## _tnm1004 - Introduction ## Source details **Canonical URL:** [_tnm1004 - Introduction](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1004.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1004.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1004.pdf.json) --- ### Overview and context - Constitutions specify the role of the legislature and its relationship with the executive (hereafter “government”). - Constitutions and/or budget system laws elaborate on the budgetary roles and powers of the legislature. - Legal constraints and budgetary practices vary greatly across countries (Lienert, 2005; Stapenhurst et al. 2008; Wehner, 2006). - The role of the legislature is changing (Posner and Park, 2007), with parliaments playing a more active role in budget matters, especially in developing countries. - For promoting good governance and fiscal transparency, the legislature’s active engagement in the budget process is essential. - Risk: more active parliamentary participation can worsen fiscal discipline because the “common pool” problem may be large at the parliamentary approval stage; legislatures with unrestrained amendment authority are prone to introduce changes that increase spending or reduce taxes. ### Purpose and main issues addressed - Main questions: - When, in the budget cycle, should parliaments be involved? - What do parliaments typically approve, as distinct from what they review? - What internal structures and support should parliaments have for scrutinizing governments’ draft budgets and budget outcomes? - What accountability and legal requirements should parliaments impose on the executive? - How should legislatures’ involvement in budget processes be formalized in laws and regulations? - Objectives: - Review country practices regarding varying roles of parliaments, with focus on OECD country practices. - Identify parliamentary budget procedures where “good” practice can be identified and areas where one-size-fits-all guidance is not possible. ### Scope and political considerations - Political factors influencing parliamentary budget decisions (not covered in depth) include: - Role and organization of political parties; composition of legislatures (unicameral or bicameral); consensus mechanisms; re-election incentives; information asymmetries; alliances between politicians and bureaucrats; coordination problems within parliament. - No ranked reform priorities provided; reforms must be tailored to each country’s parliamentary context. ### When should parliament be involved? - Main parliamentary roles: - Review and debate government’s draft ex ante budget (revenue estimates and spending plans) and authorize spending to implement the annual budget. - Review budget execution and, in some countries, formally approve and discharge the government after annual budget implementation. - Other possible points of involvement: - Pre-budget debates; - Review of government’s medium-term budget strategy; - Approval of supplementary budgets; - Examination of external auditor’s report. - Guidelines focus on typical annual budget practice. ### A. Pre-Budget Discussions in Parliament - Timing and purposes: - Many countries have a pre-budget debate around the middle of the year preceding the new budget year. - Two main purposes: - Information: inform parliament of government’s fiscal intentions, updated annual and medium-term budget strategy and priorities. - Provide “hard” multiyear fiscal targets and/or spending ceilings for the government to adhere to when preparing detailed estimates. - Example: France times a budget orientation debate with presentation of detailed budget performance reports of the previous fiscal year. - Good practice: - Legislature should have opportunity for pre-budget review of government’s main orientations and proposals for upcoming fiscal years, especially the next year’s strategy and main aggregates. ### Box 1 — Dates, timelines, and related practices - Submission timing (practice and legal requirements): - Around 85% of OECD countries: budget presented 2–4 months prior to start of new fiscal year. - Wide variance from zero to eight months. - United States example: 8 months in advance. - U.K. and countries of British inheritance: generally adopt annual Appropriations Acts after the beginning of the fiscal year. - Date for budget approval: - Several countries’ laws require annual budget law to be adopted before beginning of new fiscal year. - Exceptions: United Kingdom, Canada, Ireland, New Zealand, Anglophone Africa generally adopt Appropriations Acts after fiscal year begins. - Time allowed for scrutiny: - Prior to beginning of new fiscal year, parliaments typically have 2–3 months to review detailed budget. - United States allows eight months. - Good practice: - Government should submit draft annual budget 2–4 months in advance of new fiscal year. - Parliament should be allowed 2–4 months to scrutinize, debate, and propose alternatives (within cost limits) prior to adopting and promulgating the annual budget before the new fiscal year begins. - Examples of submission requirements (selected): - More than 6 months: United States (8 months) - 4–6 months: Denmark (4 months), Finland (4 months) - 2–4 months: France, Spain (3 months), Korea (90 days), Japan (2-3 months), Sweden (3!/3 months) - 0–2 months: Canada - After year begins: New Zealand (no later than one month after year begins), United Kingdom ### Reversion budgets - Common practices if budget not approved before new fiscal year: - Many countries execute budget monthly at 1/12th of the annual budget of the previous year. - Two main legal choices: - Executive’s proposed budget, including policy changes, takes effect for a time-limited period (examples: Finland, Germany, Japan). - Previous year’s budget takes effect on basis of “unchanged” policies; no new major projects or expansions except perhaps inflation adjustments. - Good practice: - If parliament does not adopt budget for year N+1 by end of year N, executive should implement previous year’s budget spending at rate of 1/12th per month (seasonal patterns considered). - Require clear rules on meaning of “on the basis of existing policies” and duration of automatic re-enactment. - Basis of reversion budgets should be clearly laid out in law. ### Supplementary or rectifying budgets - Purposes: “new policies” or “changed circumstances” (natural disasters, emergencies, legal obligations, parliamentary changes within spending categories, contingency funds use, cancellation of approved spending, end-of-year clean-up). - Country examples: - Japan’s 1947 Public Finance Act permits Cabinet to submit supplementary budgets to Diet for unforeseen contractual obligations and additional spending needs arising after approval. - Some Latin American countries (e.g., Paraguay, Peru) adopt supplementary budgets when a new financing source is secured. - Good practice: - Specify in law the main reasons for allowing supplementary budgets. - Avoid excessive number of supplementary budgets by anticipating major policy changes in the annual budget; use regular mid-year reviews or periodic comprehensive spending reviews. ### What the legislature should review and approve: fiscal rules and debt strategy - Fiscal rules: - Definition: durable constraint on budgetary discretion, often numerical limits on aggregates (fiscal balance, total revenues, total expenditures, and/or debt). - Can be endorsed by legislature formally in law or informally by review. - Most effective when political consensus exists and rules have flexibility for adverse shocks. - Risks: quantitative rules fail when targets unrealistic, political commitment inadequate, or compliance mechanisms ineffective. - Debt strategy: - If high public debt and long-term sustainability issues exist, legislature approval of annually-updated debt management strategy (within an MTBF) can implicate legislature in fiscal discipline. - Good practice: - When fiscal sustainability threatened and/or after consolidation begins, adoption of fiscal rules by legislature can help achieve sustainable medium-term fiscal and debt positions. - Incorporate quantitative fiscal rules into law only if targets realistic, political commitment adequate, and compliance mechanisms function. - Legislature should review and endorse government’s annual debt management action plan (or asset-liability management plan), consistent with agreed medium-term objectives for gross and net debt. ### Macrofiscal framework - Presentation and review of macroeconomic assumptions: - Main macroeconomic assumptions underlying annual budget projections are clearly presented to parliament in 93 percent of OECD countries. - Most parliaments do not examine these assumptions in depth or change the executive’s basic assumptions. - In some countries, assumptions are influenced/prepared by independent agencies (examples: Canada—average of private sector forecasts; Netherlands—Central Planning Bureau; U.K.—assumptions reviewed by National Audit Office). - Revenue projections: - Methodology and assumptions underlying revenue projections publicly available in majority of OECD countries. - Several countries project revenues conservatively. - Parliaments typically focus on revenue policies proposed by government rather than on projection methodology. - Medium-term budget framework (MTBF): - Parliament can influence budgetary policies by adopting or endorsing an MTBF covering at least two years beyond the new budget year; preferably covering at least the upcoming three fiscal years. - MTBF aggregates serve as firm upper limits and guide annual or supplementary budgets. - Good practice: - Provide legislature with clear macro-fiscal assumptions, preferably with inputs or review by an independent body (“fiscal council”). - Governments should present an MTBF covering at least the upcoming three fiscal years; parliament should endorse or adopt an MTBF that transparently lays out agreed aggregates. ### Structure, classification, type, and duration of annual budget appropriations - Common classification dimensions: - Administrative unit (ministries/agencies) - Program/subprogram/activity/project; outcomes/outputs - Economic type (salaries, transfers, other non-salary current expenditures, capital spending) - Functional and subfunctions (international classification) - Country practices: - U.S. Congress: format changes frequently with many earmarked items. - U.K.: government proposes format of the Estimates. - Germany: budget principles law requires detailed economic and functional classifications at all levels. - France: 2001 Organic Budget Law requires appropriations by mission and program. - Transparency and line items: - When there are more than, say, 1,000 lines, transparency of main objectives is lost. - Table excerpt: Number of line items in annual budgets of OECD countries - Up to 200: 26.7% — Australia, Canada, France, Luxembourg, Mexico, Netherlands, Poland, South Korea - From 201 to 500: 3 10.0% — Belgium, Finland, Sweden - From 501 to 1000: 8 26.7% — Czech Republic, Greece, Hungary, Ireland, Japan, New Zealand, Portugal, Slovakia - From 1001 to 2000: 7 23,3% — Austria, Denmark, Iceland, Italy, Norway, Switzerland, USA - More than 2000: 3 10.0% — Germany, Spain, Turkey - Not reported: 1 3.2% — United Kingdom - Virement powers: - Practices vary: some parliaments require approval for every line item change; others delegate virement power to MoF or allow only a few large-category changes. - Among 30 OECD countries: six cannot increase discretionary spending; six may increase such spending without restriction; remaining 18 usually require prior approval (some allow ex post parliamentary approval). - Contingency reserve funds: - Many parliaments grant executive authority to spend from an unallocated centrally-controlled contingency reserve (typically MoF-controlled). - Reserves should be subject to conditions: size, nature of spending, access by ministries, frequency of reporting to parliament. - Types and duration of appropriations: - In federal countries (e.g., Australia, Canada, United States), only a small portion of annual spending authorized by Annual Appropriations Acts. - Distinction between “authority to spend” and “cash payments”: some systems limit both commitments and cash payments; most practice is cash-based, some (e.g., United Kingdom) accrual-based. - Binding upper limits apply to most expenditures; exceptions can be specified in law. - Finland’s State Budget Act specifies: - Fixed appropriations: may never be exceeded. - Multiannual appropriations: may never be exceeded; unused authority may be used in subsequent fiscal years up to a maximum of two years beyond the budget year. - Carryover of unused funds commonly permitted (especially for investment), usually with restrictions and ministry of finance approval; in several countries, legislative approval required for end-year carryover. - Good practice (guidelines): - Parliament may adopt a law providing a “permanent” format of the annual budget if focus is on transparently presenting objectives and expected results. - For virement: if focus is on results, approve broad-banding and impose few virement restrictions; if detailed appropriations maintained, delegate authority to government to swap spending between detailed line items (regulated by MoF decree). - Contingency reserve: parliament may permanently approve a reserve amounting to 1–3% of total expenditure for genuine unforeseen emergencies; government should inform parliament at regular intervals of amount and object of spending. - Types of appropriations: parliament can specify that government is provided authority to spend at commitment, accrual, or cash stages and identify types that can be exceeded without ex ante parliamentary authority. - Spending outside appropriation acts: parliament needs to be informed of annual spending excluded from appropriations; MTBF is useful to include such spending. - Duration of annual appropriations: principle of annuality should be upheld; exceptions (e.g., carryover) can be justified and parliament should provide authority for exceptions with appropriate restrictions. ### Budget amendment powers - Around half of 30 OECD countries’ parliaments have unlimited legal power to amend the draft budget. - Presidential systems: president may have line-item or full veto power over congressional budget amendments. - In practice, coalition agreements may constrain parliaments’ exercise of amendment power. - Restricting parliamentary amendment power can assist fiscal consolidation and sustainability. - Variations: - Some countries allow increased expenditures only if legislature raises additional revenues. - In others, total expenditure cannot be increased beyond executive proposal; legislature only permitted to reallocate between expenditures (effective in many Latin American countries, e.g., Chile). - Most severe restriction: no amendment power—legislature can only approve or reject executive’s draft budget. - Good practice: - Limit changing the executive’s proposed fiscal balance; allow legislature to increase total expenditure provided it raises revenues to offset spending. ### Extrabudgetary funds, fiscal risks, and tax expenditures - Off-budget spending examples: social security funds approved separately; spending agencies authorized to collect fees with only net expenditure approved by parliament. - Risks: off-budget loans, contingent liabilities (loan guarantees), public-private partnership risks. - Parliament needs full information in budget documents on off-budget spending and contingent liabilities. - Fiscal Risk Statement and quantification (if possible) contributes to parliament’s assessment. - Tax expenditures: exemptions and concessions outside usual tax benchmarks; parliament needs information on amplitude. - Good practice: - Avoid approving laws authorizing off-budget spending unless highly transparent arrangements exist for recording, monitoring, reporting, auditing associated financial transactions. - If tax expenditures are introduced, they should be considered alongside regular budget spending, not outside normal budget cycle. - Parliament should require full and regular reports on all extrabudgetary spending, contingent liabilities, and quasi-fiscal activities. - A comprehensive Fiscal Risk Statement and estimates of tax expenditure should be presented to parliament, preferably as part of annual budget documentation. ### Expenditure control, internal audit, and government accounting - Generally, government responsible for expenditure control and internal audit; legislature rarely intervenes. - Changes in government accounting basis should be reviewed by parliament; general accounting provisions may be included in law. - Advisory bodies (e.g., Government Accounting Standards Board) typically advised by MoF; advisory boards may include external representation (example: U.K.’s Government Resources and Accounts Act, 2000). - Strong parliamentary PACs may draft changes for PAC review. - Good practice: - Parliamentary oversight of internal control/audit is best communicated via external auditor reports; legislature should limit direct oversight of internal control and audit within government spending agencies. - Executive should seek parliamentary input when contemplating major revisions of government accounting systems (e.g., moves to accrual-based accounting). ### Support parliament needs for budgeting - Parliamentary committees: - Most parliaments have sectoral committees for budget issues; about 40% of OECD countries have a specialist budget committee. - Committee role options: - Budget committee sets aggregate and sectoral spending ceilings; sectoral committees decide detailed appropriations within ceilings. (Top-down approach provides strongest institutional framework for fiscal discipline.) - Budget committee considers overall fiscal policies; sectoral committees recommend higher sectoral expenditures. - Only sectoral committees consider and approve appropriations; budget committee provides coherency guidance without constraining total expenditure. - France limits permanent parliamentary committees to six; subcommittees may be needed to align with budget structures. - Good practice: - Establish a budget committee (or two in bicameral systems) charged with setting/endorsing aggregate spending targets and sectoral allocations; committee can scrutinize ex ante and ex post budgets. - Sectoral committees’ work should be subject to spending ceilings from the budget committee. - Provide budget committee with strong powers and adequate analytical support. - Parliamentary Budget Offices (PBOs): - Thirteen OECD countries have specialist budget offices attached to the legislature. - Purposes: - Provide independent budget analysis and advice to all parliamentary parties. - Provide medium-term fiscal projections and scenarios alternative to government’s. - Quantify impact of alternative tax or spending policies on forthcoming year’s budget. - Remedy lack of time/analytical capacity of elected representatives. - Good practice: - Establishment of a parliamentary budget office can enhance parliament’s capacity to evaluate government budgets and propose responsible alternatives. - Funding of parliament: - Many OECD legislatures prepare their own budgets, typically not altered by the executive; parliaments’ budgets are small relative to national budgets (exceptions in some emerging countries). - Good practice: - Parliaments’ budgets should be prepared independently but subject to same procedures for executing and reporting spending. - Parliaments should not abuse powers to increase operating and investment expenses out of line with other constitutional entities. ### Accountability of the executive to the legislature in budget matters - Reporting to parliament and Fiscal Responsibility Laws (FRL): - Majority of OECD countries require government to accompany annual budget with medium-term projections of revenues and spending beyond next fiscal year. - Increasing practices: distinguish medium-term impact of new policies; include scenarios of alternative policies; extend projection period for long-term analyses (demographic impacts). - Ex post reporting: about one third of OECD countries legally require comparison of actual spending with budgeted spending; some require a Budget Execution Law. - Good practice: - Parliament should be provided with adequate and timely budget reports to understand ex ante budget and to hold government to account after execution. - Final reports/accounts should compare outcome with ex ante budget in identical format. - Long-term fiscal projections (including demographic impacts) should be prepared. - Budget execution and accountability reports by government agencies should be provided to parliament; obligations can be incorporated into law, possibly an FRL. - Submission and follow-up of external audit annual report: - Nearly all OECD countries’ external audit reports on annual financial accounts are made public within 12 months; slightly less than half receive them within 6 months after year-end. - Reporting lags are longer in non-OECD and lower-income countries due to delays in government submission and limited audit capacity. - IMF Fiscal Transparency Manual and OECD suggest best practice lag of 6 months; some OECD countries prepare audited statements in under four months. - Parliamentary procedures dictate time for committees to discuss external auditor report and follow-up. - Many OECD countries have systems for systematic tracking of implementation of external auditor recommendations; in several countries, follow-up is a legal obligation. ### Box 2 — Good practices in fiscal reporting to parliament (high-level checklist) - Proposed fiscal strategy report: - Table fiscal strategy with draft annual budget. - Include long-term fiscal objectives (10 or more years) and medium-term objectives (three or more years) updating MTBF projections. - Annual budget policy statement: - Lay out strategic priorities and consistency with medium-term intentions or binding rules. - Describe major proposed tax changes; changes in expenditure policies; changes in assets and liabilities; quantify impact of each major new policy (including changes in tax expenditures). - Economic and fiscal updates: - Each update should contain forecasts for the year and subsequent two years. - Possible required updates: budget-tabled update; mid-year update for pre-budget debate; pre-election update 20-30 working days before elections. - Disclose significant assumptions (GDP growth, consumer prices, exchange rate, (un)employment rate, etc.). - Long-term fiscal reporting: - Periodic statement every 2–4 years covering at least 40 years to assess aging and long-term pressures. - External audit and parliamentary follow-up (Good practice): - External audit report on annual performance should be received by parliament within six months to inform pre-budget discussions for Y(+1). - Establish formal institutional arrangements for systematic follow-up of external audit findings (for example, budget committee should report on executive response to auditor recommendations). - Hearings and questions by parliament (Good practice): - Require ministers and senior civil servants to appear before specialist committees and answer questions on ex ante and ex post budgets. - Internal regulations should specify rules for hearings and questioning; ensure focused questions, advance agendas, and specified procedures for leadership and decision-making in committees. - Formalizing legislature’s budget rules and procedures: - Embedding procedures in budget system laws: include budget principles and procedures where needed to implement constitutional requirements. - Avoid overloading laws with detailed provisions; delegate details to executive regulations where appropriate. - Internal procedures and regulations of the legislature (Good practice): - Formalize internal rules for organizational arrangements for budget approval and review. - Avoid substituting internal parliamentary regulations for general budget procedures and restrictions that should be in law. *Source: _tnm1004 - Introduction (Technical Notes and Manuals 10/04 | 2010)_* ### Introduction ### _tnm1004 - Introduction ### Overview and context - Constitutions specify the role of the legislature and its relationship with the executive (hereafter “government”). - Constitutions and/or budget system laws elaborate on the budgetary roles and powers of the legislature. - Legal constraints and budgetary practices vary greatly across countries (Lienert, 2005; Stapenhurst et al. 2008; Wehner, 2006). - The role of the legislature is changing (Posner and Park, 2007), with parliaments playing a more active role in budget matters, especially in developing countries. - For promoting good governance and fiscal transparency, the legislature’s active engagement in the budget process is essential. - More active participation by the legislature runs the risk that fiscal discipline deteriorates because the “common pool” problem, observed at the budget preparation stage within the government, may be large at the parliamentary approval stage. In particular, in countries where the legislature has unrestrained budget amendment authority, parliament is prone to introduce changes that increase spending or reduce taxes. ### Purpose and main issues addressed by this note - This note addresses the following main issues: - When, in the budget cycle, should parliaments be involved? - What do parliaments typically approve, as distinct from what they review? - What internal structures and support should parliaments have for scrutinizing governments’ draft budgets and budget outcomes? - What accountability and legal requirements should parliaments impose on the executive? - How should legislatures’ involvement in budget processes be formalized in laws and regulations? - The main objectives of this note are: - To review country practices regarding the widely varying roles of parliaments in budgetary processes, with focus particularly on OECD country practices since most of these countries’ parliaments have been active in budget matters for a long time.3 - To identify parliamentary budget procedures where “good” practice can be identified, as well as identifying areas of parliamentary budget review and approval where it is not possible to provide one-size-fits-all guidance for all countries. ### Scope and political considerations - Political factors that may influence parliamentary budget decision making (not covered in depth in this note) include: the role and organization of political parties; the composition of legislatures (one house or bicameral); the way consensus is reached within the legislature (including procedures for resolving differences between two chambers); the re-election incentives that members have to hold the government accountable; information asymmetries between members of the legislature and of the government; alliances between politicians and bureaucrats; and (within parliament) coordination problems of parliamentary committees and floor activities.4 - Because there are diverse roles for, and constraints on, the legislature, this paper does not rank reform priorities; such priorities necessarily need to be tailored to the needs of each country’s parliamentary involvement in budget matters. ### I. When Should Parliament Be Involved? - Parliament’s main roles: - To review and debate the government’s draft ex ante budget (including its revenue estimates and its spending plans) and to authorize spending to implement the annual budget plan. - To review budget execution and, in some countries, to formally approve and discharge the government after annual budget implementation. - Other steps in which parliament may be involved include: - Pre-budget debates; - Review of the government’s medium-term budget strategy; - Approval of supplementary budgets that modify the initial budget adopted by the legislature; - Examination of the report of the external auditor. - The following guidelines are based on the typical practice of adopting an annual budget.5 ### A. Pre-Budget Discussions in Parliament - Timing and purposes: - Prior to adopting the annual budget close to the beginning of a new fiscal year, a number of countries have a pre-budget debate in parliament around the middle of the year preceding the new budget year. - There are two main purposes: (1) information — so that parliament becomes aware of the government’s fiscal policy intentions: the government presents its updated annual and medium-term budget strategy and policy priorities; and (2) provide “hard” multiyear fiscal targets and/or spending ceilings, which the government must adhere to when preparing the detailed spending estimates for the upcoming fiscal year. - In the case of France, the budget orientation debate is timed to coincide with the presentation to parliament of detailed budget performance reports of the previous fiscal year (Box 1). - Good practice: - The legislature should be provided with an opportunity for a pre-budget review of the government’s main budget orientations and proposals for the upcoming fiscal years, especially the next year’s annual budget strategy and main aggregates. *Source: _tnm1004 - Introduction (Technical Notes and Manuals 10/04 | 2010)_* ### Box 1. Pre-Budget Debates and Guidelines Laws: Country Examples ### _tnm1004 - Box 1. Pre-Budget Debates and Guidelines Laws: Country Examples ### Pre-budget debate and guidelines laws: country examples - France - Organic Budget Law, 2001: government must present overall budget orientations for year (+1) and annual performance reports for year (-1). - Objective: allow the National Assembly to debate budgetary objectives and policy priorities for year (+1) some 6-7 months before the start of the new fiscal year. - Brazil - By end-June of each year (6 months before new fiscal year), Congress adopts a Budget Guidelines Law serving three purposes: - a pre-budget document to encourage debate on the budget aggregates; - sets out expenditures considered “mandatory” for the coming year (programs exempt from reductions in the annual presidential decree implementing the budget); - formalizes budget targets for the upcoming fiscal year, as well as the main assumptions underlying the budget. - Sweden - 1994-2002: two-stage process—parliament adopted “hard top-down” spending ceilings for the next three years in its Spring Bill; detailed estimates in the Autumn Bill three months before year (+1). - Since 2002: government presents proposals for budgetary policy in April (eight months before year (+1)); aggregate and specific ceilings for 27 expenditure areas presented to parliament in September and subsequently approved. - Reason for change: parliament chose not to conduct two budget approval procedures every year. ### Dates for submitting and approving annual budgets in parliament - Submission timing (practice and legal requirements) - Around 85% of OECD countries: budget presented 2–4 months prior to the beginning of the new fiscal year. - Wide variance from zero to eight months. - United States example: 8 months in advance. - U.K. and countries of British inheritance: generally adopt annual Appropriations Acts after the beginning of the fiscal year. - Date for budget approval - Several countries’ laws require annual budget law to be adopted before the beginning of the new fiscal year. - Exceptions: United Kingdom and countries influenced by the British system (e.g., Canada, Ireland, New Zealand, Anglophone Africa) generally adopt Appropriations Acts after the fiscal year begins. - Time allowed for budget scrutiny by parliament - Prior to the beginning of the new fiscal year, parliaments typically have 2–3 months to review the detailed budget. - United States allows much longer (eight months) due to complex legislature. - Good practice - Government should submit draft annual budget to parliament 2–4 months in advance of the beginning of the new fiscal year. - Parliament should be allowed 2–4 months to scrutinize, debate, and propose alternative budgetary policies (within limits of cost) prior to adopting and promulgating the annual budget before the new fiscal year begins. - Table excerpt: Requirements for the date of submission (selected entries) - More than 6 months: United States (8 months) - 4–6 months: Denmark (4 months), Finland (4 months) - 2–4 months: France, Spain (3 months), Korea (90 days), Japan (2-3 months), Sweden (3!/3 months) - 0–2 months: Canada - After year begins: New Zealand (no later than one month after year begins), United Kingdom ### Reversion budgets - Common practices if budget not approved by legislature before new fiscal year: - Many countries execute budget monthly at 1/12th of the annual budget of the previous year. - Two main choices specified in law: - Executive’s proposed budget, including policy changes, takes effect for a time-limited period (examples: Finland, Germany, Japan). - Previous year’s budget takes effect on basis of “unchanged” policies; no new major projects or expansions except perhaps inflation adjustments. - Good practice - When parliament does not adopt the budget for year N+1 by end of year N, executive should begin implementing previous year’s budget spending at the rate of 1/12th per month (seasonal patterns considered). - Require clear rules on what “on the basis of existing policies” means and on the duration for which previous-year budget is re-enacted automatically. - Basis of reversion budgets should be clearly laid out in law. ### Supplementary or rectifying budgets - Purposes for supplementary budgets: “new policies” or “changed circumstances” (also natural disasters, emergencies, legal obligations, parliamentary approval of changes within spending categories, use of contingency funds, cancellation of approved spending, end-of-year account clean-up). - Country examples and practices - Japan’s 1947 Public Finance Act permits Cabinet to submit supplementary budgets to Diet for supplementing funds to meet statutory contractual government obligations unforeseen in initial budget and modifying the budget to meet additional spending needs arising after approval. - Some Latin American countries (e.g., Paraguay, Peru) adopt supplementary budgets when a new financing source is secured. - Good practice - Specify in law the main reasons for allowing adoption of supplementary budgets. - Avoid an excessive number of supplementary budgets by anticipating major policy changes in advance of the annual budget; regular budget reviews (e.g., mid-year) or periodic comprehensive spending reviews by parliament are helpful. ### What the legislature should review and approve: fiscal rules and debt strategy - Fiscal rules - Definition: a durable constraint on budgetary discretion, often through numerical limits on aggregates (fiscal balance, total revenues, total expenditures, and/or debt). - Fiscal rules can be endorsed by the legislature (formally in law or informally by review). - Most effective when political consensus exists and when rules have flexibility for adverse shocks. - Risks: quantitative fiscal rules fail when targets are unrealistic, political commitment is inadequate, or compliance mechanisms are ineffective. - Debt strategy - If high public debt and long-term fiscal sustainability are issues, legislature approval of an annually-updated debt management strategy (within an MTBF) can implicate the legislature in fiscal discipline. - Good practice - When fiscal sustainability is under threat and/or after fiscal consolidation has begun, adoption of fiscal rules by the legislature can help achieve sustainable medium-term fiscal and debt positions. - Incorporate quantitative fiscal rules into law only if targets are realistic, political commitment is adequate, and compliance mechanisms function. - Legislature should review and endorse the government’s annual debt management action plan (or asset-liability management plan), consistent with agreed medium-term objectives for gross and net debt. ### Macrofiscal framework - Presentation and review of macroeconomic assumptions - Main macroeconomic assumptions underlying annual budget projections are clearly presented to parliament in 93 percent of OECD countries. - Most parliaments do not examine these assumptions in depth or change the executive’s basic assumptions. - In some countries, assumptions are influenced/prepared by independent agencies (e.g., Canada—average of private sector forecasts; Netherlands—Central Planning Bureau; U.K.—assumptions reviewed by National Audit Office). - Revenue projections - Methodology and assumptions underlying revenue projections publicly available in majority of OECD countries. - Several countries project revenues conservatively. - Parliaments typically focus on revenue policies proposed by government rather than on projection methodology. - Medium-term budget framework (MTBF) - Parliament can influence budgetary policies by adopting or endorsing an MTBF covering at least two years beyond the new budget year; preferably covering at least the upcoming three fiscal years. - MTBF aggregates serve as firm upper limits and guide annual or supplementary budgets. - Good practice - Provide legislature with clear macro-fiscal assumptions, preferably with inputs or review by an independent body (“fiscal council”). - Governments should present an MTBF covering at least the upcoming three fiscal years; parliament should endorse or adopt an MTBF that transparently lays out agreed aggregates. ### Structure, classification, type, and duration of annual budget appropriations - Common classification dimensions used in annual appropriations laws: - Administrative unit (ministries/agencies) - Program/subprogram/activity/project; outcomes/outputs - Economic type (salaries, transfers, other non-salary current expenditures, capital spending) - Functional and subfunctions (international classification) - Country practices on format and line-item detail - U.S. Congress: effectively changes format every year with many earmarked items. - U.K.: government has prerogative to propose format of the Estimates. - Germany: budget principles law requires detailed economic and functional classifications at all levels of government. - France: 2001 Organic Budget Law requires budget appropriations by mission and program. - Transparency and number of line items - When there are more than, say 1,000 lines, transparency of main objectives is lost. - Table excerpt: Number of line items in annual budgets of OECD countries - Up to 200: 26.7% — Australia, Canada, France, Luxembourg, Mexico, Netherlands, Poland, South Korea - From 201 to 500: 3 10.0% — Belgium, Finland, Sweden - From 501 to 1000: 8 26.7% — Czech Republic, Greece, Hungary, Ireland, Japan, New Zealand, Portugal, Slovakia - From 1001 to 2000: 7 23,3% — Austria, Denmark, Iceland, Italy, Norway, Switzerland, USA - More than 2000: 3 10.0% — Germany, Spain, Turkey - Not reported: 1 3.2% — United Kingdom - Virement powers (flexibility to swap between line items) - Practices vary: some parliaments require approval for every line item change; others delegate virement power to MoF or allow only a few large-category changes. - Among 30 OECD countries: six cannot increase discretionary spending; six may increase such spending without restriction; remaining 18 usually require prior approval (some allow ex post parliamentary approval). - Contingency reserve funds - Many parliaments grant executive authority to spend from an unallocated centrally-controlled contingency reserve (typically MoF-controlled). - Reserves should be subject to conditions: size, nature of spending, access by ministries, frequency of reporting to parliament. - Types and duration of appropriations - In federal countries (e.g., Australia, Canada, United States), only a small portion of annual spending authorized by Annual Appropriations Acts. - Distinction between “authority to spend” and “cash payments”: some systems limit both commitments and cash payments; most practice is cash-based, some (e.g., United Kingdom) accrual-based. - Binding upper limits apply to most expenditures; exceptions can be specified in law. - Finland’s State Budget Act specifies: - Fixed appropriations: may never be exceeded. - Multiannual appropriations: may never be exceeded; unused authority may be used in subsequent fiscal years up to a maximum of two years beyond the budget year. - Carryover of unused funds commonly permitted (especially for investment), usually with restrictions and ministry of finance approval; in several countries, legislative approval required for end-year carryover. - Good practice (guidelines) - Parliament may adopt a law providing a “permanent” format of the annual budget if focus is on transparently presenting objectives and expected results (performance). - For virement: if focus is on results, approve broad-banding and impose few virement restrictions; if detailed appropriations maintained, delegate authority to government to swap spending between detailed line items (regulated by MoF decree). - Contingency reserve: parliament may permanently approve a reserve amounting to 1–3% of total expenditure for genuine unforeseen emergencies; government should inform parliament at regular intervals of amount and object of spending. - Types of appropriations: parliament can specify that government is provided authority to spend at commitment, accrual, or cash stages and identify types that can be exceeded without ex ante parliamentary authority. - Spending outside appropriation acts: parliament needs to be informed of annual spending excluded from appropriations; MTBF is useful to include such spending. - Duration of annual appropriations: principle of annuality should be upheld; exceptions (e.g., carryover) can be justified and parliament should provide authority for exceptions with appropriate restrictions. ### Budget amendment powers - Around half of 30 OECD countries’ parliaments have unlimited legal power to amend the draft budget. - Presidential systems: president may have line-item or full veto power over congressional budget amendments. - In practice, coalition agreements may constrain parliaments’ exercise of amendment power. - Restricting parliamentary amendment power can assist fiscal consolidation and sustainability. - Variations: - Some countries allow increased expenditures only if legislature raises additional revenues. - In others, total expenditure cannot be increased beyond executive proposal; legislature only permitted to reallocate between expenditures (effective in preserving fiscal sustainability in many Latin American countries, e.g., Chile). - Most severe restriction: no amendment power—legislature can only approve or reject executive’s draft budget. - Good practice - Limit changing the executive’s proposed fiscal balance; allow legislature to increase total expenditure provided it raises revenues to offset spending. ### Extrabudgetary funds, fiscal risks, and tax expenditures - Off-budget spending examples: social security funds approved separately; spending agencies authorized to collect fees with only net expenditure approved by parliament. - Risks: off-budget loans, contingent liabilities (loan guarantees), public-private partnership risks. - Parliament needs full information in budget documents on off-budget spending and contingent liabilities. - Fiscal Risk Statement and quantification (if possible) contributes to parliament’s assessment. - Tax expenditures: exemptions and concessions outside usual tax benchmarks; parliament needs information on amplitude. - Good practice - Avoid approving laws authorizing off-budget spending unless highly transparent arrangements exist for recording, monitoring, reporting, auditing associated financial transactions. - If tax expenditures are introduced, they should be considered alongside regular budget spending, not outside normal budget cycle. - Parliament should require full and regular reports on all extrabudgetary spending, contingent liabilities, and quasi-fiscal activities. - A comprehensive Fiscal Risk Statement and estimates of tax expenditure should be presented to parliament, preferably as part of annual budget documentation. ### Expenditure control, internal audit, and government accounting - Generally, government responsible for expenditure control and internal audit; legislature rarely intervenes. - Changes in government accounting basis should be reviewed by parliament; general accounting provisions may be included in law. - Advisory bodies (e.g., Government Accounting Standards Board) typically advised by MoF; advisory boards may include external representation (example: U.K.’s Government Resources and Accounts Act, 2000). - Strong parliamentary PACs may draft changes for PAC review. - Good practice - Parliamentary oversight of internal control/audit is best communicated via external auditor reports; legislature should limit direct oversight of internal control and audit within government spending agencies. - Executive should seek parliamentary input when contemplating major revisions of government accounting systems (e.g., moves to accrual-based accounting). ### Support parliament needs for budgeting - Parliamentary committees - Most parliaments have sectoral committees for budget-related issues; about 40% of OECD countries have a specialist budget committee. - Options for committee roles: - Budget committee sets aggregate and sectoral spending ceilings; sectoral committees decide detailed appropriations within ceilings. - Budget committee considers overall fiscal policies; sectoral committees can recommend higher sectoral expenditures. - Only sectoral committees consider and approve appropriations; budget committee provides coherency guidance without constraining total expenditure. - Top-down approach (first option) provides strongest institutional framework for fiscal discipline. - France limits permanent parliamentary committees to six; subcommittees may be needed to align with budget structures. - Good practice - Establish a budget committee (or two in bicameral systems) charged with setting/endorsing aggregate spending targets and sectoral allocations; committee can scrutinize ex ante and ex post budgets. - Sectoral committees’ work should be subject to spending ceilings from the budget committee. - Provide budget committee with strong powers and adequate analytical support. - Parliamentary Budget Offices (PBOs) - Thirteen OECD countries have specialist budget offices attached to the legislature. - Purposes: - Provide independent budget analysis and advice to all parliamentary parties. - Provide medium-term fiscal projections and scenarios alternative to government’s. - Quantify impact of alternative tax or spending policies on forthcoming year’s budget. - Remedy lack of time/analytical capacity of elected representatives. - Good practice - Establishment of a parliamentary budget office can enhance parliament’s capacity to evaluate government budgets and propose responsible alternatives. - Funding of parliament - Many OECD legislatures prepare their own budgets, typically not altered by the executive; parliaments’ budgets are small relative to national budgets (exceptions in some emerging countries). - Good practice - Parliaments’ budgets should be prepared independently but subject to same procedures for executing and reporting spending. - Parliaments should not abuse powers to increase operating and investment expenses out of line with other constitutional entities. ### Accountability of the executive to the legislature in budget matters - Reporting to parliament and Fiscal Responsibility Laws (FRL) - Majority of OECD countries require government to accompany annual budget with medium-term projections of revenues and spending beyond next fiscal year. - Increasing practices: distinguish medium-term impact of new policies; include scenarios of alternative policies; extend projection period for long-term analyses (demographic impacts). - Ex post reporting: about one third of OECD countries legally require comparison of actual spending with budgeted spending; some require a Budget Execution Law. - Good practice - Parliament should be provided with adequate and timely budget reports to understand ex ante budget and to hold government to account after execution. - Final reports/accounts should compare outcome with ex ante budget in identical format. - Long-term fiscal projections (including demographic impacts) should be prepared. - Budget execution and accountability reports by government agencies should be provided to parliament; obligations can be incorporated into law, possibly an FRL. - Submission and follow-up of external audit annual report to legislature - Nearly all OECD countries’ external audit reports on annual financial accounts are made public within 12 months; slightly less than half receive them within 6 months after year-end. - Reporting lags are longer in non-OECD and lower-income countries due to delays in government submission and limited audit capacity. - IMF Fiscal Transparency Manual and OECD suggest best practice lag of 6 months; some OECD countries prepare audited statements in under four months. - Parliamentary procedures dictate time for committees to discuss external auditor report and follow-up. - Many OECD countries have systems for systematic tracking of implementation of external auditor recommendations; in several countries, follow-up is a legal obligation. *Source: _tnm1004 - Box 1. Pre-Budget Debates and Guidelines Laws: Country Examples (Technical Notes and Manuals 10/04 | 2010).* ### Box 2. Good Practices in Fiscal Reporting to Parliament ### Box 2. Good Practices in Fiscal Reporting to Parliament ### Proposed fiscal strategy report - The government’s fiscal strategy should be tabled in parliament with the draft annual budget. - Content to include: - Long-term fiscal objectives (10 or more years) for fiscal policy (for example, total revenues and expenses; fiscal balances and total debt). - Medium-term fiscal objectives (three or more years) that update previous MTBF projections and justify why any changes are being made (either relative to a binding fiscal rule, or previous medium-term objectives). ### Annual budget policy statement - Lays out strategic priorities for the forthcoming budget and consistency with the most recent medium-term announced fiscal intentions or binding fiscal rules. - Should describe: - Major proposed tax changes. - Changes in expenditure policies. - Changes in assets and liabilities that impact on the budget aggregates. - Quantification of the impact of each major new policy (including changes in tax expenditures). ### Economic and fiscal updates - Each update should contain economic and fiscal forecasts for the year to which the update relates and the subsequent two years. - Possible required updates: - An economic and fiscal update, to be tabled with the budget. - A mid-year economic and fiscal update, for a pre-budget debate. - A pre-election economic and fiscal update, 20-30 working days before the date of any parliamentary or presidential elections. - Disclosures: - Significant assumptions underlying the economic forecasts should be disclosed (GDP growth, consumer prices, exchange rate, (un)employment rate, etc.). ### Long-term fiscal reporting - Periodic statement on the long-term fiscal position, for example once every 2–4 years, covering at least 40 years. - Purpose: - Provide a comprehensive report on long-term issues (aging populations, health care costs) that impact the fiscal balance and government net worth. - Assist the legislature in making responsible fiscal policy decisions. ### External audit and parliamentary follow-up (Good practice) - The external audit report on annual budget performance should be received by parliament within six months, so that the audit report for Y(–1) outcome can be used by parliament in pre-budget discussions on the budget strategy for Y(+1). - Establish formal institutional arrangements at the legislature for systematic follow-up of external audit findings (for example, the budget committee of parliament should report on the extent to which the executive has responded to the recommendations of the external auditor). ### Hearings and questions by parliament (Good practice) - Require ministers and senior civil services to appear before specialist parliamentary committees and/or the budget committee and answer questions pertaining to ex ante budget and ex post budget execution and accounts. - Parliament’s internal regulations should specify the rules applicable for hearings and questioning. - Parliamentary rules should ensure questions are focused, agendas are distributed in advance, and procedures for leadership and decision-making in committees are specified to enable productive interaction. ### Formalizing legislature’s budget rules and procedures - Embedding parliamentary budget procedures in laws: - Parliaments can contribute to budget indiscipline by approving spending from the “common pool”; this can be addressed by placing firm restrictions on parliament’s powers, including restraints on parliament’s budget amendment powers. - Constitutional rules or budget system laws are useful when they lay out principles for good budget practice. - Avoid overloading budget system laws with detailed provisions that take away budget flexibility needed by the executive; government regulations and other “secondary law” may be better for providing the executive with flexibility without removing the legislature’s prerogatives. - Good practice: - Include budget principles and procedures in budget system laws, especially when needed to implement constitutional requirements. - Avoid overloading laws, including the constitution, with detailed budget rules, delegating details to the executive’s regulations. ### Internal procedures and regulations of the legislature (Good practice) - Formalize the legislature’s internal rules for organizational arrangements for budget approval and review. - Avoid using internal parliamentary regulations as substitutes for general budget procedures and restrictions that should be in law, not internal parliamentary regulations. - Recognize that parliamentary regulations and organizational arrangements vary widely across countries; there is no one-size-fits-all set of “Regulations of Parliament for Budget Processes,” but general considerations apply. *Source: Box 2. Good Practices in Fiscal Reporting to Parliament — TNM/10/04* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1004.pdf_