## _tnm1001

## Source details

**Canonical URL:** [_tnm1001](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1001.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1001.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1001.pdf.json)

---

### Features of the Main Budget System Laws (Box 1: Brazil)
- Hierarchical structure
  - Main laws: the 1988 Constitution; Law No. 4320, 1964; the Fiscal Responsibility Law (FRL) No. 101, 2000; and the Budget Guidelines Law (BGL), approved annually prior to each annual budget law.
  - Constitution assigns budget powers to the legislature and the executive and includes a “golden rule” that government borrowing shall not exceed capital expenditures.
  - Law 4320 and the FRL:
    - establish general rules for preparation, execution, accounting, and reporting of the budget.
    - are higher-ranked laws that prevail over ordinary laws and cannot be modified by them.
    - require approval by each chamber of congress with an absolute majority of the respective members.
    - modifying the FRL also requires a qualified (two-thirds) majority of congress.
    - are “unitary laws” establishing common budgeting rules for all three levels of government (with some specific rules for each level).

- Main features of Brazil’s Fiscal Responsibility Law (FRL)
  - Detailed provisions for budget preparation and execution.
  - Numerical limits for some fiscal indicators (example indicators provided: the ratio of net public debt to net revenues; and the ratio of personnel expenditures to net revenues).
  - Provisions to restrict expenditure commitments in the final year of government.
  - Limits on the borrowing activities of subnational governments.
  - Transparent fiscal reporting: the government must present multiyear fiscal targets; targets for the primary balance and public debt for the following three fiscal years; and a description of fiscal risks with an assessment of contingent fiscal liabilities.
  - Strong sanctions for non-compliance (the FRL is accompanied by a Fiscal Crimes Law).

- Legal design considerations for budget system laws
  - Number of laws:
    - Consolidation case: strong case for consolidating all functional areas of the budget system into a single law.
    - Specialist laws may be adopted for procurement, debt management, local government finance.
    - External audit: a separate law is desirable given constitutional status and independence of the supreme audit institution.
  - Legal review and preparatory steps — key questions:
    - What procedures/steps must be followed before the draft law promulgation after legislative adoption?
    - How much time is needed for each step?
    - What are the risks of rejection or stalling by the legislature or constitutional court?
    - Are drafts of new regulations already available to facilitate early implementation?
  - Enforceability and sanctions:
    - Can new provisions be enforced? If not, should they be introduced?
    - Sanctions against collective bodies may be covered in other laws (e.g., vote of no confidence).
    - National law may specify sanctions on subnational governments for reporting or debt-limit failures.
    - Sanctions on individual actors can include administrative actions (removal), fines, or criminal law for serious offenses (misappropriation, fraud, corruption).

- Political arrangements to consider
  - Federal or unitary state:
    - In federal countries, assess whether legal constraints exist on subnational governments (e.g., separate law constraining subnational debt levels and requiring reporting of subnational budgetary and debt data using internationally accepted reporting and classification standards).
  - Presidential versus parliamentary systems:
    - In presidential systems, consider whether legal provisions will withstand changes in the political balance between legislature and executive.
    - In parliamentary systems where the government controls parliament, evaluate whether provisions could be implemented via less formal instruments (government order or decree).
  - Number of political parties:
    - In multiparty systems with proportional representation, multiyear budget agreements between coalition partners may substitute for some BSL provisions.
  - Bicameral versus unicameral legislature:
    - In bicameral systems, examine budget-making powers of both houses; when both have equivalent powers, BSL must accommodate longer adoption timeframes.

- Accountabilities and authority of the legislature and the executive
  - Legislature:
    - Supreme in budget matters regarding approval of annual and supplementary budgets.
    - If not in the constitution, the BSL should specify that all taxation and expenditures be based on law; no revenues can be spent without legislative approval, with specified exceptions.
  - Executive responsibilities:
    - Main responsibilities: (1) submit a draft budget law to the legislature; and (2) report on its implementation.
    - Key actors typically include the president (in presidential systems) or the minister of finance (in parliamentary systems).
    - Authority and areas of responsibility of the minister of finance (or equivalent) should be spelt out in law.
  - Reporting and accountability by ministers and budget managers:
    - Responsibilities to report to the legislature on budget execution should be spelt out in law.
    - Ministers and budget managers can be required to respond formally to questions or appear before budget committees.
    - Accountability should cover financial and nonfinancial outcomes, including value-for-money and attainment of performance targets.
  - Internal executive accountabilities:
    - Do not need to be in law; internal regulations, orders, or decrees are appropriate instruments to specify roles within the executive.

- Main content suggestions for a Budget Systems Law (BSL)
  - Preliminary step: determine which budget principles are already covered in law; reference to 11 guiding principles for budget management (see Box 3).
  - The specific aims of the BSL should be explicit: main principles and objectives, scope, and clear definitions of terms in introductory articles or a separate document.
  - Most budget process steps should be specified in the BSL: preparation by the executive; submission of draft budget law to the legislature; adoption by the legislature (annual and supplementary budgets); aspects of budget execution; ex post reporting to the legislature.
  - Detailed execution procedures can be laid down in regulations, except where constitutional or political arrangements require more legal constraint on the executive’s room for maneuver.

### Sound principles for a Budget System Law (Box 3)
- Overarching Principle
  - 1. Authoritativeness: Decision-making authority is specified clearly in the BSL. The executive prepares a draft annual budget law and supporting documents such as a fiscal policy strategy paper and a medium-term macro-fiscal framework; the legislature approves the annual budget, possibly after amendments; no expenditure can be made without approval of the legislature; the executive implements the annual budget and provides reports on implementation. It also has the authority to close and open public bank accounts. The authority to modify the approved budget law is specified in the BSL.

- Classical Principles
  - 2. Annual basis: Budget authority is for a 12-month period. Exceptions are specified in the BSL, including multiyear appropriations and end-year carryovers. The annual budget law is enacted prior to the year to which it refers. All transactions are estimated for their one year effect.
  - 3. Comprehensiveness: The “universe” (e.g., central government) is specified clearly. All revenues and expenditures are included in the budget on a gross basis. Expenditures are not offset by revenues: the BSL specifies any exceptions. Extrabudgetary funds are minimal, being established by law. Contingency funds are included in the budget law. Tax expenditures and quasi-fiscal activities are reported.
  - 4. Unity: The budget presents, and the legislature approves, all receipts and payments in the same annual budget law. For expenditures, there is no “dual” budget system that splits current and development (or capital) transactions (this is best implemented if there is also unity of budget administration—one central budget authority). For revenues, there is an option between (i) approving all new revenue measures in the annual budget law or (ii) approving revenue measures only in laws other than the annual appropriations laws (the principle of exclusivity, which may be included in the BSL).
  - 5. Common pooling (or fungibility) of revenues: All resources are channeled into one common fund.
  - 6. Specificity: Revenues and expenditures are approved with some detail in the budget estimates. Authorized spending is intended for particular purposes (inputs or programs/outputs).
  - 7. Balance: Budget payments are balanced by receipts (accounting balance, cash basis). Budget expenses are balanced by budget revenues and financing (accrual basis). “Balance” is well defined and may be subject to legal limitations.

- Modern Principles
  - 8. Accountability: The executive must account to the legislature for how it has met its responsibilities at least twice a year. An independent external audit body reports at least annually to the legislature on budget execution and annual government accounts. Within the executive, the accountability of budget managers is clearly defined.
  - 9. Transparency: The roles of public bodies are clear. Timely and regular financial and nonfinancial information on the budget is publicly available. The terms used in the BSL are clearly defined.
  - 10. Stability: Short-term policy stability: anchoring commitments to achieve targets for revenues, total expenditures, fiscal balance or public debt, specified in the context of a regularly updated medium-term budget framework. Medium-term fiscal sustainability is also another important aspect of stability.
  - 11. Performance: The expected and recent past results (outputs and/or outcomes) of budget programs are reported in the budget document.

### Key procedural and technical content areas for the BSL (selection)
- Submission of annual budget or appropriation law(s) to the legislature
  - Fiscal rules: numerical limits on budget aggregates constrain budget-setting of executive and legislature; fiscal rules serve goals including fiscal sustainability, economic stabilization, containment or reduction of government size, and support of intergenerational equity.
  - Budget submission timing: if not in the constitution, the BSL should specify the date by which the executive must submit the draft annual budget to the legislature (typically two to four months prior to the beginning of the new fiscal year).
  - Appropriations as legally binding upper limits: the BSL should specify whether individual appropriations are legally binding upper limits; some spending mandated by other laws may not be upper-limited by annual appropriations.
  - Classification and type of appropriations: the BSL should specify broad classification of expenditures to be used in annual appropriation act(s); detailed classifications for execution and statistical reporting can be specified by government decree.
  - Gross versus net appropriations: consistent with comprehensiveness, expenditures should not be offset against revenues; where agencies raise and retain revenues, the legislature should approve projected agency revenues and set guidelines; any excess spending should require legislative approval.
  - Accounting basis of annual appropriations: traditionally cash-based and limited to 12 months; BSL may require multiannual commitments to be approved in the context of the annual budget or may be a vehicle to introduce accrual-based accounting.
  - Carryover of budget authority: BSLs of countries with good expenditure control mechanisms may allow investment spending authority to be carried over to the next fiscal year; BSL should specify types of expenditures and limits on carryover.
  - Appropriations for contingencies: BSL could specify a contingency line item, limit unallocated spending to a small percentage of total expenditure (usually not in excess of 3 percent) and place authority with the MoF; regulations specify procedures and require regular reporting to the legislature.

- Procedural provisions and limits
  - Specify whether individual appropriations are legally binding upper limits.
  - Provide rules on carryover and on contingency appropriations (limit unallocated spending, e.g., usually not in excess of 3 percent).
  - Allow detailed execution rules to be set by regulation except where legal constraints are necessary.

---

### Documents to accompany the annual draft budget law (Section 2)
- Medium-term projections, assumptions, and fiscal strategy
  - The BSL should specify the various documents the executive must submit to the legislature with the draft annual budget.
  - Good practice: require the legislature to review and endorse an annually-updated multiyear budget framework covering all institutional units comprising “general government,” as defined in GFS.
  - The BSL could include a requirement for the legislature to formally approve the government’s strategy for public debt.
  - The BSL, or a separate public debt law, should spell out key public debt requirements, including:
    - responsibilities of organization(s) involved in government debt management;
    - authority of the minister of finance as sole borrowing agent and to select borrowing instruments;
    - authority and general conditions for guarantees and on-lending of sovereign external loans;
    - fix a limit on total public debt issuance (with clear provisions for subnational governments);
    - provide for permanent parliamentary appropriations for all debt servicing;
    - establish audit and accountability arrangements for government debt management.
  - Regarding coverage of debt, the “public sector” may be appropriate where nonfinancial and/or financial public enterprises have an important impact on fiscal aggregates or fiscal risks.

- Extrabudgetary funds
  - Such funds should be limited in number and purpose.
  - If strong grounds exist for special funds (e.g., social security), a special law may be adopted.
  - Some countries restrict creation and management of extrabudgetary funds (example: Finland’s 1999 constitution requires a supermajority in parliament).
  - For off-budget extrabudgetary funds, the BSL should specify:
    - fiscal aggregates include projected revenues and expenditures of all off-budget activities;
    - separate reports on specific funds be included with the annual budget documents.

- Information on performance objectives
  - Countries with performance- or results-oriented budget systems usually require forward-looking annual performance reports prepared by each major program and/or each ministry.

- Documents to accompany the draft annual budget law or appropriations act (Box 4)
  - A medium-term fiscal strategy and objectives, the medium-term budget framework (MTBF) showing expected revenue, expenditure, budget balance, and public debt during at least the two years beyond the next fiscal year;
  - Identification and discussion of the economic assumptions and fiscal risks underlying the projections;
  - A statement on fiscal risks including:
    - sensitivity of the fiscal and debt projections to changes in assumptions;
    - alternative macrofiscal scenarios;
    - assessment of debt sustainability and debt-related risks;
    - risks associated with quasi-fiscal activities, government guarantees and other contingent liabilities, State-owned enterprises, financial sector, subnational governments, extrabudgetary funds, and government assets;
  - Clear identification of new policies in the annual budget, with an estimate of their quantitative impact on the budget;
  - Comparative information on actual revenue and expenditure during the previous two years and an updated forecast for the current year, with commentary on each revenue and expenditure program, plus reconciliation with earlier forecasts and explanations of significant deviations;
  - Tax expenditures, contingent liabilities and quasi-fiscal activities should be discussed, especially when quantitatively important.

---

### Adoption of the budget by the legislature, including amendments and procedures (Section 3)
- Fiscal rules and legislative approval
  - Fiscal rules have been included in fiscal responsibility laws (FRLs) in a number of countries; embedding them in law makes them more difficult to reverse.
  - To be effective, a FRL should:
    - cover all relevant budget and quasi-fiscal operations of the public sector;
    - comprehensively include procedural and transparency requirements.
  - Brazil’s FRL provides an example where strong sanctions for noncompliance help successful embedding.
  - Fiscal rules must be accompanied by political commitment and mechanisms for accountability, monitoring, and enforcement; without legislative commitment rules may undermine credibility.
  - An alternative to FRL-type embedding is transparent and credible fiscal strategies backed by strong institutions (examples cited: Australia and New Zealand). This alternative usually includes:
    - medium-term perspective for budget preparation;
    - budget procedures to minimize deficit bias (e.g., top-down budgeting procedures);
    - strong transparency requirements and public oversight.

- Two-part budget approval process
  - Some countries require presentation of the MTBF and annual budget aggregates for a pre-budget debate (e.g., midyear before the new budget year).
  - Other countries require approval of annual budget aggregates—revenues, financing, total expenditure; and debt repayments—prior to the second parliamentary round approving detailed expenditure estimates.
  - Two-part processes focus the legislature first on overall fiscal strategy and main aggregates before detailed expenditures, and can be incorporated in the BSL where top-down budgeting is important.

- Limits on legislature’s amendment powers
  - Three main options for legislative amendment powers: unlimited, limited, or negligible (e.g., any change must be approved by the executive).
  - For medium-term fiscal stability, it is desirable to limit the legislature’s powers.
  - Examples of restrictions:
    - allow additional expenditures only if additional revenues are raised so fiscal balance is unchanged;
    - prevent increases in total expenditure but allow reallocation across categories;
    - a few countries allow no changes except minor effects on the MTBF.
  - Sunset rules for tax expenditures could be introduced (example: expire after 5 or 10 years) and limits on total tax expenditures (e.g., as a percentage of total annual expenditures) could be established.

- Legislative procedures and timing
  - The BSL should require adoption of the annual budget no later than the final day of the year immediately preceding the new fiscal year.
  - Reversionary budget rule: if the budget is not adopted, execute monthly at a rate of 1/12th of the previous fiscal year appropriations (excluding proposed new policies, activities, or projects).
    - Some laws limit the duration of the 1/12 rule (example: to four months after the beginning of the new fiscal year) to force adoption.

- Rules to prevent impasses
  - If the legislature can reject the budget, the BSL may need rules to ensure adoption and prevent impasses between legislature and executive.
  - Parliamentary systems: rejection may equate to a vote of no confidence; a reversionary budget rule is important.
  - Presidential systems: legislature may reject the president’s proposed budget or president may veto legislature’s budget; a formal agreement or legal article on a reversionary budget ensures continued government function.

- Supplementary budgets and independent budget offices
  - Good practice: require a formal midterm review of budget execution by the legislature, with possible revised annual budget law to accommodate necessary changes.
    - Such a law may authorize (1) higher expenditures if revenues exceed projections or large unexpected expenditures occur; or (2) lower expenditures when revenues are less than projected and government wishes to maintain pre-announced deficit/surplus targets.
    - The BSL should allow a supplementary budget to be adopted any time required and apply BSL principles and procedures to supplementary budgets.
  - Independent budget offices serving the legislature (examples: Canada, United States, Mexico) can be specified by BSL or a “budget office” law with roles, responsibilities, and staffing.
    - To ensure independence, the office should be nonpartisan, with no political appointees.

---

### Budget execution and control (Section 4)
- Delegation, allotment, and flexibility
  - Many execution procedures (allotment, apportionment, expenditure control, internal control, internal audit) are best specified in government/ministerial regulations.
  - The BSL may specify:
    - flexibility for virement: exceeding a line item provided there is offsetting downward revision within the same expenditure category;
    - the minister of finance’s virement powers (e.g., percentage allowed without submitting a supplementary budget).

- Authority to cut appropriations and cash management
  - The BSL should specify whether the minister of finance has zero, limited, or unlimited authority to cut appropriations and the conditions for doing so (e.g., revenue shortfalls).
  - Law should provide the minister of finance power to cut expenditures up to a certain percentage before returning to the legislature for additional authority, to aid macrofiscal stability and prevent payment arrears.
  - The BSL should give the minister extensive powers over government banking arrangements and cash management, including opening and closing bank accounts, minimizing idle balances, and investing short-term surpluses to minimize borrowing costs and risks.

- Common-pooling and treasury single account (TSA)
  - The BSL should incorporate the common-pooling principle: all revenues should be paid into the same common fund; exceptions must be specified in law.
  - The BSL should specify that a TSA be held at the central bank; the TSA may have subaccounts.
  - Regulations would clarify responsibilities of designated account holders of subaccounts; in decentralized payment systems, other ministers or delegated authorities may have signature rights; in centralized systems, only the minister of finance or delegated authorities have such rights.

- Procurement
  - Public procurement procedures are often specified in a dedicated law that sets procurement principles and practices, degree of decentralization, and any overseeing administrative entities; details are specified in regulation(s).

- Ex post reporting (Box 5)
  - Quarterly (or monthly) reports:
    - Monthly and year-to-date budget execution reports, to be released within four weeks after the end of each period, with a brief commentary on revenues, expenditures, and balance.
  - Midyear report:
    - Comprehensive update on budget implementation, released within six weeks of the end of the midyear period.
    - Should discuss impact of changes in economic assumptions, recent budget-related political decisions, and other material circumstances.
    - Should include updated budget projections for the current fiscal year and the following two fiscal years.
  - Year-end accounts and annual report:
    - Annual accounts should show compliance with budgeted levels of revenues and expenditures authorized by the legislature; format should be identical to the budget presentation; any in-year adjustments should be shown.
    - Comparative information on revenues and expenditures of the preceding year should be provided.
    - The annual accounts should be audited by the external audit body and submitted to parliament within no more than 6–12 months after the fiscal year ends (more advanced countries can shorten the delay).
    - The year-end budget report should contain a comprehensive discussion of the overall budget outcome compared with ex ante targets for aggregates for revenues and broad expenditure categories; spending ministries’ reports on budget outcomes should be included.
    - For performance-oriented budget systems, the law should require annual reports include non-financial performance information, including a comparison of performance targets and actual results achieved. The reports for year (-1) should be available in time for the legislature’s consideration of the budget for year (+1).

---

### Government accounts, reporting, and external audit (Section 5)
- Accounting systems and procedures
  - A separate accounting law is not usually needed; accounting details should be provided in standards and/or regulations issued by the MoF or an independent accounting standards board.
  - The BSL should specify:
    - the basis of accounting to be used by budget entities;
    - the accounting standards-setting body.
  - Law may require accounting regulations be reviewed by qualified public and private sector experts.

- Ex post reporting and other reports
  - The BSL should specify the reports and accounts the executive must prepare for the legislature to satisfy transparency and accountability.
  - For results-oriented systems, annual performance reports should also be required.
  - Other best-practice budget information could be made a legal requirement, but choices should avoid overloading the legislature; distinguish between legislative needs and internal management information (the latter governed by regulation).

- External audit
  - Main powers and responsibilities of the supreme audit institution (SAI) should be established in the constitution.
  - The Lima Declaration of INTOSAI establishes international standards, including requiring the constitution to establish SAI independence and preparation of audit reports for the legislature.
  - A separate external audit law should elaborate SAI powers, roles and responsibilities, appointment of the auditor general or collegial body, staffing (independent of the civil service), and type of audit—compliance and/or performance (value-for-money).
  - Possible minimum norms for an external audit law are referenced in Box III.5 of Lienert and Jung (2005).

*Source: IMF Technical Notes and Manuals 10/01, 2010 (Box 1: Brazil: Features of the Main Budget System Laws; Sections 2–5).*

### Box 1. Brazil: Features of the Main Budget System Laws

### Box 1. Brazil: Features of the Main Budget System Laws

### Main laws — A hierarchical structure
- Main laws: the 1988 Constitution; Law No. 4320, 1964; the Fiscal Responsibility Law (FRL) No. 101, 2000; and the Budget Guidelines Law (BGL), approved annually prior to each annual budget law.
- Constitution assigns budget powers to the legislature and the executive and includes a “golden rule” that government borrowing shall not exceed capital expenditures.
- Law 4320 and the FRL:
  - establish general rules for preparation, execution, accounting, and reporting of the budget.
  - are higher-ranked laws that prevail over ordinary laws and cannot be modified by them.
  - require approval by each chamber of congress with an absolute majority of the respective members.
  - modifying the FRL also requires a qualified (two-thirds) majority of congress.
  - are “unitary laws” establishing common budgeting rules for all three levels of government (with some specific rules for each level).

### Main features of Brazil’s Fiscal Responsibility Law (FRL)
- The FRL is a comprehensive law with the following features:
  - Detailed provisions for budget preparation and execution.
  - Numerical limits for some fiscal indicators (example indicators provided: the ratio of net public debt to net revenues; and the ratio of personnel expenditures to net revenues).
  - Provisions to restrict expenditure commitments in the final year of government.
  - Limits on the borrowing activities of subnational governments.
  - Transparent fiscal reporting: the government must present multiyear fiscal targets; targets for the primary balance and public debt for the following three fiscal years; and a description of fiscal risks with an assessment of contingent fiscal liabilities.
  - Strong sanctions for non-compliance (the FRL is accompanied by a Fiscal Crimes Law).

### Legal design considerations for budget system laws
- Number of laws:
  - Consolidation case: strong case for consolidating all functional areas of the budget system into a single law.
  - Specialist laws may be adopted for procurement, debt management, local government finance.
  - External audit: a separate law is desirable given constitutional status and independence of the supreme audit institution.
- Legal review and preparatory steps — key questions:
  - What procedures/steps must be followed before the draft law promulgation after legislative adoption?
  - How much time is needed for each step?
  - What are the risks of rejection or stalling by the legislature or constitutional court?
  - Are drafts of new regulations already available to facilitate early implementation?
- Enforceability and sanctions:
  - Can new provisions be enforced? If not, should they be introduced?
  - Sanctions against collective bodies may be covered in other laws (e.g., vote of no confidence).
  - National law may specify sanctions on subnational governments for reporting or debt-limit failures.
  - Sanctions on individual actors can include administrative actions (removal), fines, or criminal law for serious offenses (misappropriation, fraud, corruption).

### Political arrangements to consider
- Federal or unitary state:
  - In federal countries, assess whether legal constraints exist on subnational governments (e.g., separate law constraining subnational debt levels and requiring reporting of subnational budgetary and debt data using internationally accepted reporting and classification standards).
- Presidential versus parliamentary systems:
  - In presidential systems, consider whether legal provisions will withstand changes in the political balance between legislature and executive.
  - In parliamentary systems where the government controls parliament, evaluate whether provisions could be implemented via less formal instruments (government order or decree).
- Number of political parties:
  - In multiparty systems with proportional representation, multiyear budget agreements between coalition partners may substitute for some BSL provisions.
- Bicameral versus unicameral legislature:
  - In bicameral systems, examine budget-making powers of both houses; when both have equivalent powers, BSL must accommodate longer adoption timeframes.

### Accountabilities and authority of the legislature and the executive
- Legislature:
  - Supreme in budget matters regarding approval of annual and supplementary budgets.
  - If not in the constitution, the BSL should specify that all taxation and expenditures be based on law; no revenues can be spent without legislative approval, with specified exceptions.
  - Some countries adopt BSLs to strengthen legislative roles (examples cited historically).
- Executive responsibilities:
  - Main responsibilities: (1) submit a draft budget law to the legislature; and (2) report on its implementation.
  - Key actors typically include the president (in presidential systems) or the minister of finance (in parliamentary systems).
  - Authority and areas of responsibility of the minister of finance (or equivalent) should be spelt out in law.
- Reporting and accountability by ministers and budget managers:
  - Responsibilities to report to the legislature on budget execution should be spelt out in law.
  - Ministers and budget managers can be required to respond formally to questions or appear before budget committees.
  - Accountability should cover financial and nonfinancial outcomes, including value-for-money and attainment of performance targets.
- Internal executive accountabilities:
  - Do not need to be in law; internal regulations, orders, or decrees are appropriate instruments to specify roles within the executive.

### What should be the main content of a Budget Systems Law (BSL)?
- Preliminary step: determine which budget principles are already covered in law; reference to 11 guiding principles for budget management (see Box 3).
- The specific aims of the BSL should be explicit: main principles and objectives, scope, and clear definitions of terms in introductory articles or a separate document.
- Most budget process steps should be specified in the BSL: preparation by the executive; submission of draft budget law to the legislature; adoption by the legislature (annual and supplementary budgets); aspects of budget execution; ex post reporting to the legislature.
- Detailed execution procedures can be laid down in regulations, except where constitutional or political arrangements require more legal constraint on the executive’s room for maneuver.

### Box 3 — Sound Principles for a Budget System Law (BSL)
- Overarching Principle
  1. Authoritativeness: Decision-making authority is specified clearly in the BSL. The executive prepares a draft annual budget law and supporting documents such as a fiscal policy strategy paper and a medium-term macro-fiscal framework; the legislature approves the annual budget, possibly after amendments; no expenditure can be made without approval of the legislature; the executive implements the annual budget and provides reports on implementation. It also has the authority to close and open public bank accounts. The authority to modify the approved budget law is specified in the BSL.
- Classical Principles
  2. Annual basis: Budget authority is for a 12-month period. Exceptions are specified in the BSL, including multiyear appropriations and end-year carryovers. The annual budget law is enacted prior to the year to which it refers. All transactions are estimated for their one year effect.
  3. Comprehensiveness: The “universe” (e.g., central government) is specified clearly. All revenues and expenditures are included in the budget on a gross basis. Expenditures are not offset by revenues: the BSL specifies any exceptions. Extrabudgetary funds are minimal, being established by law. Contingency funds are included in the budget law. Tax expenditures and quasi-fiscal activities are reported.
  4. Unity: The budget presents, and the legislature approves, all receipts and payments in the same annual budget law. For expenditures, there is no “dual” budget system that splits current and development (or capital) transactions (this is best implemented if there is also unity of budget administration—one central budget authority). For revenues, there is an option between (i) approving all new revenue measures in the annual budget law or (ii) approving revenue measures only in laws other than the annual appropriations laws (the principle of exclusivity, which may be included in the BSL).
  5. Common pooling (or fungibility) of revenues: All resources are channeled into one common fund.
  6. Specificity: Revenues and expenditures are approved with some detail in the budget estimates. Authorized spending is intended for particular purposes (inputs or programs/outputs).
  7. Balance: Budget payments are balanced by receipts (accounting balance, cash basis). Budget expenses are balanced by budget revenues and financing (accrual basis). “Balance” is well defined and may be subject to legal limitations.
- Modern Principles
  8. Accountability: The executive must account to the legislature for how it has met its responsibilities at least twice a year. An independent external audit body reports at least annually to the legislature on budget execution and annual government accounts. Within the executive, the accountability of budget managers is clearly defined.
  9. Transparency: The roles of public bodies are clear. Timely and regular financial and nonfinancial information on the budget is publicly available. The terms used in the BSL are clearly defined.
  10. Stability: Short-term policy stability: anchoring commitments to achieve targets for revenues, total expenditures, fiscal balance or public debt, specified in the context of a regularly updated medium-term budget framework. Medium-term fiscal sustainability is also another important aspect of stability.
  11. Performance: The expected and recent past results (outputs and/or outcomes) of budget programs are reported in the budget document.

### Key procedural and technical content areas for the BSL (selection)
- Submission of annual budget or appropriation law(s) to the legislature:
  - Fiscal rules: numerical limits on budget aggregates constrain budget-setting of executive and legislature; fiscal rules serve goals including fiscal sustainability, economic stabilization, containment or reduction of government size, and support of intergenerational equity.
  - Budget submission timing: if not in the constitution, the BSL should specify the date by which the executive must submit the draft annual budget to the legislature (typically two to four months prior to the beginning of the new fiscal year).
  - Appropriations as legally binding upper limits: the BSL should specify whether individual appropriations are legally binding upper limits; some spending mandated by other laws may not be upper-limited by annual appropriations.
  - Classification and type of appropriations: the BSL should specify broad classification of expenditures to be used in annual appropriation act(s); detailed classifications for execution and statistical reporting can be specified by government decree.
  - Gross versus net appropriations: consistent with comprehensiveness, expenditures should not be offset against revenues; where agencies raise and retain revenues, the legislature should approve projected agency revenues and set guidelines; any excess spending should require legislative approval.
  - Accounting basis of annual appropriations: traditionally cash-based and limited to 12 months; BSL may require multiannual commitments to be approved in the context of the annual budget or may be a vehicle to introduce accrual-based accounting.
  - Carryover of budget authority: BSLs of countries with good expenditure control mechanisms may allow investment spending authority to be carried over to the next fiscal year; BSL should specify types of expenditures and limits on carryover.
  - Appropriations for contingencies: BSL could specify a contingency line item, limit unallocated spending to a small percentage of total expenditure (usually not in excess of 3 percent) and place authority with the MoF; regulations specify procedures and require regular reporting to the legislature.

*Source: IMF Technical Notes and Manuals 10/01, 2010 (Box 1: Brazil: Features of the Main Budget System Laws).*

### 2. Documents to accompany the annual draft budget law

### 2. Documents to accompany the annual draft budget law

### Medium-term projections, assumptions, and fiscal strategy
- The BSL should specify the various documents the executive must submit to the legislature with the draft annual budget.
- It is good practice to require the legislature to review and endorse an annually-updated multiyear budget framework covering all institutional units comprising “general government,” as defined in GFS.
- The BSL could include a requirement for the legislature to formally approve the government’s strategy for public debt.
- The BSL, or a separate public debt law, should spell out key public debt requirements, including:
  - responsibilities of organization(s) involved in government debt management;
  - authority of the minister of finance as sole borrowing agent and to select borrowing instruments;
  - authority and general conditions for guarantees and on-lending of sovereign external loans;
  - fix a limit on total public debt issuance (with clear provisions for subnational governments);
  - provide for permanent parliamentary appropriations for all debt servicing;
  - establish audit and accountability arrangements for government debt management.
- Regarding coverage of debt, the “public sector” may be appropriate where nonfinancial and/or financial public enterprises have an important impact on fiscal aggregates or fiscal risks.

### Extrabudgetary funds
- Such funds should be limited in number and purpose.
- If strong grounds exist for special funds (e.g., social security), a special law may be adopted.
- Some countries restrict creation and management of extrabudgetary funds (example: Finland’s 1999 constitution requires a supermajority in parliament).
- For off-budget extrabudgetary funds, the BSL should specify:
  - fiscal aggregates include projected revenues and expenditures of all off-budget activities;
  - separate reports on specific funds be included with the annual budget documents.

### Information on performance objectives
- Countries with performance- or results-oriented budget systems usually require forward-looking annual performance reports prepared by each major program and/or each ministry.

### Box 4 — Documents to Accompany the Draft Annual Budget Law or Appropriations Act
- A medium-term fiscal strategy and objectives, the medium-term budget framework (MTBF) showing expected revenue, expenditure, budget balance, and public debt during at least the two years beyond the next fiscal year;
- Identification and discussion of the economic assumptions and fiscal risks underlying the projections;
- A statement on fiscal risks including:
  - sensitivity of the fiscal and debt projections to changes in assumptions;
  - alternative macrofiscal scenarios;
  - assessment of debt sustainability and debt-related risks;
  - risks associated with quasi-fiscal activities, government guarantees and other contingent liabilities, State-owned enterprises, financial sector, subnational governments, extrabudgetary funds, and government assets;
- Clear identification of new policies in the annual budget, with an estimate of their quantitative impact on the budget;
- Comparative information on actual revenue and expenditure during the previous two years and an updated forecast for the current year, with commentary on each revenue and expenditure program, plus reconciliation with earlier forecasts and explanations of significant deviations;
- Tax expenditures, contingent liabilities and quasi-fiscal activities should be discussed, especially when quantitatively important.

---

### 3. Adoption of the budget by the legislature, including amendments and procedures

### Fiscal rules and legislative approval
- Fiscal rules have been included in fiscal responsibility laws (FRLs) in a number of countries; embedding them in law makes them more difficult to reverse.
- To be effective, a FRL should:
  - cover all relevant budget and quasi-fiscal operations of the public sector;
  - comprehensively include procedural and transparency requirements.
- Brazil’s FRL provides an example where strong sanctions for noncompliance help successful embedding.
- Fiscal rules must be accompanied by political commitment and mechanisms for accountability, monitoring, and enforcement; without legislative commitment rules may undermine credibility.
- An alternative to FRL-type embedding is transparent and credible fiscal strategies backed by strong institutions (examples cited: Australia and New Zealand). This alternative usually includes:
  - medium-term perspective for budget preparation;
  - budget procedures to minimize deficit bias (e.g., top-down budgeting procedures);
  - strong transparency requirements and public oversight.

### Two-part budget approval process
- Some countries require presentation of the MTBF and annual budget aggregates for a pre-budget debate (e.g., midyear before the new budget year).
- Other countries require approval of annual budget aggregates—revenues, financing, total expenditure; and debt repayments—prior to the second parliamentary round approving detailed expenditure estimates.
- Two-part processes focus the legislature first on overall fiscal strategy and main aggregates before detailed expenditures, and can be incorporated in the BSL where top-down budgeting is important.

### Limits on legislature’s amendment powers
- Three main options for legislative amendment powers: unlimited, limited, or negligible (e.g., any change must be approved by the executive).
- For medium-term fiscal stability, it is desirable to limit the legislature’s powers.
- Examples of restrictions:
  - allow additional expenditures only if additional revenues are raised so fiscal balance is unchanged;
  - prevent increases in total expenditure but allow reallocation across categories;
  - a few countries allow no changes except minor effects on the MTBF.
- Limits on powers to revise revenue projections upwards to accommodate more expenditures are important where separation of powers is strong (e.g., presidential systems in Latin America).
- Controls over creation and maintenance of earmarks and tax expenditures can be included; avoid earmarking as it contravenes common pooling.
- Sunset rules for tax expenditures could be introduced (example: expire after 5 or 10 years) and limits on total tax expenditures (e.g., as a percentage of total annual expenditures) could be established.

### Legislative procedures and timing
- Budgetary procedures within the legislature are often specified in internal regulations; some constitutions or laws give draft budget law discussions higher priority than nonbudget laws.
- The BSL should require adoption of the annual budget no later than the final day of the year immediately preceding the new fiscal year.
- Reversionary budget rule: if the budget is not adopted, execute monthly at a rate of 1/12th of the previous fiscal year appropriations (excluding proposed new policies, activities, or projects).
  - Some laws limit the duration of the 1/12 rule (example: to four months after the beginning of the new fiscal year) to force adoption.

### Rules to prevent impasses
- If the legislature can reject the budget, the BSL may need rules to ensure adoption and prevent impasses between legislature and executive.
- Parliamentary systems: rejection may equate to a vote of no confidence; a reversionary budget rule is important.
- Presidential systems: legislature may reject the president’s proposed budget or president may veto legislature’s budget; a formal agreement or legal article on a reversionary budget ensures continued government function.

### Supplementary budgets and independent budget offices
- Good practice: require a formal midterm review of budget execution by the legislature, with possible revised annual budget law to accommodate necessary changes.
  - Such a law may authorize (1) higher expenditures if revenues exceed projections or large unexpected expenditures occur; or (2) lower expenditures when revenues are less than projected and government wishes to maintain pre-announced deficit/surplus targets.
  - The BSL should allow a supplementary budget to be adopted any time required and apply BSL principles and procedures to supplementary budgets.
- Independent budget offices serving the legislature (examples: Canada, United States, Mexico) can be specified by BSL or a “budget office” law with roles, responsibilities, and staffing.
  - To ensure independence, the office should be nonpartisan, with no political appointees.

---

### 4. Budget execution and control

### Delegation, allotment, and flexibility
- Many execution procedures (allotment, apportionment, expenditure control, internal control, internal audit) are best specified in government/ministerial regulations.
- The BSL may specify:
  - flexibility for virement: exceeding a line item provided there is offsetting downward revision within the same expenditure category;
  - the minister of finance’s virement powers (e.g., percentage allowed without submitting a supplementary budget).

### Authority to cut appropriations and cash management
- The BSL should specify whether the minister of finance has zero, limited, or unlimited authority to cut appropriations and the conditions for doing so (e.g., revenue shortfalls).
- Law should provide the minister of finance power to cut expenditures up to a certain percentage before returning to the legislature for additional authority, to aid macrofiscal stability and prevent payment arrears.
- The BSL should give the minister extensive powers over government banking arrangements and cash management, including opening and closing bank accounts, minimizing idle balances, and investing short-term surpluses to minimize borrowing costs and risks.

### Common-pooling and treasury single account (TSA)
- The BSL should incorporate the common-pooling principle: all revenues should be paid into the same common fund; exceptions must be specified in law.
- The BSL should specify that a TSA be held at the central bank; the TSA may have subaccounts.
- Regulations would clarify responsibilities of designated account holders of subaccounts; in decentralized payment systems, other ministers or delegated authorities may have signature rights; in centralized systems, only the minister of finance or delegated authorities have such rights.

### Procurement
- Public procurement procedures are often specified in a dedicated law that sets procurement principles and practices, degree of decentralization, and any overseeing administrative entities; details are specified in regulation(s).

### Box 5 — Ex Post Budget Reporting
- Quarterly (or monthly) reports:
  - Monthly and year-to-date budget execution reports, to be released within four weeks after the end of each period, with a brief commentary on revenues, expenditures, and balance.
- Midyear report:
  - Comprehensive update on budget implementation, released within six weeks of the end of the midyear period.
  - Should discuss impact of changes in economic assumptions, recent budget-related political decisions, and other material circumstances.
  - Should include updated budget projections for the current fiscal year and the following two fiscal years.
- Year-end accounts and annual report:
  - Annual accounts should show compliance with budgeted levels of revenues and expenditures authorized by the legislature; format should be identical to the budget presentation; any in-year adjustments should be shown.
  - Comparative information on revenues and expenditures of the preceding year should be provided.
  - The annual accounts should be audited by the external audit body and submitted to parliament within no more than 6–12 months after the fiscal year ends (more advanced countries can shorten the delay).
  - The year-end budget report should contain a comprehensive discussion of the overall budget outcome compared with ex ante targets for aggregates for revenues and broad expenditure categories; spending ministries’ reports on budget outcomes should be included.
  - For performance-oriented budget systems, the law should require annual reports include non-financial performance information, including a comparison of performance targets and actual results achieved. The reports for year (-1) should be available in time for the legislature’s consideration of the budget for year (+1).

---

### 5. Government accounts, reporting, and external audit

### Accounting systems and procedures
- A separate accounting law is not usually needed; accounting details should be provided in standards and/or regulations issued by the MoF or an independent accounting standards board.
- The BSL should specify:
  - the basis of accounting to be used by budget entities;
  - the accounting standards-setting body.
- Law may require accounting regulations be reviewed by qualified public and private sector experts.

### Ex post reporting and other reports
- The BSL should specify the reports and accounts the executive must prepare for the legislature to satisfy transparency and accountability.
- For results-oriented systems, annual performance reports should also be required.
- Other best-practice budget information could be made a legal requirement, but choices should avoid overloading the legislature; distinguish between legislative needs and internal management information (the latter governed by regulation).

### External audit
- Main powers and responsibilities of the supreme audit institution (SAI) should be established in the constitution.
- The Lima Declaration of INTOSAI establishes international standards, including requiring the constitution to establish SAI independence and preparation of audit reports for the legislature.
- A separate external audit law should elaborate SAI powers, roles and responsibilities, appointment of the auditor general or collegial body, staffing (independent of the civil service), and type of audit—compliance and/or performance (value-for-money).
- Possible minimum norms for an external audit law are referenced in Box III.5 of Lienert and Jung (2005).

*Source: _tnm1001 - 2. Documents to accompany the annual draft budget law*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1001.pdf_