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III.  Open Budget Preparation, Execution, and Reporting

95. Since the annual budget is almost without exception the main instrument of fiscal policy, the budget process and the information contained in and presented with the budget is central to fiscal transparency. Budget preparation and execution should be open in the sense that information is readily available on how budgets are prepared and executed (for instance, budget circulars and information on the budget process should be available to the public). The Code does not specifically advocate participation of civil society in budget processes, though such approaches are not excluded. Nor does openness imply full disclosure to the public at all stages of the budget process. Transparency in this context is necessarily limited by considerations of market sensitivity, due process in policy formulation, and the costs of providing information to the public relative to the expected benefits.

96. Principles and practices relating to openness of the budget process concern budget documentation, budget presentation, procedures for budget execution, and fiscal reporting. The OECD best practice guidelines, which focus on budget transparency, are most relevant to this section of the Code. Box 14 describes the coverage of the OECD guidelines. As they include much that is already in the Code, this section as a result refers only selectively to them.

Box 14. OECD Best Practices for Budget Transparency

The OECD issued the OECD Best Practices for Budget Transparency in September 2000. While there is a significant overlap between the OECD best practice guidelines and the fiscal transparency Code, the former focuses solely on central government, and on the budget rather than all fiscal and quasi-fiscal activities.

The OECD best practice guidelines are in three parts.

Part I lists the principal budget reports that governments should produce and their general content: the budget; a prebudget report; monthly reports on budget implementation; a mid-year report; a year-end report; a preelection report; and a long-term report.

Part II describes specific disclosures to be contained in the reports: economic assumptions; tax expenditure; financial liabilities and assets; nonfinancial assets; employee pension obligations; and contingent liabilities.

Part III highlights practices that ensure the integrity of reports: accounting policies; systems and responsibility; audit; and public and parliamentary scrutiny.

Budget Documentation

3.1 The budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks.

97. The Code includes good practices relating to: (1) fiscal policy objectives and sustainability; (2) fiscal rules; (3) the macroeconomic framework; (4) identifying new policies; and (5) major fiscal risks.

Fiscal policy objectives and sustainability

3.1.1 A statement of fiscal policy objectives and an assessment of fiscal sustainability should provide the framework for the annual budget.

Fiscal policy objectives

98. While the budget has an annual perspective, it should be placed in a wider context. It is important to make a clear statement about the broad objectives of fiscal policy and the sustainability of fiscal policy over the longer term. At the very least, it should be indicated in the budget documentation how the annual central government budget fits in with the government's broader objectives regarding government or public sector finances, and longer-term deficit and debt targets. This could be a mainly qualitative statement supported by a few key figures, in which case it could be included in the preamble to the annual budget or the budget speech. However, such statements are more helpful if they include quantitative detail on government or public sector finances and the longer-term fiscal outlook, in which case this information should be provided in a background paper that is part of the budget documentation.83

99. The OECD best practice guidelines suggest the presentation of a prebudget report no later than one month prior to the tabling of the annual budget, stating the government's medium-term economic and fiscal intentions, and highlighting the total revenue, expenditure, the deficit or surplus, and debt.84 Such a report can facilitate legislative and public debate on overall fiscal policy objectives and strategy prior to the finalization of the budget by the executive and presentation of the detailed revenue and expenditure proposals to the legislature. It is by no means suggested, however, that the executive should formulate the whole budget in public. Governments need the space for careful deliberation and decision-making before they expose the full detail of the proposed budget for legislative and public consideration. This is particularly important for tax policy changes. In general, however, the detailed budget proposals should be presented to the legislature in sufficient time to allow careful deliberation before passage of the necessary legislation. The OECD best practice guidelines suggest the presentation of the draft budget to the legislature no less than three months prior to the start of the fiscal year, and approval of the budget prior to the start of the fiscal year.

Fiscal sustainability analysis

100. While all countries should provide some indication of the sustainability of fiscal policy, more formal fiscal sustainability analysis would be a demanding requirement for many countries, especially since there are no clear and practical rules for establishing whether fiscal policy is sustainable or not.

101. Fiscal policies are unsustainable if they lead to a build-up of debt to an excessive level, in which case there is a need for change to current policy. However, judgments about excessive debt, and particularly about excessive debt-to-GDP ratios, are hard to make. Economic theory provides little guidance on this. A common approach, therefore, is to rely on a simple rule that specifies, for example, that the debt ratio cannot rise or cannot exceed a specific limit. But this and similar rules are arbitrary, and provide little guidance as to whether a particular debt ratio is a threat to macroeconomic stability, could lead to a loss of fiscal policy credibility, result in higher interest rate premia, etc. This being the case, assessments of fiscal sustainability have to be made on a country-specific basis, relying on particular knowledge about the implications of, and market reactions to, the government's past and future fiscal policies. In this connection, reporting a country's sovereign debt rating, and changes to the rating in recent years, provides one useful guide to sustainability.

102. At a technical level, assessments of fiscal sustainability involve decomposing the change in the debt ratio into components reflecting the primary balance (the overall balance excluding interest payments), the interest rate on debt, the growth rate of the economy, and the initial debt stock.85 From a policy perspective, attention is focused on the change in the primary balance required to meet a debt target (starting from a debt ratio which is judged excessive) or to stay under a debt ceiling over a specified time period. This provides an indicator of the fiscal adjustment required for sustainability. Of course, more relevant for a policymaker is the discretionary adjustment that has to be made, so it is important in the short to medium term that likely cyclical movements in fiscal aggregates are distinguished from necessary structural changes.86

103. The OECD best practice guidelines suggest that a long-term report assessing the sustainability of current fiscal policies should be published every five years, with more frequent publication if there are major revenue or expenditure policy changes. The assumptions underlying the analysis, and alternative scenarios should be provided. In the longer term, it is important that, in addition to public debt, policy commitments with a future financial impact also be properly taken into account. Especially relevant in this regard are public pension programs, the costs of which will be adversely affected by population aging. One way of doing this would be to look at unfunded public pension liabilities alongside public debt in assessing sustainability.87

104. An alternative means of looking at the longer-term effects of fiscal policy is through the use of generational accounting. This shows the net tax burden on cohorts of individuals over their remaining lifetime. By comparing the net tax burden faced by different cohorts, it is possible to examine the extent to which current policies imply a transfer between generations, and to use this information as a basis for judgments about the sustainability of these policies.88

Fiscal rules

3.1.2 Any fiscal rules that have been adopted (e.g., a balanced budget requirement or borrowing limits for subnational levels of government) should be clearly specified.

105. Fiscal rules are forms of agreement (usually in law) that restrict the fiscal policy action of government. Examples are a balanced budget requirement, borrowing limits (e.g., on access to central bank financing) for the central government or subnational levels of government, a "golden rule" (that public borrowing cannot exceed public investment), the criteria for fiscal convergence in the Maastricht Treaty, and the "close to balance" requirement of the Stability and Growth Pact. It is necessarily true that any rule adopted by a government must be specified in some form. The transparency issue that arises relates to the clarity with which the rule is defined, and the adequacy of reporting against the rule. The golden rule, for instance, is open to interpretation as to what constitutes public investment and so needs to be supported by a clear budget classification. Obviously, if a fiscal rule is to be durable, there must be some flexibility in its application when a departure from the rule is justified by economic conditions. However, the circumstances under which such a departure is justified should be clearly explained. Reporting on performance relative to a rule should also be consistent with other practices of the Code.89

Macroeconomic framework

3.1.3 The annual budget should be prepared and presented within a comprehensive and consistent quantitative macroeconomic framework, and the main assumptions underlying the budget should be provided.

106. This is a basic requirement of fiscal transparency. As part of the broader context in which fiscal policy must be placed, its aggregate impact on the economy and its relation to other macroeconomic policies is critical. Most countries have some formal methodology for macroeconomic forecasting and policy formulation, and advanced economies use sophisticated quantitative models to help frame the budget. Information on the macroeconomic framework should be provided in a background paper that is part of the budget documentation. One possibility is that this is combined with the discussion of fiscal policy objectives and fiscal sustainability in a fiscal and economic outlook paper, in which context the macroeconomic framework should be extended to support fiscal sustainability analysis.

Medium-term budget frameworks

107. Many countries already present basic fiscal and economic policy statements. In this connection, a distinction needs to be drawn between statements based on medium-term projections of fiscal aggregates, and those based on integrated, consistent, medium-term estimates broken down by individual spending agencies. The latter is sometimes referred to as a medium-term budget framework, with the former representing a necessary step toward a medium-term budget framework. Box 15 describes medium-term budget frameworks in more detail. They are administratively and politically demanding, and have been implemented mainly in advanced economies. However, some other countries have successfully implemented them.90

108. An important advantage of a medium-term budget framework for developing countries and countries in transition is that it helps link the capital and current budgets. Without the coordination that results from such a link, the usefulness of budget information is limited, and there is often inadequate provision made for operating and maintenance costs. However, for many developing countries and countries in transition, only an aggregate forecast will be feasible. This will nonetheless provide a useful starting point for considering medium-term changes in budget policy. Best practice is that a comprehensive, rolling medium-term budget framework (covering 3-5 years) should be published as a central basis of fiscal management.91

Box 15. Medium-Term Budget Frameworks:
Some Lessons from the Experience of Selected OECD Countries

A medium-term budget framework, if applied rigorously, provides a very clear statement of the revenue and expenditure effects of maintaining current government policies, and a mechanism for controlling the introduction of new policies and tracking budget implementation beyond a single year. It provides a transparent basis for accountability of the executive branch, and a necessary foundation for more detailed results-oriented budgeting. Medium-term budget frameworks have been used successfully by Germany, the United Kingdom, and Australia. Experience in these and other countries, however, suggests that stringent conditions have to be fulfilled before the full benefits can be attained.

What is a medium-term budget framework?

The key characteristics of a medium-term framework are as follows:

  • a statement of fiscal policy objectives;

  • integrated medium-term macroeconomic and fiscal forecasts;

  • estimates of expenditure and receipts of ministries and agencies for two to four years beyond the budget year;

  • formal "forward" or "out-year" estimates— the first out-year estimate of expenditure becomes the basis of budget negotiations for the following year; and

  • ministries' and agencies' budget appropriations become hard budget con- straints.

The forward estimates process has significant technical advantages both for central agencies and individual spending agencies. For the latter, funding for their programs is given a greater degree of predictability, and the requirement for agencies to maintain multiyear estimates also provides greater clarity of policy at a program level. It should also be noted that, particularly in the United Kingdom and Australia, the establishment of a strong forward-estimates process has been associated with much greater flexibility for agencies in resource use within the aggregate and program ceilings.

Some lessons drawn from experience

The experiences of the three above-mentioned countries suggest the following

conclusions with regard to medium-term budget frameworks:

  • fiscal policy objectives and quantitative fiscal targets need to be articulated and defended at the highest level of government;

  • robust revenue forecasts are critical, and the target levels of expenditure must be rigorously related to the macroeconomic prospects over the medium term;

  • budget and forward estimates are better set in nominal terms to ensure that program managers respond to price changes;

  • the framework should be based on clearly defined and fully costed policy proposals; and

  • the medium-term budget framework should be accompanied by strengthened measures to review individual expenditure policies and their institutional delivery mechanisms.

Medium-term budget frameworks provide better, more transparent tools for formulating, assessing, and implementing fiscal policy, but they will only be effective if there is a real, stable, transparent, and well-publicized commitment to fiscal control. Medium-term budget frameworks must also be based on fundamental institutional improvements, sustained political commitment, an appropriately phased introduction of improved forecasting and rigorous costing of programs, and disciplined budget management.


Identifying new policies

3.1.4 New policies being introduced in the annual budget should be clearly described.

109. Clear description, including careful costing, of continuing government programs and new policies are vital elements of budget discipline. Countries should include a statement which describes tax and expenditure policy changes being introduced and their expected fiscal effects as part of the budget documentation.92 This allows clear identification of factors causing budget outcomes to diverge from planned spending and thus improves accountability for fiscal policy implementation. It also provides a basis for a disciplined medium-term budget framework. Best practice is that the estimated fiscal effects of all proposed central government legislation, including the cost implications for subnational levels of government, should be made publicly available.93

Major fiscal risks

3.1.5 Major fiscal risks should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).

110. Budget estimates and the economic forecasts underlying the budget are subject to a variety of risks, including the effects of variations in the assumptions and parameters underlying the macroeconomic forecasts and individual program estimates, as well as uncertainty over the costs of specific expenditure commitments.94 Best practice is that a statement of fiscal risks should be included in the budget documentation as a basis for assessing the budget's reliability as a guide to likely fiscal outcomes.95 Box 16 describes what should be covered in a statement of fiscal risks.

Box 16. Statement of Fiscal Risks

A statement should be provided with the annual budget giving an overview of all material fiscal risks, quantified to the extent possible. Where allowance for a risk has been made in a budget contingency reserve this should be noted. The statement should contain information on risks broken down into the following categories:

(1) variations in key forecasting assumptions—the fiscal effects of variations in key assumptions underpinning the macroeconomic forecasts (e.g., the effect on the fiscal deficit of a 1 percent increase or decrease in GDP growth, inflation, interest rates, or the exchange rate from the central rate assumed in the budget forecast); and the fiscal effects of variations in key assumptions underpinning the budget forecasts of revenue and expenditure (e.g., a variation in the effective tax rates, public sector wage increases, or the average number of claimants for social assistance).

(2) contingent liabilitiesthese may include guarantees, indemnities, and warranties; uncalled capital (e.g., in international financial institutions); and litigation against the government.

(3) uncertainty about the size of specific expenditure commitmentswhere provision has been made in the budget for expenditure on an item or activity but there is a greater-than-usual degree of uncertainty about the likely cost, the risk should be disclosed. For example, the government may have given a blanket undertaking to depositors of a specified distressed financial institution that their deposits would be honored. However, at the time of finalizing the budget, the cost of this commitment may still be highly uncertain.

(4) other items that have not been included in the budget because of the extent of uncertainty about their timing, magnitude, or eventuality—for example, the government may have announced a general intention to introduce a tax or expenditure policy change, the details of which have not been finalized sufficiently for inclusion in the budget.

83 In Hong Kong SAR, the annual budget documentation provides a clear statement of fiscal policy objectives and medium term sustainability. See the ROSC for Hong Kong SAR, Fiscal Transparency Module, paragraph 32, at
84 In South Africa, a Medium Term Budget Policy Statement is presented to parliament three months before budget day. It contains the macroeconomic assumptions, proposed inter-provincial allocations, the expected functional classification of expenditure, and the expected split between capital and current spending. See Folscher (1999) at For a discussion of the prebudget consultation phase in Canada, see OECD (1999).
85 The emergence of new debt creating obligations that may be excluded from routine fiscal projections-such as contingent liabilities that may have to be honored-should also be taken into account.
86 For further discussion of approaches to assessing fiscal sustainability, including for countries where the assessments are affected by special circumstances such as the availability of an exhaustible mineral resource, see Chalk and Hemming (2000).
87 See Chand and Jaeger (1996). Also, the United States budget for 1999 contains detailed information on the long-term implications of current fiscal policies. In an "Analytical Perspectives" publication provided as part of the budget documentation projections are given for the budget to the year 2070. The key assumptions are described, and illustrations provided of the sensitivity of the projections to alternative assumptions and scenarios. Long-term (75 year) projections of the income and outgoings of the Social Security and Hospital Insurance Trust Funds are also provided, including the estimated 75-year actuarial balance of the Trust Funds as a summary measure of their financial status (see
88 The United Kingdom budget for 2000 contains information on generational accounts for the United Kingdom (including comparative information for other countries), in the context of a detailed discussion of long term fiscal sustainability (see
89 Kopits and Symansky (1998) discuss fiscal rules in detail.
90 In Hong Kong SAR, a medium range forecast is prepared and published as an annex to the budget speech (see The medium range forecast involves projections for the budget year plus three years. Hungary has also started to present its budget in the context of a three-year outlook for the budget and the economy (see, as has Uganda-see the ROSC for Uganda, Fiscal Transparency Module, paragraph 28,
91 In Germany, the Law on Budgetary Principles, for instance, explicitly requires multiyear financial planning by all levels of government. To coordinate this task, a Financial Planning Council comprising the minister of Finance (chairman), the minister of economics, the state ministers responsible for financial affairs, and four representatives of municipalities was created in 1968.
92 A good example of this is the reporting of budget measures in the United Kingdom, where a summary table of new budget measures and their estimated fiscal effects is provided in the budget document, and an annex expands upon each new measure in more detail. In France, existing policy expenditure ("appropriations for current services") is clearly distinguished from "items of expenditure reflecting new policies." This distinction is required by the organic budget law and, under that law, current services appropriations are subject to only one vote in parliament while new policy items are subject to detailed voting processes. See the ROSC for France, Fiscal Transparency Module, paragraph 13, at
93 In the United States, the Congressional Budget Office is required by law to advise the legislature of the estimated costs (and the basis of the estimate) that proposed federal legislation would impose on state and local governments (and on the private sector). See CBO's website at
94 There may be some instances where there are legitimate public policy reasons not to quantify a fiscal risk; this might be the case, for example, where to do so would result in disadvantage to the government in negotiations with third parties. The existence and nature of the risk should however still be disclosed.
95 In recent years Greece has strengthened its reporting of fiscal risks. Risks from variations in macroeconomic assumptions, contingent liabilities, and other uncertainties are now examined in the budget document. See, where IMF Staff Country Report No. 99/138 (pp. 49-53) discusses fiscal transparency in Greece. An example of comprehensive reporting of information on fiscal risks in the annual budget is provided by New Zealand. See

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