budgeting and fiscal governance faculty of economics and political sciences cairo university

Budgeting and Fiscal Governance

Faculty of Economics and Political SciencesCairo University

Budget as a public policy tool •The budget is a policy document and tool for allocating public resources. •Fiscal policy and budgets are important instruments for redistribution of public resources (benefits/losses)•Budget decisions are political decisions (institutions, actors, incentives, etc. ). Accordingly, budget outcomes are political outcomes. The budget is a pivotal instrument of public policy and a critical arena for political bargaining between the executive and the legislature. The budget is more than a law; rather, it is a continuous policy process. Indeed, at any point in time, at least three budget cycles overlap: the preparation of next year’s budget, the execution of current year’s budget, and the control of last year’s budget.

Governance of Budget •The literature suggests that the budget process, actors and budget institutions matter a lot in promoting Fiscal Governance.

o Budget institutions and processes determinate fiscal outcomes and fiscal performance.

o Both state and non-state actors seek to influence budget outcomes in their preferred direction.

•We therefore use the concept of the governance of the budget to Checks and Balances throughout different stages of budget process. In anther meaning, to capture the dynamic aspect of budgetary cycles, the institutional dimensions of public budgeting and the political economy of public finance management.

The governance of the budget can be defined as encompassing the interests and incentives of individuals and institutions governing the formulation, approval, execution and oversight of the Budget.

Budget ProcessBudget Process has four Stages (Budget cycle) 1- Budget formulation stage, when the budget plan is put together by the executive branch of government.During the formulation stage:the economic forecast and the program and financial plans are prepared for the various departments. Economic data and statistics are utilized in developing projected revenues for the upcoming fiscal year.

Budget ProcessBudget Process has four Stages (Budget cycle) 2- Budget review and approval Stage is the process in which the Legislature discusses, modify, and adopt the budget. During the Enactment stage:Public expenditure may be increased and redistributed.Public revenues may be increased or decreased.

Budget ProcessBudget Process has four Stages (Budget cycle) 3- Execution Stage, when the policies of the budget are carried out by the government.

During the execution stage:funds which appropriated are released.Amendments or Supplementary budgets be introduced for enactment into law.

Budget ProcessBudget Process has four Stages (Budget cycle) 4- Auditing and assessment Satge, when the actual expenditures of the budget are accounted for and assessed for effectiveness.During the assessment stage:departments / agencies are evaluated to identify areas in need of improving compliance procedures with applicable laws and regulations.Financial transactions, accounts and reports are assessed and analyzed to improve accountability, effectiveness, and efficiency in the achievement of goals and objectives.Economic use of the resources is assured.

Actors in Budget processThe executive has the exclusive right to initiate the budget

process and draft the budget bill. It is also the only branch of government that possesses the required technical capacity and information base for doing so. Accordingly, The executive has a predominant role in the formulation of the budget and the drafting of the budget bill presented to parliament for review and adoption.

Once agreed within government, the draft budget bill is submitted to parliament for consideration, review and approval. As for any other piece of legislation, the executive’s budget proposal must be approved parliament to become law.

The central budget offices of the finance ministries are responsible for overseeing budget execution by spending agencies and line ministries(Ex-ante auditing). Access to and control over governmental financial information gives them an undisputed advantage both over the legislature and the other ministries and executing agencies within government.

Actors in Budget processConstitutions give parliaments an important role in the

oversight of the execution of the budget, the scrutiny of budget re-allocations, and the ex post review of public accounts.

In practice, however, legislative oversight of budget execution is still embryonic, undermining its contribution to concurrent budget accountability.

Legislatures exercise only a limited monitoring of the government’s compliance with formal budget rules and procedures as set in the budget law.

They are even more ill-equipped to monitor the performance of public spending and enforce results based budgeting.

Budget Institutions

budgetary institutions are ‘all the rules and regulations according to which budgets are drafted, approved implemented, and audited.

Executive versus legislative budget powers

In theory, increased legislative budget powers ought to enhance transparency, accountability and integrity in public expenditure management.

Immature legislatures and unstable party systems are often the source of dysfunctional economic governance, budget deficits, fiscal imbalances, and public debt. Overspending and under-taxation are likely results.

At the same time, however, unconstrained executives and autocratic presidents tend to abuse their constitutional authority and delegated powers, left largely unchecked by amenable parliaments. The use, misuse and abuse of executive discretion in public budgeting have often lead to serious economic mismanagement, pervasive corruption and state capture.

Common pool’ dilemma of public budgeting

The core of the argument linking institutional arrangements to fiscal performance resides in the ‘common pool’ dilemma of public budgeting. while the costs are borne by the general fund, benefits go to specific groups, sectors, or localities.

Every government faces a Common Pool Resource (CPR) Problem. This problem arises when policy-makers consider the full benefits of their spending decisions on their constituencies but only part of the tax burden. In practice, the problem permeates decision-making. Policy-makers for sound political reasons do not have an incentive in most cases to consider the implications of their spending decisions upon the full tax burden.

Common pool’ dilemma of public budgeting

Common pool’ problem can be minimized by assigning control over the budget to agents with incentives to internalize the costs of the programs the state finances. Institutional checks and balances help mitigate those risks throughout The introduction of procedural and numerical budget constraints and the strengthening of transparency and integrity.

Common pool’ dilemma of public budgeting and Fiscal Governance Fiscal Governance: Definitions and FormsFiscal governance can be defined as those rules, regulations and procedures that influence on how budgetary policy is planned, approved, carried out and monitored. There are four forms of Governance:

1. fiefdom form of governance2. Delegation3. Commitment or contract 4. mixed form of governance

Common pool’ dilemma of public budgeting and fiefdom form governance

If policy-makers do little to address Common pool problem, then a fiefdom form of governance predominates. Policy-makers consider their domains their “fiefdoms,” and they policy decide spending levels more or less in isolation from one another.

A fiefdom form of governance, in which the decision-making process is decentralized, exists when government ministers set their own budgets. Ministers do not consider the full tax implications of their decisions, and the result is a severe common pool resource problem.

Common pool’ dilemma of public budgeting and the ideal forms of fiscal governance

There are, however, two “ideal” forms of governance conducive to solving the Common Pool Resource (CPR) Problem, a mode of delegation and a mode of commitment.

Delegation involves vesting the Finance Minister with significant decision-making powers over public monies.

Under commitment a group of agents with similar decision making rights enters an agreement, or a “fiscal contract,” to commit themselves strictly to budgetary norms, i.e., targets for budget aggregates set for one or several years.

A third form of governance that solves the CPR problem, which is found in minority governments only and that combines elements of both ideal forms, I define to as mixed.

Each of these forms of governance to solve the Common Pool Resource (CPR) problem has distinct implications for the adoption, and for the effectiveness, of fiscal institutions.

In delegation states, the emphasis is on improving the discretion of the finance minister in the budgetary process.

One expects formal or informal rules that enhance the position of the finance minister.

Moreover, spending targets such as caps on personnel costs, explicit mechanisms to deal with open-ended expenditures, and the like that make the budget more manageable for the finance minister are likely.


In contrast, in commitment states one expects a range of formal rules to maintain the fiscal contract among the political parties who make the initial agreements.

This mode of governance is more rule-based, and a range of multi-annual targets and sub-targets as well as rules to deal with unexpected shocks so that the initial agreement is not broken should be common.

The mixed form of governance has elements of delegation in the budget deliberations that take place within the cabinet and elements of commitment in the “contracts” the government signs with one or more opposition parties in parliament.


Reviewing budget processes in Europe reveals that centralization follows two basic approaches.

The first is centralization based on delegation, the second is centralization based on contracts.

These two modes of fiscal governance conducive to greater fiscal discipline, a mode of delegation and a mode of contracts.

An important insight is that the effectiveness of a given form of fiscal governance depends crucially on the underlying political system.

Ideal forms of Fiscal Governance

Delegation functions well when there are few, or no, ideological differences among government parties, whereas contracts are effective when there are many such differences.

Electoral institutions have an impact on the form of governance

One party majority delegates budget to a strong MoF.

Multi-party coalitions forge a contract or commit to a specific budget.


Delegating the budget a strong MoF would mean potential political frictions.

With delegation, the rules of the executive planning stage of the budget process lend special authority to a central agent who determines the broad parameters of the budget and enforces them using selective punishments for defecting spending ministers.

Typically this agent is the finance minister, who can be expected to take the most comprehensive view of the budget among all members of the executive, and, therefore, to internalize the common pool externality.


At the legislative approval stage, the delegation approach lends large agenda-setting powers to the executive.

At the implementation stage, centralization requires that the central agent be able to monitor and control the flow of expenditures during the year, to prevent spending departments from overspending their appropriations.

Furthermore, centralization puts tight limits on any changes in the budget law during the fiscal year and limits the use of supplementary budgets.


In contrast, the contract approach emphasizes binding budgetary agreements on a set of fiscal targets negotiated among all members of the executive at the onset of the executive planning stage.

Here, the bargaining process serves as a mechanism to internalize the common pool externality.

In practice, the targets are often derived from medium-term fiscal programs or coalition agreements among the ruling parties.

The finance ministry’s role under this approach is to evaluate the consistency of the individual departments’ spending plans with these limits.


Thus, the finance minister has information advantages but no extra strategic powers.

At the legislative stage, the contract approach places more weight on the role of the legislature monitoring the faithful implementation of the fiscal targets and less on controlling parliamentary amendments.

At the implementation stage, finally, the contract approach resembles the delegation approach in that it requires strong monitoring and control powers of the finance minister.



It is quite obvious that the delegation approach relies on hierarchical structures within the executive, and between the executive and the legislature, while the contract 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 institutional choice between the two approaches depends on the number of parties in government.

Delegation is appropriate for single-party governments, while the contracts approach is appropriate for multi-party coalition governments.


There are two reasons behind this conjecture. First, the delegation of strategic powers to the finance

minister would create a new principal agent problem for coalition governments.

Cabinet members are likely to have very different views on spending priorities and the finance minister could abuse any special powers he has to promote the political interests of his own party at the cost of others.

This problem does not arise in one-party governments, where spending ministers can be reasonably sure that the finance minister shares their basic spending preferences.


Second, delegation and contracts use different enforcement mechanisms. Under delegation, the ultimate punishment for a defecting spending minister is his dismissal from office.

This punishment is heavy for the individual, but light for the government as a whole. It can be used, if the prime minister has the authority to select and replace cabinet members, which is typically not true in coalition governments.

Breaking up the coalition is the ultimate punishment in coalition governments. This punishment is heavy for the entire coalition.

Finally, commitment to fiscal targets is per-se much less credible for one-party governments, who can always walk away from the targets with no further consequences.


These different enforcement mechanisms also explain the different relations between the executive and the legislature.

When a single ruling party enjoys a majority in parliament, the main concern of the legislative stage is to limit the scope of defections from the budget proposals by individual members of parliament.

This can be achieved by limiting the scope of parliamentary amendments to the budget proposal.

With multi-party coalitions, in contrast, each party involved in the coalition will want to watch carefully that the executive sticks to the coalition agreement.


Therefore, the contract approach typically vests the legislature with more information rights and stronger amendment power than the delegation approach.

Elections based on plurality rule promote the emergence of two-party systems and one-party majority governments.

In contrast, proportional representation is consistently characterized by multi-party coalition governments.

This suggests that countries are more likely to opt for the contract approach, if their elections are based on proportional representation (and low thresholds).

while they are more likely to opt for delegation, if their elections based on plurality rule.


Thus, different electoral rules demand different institutional solutions to the common pool problem.

In presidential systems of government, the president does not rely directly on the legislature for his position as leader of the executive.

Voters can, and often do, support a president from one party while denying his party a majority in the legislature.

The role of the executive in the budget process is not much different in presidential systems. Since the president typically appoints the members of his

administration—with confirmation by the legislature where applicable—the structure of the administration lends itself more to a delegation approach than to a contract approach to centralizing the budget process.


The relationship between the president and the legislature, however, is often more difficult, since the two are conceived to be more equal political institutions than in parliamentary forms of governments.

As a result, centralization of the budget process in presidential systems emphasizes two institutional dimensions.

One is the internal organization of the legislature. Here, centralization can be achieved by creating a strong leadership in parliament, through an elevated position of the speaker and through a hierarchical committee structure.

The other dimension regards the relation between the executive and the legislature. The more the constitution puts the two institutions on an equal footing, the more budget agreements between the two must rely on the contract approach.

budgeting and fiscal governance faculty of economics and political sciences cairo university

Documents

governance of budget

budget institutions

budget outcomes

budget cycles

budget review

budget plan

budget processbudget

budget formulation stage