## _040714d ## Source details **Canonical URL:** [_040714d](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_040714d.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_040714d.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_040714d.pdf.json) --- ### Fiscal Rule Implementation (Germany) - Structural deficit ceilings will fully apply in 2016 for the federation and 2020 for the Länder. - The fiscal rule includes an escape clause in the case of natural catastrophes, but a debt reduction plan must be developed. - The rule accommodates the business cycle by being defined in structural terms. - Legislation on the domestic transposition of the Fiscal Compact enshrined the maximum general-government structural deficit of 0.5 percent of GDP in the Budgetary Principles Act (Haushaltsgrundsätzegesetz). ### Medium-term Budget Framework (Germany) - The federal medium-term financial plan (Finanzplan) includes detailed multi-year estimates of revenues and expenditure by line ministry and is updated annually. - Ceilings are not binding beyond the budget year, but sectoral priorities are transparently identified and changes in resource allocations over the medium term are explained. - The medium-term financial plan covers the whole federal budget, with the exception of social security. - The fiscal impact of the most important new policies is presented, but the effects of current and new policies are not disclosed separately. ### Performance Orientation of the Budget (Germany) - A comprehensive performance budgeting and performance management system does not exist in the federal budget system. - Detailed line items form the basis for budget appropriations; objectives and targets are not set in the budget and therefore not monitored. - “Output-oriented budgeting” (Produkthaushalt) exists in some Länder (e.g., Berlin, Bremen, Hamburg, Hessen, Nordrhein-Westfalen), but not at the federal level. - At the federal level the line item system has been updated to move toward classification by departmental policies and introduction of a performance orientation. - The federal government is required to submit a report on subsidies to Parliament every two years which includes efficiency analysis for selected policies. ### Intergovernmental Financial Relations (Germany) - The debt brake (Schuldenbremse) includes deficit limits for federal and Länder levels of government. - Deficits of the different levels of government are presented in the Stability program. - The Stability Council (Stabilitätsrat) was established in 2010 replacing the Financial Planning Council (Finanzplanungsrat). - The Stability Council advises on coordination of fiscal plans across government levels and is tasked with ensuring compliance with the maximum general-government structural deficit of 0.5 percent of GDP permissible under the Fiscal Compact. - The Council can recommend austerity programs at individual levels of government to ensure coordination and achievement of aggregate fiscal policy. ### Implementing the Adjustment Strategy — Main Reforms since 2010 (Germany) - Top-down Budget Preparation: In 2011, the government implemented “key figure decisions” (Eckwertebeschluss) in March in which binding ceilings for the development of the budget and financial plans are defined. - Parliamentary Approval: The “key figures decisions” (Eckwertebeschluss) are presented by the Minister of Finance to parliament and discussed by the parliamentary budget committee. ### Budget Unity (Germany) - The central government budget excludes social security funds due to their legally independent status; therefore only around 40 percent of central government expenditure is covered by the budget. - The budget does not contain any permanently-mandated expenditure. - Estimates of all tax expenditure are reported to the public every two years in the report on subsidies, but there is no binding control on the size of tax expenditure. ### Top-down Budget Preparation (detailed) (Germany) - The government introduced a top-down budgeting process in 2011 as part of internal budget preparation. - In the Eckwertebeschluss, the government defines aggregate and ministerial ceilings for expenditures and revenues in March; this is the binding basis for developing the Finanzplan and the annual budget. - The budget process for central governmental entities is comprehensive. - Earmarking through special accounts fell after reunification but was used again recently to implement post-crisis interventions in the financial sector. ### Parliamentary Approval (detailed) (Germany) - The Eckwertebeschluss is presented to and discussed by the parliamentary budget committee in March, but neither the Eckwertebeschluss nor the financial plan is formally approved by parliament. - The constitution does not restrict parliament’s right to amend the government’s draft budget proposal. - Parliament has a veto over the government’s proposal to change the aggregate expenditure ceiling, future commitments or expected revenues. - The budget is approved before the beginning of the budget year. ### Budget Execution Controls (Germany) - Budget overruns are authorized by supplementary budgets; offsetting reductions in other appropriations are not required. - No explicit contingency reserve exists in the budget; urgent needs are addressed through the excess expenditure procedure. - After consultation of the Budget Committee of the Bundestag, the Minister of Finance may authorize unforeseen and compelling expenditure in excess of voted appropriations. - The Federal Budget Code (Bundeshaushaltsordnung) and the annual budget define the types of expenditure which may be carried forward to future years. - Use of unspent appropriations from the previous year’s budget requires consent of the Ministry of Finance and an equivalent saving on the budget of the sectoral ministry; some budget items are exempted. - The Minister of Finance may impose blocks on voted appropriations, without limit, if justified by savings requirements. - Commitment appropriations voted by Parliament separately from cash appropriations support control of multi-annual commitments. ### Recommendations (Germany) - The federal government should prepare and publish a more comprehensive balance sheet, including nonfinancial assets gathered by a comprehensive (accrual) accounting system. - Ongoing efforts to strengthen harmonization of the accounting systems between federal and Länder level should be continued and common accounting policies should be required at all levels of government. - The detailed line-item budget classification should be replaced by a program budget structure. - Implementing a model for performance-orientation and integrating performance elements, including policy outcomes and service delivery, into the budget process should be pursued with greater urgency. *International Monetary Fund — G-20 Budget Institutions: Country Evaluations (excerpt).* --- ### Fiscal framework and MTBF (Indonesia) - Medium-Term Budget Framework (MTBF): - Indonesia is introducing a rolling four-year MTBF. - In 2009, the MOF and Bappenas launched pilot MTBF and performance budgeting (PB) in six spending ministries (SMs). - At the start of each Presidential term a five-year fixed plan (RPJMN) is developed and now includes an indicative medium-term resource envelope and indicative ceilings for over 170 priority programs. - The government-wide annual plan (RKP) elaborates RPJMN priorities, includes details of new projects, and establishes annual indicative ceilings for SMs within the MOF’s overall annual resource envelope. - Based on the RKP, SMs develop annual work plans (Renja-KL) and annual budget proposals (RKA-KL). - The 2011 SMs’ budget submissions in the RKA-KL contained three year forward estimates at the program and activity level covering around 44 percent of government expenditure; these forward estimates have been incorporated into budget documents presented to Parliament. - There is no distinction between baseline expenditures and new initiatives, and updated forward estimates are not used as the starting point for the next year’s budget. - Spending estimates are not used as binding multi-year expenditure restrictions, neither for aggregate central government spending nor for sectoral/ministry spending. - Performance orientation: - Program classification reformed beginning in 2010 to align programs and organizations and to incorporate performance targets and indicators. - RKA-KL budget documents include 5000 outputs and performance indicators. - Program classification and output indicators in the budget differ from those used in planning documents. - For the 2015 budget the government is working on aligning structures and indicators used in planning and budget documents. - PI (performance information) quality is being improved and a system for monitoring and evaluation is being developed; currently PI is not used extensively in budgetary decision making. - There are no comprehensive spending reviews; non-discretionary spending includes routine operational expenditures that tend to increase incrementally without review. - The Treasury has been assigned to develop comprehensive spending reviews and the MOP is piloting a review of infrastructure spending. ### Intergovernmental relations and fiscal reporting (Indonesia) - Decentralization and SNG role: - Regional governance law 32/2004 transferred responsibilities for all major public services to the regions and provinces. - Fiscal balance law 33/2004 expanded regions’ fiscal responsibilities and established transfers and revenue sharing. - SNGs account for around 41 percent of total general government expenditures. - SNGs receive approximately 90 percent of their funding from central government. - Direct foreign borrowing by SNGs is not allowed; pre-approval of the MOF is required before SNGs can borrow domestically. - Regional governments must report to MOHA and MOF on their budget balance 30 days after the end of each semester and provide an approved annual financial report no later than August 31st following the end of the financial year. - Timeliness and quality challenges: as of mid-2012, only 88 percent of regional governments had submitted their annual financial reports for FY2010. ### Budget preparation, unity, execution, and recent reforms (Indonesia) - Budget unity and earmarking: - In 2005 “routine” and “development” budgets were integrated into a single “state budget” for central government. - Annual appropriations are required for the majority of central government expenditure. - A few expenditures are based on permanent legislation outside the budget and less than 10 percent of total central government expenditures are off-budget. - Constitutional mandate earmarks 20 percent of total government expenditures for education. - Since 2003 some tax expenditures have been quantified in the annual budget, but limits are not placed on their size. - Top-down budget preparation: - Process starts with establishment of overall aggregates for non-discretionary and discretionary spending. - In March, MOF and Bappenas issue a circular with cabinet approved indicative ceilings for SMs and programs for the current financial year and three forward years. - Parliament discussions in May result in changes to aggregate ceilings and revised revenue and economic growth projections. - After agreement with Parliament on the macroeconomic framework in mid-June the government issues new ceilings to SMs known as budget ceilings; SMs revise plans and produce RKA-KL. - In August, once the annual budget proposal is presented to Parliament, ceilings tend not to change although composition of expenditures may shift. - The government has produced a revised budget prior to the end of the first half of the FY to correct inaccurate macroeconomic assumptions that contributed to overestimations of revenues and underestimation of subsidy spending. - Across-the-board cuts have been applied to all SMs non-priority expenditure as part of revised budgets. - Parliamentary approval and role: - Parliament is very active and in principle has unlimited powers to amend the budget; in practice formal amendments are limited in size. - Parliament negotiates macroeconomic and fiscal forecasts with the executive in May and focuses mostly on individual line items, capital investments, and constituency interests. - There is no separate debate on the government’s fiscal policy, its medium term objectives, strategic policy issues, or inter-sectoral allocations. - Budget documents remain very detailed with limited strategic focus. - Parliament plays a limited role in ex post evaluation of program performance, though the State Finance Accountability Committee has started reviewing audit reports. - The annual budget is approved in a timely manner two months before the start of the new FY. - Budget execution controls and 2013 reforms: - MOF can cut or defer expenditure without Parliament’s pre-approval. - Regulations place tight restrictions on multi-annual expenditure commitments; there is no carry-over of unspent appropriations to the next year. - A general contingency reserve exists though rules for its use are not transparent. - A supplementary budget that increases aggregate expenditure requires Parliament approval. - Persistent challenges: under-spending and disproportionate spending in the last quarter, particularly for capital expenditures. - 2013 regulations (45/2013 and 94/2013) to improve budget implementation introduce commitment controls, allow earlier procurement, remove obstacles to budget execution, no longer require annual reappointment of budget execution officers in spending units, allow procurement to begin before the start of the FY, and eliminate the “Bintang” practice which permitted blocking of budget execution by parliamentary committees. ### Monitoring and data challenges (Indonesia) - Lack of timely and comprehensive general government fiscal statistics (especially local government statistics) makes it difficult to monitor and report on performance against the fiscal rule. - Spending estimates and forward estimates are not treated as binding multi-year restrictions. ### Recommendations (Indonesia) - Introduce a formal mechanism to monitor and report on the differences between annual outturns and fiscal objectives and rules to enhance credibility and accountability. - Improve macroeconomic and fiscal forecasting by publishing the underlying economic assumptions, comparisons with private sector forecasts, an ex post comparison of forecasts with actual outturns, and publishing legislature changes to key economic assumptions and forecasts. - Create an independent fiscal council to review official forecasts and conduct independent evaluations of the government’s fiscal performance. - Establish a more strategic annual and medium term focus in budget documents by reducing detail, separating ongoing programs from new initiatives, and aligning programs and indicators used in planning and budget documents. - Strengthen MTBF implementation by establishing clear procedures for updating baselines to support more accurate projections at the SM and program level; expand MTBF coverage to the entire central government budget; and explain variances between budget year aggregate ceilings and aggregates forecasted in the prior year MTBF. - Establish a clearly defined two-step top-down budget preparation process in which the executive and Parliament agree on fiscal aggregates and SM ceilings before addressing detailed SM or program issues. - Improve fiscal reporting by local governments, which execute a large share of general government expenditures and have been beneficiaries of fiscal decentralization. - Introduce spending reviews, including of non-discretionary spending, to improve quality of expenditures and help create fiscal space; include subsidies, revenues, and transfer policies in the broader fiscal discussion during budget preparation. *Italic source: G-20 BUDGET INSTITUTIONS - COUNTRY EVALUATIONS (excerpts provided in the content unit).* --- ### Introduction of a rule for the primary balance (Japan) #### Fiscal objectives, rules, and recent reforms - The Fiscal Management Strategy (FMS), adopted in 2010 and broadly reaffirmed subsequently, targeted: - "a primary budget surplus for the central government and local governments by FY2020" - "to put debt on a downward trajectory from FY2021." - The FMS mandated an aggregate expenditure ceiling that held spending fixed, in nominal terms, over a three-year period, excluding recovery and reconstruction-related spending. - The Medium-term Fiscal Plan (MTFP), approved by Cabinet in August 2013, replaced the FMS and: - "retains the long-term objectives in the FMS" - substitutes the expenditure ceiling with a rule that "the primary balance of the General Account of the central government should improve by at least JPY 4 trillion in FY2014 and again in FY2015." - calls for "expenditure to be reduced, and revenue increased, as percentages of GDP." - Special Accounts and General Account relationships: - Number of Special Accounts reduced "from 31 to 17 in recent years." - "Total expenditure through Special Accounts is still over four times that of expenditure through the General Account." - "In 2014, the authorities will further reduce the number of Special Accounts from 17 to 14, excluding the Special Account for Reconstruction from the Great East Japan Earthquake." - Note: "The General Account represents general expenditure of the central government. Special Accounts are set up to carry out projects and administer and manage specific funds or revenues." - Cabinet decisions have set and revised short- to long-term objectives for debt and the deficit, but these "are not based on a rule-based framework that integrates both sustainability and stability concerns in a balanced way." - The FMS established a "budget-neutrality rule" requiring countervailing permanent reductions in expenditures or revenue-raising measures when policies increase expenditure or reduce revenue; this principle is retained in later plans. #### Medium-term fiscal framework and budget formulation (Japan) - Legal and procedural context: - The budget is formulated under the "single-year budget principle" stipulated by the Public Finance Act; "no law requires the presentation of a medium-term fiscal framework (MTFF)." - A basic MTFF was introduced in August 2013, dividing expenditure into five broad economic categories: "debt service, local government transfers, social security, other current expenditure, and investment." - Expenditure ceilings for each category are set only "for one-year ahead." - "Fiscal forecasts do not systematically identify the impact of new versus ongoing policy." - Budget unity and reporting: - All revenues and expenditures are incorporated into the annual budget, but "budget unity is undermined by separating the budget into the General Account, Special Accounts, and government-affiliated agencies, which are presented in separate documents." - "There are no permanent appropriations." - The Ministry of Finance "every year provides a report on tax expenditures to the Diet" and the report "states the annual revenue loss attributable to each specific tax expenditure over a multi-year period, including the budget year." Tax expenditures have sunset clauses when authorized. - Top-down budget preparation: - Process follows a "top-down procedure that is generally well respected." - The Cabinet Office issues "the basic principles of budget formulation" decided by Cabinet after discussion in the CEFP. - "There is no legal constraint on the number of supplementary budgets." - Frequent use of expansionary supplementary budgets in recent years has "compromised integrity of both the fiscal rule and the annual budget as tools for enforcing overall fiscal discipline." - Parliamentary approval and timing: - "The Diet approves the budget aggregates and detailed appropriations at the same time." - "The time available for legislative debate of the government’s budget proposal is typically two months." - In practice, "substantive amendments to the budget proposal by the Diet are rare" due to strong self-imposed constraints. - Budget execution and controls: - The approved budget "represents a ceiling on expenditure, and the government is authorized to spend less if desired." - Line ministers may reassign funds within thresholds with prior consent from the Ministry of Finance; ex post approval of the Diet is needed for some reassignments. - "An increase in spending beyond the voted budget requires the Diet’s approval ex ante in the case of investment spending, but ex post in the case of mandatory or discretionary operational spending." - "Overspending requires a supplementary budget, but there is no presumption that the additional spending will be offset." - Clear rules/procedures exist for access to the government's general contingency reserve; "there are no rules for its relative size." - Carryover rules: - "Carryover of unspent appropriations is permitted only for a subset of expenditure items that are specified in the budget documents." - In other instances, carryover is permitted "with the approval of the Ministry of Finance, subject to an ex ante resolution by the Diet, if the carryover is attributable to the nature of the expenditure or is due to reasons unforeseen when the budget was initially approved." - "The Diet’s approval is required for all multi-year expenditure commitments, which are limited in duration to two or five years, depending on the type of expenditure." #### Performance orientation, evaluations, and intergovernmental relations (Japan) - Performance budgeting: - Since 2008, the budget has used a program classification and "programs are the basis for legislative appropriation of expenditure." - The impact of performance measures on allocation "is limited." - Program evaluations are conducted and published primarily by line ministries; cross-ministerial programs are evaluated by the Ministry of Internal Affairs and Communications. - Evaluations are linked to the budget cycle and studied by the Ministry of Finance during budget preparation, but "program evaluations do not require savings options to be discussed." - The independent Board of Audit evaluates legal compliance and "efficiency and effectiveness in project implementation, rather than on priority and relevance for the government’s agenda." - Intergovernmental financial relations: - Relations are regulated through a number of laws; the FMS and MTFP retain the principle of mutual cooperation in fiscal consolidation between central and local governments. - Principle that "the central government not transfer expenditure burdens to local governments or hinder their autonomy." - "The fiscal objectives and the rule for the primary balance are inclusive of spending by local governments." #### Key statistics and exact numeric facts (Japan) - Primary balance rule target: "improve by at least JPY 4 trillion in FY2014 and again in FY2015." - FMS targets: primary budget surplus by "FY2020"; debt downward from "FY2021." - Special Accounts count: reduced "from 31 to 17"; "further reduce the number of Special Accounts from 17 to 14 in 2014, excluding the Special Account for Reconstruction from the Great East Japan Earthquake." - Relative spending: "total expenditure through Special Accounts is still over four times that of expenditure through the General Account." - FMS three-year nominal spending freeze: "held spending fixed, in nominal terms, over a three-year period, excluding recovery and reconstruction-related spending." - Timeframes and dates retained as presented: "2010-13 period"; "August 2013"; "2014." #### Recommendations (Japan) - "Define a fiscal rule framework that will ensure an appropriate balance between fiscal sustainability and stability concerns over the medium-term, and possibly, in due course enshrine this framework in law. The present regime of exceptions to fiscal objectives provides flexibility to budget management but insufficient assurances for fiscal consolidation. A new framework should encompass all supplementary budgets, and allow for flexibility through accommodation of automatic stabilizers and appropriate escape clauses." - "Develop the MTFF gradually into a more detailed medium-term budget framework (MTBF), including expenditure ceilings by line ministry and possibly by major programs. The framework should reflect Cabinet decision-making on expenditure and revenue measures over the medium-term." - "Base the MTBF on prudent macroeconomic forecasts rather than on optimistic macroeconomic assumptions. Macroeconomic forecasts should be compared in the budget with forecasts of other institutions and/or commercial banks. Forecast errors of previous years should also be reported and explained." - "Limit the conditions under which supplementary budgets can be used so as not to undermine the integrity of the fiscal rule framework and the annual budget as tools for enforcing overall fiscal discipline." - "Transform the Fiscal System Council into an independent, impartial body to monitor and evaluate fiscal performance both ex post and ex ante." - "Reform expenditure review processes to include independent assessment of program performance, and enforce presentation of savings options." *International Monetary Fund — G-20 Budget Institutions: Country Evaluations (excerpt on introduction of a rule for the primary balance and related MTFF material).* ### 0.0 percent of GDP. As of 2011 the rule has been implemented and its structural deficit ceilings will ### _040714d - 0.0 percent of GDP. As of 2011 the rule has been implemented and its structural deficit ceilings will ### Fiscal Rule Implementation - Structural deficit ceilings will fully apply in 2016 for the federation and 2020 for the Länder. - The fiscal rule includes an escape clause in the case of natural catastrophes, but a debt reduction plan must be developed. - The rule accommodates the business cycle by being defined in structural terms. - Legislation on the domestic transposition of the Fiscal Compact enshrined the maximum general-government structural deficit of 0.5 percent of GDP in the Budgetary Principles Act (Haushaltsgrundsätzegesetz). ### Medium-term Budget Framework - The federal medium-term financial plan (Finanzplan) includes detailed multi-year estimates of revenues and expenditure by line ministry and is updated annually. - Ceilings are not binding beyond the budget year, but sectoral priorities are transparently identified and changes in resource allocations over the medium term are explained. - The medium-term financial plan covers the whole federal budget, with the exception of social security. - The fiscal impact of the most important new policies is presented, but the effects of current and new policies are not disclosed separately. ### Performance Orientation of the Budget - A comprehensive performance budgeting and performance management system does not exist in the federal budget system. - Detailed line items form the basis for budget appropriations; objectives and targets are not set in the budget and therefore not monitored. - “Output-oriented budgeting” (Produkthaushalt) exists in some Länder (e.g., Berlin, Bremen, Hamburg, Hessen, Nordrhein-Westfalen), but not at the federal level. - At the federal level the line item system has been updated to move toward classification by departmental policies and introduction of a performance orientation. - The federal government is required to submit a report on subsidies to Parliament every two years which includes efficiency analysis for selected policies. ### Intergovernmental Financial Relations - The debt brake (Schuldenbremse) includes deficit limits for federal and Länder levels of government. - Deficits of the different levels of government are presented in the Stability program. - The Stability Council (Stabilitätsrat) was established in 2010 replacing the Financial Planning Council (Finanzplanungsrat). - The Stability Council advises on coordination of fiscal plans across government levels and is tasked with ensuring compliance with the maximum general-government structural deficit of 0.5 percent of GDP permissible under the Fiscal Compact. - The Council can recommend austerity programs at individual levels of government to ensure coordination and achievement of aggregate fiscal policy. ### Implementing the Adjustment Strategy — Main Reforms since 2010 - Top-down Budget Preparation: In 2011, the government implemented “key figure decisions” (Eckwertebeschluss) in March in which binding ceilings for the development of the budget and financial plans are defined. - Parliamentary Approval: The “key figures decisions” (Eckwertebeschluss) are presented by the Minister of Finance to parliament and discussed by the parliamentary budget committee. ### Budget Unity - The central government budget excludes social security funds due to their legally independent status; therefore only around 40 percent of central government expenditure is covered by the budget. - The budget does not contain any permanently-mandated expenditure. - Estimates of all tax expenditure are reported to the public every two years in the report on subsidies, but there is no binding control on the size of tax expenditure. ### Top-down Budget Preparation (detailed) - The government introduced a top-down budgeting process in 2011 as part of internal budget preparation. - In the Eckwertebeschluss, the government defines aggregate and ministerial ceilings for expenditures and revenues in March; this is the binding basis for developing the Finanzplan and the annual budget. - The budget process for central governmental entities is comprehensive. - Earmarking through special accounts fell after reunification but was used again recently to implement post-crisis interventions in the financial sector. ### Parliamentary Approval (detailed) - The Eckwertebeschluss is presented to and discussed by the parliamentary budget committee in March, but neither the Eckwertebeschluss nor the financial plan is formally approved by parliament. - The constitution does not restrict parliament’s right to amend the government’s draft budget proposal. - Parliament has a veto over the government’s proposal to change the aggregate expenditure ceiling, future commitments or expected revenues. - The budget is approved before the beginning of the budget year. ### Budget Execution Controls - Budget overruns are authorized by supplementary budgets; offsetting reductions in other appropriations are not required. - No explicit contingency reserve exists in the budget; urgent needs are addressed through the excess expenditure procedure. - After consultation of the Budget Committee of the Bundestag, the Minister of Finance may authorize unforeseen and compelling expenditure in excess of voted appropriations. - The Federal Budget Code (Bundeshaushaltsordnung) and the annual budget define the types of expenditure which may be carried forward to future years. - Use of unspent appropriations from the previous year’s budget requires consent of the Ministry of Finance and an equivalent saving on the budget of the sectoral ministry; some budget items are exempted. - The Minister of Finance may impose blocks on voted appropriations, without limit, if justified by savings requirements. - Commitment appropriations voted by Parliament separately from cash appropriations support control of multi-annual commitments. ### Recommendations - The federal government should prepare and publish a more comprehensive balance sheet, including nonfinancial assets gathered by a comprehensive (accrual) accounting system. - Ongoing efforts to strengthen harmonization of the accounting systems between federal and Länder level should be continued and common accounting policies should be required at all levels of government. - The detailed line-item budget classification should be replaced by a program budget structure. - Implementing a model for performance-orientation and integrating performance elements, including policy outcomes and service delivery, into the budget process should be pursued with greater urgency. *International Monetary Fund — G-20 Budget Institutions: Country Evaluations (excerpt).* ### 2.5 percent. Due to lack of timely and comprehensive general government fiscal statistics (especially ### 040714d - 2.5 percent. Due to lack of timely and comprehensive general government fiscal statistics (especially ### Fiscal framework and MTBF (Indonesia) - Medium-Term Budget Framework (MTBF): - Indonesia is introducing a rolling four-year MTBF. - In 2009, the MOF and Bappenas launched pilot MTBF and performance budgeting (PB) in six spending ministries (SMs). - At the start of each Presidential term a five-year fixed plan (RPJMN) is developed and now includes an indicative medium-term resource envelope and indicative ceilings for over 170 priority programs. - The government-wide annual plan (RKP) elaborates RPJMN priorities, includes details of new projects, and establishes annual indicative ceilings for SMs within the MOF’s overall annual resource envelope. - Based on the RKP, SMs develop annual work plans (Renja-KL) and annual budget proposals (RKA-KL). - The 2011 SMs’ budget submissions in the RKA-KL contained three year forward estimates at the program and activity level covering around 44 percent of government expenditure; these forward estimates have been incorporated into budget documents presented to Parliament. - There is no distinction between baseline expenditures and new initiatives, and updated forward estimates are not used as the starting point for the next year’s budget. - Spending estimates are not used as binding multi-year expenditure restrictions, neither for aggregate central government spending nor for sectoral/ministry spending. - Performance orientation: - Program classification reformed beginning in 2010 to align programs and organizations and to incorporate performance targets and indicators. - RKA-KL budget documents include 5000 outputs and performance indicators. - Program classification and output indicators in the budget differ from those used in planning documents. - For the 2015 budget the government is working on aligning structures and indicators used in planning and budget documents. - PI (performance information) quality is being improved and a system for monitoring and evaluation is being developed; currently PI is not used extensively in budgetary decision making. - There are no comprehensive spending reviews; non-discretionary spending includes routine operational expenditures that tend to increase incrementally without review. - The Treasury has been assigned to develop comprehensive spending reviews and the MOP is piloting a review of infrastructure spending. ### Intergovernmental relations and fiscal reporting (Indonesia) - Decentralization and SNG role: - Regional governance law 32/2004 transferred responsibilities for all major public services to the regions and provinces. - Fiscal balance law 33/2004 expanded regions’ fiscal responsibilities and established transfers and revenue sharing. - SNGs account for around 41 percent of total general government expenditures. - SNGs receive approximately 90 percent of their funding from central government. - Direct foreign borrowing by SNGs is not allowed; pre-approval of the MOF is required before SNGs can borrow domestically. - Regional governments must report to MOHA and MOF on their budget balance 30 days after the end of each semester and provide an approved annual financial report no later than August 31st following the end of the financial year. - Timeliness and quality challenges: as of mid-2012, only 88 percent of regional governments had submitted their annual financial reports for FY2010. ### Budget preparation, unity, execution, and recent reforms (Indonesia) - Budget unity and earmarking: - In 2005 “routine” and “development” budgets were integrated into a single “state budget” for central government. - Annual appropriations are required for the majority of central government expenditure. - A few expenditures are based on permanent legislation outside the budget and less than 10 percent of total central government expenditures are off-budget. - Constitutional mandate earmarks 20 percent of total government expenditures for education. - Since 2003 some tax expenditures have been quantified in the annual budget, but limits are not placed on their size. - Top-down budget preparation: - Process starts with establishment of overall aggregates for non-discretionary and discretionary spending. - In March, MOF and Bappenas issue a circular with cabinet approved indicative ceilings for SMs and programs for the current financial year and three forward years. - Parliament discussions in May result in changes to aggregate ceilings and revised revenue and economic growth projections. - After agreement with Parliament on the macroeconomic framework in mid-June the government issues new ceilings to SMs known as budget ceilings; SMs revise plans and produce RKA-KL. - In August, once the annual budget proposal is presented to Parliament, ceilings tend not to change although composition of expenditures may shift. - The government has produced a revised budget prior to the end of the first half of the FY to correct inaccurate macroeconomic assumptions that contributed to overestimations of revenues and underestimation of subsidy spending. - Across-the-board cuts have been applied to all SMs non-priority expenditure as part of revised budgets. - Parliamentary approval and role: - Parliament is very active and in principle has unlimited powers to amend the budget; in practice formal amendments are limited in size. - Parliament negotiates macroeconomic and fiscal forecasts with the executive in May and focuses mostly on individual line items, capital investments, and constituency interests. - There is no separate debate on the government’s fiscal policy, its medium term objectives, strategic policy issues, or inter-sectoral allocations. - Budget documents remain very detailed with limited strategic focus. - Parliament plays a limited role in ex post evaluation of program performance, though the State Finance Accountability Committee has started reviewing audit reports. - The annual budget is approved in a timely manner two months before the start of the new FY. - Budget execution controls and 2013 reforms: - MOF can cut or defer expenditure without Parliament’s pre-approval. - Regulations place tight restrictions on multi-annual expenditure commitments; there is no carry-over of unspent appropriations to the next year. - A general contingency reserve exists though rules for its use are not transparent. - A supplementary budget that increases aggregate expenditure requires Parliament approval. - Persistent challenges: under-spending and disproportionate spending in the last quarter, particularly for capital expenditures. - 2013 regulations (45/2013 and 94/2013) to improve budget implementation introduce commitment controls, allow earlier procurement, remove obstacles to budget execution, no longer require annual reappointment of budget execution officers in spending units, allow procurement to begin before the start of the FY, and eliminate the “Bintang” practice which permitted blocking of budget execution by parliamentary committees. ### Monitoring and data challenges - Lack of timely and comprehensive general government fiscal statistics (especially local government statistics) makes it difficult to monitor and report on performance against the fiscal rule. - Spending estimates and forward estimates are not treated as binding multi-year restrictions. ### Recommendations (Indonesia) - Introduce a formal mechanism to monitor and report on the differences between annual outturns and fiscal objectives and rules to enhance credibility and accountability. - Improve macroeconomic and fiscal forecasting by publishing the underlying economic assumptions, comparisons with private sector forecasts, an ex post comparison of forecasts with actual outturns, and publishing legislature changes to key economic assumptions and forecasts. - Create an independent fiscal council to review official forecasts and conduct independent evaluations of the government’s fiscal performance. - Establish a more strategic annual and medium term focus in budget documents by reducing detail, separating ongoing programs from new initiatives, and aligning programs and indicators used in planning and budget documents. - Strengthen MTBF implementation by establishing clear procedures for updating baselines to support more accurate projections at the SM and program level; expand MTBF coverage to the entire central government budget; and explain variances between budget year aggregate ceilings and aggregates forecasted in the prior year MTBF. - Establish a clearly defined two-step top-down budget preparation process in which the executive and Parliament agree on fiscal aggregates and SM ceilings before addressing detailed SM or program issues. - Improve fiscal reporting by local governments, which execute a large share of general government expenditures and have been beneficiaries of fiscal decentralization. - Introduce spending reviews, including of non-discretionary spending, to improve quality of expenditures and help create fiscal space; include subsidies, revenues, and transfer policies in the broader fiscal discussion during budget preparation. *Italic source: G-20 BUDGET INSTITUTIONS - COUNTRY EVALUATIONS (excerpts provided in the content unit).* ### Introduction of a rule for the primary balance ### Introduction of a rule for the primary balance ### Fiscal objectives, rules, and recent reforms - The Fiscal Management Strategy (FMS), adopted in 2010 and broadly reaffirmed subsequently, targeted: - "a primary budget surplus for the central government and local governments by FY2020" - "to put debt on a downward trajectory from FY2021." - The FMS mandated an aggregate expenditure ceiling that held spending fixed, in nominal terms, over a three-year period, excluding recovery and reconstruction-related spending. - The Medium-term Fiscal Plan (MTFP), approved by Cabinet in August 2013, replaced the FMS and: - "retains the long-term objectives in the FMS" - substitutes the expenditure ceiling with a rule that "the primary balance of the General Account of the central government should improve by at least JPY 4 trillion in FY2014 and again in FY2015." - calls for "expenditure to be reduced, and revenue increased, as percentages of GDP." - Special Accounts and General Account relationships: - Number of Special Accounts reduced "from 31 to 17 in recent years." - "Total expenditure through Special Accounts is still over four times that of expenditure through the General Account." - "In 2014, the authorities will further reduce the number of Special Accounts from 17 to 14, excluding the Special Account for Reconstruction from the Great East Japan Earthquake." - Note: "The General Account represents general expenditure of the central government. Special Accounts are set up to carry out projects and administer and manage specific funds or revenues." - Cabinet decisions have set and revised short- to long-term objectives for debt and the deficit, but these "are not based on a rule-based framework that integrates both sustainability and stability concerns in a balanced way." - The FMS established a "budget-neutrality rule" requiring countervailing permanent reductions in expenditures or revenue-raising measures when policies increase expenditure or reduce revenue; this principle is retained in later plans. ### Medium-term fiscal framework and budget formulation - Legal and procedural context: - The budget is formulated under the "single-year budget principle" stipulated by the Public Finance Act; "no law requires the presentation of a medium-term fiscal framework (MTFF)." - A basic MTFF was introduced in August 2013, dividing expenditure into five broad economic categories: "debt service, local government transfers, social security, other current expenditure, and investment." - Expenditure ceilings for each category are set only "for one-year ahead." - "Fiscal forecasts do not systematically identify the impact of new versus ongoing policy." - Budget unity and reporting: - All revenues and expenditures are incorporated into the annual budget, but "budget unity is undermined by separating the budget into the General Account, Special Accounts, and government-affiliated agencies, which are presented in separate documents." - "There are no permanent appropriations." - The Ministry of Finance "every year provides a report on tax expenditures to the Diet" and the report "states the annual revenue loss attributable to each specific tax expenditure over a multi-year period, including the budget year." Tax expenditures have sunset clauses when authorized. - Top-down budget preparation: - Process follows a "top-down procedure that is generally well respected." - The Cabinet Office issues "the basic principles of budget formulation" decided by Cabinet after discussion in the CEFP. - "There is no legal constraint on the number of supplementary budgets." - Frequent use of expansionary supplementary budgets in recent years has "compromised integrity of both the fiscal rule and the annual budget as tools for enforcing overall fiscal discipline." - Parliamentary approval and timing: - "The Diet approves the budget aggregates and detailed appropriations at the same time." - "The time available for legislative debate of the government’s budget proposal is typically two months." - In practice, "substantive amendments to the budget proposal by the Diet are rare" due to strong self-imposed constraints. - Budget execution and controls: - The approved budget "represents a ceiling on expenditure, and the government is authorized to spend less if desired." - Line ministers may reassign funds within thresholds with prior consent from the Ministry of Finance; ex post approval of the Diet is needed for some reassignments. - "An increase in spending beyond the voted budget requires the Diet’s approval ex ante in the case of investment spending, but ex post in the case of mandatory or discretionary operational spending." - "Overspending requires a supplementary budget, but there is no presumption that the additional spending will be offset." - Clear rules/procedures exist for access to the government's general contingency reserve; "there are no rules for its relative size." - Carryover rules: - "Carryover of unspent appropriations is permitted only for a subset of expenditure items that are specified in the budget documents." - In other instances, carryover is permitted "with the approval of the Ministry of Finance, subject to an ex ante resolution by the Diet, if the carryover is attributable to the nature of the expenditure or is due to reasons unforeseen when the budget was initially approved." - "The Diet’s approval is required for all multi-year expenditure commitments, which are limited in duration to two or five years, depending on the type of expenditure." ### Performance orientation, evaluations, and intergovernmental relations - Performance budgeting: - Since 2008, the budget has used a program classification and "programs are the basis for legislative appropriation of expenditure." - The impact of performance measures on allocation "is limited." - Program evaluations are conducted and published primarily by line ministries; cross-ministerial programs are evaluated by the Ministry of Internal Affairs and Communications. - Evaluations are linked to the budget cycle and studied by the Ministry of Finance during budget preparation, but "program evaluations do not require savings options to be discussed." - The independent Board of Audit evaluates legal compliance and "efficiency and effectiveness in project implementation, rather than on priority and relevance for the government’s agenda." - Intergovernmental financial relations: - Relations are regulated through a number of laws; the FMS and MTFP retain the principle of mutual cooperation in fiscal consolidation between central and local governments. - Principle that "the central government not transfer expenditure burdens to local governments or hinder their autonomy." - "The fiscal objectives and the rule for the primary balance are inclusive of spending by local governments." ### Key statistics and exact numeric facts (preserved) - Primary balance rule target: "improve by at least JPY 4 trillion in FY2014 and again in FY2015." - FMS targets: primary budget surplus by "FY2020"; debt downward from "FY2021." - Special Accounts count: reduced "from 31 to 17"; "further reduce the number of Special Accounts from 17 to 14 in 2014, excluding the Special Account for Reconstruction from the Great East Japan Earthquake." - Relative spending: "total expenditure through Special Accounts is still over four times that of expenditure through the General Account." - FMS three-year nominal spending freeze: "held spending fixed, in nominal terms, over a three-year period, excluding recovery and reconstruction-related spending." - Timeframes and dates retained as presented: "2010-13 period"; "August 2013"; "2014." ### Recommendations (as presented in the source) - "Define a fiscal rule framework that will ensure an appropriate balance between fiscal sustainability and stability concerns over the medium-term, and possibly, in due course enshrine this framework in law. The present regime of exceptions to fiscal objectives provides flexibility to budget management but insufficient assurances for fiscal consolidation. A new framework should encompass all supplementary budgets, and allow for flexibility through accommodation of automatic stabilizers and appropriate escape clauses." - "Develop the MTFF gradually into a more detailed medium-term budget framework (MTBF), including expenditure ceilings by line ministry and possibly by major programs. The framework should reflect Cabinet decision-making on expenditure and revenue measures over the medium-term." - "Base the MTBF on prudent macroeconomic forecasts rather than on optimistic macroeconomic assumptions. Macroeconomic forecasts should be compared in the budget with forecasts of other institutions and/or commercial banks. Forecast errors of previous years should also be reported and explained." - "Limit the conditions under which supplementary budgets can be used so as not to undermine the integrity of the fiscal rule framework and the annual budget as tools for enforcing overall fiscal discipline." - "Transform the Fiscal System Council into an independent, impartial body to monitor and evaluate fiscal performance both ex post and ex ante." - "Reform expenditure review processes to include independent assessment of program performance, and enforce presentation of savings options." *International Monetary Fund — G-20 Budget Institutions: Country Evaluations (excerpt on introduction of a rule for the primary balance and related MTFF material).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_040714d.pdf_