year
c. Parliament can be dissolved if it fails
to adopt the budget in due time
9. Authority of the national president in
the budget procedure
a. No special authority
b. President has veto right (president
elected by parliament)
c. President has veto right (president
directly elected by citizens)
d. President has veto right (qualified
majority required to override veto)
C. Implementation
Numerical
coding
0,20
0,33
4,00
0,33
4,00
0,33
4,00
0,20
4,00
2,67
1,33
0,00
0,33
10. Flexibility to change budget aggregates
during execution
a. Any increase in total revenues,
expenditures and the deficit needs to
be approved by the parliament in a
supplementary budget
b. Revenue windfalls can be used to
increase expenditure without the
approval of the parliament as long as
the deficit is not increased
c. Simultaneous changes in revenues
and expenditures allowed without
approval of parliament if budget
balance is not changed
d. At discretion of government
0,25
11. Transfers of expenditures between
chapters (i.e. ministries’ budgets)
a. Require approval of parliament
0,25
4,00
2,67
1,33
0,00
4,00
b. FM or cabinet can authorize transfers between chapters
c. Limited
2,67
d. Unrestricted
0,00
1,33
63
APPENDIX
Czynniki ważenia
Czynnik instytucjonalny
12. Carry-over of unused funds to next
fiscal year
a. Not permitted
Wskaźnik
Wsk.
składowy
Pozycja
Kodowanie
numeryczne
0,25
4,00
b. Only if provided for in initial budget
or with finance ministry approval
c. Limited
2,67
d. Unlimited
0,00
13. Procedure to react to a deterioration
of the budget deficit (due to unforeseen revenue shortfalls or expenditure
increases)
a. MF can block expenditures
1,33
0,25
4,00
b.The cabinet can block expenditures
2,67
c. Approval of the parliament necessary
to block expenditures
d. No action is taken
1,33
0,00
About the Authors
Jürgen von Hagen is professor and director of the Center
for European Integration Studies at the University of Bonn. In 1992-1996, he was professor and director at the Institute for Advanced
Studies at the University of Mannheim; in 1987-1992 he lectured at
Indiana University. His principal academic interests are public finance, international finance,
European economic integration and monetary policy. [[email protected]]
Mark Hallerberg
is professor in the Department of
Political Science at Emory University in Atlanta. In 1999-2004,
he worked at the University of Pittsburgh and between 1996-1999 in the Georgia Institute of Technology. His academic
interests focus on the fiscal policy of developing countries, the performance of coalition
governments and Europeanization of political institutions in EU member states.
[[email protected] ]
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