## _wp1080 ## Source details **Canonical URL:** [_wp1080](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp1080.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp1080.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp1080.pdf.json) --- ### Purpose, scope, and research questions - Study focus and sample: - First to focus primarily on low-income countries; develops a composite index of the quality of budget institutions for 72 low-income and middle-income countries. - Assessments largely cover the 2006–2008 periods. - Index composed of 33 individual criteria in total. - Primary research questions: - Are strong budget institutions associated with greater fiscal discipline (lower deficits and debt)? - Do countries with stronger fiscal institutions have better scope to conduct countercyclical policies? - Empirical horizons and dependent variables: - Fiscal discipline analysis: period 2003–2007; dependent variables include average primary balance of the central government (ratio to GDP) and average public external debt owed to official creditors (ratio to GDP). - Fiscal cyclicality analysis includes the 2008–09 crisis (fiscal accommodation in 2009) and long-run procyclicality over 2000–2009. ### Index design, dimensions, and coverage - Two analytical dimensions recorded by the index: - Stages in the budget process: planning and negotiation; approval; implementation. - Characteristics of the budget process (categories): degree of centralization (top-down procedures); rules and controls; sustainability and credibility; comprehensiveness; transparency. - Cross-cutting categories at each budgetary stage: - (i) top-down procedures; (ii) rules and controls; (iii) sustainability and credibility; (iv) comprehensiveness; (v) transparency. - Composition and aggregation: - Index comprises 33 individual criteria. - Stage index: simple average of three stage sub-indices (planning, approval, implementation); each stage sub-index is a simple average of the number of questions at that stage (equal weights per question). - Category index: simple average of five category sub-indices; each category sub-index is a simple average of its questions weighted by number of questions in that category. - Most data qualitative; each question scored on a scale between 0 and 4 (higher = better). - Example scoring schemes preserved as in source: e.g., "are there any numerical fiscal rules or targets?" scores allowed were 0, 2, and 4; "in-year amendments" scores allowed were 0, 1.33, 2.67, and 4. - Sample exclusions and rationale: - Developed countries excluded because of discontinuities in budgeting techniques and limited PEFA coverage for developed countries. - Data sources used: - Primary: PEFA reports. - Other: OECD database, IBP Open Budget Index, IMF fiscal ROSC; supplemented by a survey of IMF country teams and fiscal economists. ### Scoring methodology and key operational rules - Scoring framework: - Discrete scales with explicit score rules commonly using values 0, 1.33, 2, 2.67, 4 depending on item. - Scores reflect institutional design and the quality, completeness, and timeliness of budget documentation and processes. - Examples of item definitions and score rules: - Top-down: Score = 0 if several ministries; Score = 4 if MoF or single CBA has primary responsibility. - Numerical fiscal rules codified in law: Score = 0 (none); 2 (targets/objectives not codified by law); 4 (targets codified in law). - Dual budgeting (comprehensiveness): Score = 0 if separate budgets for recurrent and capital; Score = 4 if budget includes both recurrent spending and capital investment. - Extra-budgetary expenditure: Score = 0 if unreported extra-budgetary expenditure > 10 percent of GDP; 1.33 if between 5–10 percent of GDP; 2.67 if between 2–5 percent of GDP; 4 if below 1 percent of GDP. - Index construction specifics: - Stage index is arithmetic average of planning, approval, and implementation sub-indices. - Weights: each question weight = 1 divided by the number of questions in its stage or category (example: planning stage has 14 questions; each question weight = 1/14). - Mathematical averaging formulas and question weights preserved as in the source. ### Index properties, correlations, and sensitivity analysis - Internal correlations and variation: - Stage index correlation with the category index: 0.97. - Planning and negotiation sub-index and the comprehensiveness category show the highest standard deviations. - Top-down procedures sub-index has the lowest correlation with the overall index; sustainability and credibility sub-index has the highest correlation with the overall index. - Rules and controls, sustainability, comprehensiveness, and transparency are highly correlated among themselves. - Sensitivity and robustness checks: - Alternative aggregations considered: different weights across stages/categories; CES-type aggregation with α values 0.4 and 2; multiplicative indices. - CES-type functional forms: X_stage(·) = [ (1/3) * Σ (sub-index^α) ]^(1/α); X_category(·) = [ (1/5) * Σ (sub-index^α) ]^(1/α). - Multiplicative forms: X = (X_planning * X_approval * X_implementation)^(1/3) (and analogous for categories). - Spearman rank correlations between original additive indices and alternatives (including α = 0.4 and α = 2, and multiplicative forms) are high and significant at the one percent level. - Conclusion: country rankings are robust to alternative weighting and substitutability specifications; additive aggregation appropriate for empirical analysis. ### Descriptive patterns across regions, income groups, and country types - Regional and income-group patterns: - Transition economies, followed by Latin America and the Caribbean, have relatively more developed budget institutions. - Sub-Saharan Africa characterized by weaknesses in all budget stages and in sustainability and credibility. - Transparency is weak across all regions in the sample. - Low-income countries have weaker budget institutions than middle-income countries. - Both income groups show similarly low scores for the budget approval stage on average; planning and implementation are considerably weaker in low-income countries. - Within-group diversity: - Blend countries (World Bank classification) have stronger planning and approval processes and score higher across categories. - Resource rich countries (oil exporters) have the weakest budget institutions on all dimensions. - Example cases cited: Tanzania and Uganda score relatively high within SSA (overall scores mask important country differences). - Relationship with debt distress: - Countries with weaker budget institutions tend to be in higher levels of debt distress. ### Empirical findings — budget institutions and fiscal discipline - Main OLS results (cross-section, 2003–2007): - Overall stage index of budget institutions is positively and significantly associated with the primary fiscal balance (baseline: Column 2 of Table 7). - Magnitude example: difference between the index value of the average “low quality” and average “high quality” country is 0.8 in the full sample; using the estimate from column 2 of Table 7, an average high quality budget institutions country is predicted to have a primary balance that is around 1 percentage points higher than a low quality country. - Stronger budget institutions are associated with lower external debt; coefficient on the overall index is statistically significant and negative at the 5 percent level (Columns 6–8 of Table 7). - Disaggregated drivers: - Across budget stages, planning and negotiation appears to drive results with significant estimated coefficients. - Across categories, comprehensiveness and transparency have the most pronounced influence on primary balances and fiscal performance; rules and controls and sustainability/credibility also significant for debt. - With the exception of top-down procedures, most components of budget institutions impact performance. - Controls and robustness: - Control variables used include: real economic growth (annual average for 2003–2007), log GDP per capita in 2002, HIPC post-completion point dummy, oil-exporter dummy, initial external debt in 2002, and trade/terms-of-trade measures. - Results robust to inclusion of private credit to GDP and an IMF program dummy. - Financial development (private credit as share of GDP) does not have an important independent effect on primary balances or debt (Table 9). - Results remain significant under alternative dependent variables (average yearly growth in external debt), sample restrictions (non-oil exporters, low-income countries), different time periods, and excluding HIPC countries. - Econometric caveats and instrumental-variable checks: - Endogeneity concerns: fiscal outcomes may influence evolution of budget institutions. - Omitted variable concerns: broader institutional infrastructure may drive both institutions and fiscal outcomes; regressions include government effectiveness and control of corruption to partially address this. - Measurement error: indices constructed from multiple sources and judgments may be noisy. - IV approach: use a non-linear transformation of the original index as an instrument (α = 2; see Appendix III). IV 2SLS regressions for external debt and the average yearly growth of external debt (available upon request) show effects very close to, although slightly smaller than, OLS estimates. ### Empirical findings — budget institutions and fiscal cyclicality - Crisis-year (2008–09) evidence: - Two measures of fiscal accommodation in 2009: real growth in central government expenditures and the change in the primary fiscal balance (negative change implies higher fiscal accommodation). - Cross-section OLS controlling for lagged primary balance (2008), lagged external debt (2006), oil dummy, real GDP growth, and log GDP per capita (2006). - Table 11 result: controlling for initial debt and primary balances, fiscal accommodation in 2009 was higher for countries with stronger budget institutions. - Coefficient of the overall stages index is significant at the 5–10 percent level regardless of dependent variable choice. - Result robust to inclusion of private credit to GDP and IMF program dummy in 2008. - Interpretation: preliminary support that countries with stronger budget institutions were more likely to implement countercyclical policy responses during the Crisis or at least be less procyclical. - Long-run procyclicality (2000–2009): - Method: Difference GMM on annual data for 70 countries, dependent variable growth in real central government spending, cycle proxied by real GDP growth; static budget indices linked to dynamic cyclicality by median-split comparisons. - Findings (Table 12): - Fiscal policies have been less procyclical on average in countries with strong budget institutions. - Estimated procyclicality coefficient is statistically significant for countries with below-median composite index values. - Procyclicality coefficients for above-median index countries are statistically significant but about 2 ½ times smaller than for below-median countries. - Null hypothesis that coefficients for the two groups are not significantly different is rejected. - Sub-index drivers: - Weaknesses in initial stages (planning and approval) largely drive procyclicality. - Budget transparency stands out: fiscal procyclicality coefficients in countries with stronger budgetary transparency are nearly twice as small as those with less transparent budgets. - Implementation sub-index: higher-score countries show larger coefficients than below-median score countries but not significant at conventional levels. - Interactions with income and debt (Table 13): - Fiscal policy strongly procyclical in low-income countries; elasticities of government spending to output growth above those in full sample. - Income amplifies the effect of budget institutions: differences between low-income countries below and above median composite index are about four fold. - Similar amplification for more indebted countries. - Weak budget transparency particularly detrimental to countercyclical fiscal policy. - Results for SSA are similar with larger size and precision of procyclicality estimates (results available upon request). ### Limitations, econometric cautions, and data scope - Limitations acknowledged: - Indices are cross-sectional (no time variation); causal inference limited. - Data focus primarily on expenditure side; few reliable indicators for delivery capacity, poverty-related spending tracking, or revenue administration. - PEFA does not comprehensively cover legal frameworks or strategic political-economy interactions. - Econometric issues: - Endogeneity (policy choices affect institutions); omitted variables; measurement error in indices. - Cross-sectional OLS used due to lack of time variation; Difference GMM employed for panel cyclicality analysis; IV 2SLS used with non-linear instrument (α = 2) for some specifications. - Sample and data notes: - Some analyses use 70 countries for whom full data are available; three countries dropped due to external debt outliers (Congo DRC, Liberia, and Gambia). - Institutional controls used include 2007 values for World Bank Governance Indicators: government effectiveness and control of corruption. - Financial development proxied by private credit (share of GDP). - IMF program dummy used in robustness checks to proxy de facto fiscal controls. ### Policy-relevant conclusions and suggested directions for further work - Principal empirical messages: - Sound budget institutions are preliminarily associated with higher primary balances and lower external debt. - Better budget institutions are associated with less procyclical fiscal policy responses both during the recent crisis and over 2000–2009. - Planning and implementation stages, and budget sustainability, comprehensiveness, and transparency, are the most significant institutional dimensions for fiscal outcomes. - Policy implications and research priorities: - Develop a more comprehensive index of budget institutions, extend country coverage, and introduce time variation to strengthen causal inference. - Examine the link between budget institutions and financing constraints in good and bad times. - In low-income countries lacking deeper political checks and balances, transparency and comprehensiveness (facilitating external monitoring) may be more effective than internal rules and top-down procedures. - Indicators can guide prioritization of technical assistance; further research needed on effectiveness of IMF/World Bank technical assistance in strengthening targeted institutions. - Cautions for interpretation: - Results are preliminary and subject to econometric limitations (endogeneity, omitted variables, measurement error, lack of time variation). - Statistically less significant components are not necessarily unimportant for institutional development. *Source: _wp1080 — Appendix IV; Appendix II; Appendix III; Box 1; main text summaries and references contained in the supplied content.* ### References ............................................................................................................. ### _wp1080 - References ............................................................................................................. ### Tables - Table 1. Country Coverage ......................................................................................................28 - Table 2. Summary of Statistics for Budget Institutions Dimensions and Indices ...................29 - Table 3a. Spearman Rank Correlations among Budget Stages ................................................29 - Table 3b. Spearman Rank Correlations among Categories .....................................................29 - Table 4. Pair-wise Correlations with other Indicators .............................................................31 - Table 5. Budget Institutions Index, by Country Groups and Stages ........................................31 - Table 6. Budget Institutions Index, by Country Groups and Categories .................................32 - Table 7. Budget Institutions, Primary Balance, and External Debt .........................................33 - Table 8. Disaggregated Budget Institutions and Fiscal Performance ......................................34 - Table 9. Budget Institutions and Fiscal Discipline: Robustness Checks .................................35 - Table 10. Robustness Checks: Role of Economy-wide Institutions ........................................36 - Table 11. Budget Institutions, Fiscal Accommodation, and the Global Crisis, 2008–09 ........37 - Table 12. Budget Institutions, Impact on Procyclicality ..........................................................38 - Table 13. Budget Institutions, Income and Debt, Combined Impact on Procyclicality ..........39 ### Figures - Figure 1. Budget process............................................................................................................5 - Figure 2. Budget Institutions, Country Characteristics, and Debt Vulnerabilities in LICs and MICs ........................................................................................................................................29 ### Appendices - Appendix I. Data Sources Used ...............................................................................................45 - Appendix II. Dimensions, Scoring Methodology, and Sources of Data ..................................46 - Appendix III. Sensitivity Analysis ...........................................................................................53 *Source: _wp1080 - References .............................................................................................................* ### Appendix IV. Definition and Sources of Variables .................................................................56 ### Appendix IV. Definition and Sources of Variables ### I. Introduction - Sound budget institutions are vital for a country’s ability to design and implement effective fiscal policies. - Roles of sound budget institutions: - ensure government accountability and prevent leakage of public funds; - increase efficiency of scarce public resources; - improve prospects of maintaining fiscal stability and meeting social development needs. - Importance emphasized for low-income countries where: - stability is more fragile; - resource constraints are more binding; - social needs remain more pressing. - Study scope and purpose: - first to focus primarily on low-income countries; - develops a composite index of the quality of budget institutions for 72 low-income and middle-income countries; - draws upon empirical studies, budget survey databases and assessment reports, supplemented by case studies and other reports and data from the IMF, the World Bank, and donors. - Two primary research questions: - Are strong budget institutions associated with greater fiscal discipline (lower deficits and debt)? - Do countries with stronger fiscal institutions have better scope to conduct countercyclical policies? - Paper structure (sections summarized): - Section II: literature summary; - Section III: proposed index construction, statistical properties, comparison with other indicators; - Section IV: econometric analysis of budget institutions and fiscal outcomes; - Section V: econometric evidence on institutions and counter-cyclical policies, including during the current crisis; - Section VI: conclusions and policy implications. *Source: Appendix IV. Definition and Sources of Variables (extracted content)* ### II. Literature survey — key themes and mechanisms - Theoretical mechanisms linking budget institutions to fiscal outcomes: - Common pool phenomenon: multiple decision makers compete for public resources and may not internalize current and future costs, potentially leading to a “deficit bias.” - Agency phenomenon: information asymmetry and incentive incompatibilities within government (e.g., between ministry of finance and line ministries) and between government and voters. - Institutional responses that promote fiscal discipline: - top-down planning (delegation to a strong central player like the prime minister or finance minister); - cooperative bargaining under transparent rules; - strong accountability mechanisms and monitoring/enforcement structures. - Empirical evidence: - Indices summarizing institutional features have been used to link budget institutions to deficits and debt. - Studies cited finding that: hierarchical/top-down procedures, limited parliamentary amendments, and strict execution of the budget law enhance fiscal discipline. - Relevant empirical studies include von Hagen (1992), Alesina et al. (1999), Hallerberg et al. (2009), Perotti and Kontopolous (2002), Fabrizio and Mody (2006), Mulas-Granados et al. (2009), Filc and Scartascini (2005), Prakash and Cabezón (2008). - Caveats from the literature: - Existence of fiscal rules and medium-term planning constraints alone may be insufficient if structural weaknesses or weak checks exist. - Rules can be circumvented (creative accounting, optimistic forecasts, off-budget items). ### III. Budget institutions and fiscal cyclicality - Three broad groups of factors explaining procyclical fiscal behavior: - (i) political and institutional factors leading to fiscal profligacy in good times; - (ii) financing constraints and limited access to international capital markets in bad times; - (iii) implementation constraints that delay or compromise policy quality. - Institutional impacts on procyclicality: - Weak budget institutions increase opportunities for rent-seeking and corruption, and reduce checks on the executive, fostering procyclicality. - Weak institutions worsen perceptions of creditworthiness, exacerbating financing constraints. - Implementation constraints manifest as deviations between planned and executed budgets (implementation errors). - Empirical findings referenced: - Procyclical tendencies stronger with more volatile tax bases (Talvi and Vegh, 2005). - Evidence that strong medium-term frameworks and enforced numerical rules reduce implementation errors and promote countercyclical policies (Beetsma et al., 2009). ### IV. Budget institutions in low-income countries — distinguishing features - General observation: budget institutions in low-income countries are much less developed and vary widely due to colonial heritage, cultural and administrative traditions. - Common constraints in low-income countries: - weak capacity and ineffective civil society institutions; - political economy factors that hinder modernization of budget institutions. - Specific characteristics: - numerical targets and formal constraints may not be binding in practice due to weak transparency and accountability mechanisms; - strengthening transparency, comprehensiveness, and public dissemination of budget documents can be particularly important, even absent formal rules; - central budget authority (ministry of finance) often relatively weak in the ministerial hierarchy; - budget often subordinate to national plan, and powerful planning ministries may fragment the budget process (“dual budgeting”); - extrabudgetary funds and weaker integration with the budget process; - heavy dependence on donor aid that is often not fully integrated with the budget. - Consequences: - reduced transparency and accountability; - parallel bargaining arenas outside the budget process; - weak financial reporting and audit systems, inefficient mechanisms to track aggregate limits; - weak controls of spending and commitments, prevalence of arrears; - absence of sound accounting frameworks increases scope for creative accounting. ### V. Index of budget institutions — coverage, sources, and limitations - Purpose: - construct indices relevant to analyzing the overall quality of budget institutions in low-income countries. - Sample and timing: - assessments largely cover the 2006–2008 periods; - include 72 countries across different regions. - Data sources used: - primary: published and unpublished PEFA reports (focus on operational performance of key PFM systems); - other sources: OECD database (legal regulations, numerical and procedural rules), IBP Open Budget Index (transparency/comprehensiveness), IMF fiscal ROSC (fiscal transparency module); - supplemented by a survey of IMF country teams and fiscal economists. - Limitations and scope: - data focus primarily on the expenditure side of the budget; - not an exhaustive catalogue—few reliable indicators exist for institutional capacity in delivery of core public services, tracking poverty-related spending, or revenue administration; - PEFA does not cover the legal framework comprehensively nor the strategic interactions and political economy influences. - Rationale for sample exclusion: - developed countries excluded because of discontinuities in budgeting techniques and limited PEFA coverage for developed countries. ### VI. Components and structure of the index - Two analytical dimensions recorded by the index: - 1) stages in the budget process: planning and negotiation; approval; implementation; - 2) characteristics of the budget process: degree of centralization of budgetary decision-making; existence and effectiveness of rules and controls; sustainability and credibility of the budget as a key policy instrument; comprehensiveness; transparency. - Cross-cutting categories at each budgetary stage: - (i) top-down procedures; - (ii) rules and controls; - (iii) sustainability and credibility; - (iv) comprehensiveness; - (v) transparency. - Composition: - framework allows two-dimensional analysis across budgetary stages and categories; - index is composed of 33 individual criteria in total. - Design choices: - criteria reflect specific characteristics of low-income countries; - index allows benchmarking against middle-income countries, across regions, and by institutional arrangements that deliver good fiscal performance. *Source: Appendix IV. Definition and Sources of Variables (extracted content)* ### Appendix 2 provides a detailed description of the scoring methodology and data sources ### Appendix 2 provides a detailed description of the scoring methodology and data sources ### Top-down procedures - Empirical evidence (as discussed in Section II) suggests that top-down procedural arrangements for negotiating, approving, and executing the annual budget serve to guard against the deficit bias in decision making. - Definition: Top-down budgeting is the extent to which the central budget authority (CBA), under the supervision of the cabinet or council of ministers, is given the agenda-setting role in relation to the main budgetary aggregates, ensuring compliance with the budget laws, and enforcing control of budgetary expenditures. ### Planning-stage assessment - The index assesses whether institutional arrangements attribute strategic powers to a CBA and the existence of a top-down structure of setting budget priorities. - Rationale: - Line ministries and other claimants have relatively parochial views on the budget, and may create a common pool phenomenon. - A binding top-down decision on the aggregate spending level and the sectoral or ministerial allocations at the onset of the budget process promotes fiscal discipline during budget preparation. - This reduces the room for special interest pressures to enlarge the budget envelope. ### Interactions and transparency - 15 It should be noted that these components are not mutually exclusive but reinforce and inform each other. For instance, lack of comprehensiveness in the budget process, in the form of a failure to consolidate all fiscal activities into a “bottom-line” measure, reduces transparency (Poterba and von Hagen, 1999). *Source: Appendix 2 — scoring methodology and data sources* ### Box 1. Components of the Budget Institutions Index ### Box 1. Components of the Budget Institutions Index ### I. Budget Planning and Negotiation — Structure and questions - Top-down Procedures - a. Is there a single central agency with responsibility for preparing the budget? - b. Is there a top-down budget formulation process? - Rules and Controls - a. Are there any numerical fiscal rules or targets? - b. Are line ministries subject to spending ceilings? - Sustainability and credibility - a. Is there a medium-term planning/budgeting framework? - b. Are sector strategies prepared, including estimates of their cost? - c. Macroeconomic and fiscal forecasting - Are macroeconomic and fiscal forecasts prepared and presented in budget documents? - Are alternative medium-term scenarios prepared to guide budget preparation? - Do fiscal projections separately identify the cost implications of current and new policy measures? - Comprehensiveness - a. Are there dual budgets for recurrent and capital expenditures? - b. What is the scale of extrabudgetary expenditures? - c. Is information on domestic and external debt included in the budget? - d. Is information on donor-financed aid projects included in the budget? - e. Is information on fiscal risks included in the budget? - Transparency - a. Is there an administrative, economic and functional classification of the budget? - b. Is the government’s draft budget released to the public? ### II. Budget Approval — Structure and questions - Top-down Procedures - a. What limits are there on the legislature’s power to amend the draft budget? - b. Is there a top-down procedure for approval of the budget by the legislature? - Rules and Controls - a. Are there clear time limits on the approval of the budget by the legislature? - Sustainability and Credibility - a. What is the extent of the legislature’s scrutiny of fiscal policy and the budget? - Comprehensiveness - a. What is the scope of budget documentation presented to the legislature? - Transparency - a. Does the legislature hold public hearings on the budget? ### III. Budget Implementation — Structure and questions - Top-down Procedures - a. How detailed are the expenditure appropriations received by spending ministries? - Rules and controls - a. Are there effective internal controls, including controls on spending commitments? - b. What are the rules and procedures for in-year amendments to the budget? - c. Is there an effective system of internal audit? - d. Is there an effective system of external audit? - Sustainability and credibility - a. Are the fiscal activities of local governments and public enterprises monitored? - b. How is domestic and external debt recorded and managed? - c. Is information available to measure the existence and scale of expenditure arrears? - Transparency - a. What accounting standards does the government use? - b. Are consolidated financial statements issued on a timely basis? - c. Are external audit reports produced on a timely basis, and scrutinized by the legislature? - d. What is the scope and timeliness of in-year financial reports? - e. Does the government publish a reconciliation of budgeted and outturn expenditures? ### Key explanatory notes and operational principles - During the budget approval stage, the index assesses limits on the legislature’s rights to amend the draft budget and sequencing of the vote; under a top-down voting procedure the legislature first votes on main fiscal aggregates before allocations. - At budget execution, appropriations should specify expenditures at a sufficient level of disaggregation to avoid misappropriation and over-spending on approved projects. ### Rules and Controls — Purpose and index coverage - Numerical rules: restrictions on fiscal outturns that establish clear objectives for fiscal policy. - Procedural rules: define budget decision and execution processes and can enforce fiscal rules (e.g., sectoral expenditure ceilings). - Ex ante internal controls, including controls on spending commitments, are important for reinforcing spending rules, especially in low-income countries. - Index criteria include: - Planning stage: existence of numerical rules (e.g., legal limits on deficits or borrowing); use of sectoral expenditure ceilings. - Approval stage: procedural rules such as time limits for budget approval before the new fiscal year. - Implementation stage: restrictions on in-year amendments; existence/effectiveness of internal controls, internal audit, and external audit. ### Sustainability and Credibility — Purpose and index coverage - A sustainable and credible fiscal framework requires: - Realistic economic and fiscal projections. - Budgetary cost assessment of policy decisions. - Effective oversight and monitoring arrangements. - Index criteria include: - Existence of a medium-term framework and multi-year forecasts linked to annual policies. - Existence of costed sector strategies to assess financing of multi-year current and new sector policies. - At approval stage: comprehensive and timely legislative oversight and approval. - At implementation stage: monitoring of public enterprises and local governments, control of expenditure arrears and public debt, and public availability of timely and accurate budget outturn information. ### Comprehensiveness — Purpose and index coverage - A comprehensive budget includes all elements of government revenue and expenditure within a consistent framework, reducing enclave budgeting risk. - Index criteria include: - Planning stage: measures of dual budgeting, size of off-budgetary expenditure, inclusion of donor-funded projects and public debt, and evaluation of aggregate fiscal risks. - Approval stage: comprehensiveness of information in budget documents presented to the legislature. - No implementation-stage criteria (comprehensiveness determined earlier). ### Transparency — Purpose and index coverage - Transparency requires relevant information to be reliable, timely, understandable, and internationally comparable. - Index assesses transparency across stages: - Planning stage: classification by administrative, functional, or program categories and publication procedures for the draft budget. - Approval stage: public access to legislature hearings on the annual budget. - Implementation stage: scope and timeliness of in-year and annual reports; use of generally accepted accounting standards; completeness and timeliness of annual financial statements; timely external audit reports made available to legislature and public. ### Index construction — methodology and scoring - Two overall indices: - Stage index: aggregation of three sub-indices (planning and negotiation, approval, implementation). - Category index: aggregation of five sub-indices (top-down procedures, rules and controls, sustainability and credibility, comprehensiveness, transparency). - Most data qualitative; each question scored on a scale between 0 and 4 (higher = better). - Coding rules applied to minimize discretion (see Appendix II in source). - Examples of scoring schemes: - For "are there any numerical fiscal rules or targets?": scores allowed were 0, 2, and 4. - For "what are the rules and procedures for in-year amendments to the budget?": scores allowed were 0, 1.33, 2.67, and 4. - Aggregation rules: - Stage index is a simple average of the three stage sub-indices. - Each stage sub-index is a simple average of the number of questions at that stage (weights equal to 1 divided by number of questions). - Example: budget planning and negotiation stage has 14 questions; each question weight = 1/14. - Category index is a simple average of the five category sub-indices; each category sub-index is a simple average of its questions, weighted according to number of questions in the category. - Mathematical representation preserved in source (question weights and averaging formulas). ### Index properties, correlations, and robustness - The stage index correlation with the category index: 0.97. - Sub-indices show variation: planning and negotiation, and comprehensiveness, have the highest standard deviations across stages and categories respectively. - Spearman rank-order correlations: - Planning, approval, and implementation sub-indices are significantly correlated with the overall stage index. - Budget planning and negotiation correlated with approval and implementation. - Budget approval stage has very low correlation with implementation. - Top-down procedures sub-index has the lowest correlation with the overall index. - Sustainability and credibility sub-index has the highest correlation with the overall index. - Top-down procedures has low, albeit significant, correlations with other dimensions. - Rules and control, sustainability, comprehensiveness, and transparency are highly correlated among themselves. - Sensitivity analysis: - Alternative aggregating and weighting procedures considered (Appendix III). - Rank order correlations between different approaches are high and significant, suggesting additive aggregation is robust. ### Comparisons with other indicators - Pair-wise correlations reported between the new indices and PEFA indicators, a sub-index of the World Bank’s Country Policy and Institutional Assessment (CPIA), and Kaufmann and Kraay governance indicators. - Aggregate indices show high correlations with sub-CPIA and PEFA indicators. - Aggregate indices are positively and significantly correlated with government effectiveness and regulatory quality governance components. - Conclusion: high correlations with other indices indicate the new indices capture meaningful information. - Given high correlation between overall stage and category indices and robustness checks, subsequent analysis focuses on the overall stage index. ### Descriptive statistics and cross-country patterns - Regional and income-group patterns: - Transition economies, followed by Latin America and the Caribbean, have relatively more developed budget institutions. - Sub-Saharan Africa (SSA) characterized by weaknesses in all budget stages and in sustainability and credibility. - Transparency is weak across all regions in the sample. - Income-group differences: - Low-income countries have weaker budget institutions than middle-income countries (Figure 2 and Tables 5–6). - Both groups show similarly low scores for the budget approval stage on average. - Budget planning and implementation are considerably weaker in low-income countries. - Both groups exhibit relatively high scores for top-down procedures; low-income countries are significantly weaker in all other dimensions. - Diversity within low-income countries: - Blend countries (World Bank classification) have stronger planning and approval processes and score higher across categories. - Resource rich countries (oil exporters) have the weakest budget institutions on all dimensions. - Low-income SSA countries have weaker institutional capacity, especially in sustainability and credibility, comprehensiveness, and transparency. - Relationship with debt distress: - Countries with weaker budget institutions tend to be in higher levels of debt distress. - The overall scores mask important differences across countries (examples cited in source: Tanzania and Uganda score relatively high within SSA). ### Empirical analysis: Budget institutions and fiscal discipline (overview) - Period analyzed: 2003–2007. - Dependent variables considered: average primary balance of the central government (ratio to GDP) and average public external debt owed to official creditors (ratio to GDP). - Rationale: - Average primary balance preferred because it abstracts from inflation effects on interest payments and recognizes interest payments reflect accumulated debt. - Debt focus uses official public external debt due to limited total government debt data. - Empirical method: - Cross-section OLS regression with control variables drawn from literature. - Index and sub-indices included to test association with fiscal outcomes after controlling for selected variables. - Cross-sectional design due to lack of time variation in budget institutions indices. - Outliers excluded; only countries with complete data retained. - Three countries dropped from the analysis due to external debt outliers: Congo DRC, Liberia, and Gambia. - Control variables included in regressions: - Growth: real economic growth (annual average for 2003–2007). - Initial GDP per capita: log of GDP per capita in 2002. - HIPC: dummy for HIPC post-completion point countries. - Oil: dummy for oil-exporting countries. - Initial_debt: initial debt-to-GDP ratio proxied by external debt in 2002. - Trade: changes in terms of trade scaled by degree of openness (exports + imports to GDP), measured as annual averages for 2003–2007. - Purpose of controls: - Growth to control for economic circumstances. - Initial GDP per capita to control for differences in economic and institutional development. - HIPC to control for effects of official debt relief. - Oil to control for resource-rich country effects. - Initial_debt to focus on effect of budget institutions on recent fiscal settings. - Trade and openness to capture terms-of-trade effects on revenues and fiscal positions. *Source: _wp1080 - Box 1. Components of the Budget Institutions Index* ### Appendix IV ### _wp1080 - Appendix IV ### Data and scope - Appendix IV contains details on the variables and data sources used in the paper. - Indices are cross-sectional (no time variation in indices); sample sizes and country coverage include 70 countries for some analyses and various subsamples (e.g., low-income countries, non-oil exporters). - Some institutional controls used: government effectiveness and control of corruption (2007 values for the two World Bank Governance Indicators). - Financial development proxied by credit extended to the private sector from banks and other financial institutions (as share of GDP). - IMF program indicator used as a dummy for de facto fiscal controls in robustness checks. ### Budget institutions and primary balances - Overall stage index of budget institutions is positively and significantly associated with the primary fiscal balance (baseline: Column 2 of Table 7). - Magnitude example: - Difference between the index value of the average “low quality” and average “high quality” country is 0.8 in the full sample. - Using the estimate from column 2 of Table 7, an average high quality budget institutions country is predicted to have a primary balance that is around 1 percentage points higher than a low quality country. - Results hold when excluding oil-exporting countries and for non-oil exporting low-income countries (Columns 3–4). - When all low-income countries including oil exporters are considered, the coefficient on the overall index is positive but insignificant (not reported). ### Budget institutions and external debt - Columns 6–8 of Table 7: stronger budget institutions are associated with lower external debt; the coefficient on the overall index is statistically significant and negative at the 5 percent level. - Interpretation: countries with better budget institutions tend to have lower debt; cross-country variation in external debt reflects past policies, and budget institutions may exhibit hysteresis (slow to evolve). - Disaggregation (Table 8, Panel B): robust budget planning and implementation are associated with lower debt. Stronger rules and controls and a more sustainable and credible budget process also have significant influence on debt levels. ### Disaggregated components driving results - Across budget stages, planning and negotiation appears to drive results with significant estimated coefficients. - Across categories (Table 8, Panel A and B): - More comprehensive and transparent budget processes have the most pronounced influence on primary balances and on fiscal performance. - With the exception of top-down procedures, most components of budget institutions impact performance. - Relative importance differences partly reflect larger cross-country variation in external debt levels relative to primary balances. ### Robustness checks - Financial development (private credit as share of GDP) does not have an important independent effect on primary balances or debt (Table 9, Columns 1 and 3). - Results for budget institutions are robust to inclusion of an IMF program dummy (Columns 2 and 4). - Results remain significant if: - Dependent variable is average yearly growth in external debt. - Samples restricted to non-oil exporting countries or low-income countries. - Different time periods are used. - Sample excludes HIPC countries. - Additional robustness checks (not reported in full here) included inflation, population, demographic structure, armed conflict dummy, ethnic fractionalization, legal origin, SSA and Latin America and Caribbean dummies — many were statistically insignificant but overall link between budget institutions and fiscal discipline remains largely robust. ### Econometric issues and instrumental variables - Endogeneity concern: fiscal outcomes may influence evolution of budget institutions (e.g., enhancements as part of IMF-supported fiscal consolidation), complicating causal claims. - Omitted variable concern: broader institutional infrastructure may drive fiscal discipline; to partially address this, regressions include government effectiveness and control of corruption. - Measurement error concern: indices constructed from multiple sources and subjective judgments may be noisy. OLS may be biased if measurement error is present. - Instrumental variable approach: use a non-linear transformation of the original index as an instrument (α = 2; see Appendix III for details). - IV 2SLS regressions for external debt and the average yearly growth of external debt (available upon request) show effects of budget institutions on fiscal discipline very close to, although slightly smaller than, OLS estimates. ### Budget institutions and fiscal cyclicality (2008–09 crisis) - Research question: Did stronger budget institutions lead to less procyclical (i.e., more countercyclical) fiscal responses to the global crisis? - Two measures of fiscal accommodation in 2009: real growth in central government expenditures and the change in the primary fiscal balance (negative change implies higher fiscal accommodation). - Cross-section OLS controlling for Primary Balance lagged (2008), Debt lagged (external debt to GDP ratio in 2006), Oil dummy, real GDP growth, and log GDP per capita (2006). - Table 11 result: controlling for initial debt and primary balances, fiscal accommodation in 2009 was higher for countries with stronger budget institutions. - Coefficient of the overall stages index is significant at the 5–10 percent level regardless of the dependent variable choice. - Interpretation: preliminary support that countries with stronger budget institutions were more likely to implement countercyclical policy response during the Crisis or at least be less procyclical. - Result robust to inclusion of private credit to GDP and IMF program dummy in 2008. ### Budget institutions and long-run procyclicality (2000–2009) - Method: estimate Fitt = α + β Yi,t-1 + δZ + μi + εit (equation (1) specification context); use Difference GMM to address reverse causality and fixed effects issues; dependent variable growth in real central government spending; proxy for cycle is real GDP growth; annual data for 70 countries in 2000–2009. - Approach to link static budget indices to dynamic fiscal cyclicality: split sample by median of overall index (and sub-indices) and estimate procyclicality separately for weak vs strong groups (following Alt and Lassen, and Lledó et al. 2009). - Findings (Table 12): - Fiscal policies on average have been less procyclical over the last decade in countries with strong budget institutions. - Estimated procyclicality coefficient is statistically significant for countries with below median composite index values. - Procyclicality coefficients for above-median index countries are also statistically significant but about 2 ½ times smaller than for below-median countries. - Null hypothesis that coefficients for the two groups are not significantly different is comfortably rejected. - Sub-index results: - Fiscal procyclicality appears mostly driven by weaknesses in initial stages of budget process (planning and approval). - Countries with planning and approval sub-indices below median show procyclicality coefficients more than twice those of higher-quality countries. - Budget transparency stands out: fiscal procyclicality coefficients in countries with stronger budgetary transparency are nearly twice as small as those with less transparent budgets. - Implementation sub-index: higher score countries show larger coefficients than below-median score countries but not significant at conventional levels. ### Interaction with income and debt - Interactions of composite indexes and subcomponents with low-income dummy and with level of external debt (Table 13) show qualitatively similar patterns: - Fiscal policy is strongly procyclical in low-income countries, with elasticities of government spending to output growth above those in full sample. - Income levels amplify the effect of budget institutions on fiscal procyclicality: differences between low-income countries below and above median composite index are about four fold. - Similar amplification for more indebted countries; weak budget transparency again particularly detrimental to countercyclical fiscal policy. - Results for SSA similar; size and precision of procyclicality estimates even larger for SSA (results available upon request). ### Conclusions and policy-relevant implications - Main empirical messages: - Sound budget institutions are preliminarily associated with higher primary balances and lower external debt. - Better budget institutions are associated with less procyclical fiscal policy responses both during the recent crisis and over 2000–2009. - Planning and implementation stages, and budget sustainability, comprehensiveness, and transparency are the most significant institutional dimensions for fiscal outcomes. - Cautions: - Results are preliminary and subject to econometric limitations: endogeneity, omitted variables, measurement error, and lack of time variation in indices. - Statistically less significant components are not necessarily unimportant for institutional development. - Policy implications and directions for further work: - Develop a more comprehensive index of budget institutions, extend country coverage, and introduce time variation to strengthen causal inference. - Examine the link between budget institutions and financing constraints in good and bad times. - Findings suggest transparency and comprehensiveness (facilitating external monitoring) may be more effective than internal rules and top-down procedures in low-income countries lacking deeper political checks and balances. - Indicators may guide prioritization of technical assistance; further research needed on the effectiveness of IMF/World Bank technical assistance in strengthening targeted institutions. *Source: _wp1080 - Appendix IV* ### References ### _wp1080 - References ### References - Aguiar, Mark and Gita Gopinath, 2007, Emerging Market Business Cycles: The Cycle is the Trend, Journal of Political Economy, Vol. 115 (1), pp. 69-102. - Akitoby, Bernardin, Benedict J. 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Fiscal Consolidation in the New EU Member States,” Eastern European Economics, Vol. 47 (1), pp. 60–91. - Perotti, Roberto, and Yianos Kontopoulos, 2002, “Fragmented Fiscal Policy,” Journal of Public Economics, Elsevier, Vol. 86 (2), pp. 191–222. - Persson, Torsten and Guido Tabellini, 2005, Economic Effects of Constitutions (Cambridge, Massachusetts: MIT Press). - Persson, Torsten, Gerard Roland, Guido Tabellini, 2000, “Comparative Politics and Public Finance,” Journal of Political Economy, Vol. 108 (6) (March), pp. 1121–1161. - Poterba, James and Jürgen von Hagen, 1999, Fiscal Institutions and Fiscal Performance (Chicago: University of Chicago Press). - Prakash, Tej and Cabezon Ezequiel, 2008, “Public Financial Management and Fiscal Outcomes in Sub-Saharan African Heavily-Indebted Poor Countries,” IMF Working Paper 08/217 (Washington: International Monetary Fund). - Schiavo-Campo, Salvatore, 2009, “Potemkin Villages: The Medium-Term Expenditure Framework in Developing Countries,” Public Budgeting and Finance, Vol. 29, Issue 2, (June), pp. 1–26. - Schick, Allen, 1998, “Why Most Developing Countries Should Not Try New Zealand Reforms,” The World Bank Research Observer, Vol. 13, No. 1 (February), pp. 123–131. - Shepsle, Kenneth and Barry Weingast, 1981, “Political Preferences for the Pork Barrel: A Generalization,” American Journal of Political Science, Vol. 25 (1): 96–111. - Talvi, Ernesto and Carlos Végh, 2005, “Tax Base Variability and Procyclical Fiscal Policy in Developing Countries,” Journal of Development Economics, Vol. 78, pp. 156–90. - Thornton, John, 2008, “Explaining Procyclical Fiscal Policy in African Countries,” Journal of African Economies, Vol. 17, No. 3, pp. 451–64. - Tornell, Aaron and Philip Lane, 1999, “The Voracity Effect,” American Economic Review, Vol.89, No. 1 (March), pp. 22–46. - Velasco, Andres, 1999, “A Model of Endogenous Fiscal Deficits and Delayed Fiscal Reforms,” NBER Chapters, Fiscal Institutions and Fiscal Performance, pp. 37–58. - Weingast, Barry, Kenneth Shepsle, and Christopher Johnsen, 1981, “The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics,” Journal of Political Economy, Vol. 89 (4): 642–64. ### Appendix I. Data Sources Used - Public Expenditure and Financial Accountability (PEFA) assessments. - The PEFA framework was developed between 2003 and 2005 as a joint undertaking of the World Bank, the European Commission, the UK's Department for International Development (DFID), the Swiss State Secretariat for Economic Affairs, the Royal Norwegian Ministry of Foreign Affairs, the French Ministry of Foreign Affairs, and the IMF. - Since 2005, the PEFA program conducts assessments, some of which are publicly available in the form of country reports, on the technical and institutional basis for sound budget governance covering a broad range of PFM performance indicators. - It uses 28 indicators grouped in three areas: credibility of the budget; comprehensiveness and transparency and budget cycle. - PEFA assessments are done every three years and cover 96 countries. - OECD International Budget Practices and Procedures Database. - The database, which was originally developed by the OECD, contains the results of the 2007 OECD survey of budget practices and procedures in OECD countries, the 2008 World Bank/OECD survey of budget practices and procedures in Asia and other regions, and the 2008 CABRI/OECD survey of budget practices and procedures in Africa. - The database contains the results of surveys for the 30 OECD member countries and 67 developing countries from Africa, the Middle East, Eastern Europe, Asia, Latin America and the Caribbean. - Questions cover most of the stages and several aspects of the budget cycle, including preparation, approval, execution, accounting and audit, and performance information. - The questions are of the multiple-choice or check-the-box type. - IBP Open Budget Index. - The International Budget Partnership, part of the Washington-based NGO Center on Budget and Policy Priorities, publishes the IBP Open Budget Index. - The index provides extensive data and rankings on the level of transparency of the budget process in 85 developed and developing countries based on surveys conducted by local civil society partners. - The questions reflecting the quantity and quality of publicly available budget information in eight key documents associated with the following four stages of the budget process: formulation, approval, execution, and evaluation/audit. - Reports of the Observance of Standards and Codes (ROSCS). - In 1998, the IMF Board adopted the Code of Good Practices and Fiscal Transparency, which was updated in 2007. - It involves standards and codes on the budget process including the clarity of roles and responsibility; public availability of information; open budget preparation, execution and reporting; and assurances of integrity. - Since then, the World Bank and the IMF have completed ROSCS for 86 developed and developing countries. *Content derived from _wp1080 - References (PDF chapter/section).* ### Appendix II. Dimensions, Scoring Methodology, and Sources of Data ### Appendix II. Dimensions, Scoring Methodology, and Sources of Data ### Overview of scoring approach - Sub-indices and component scores use discrete scales with explicit score rules (commonly 0, 1.33, 2, 2.67, 4 depending on item). - Sources used to code items include: OECD, FAD economists, ROSC, PEFA reports, IBP, IMF country economists, and ROSC (as indicated for each item). - Scores reflect institutional design and the quality, completeness, and timeliness of budget documentation and processes. ### I. Budget Planning and Negotiation — Top-down Budgeting - Fragmentation of budgetary authority: - Score = 0 if there are several ministries or governmental bodies. - Score = 4 if MoF or another single CBA has primary responsibility for managing the budget. - Sources: OECD, FAD economists, and ROSC. - Agenda setting (top-down budgeting): - Score = 0 if there are no ex ante limits on ministerial budget submissions before sectoral/ministerial budget discussion. - Score = 1.33 if there are ex ante limits but cabinet does not play a role. - Score = 2.67 if there are ex ante limits but influence of the cabinet is limited. - Score = 4 if there are ex ante limits on ministerial budget submissions and prior approval by Cabinet. - Sources: OECD, PEFA reports, and OECD. ### Rules and Controls (planning & approval stages) - Numerical fiscal rules codified in law: - Score = 0 if there are no fiscal targets or objectives. - Score = 2 if there are fiscal targets or objectives but not codified by law. - Score = 4 if there are fiscal targets codified in law. - Sources: OECD, ROSC, FAD economists, and IMF country economists. - Expenditure ceilings for line ministries: - Score = 0 if there are no ceilings. - Score = 2 if there are ceilings for some types of expenditures. - Score = 4 if there are ceilings for all types of expenditures. - Sources: OECD, FAD economists, and IMF country economists. ### Sustainability and Credibility (planning) - Medium-term planning and integration with annual budget: - Score = 0 if government does not prepare multi-year forecasts or forecasts are not linked to annual budget. - Score = 1.33 if forecasts for 1–2 years but no links to the annual budget. - Score = 2.67 if forecasts for at least 2 years with some links to the annual budget. - Score = 4 if forecasts for at least 2–3 years and there are clear links to the annual budget. - Sources: PEFA reports, OECD, and ROSC. - Costed sector strategies: - Score = 0 if sector strategies not prepared OR no costing of investments and recurrent expenditures. - Score = 2 if sector strategies exist in several major sectors but are not fully costed OR inconsistent with fiscal forecasts. - Score = 4 if sector strategies exist for most sectors with full costing of recurrent expenditures and investment, broadly consistent with fiscal forecasts. - Sources: PEFA reports, OECD, and ROSC. ### Macroeconomic and fiscal forecasting (three-part, score is average) - (i) Macroeconomic forecasts discussed in budget documents: - Score = 0 if no information related to macroeconomic assumptions and forecasts is presented. - Score = 2 if partial information is provided, with some details excluded. - Score = 4 if full information is presented. - Sources: IBP, ROSC, and IMF country economists. - (ii) Sensitivity analysis discussed in annual budget documents: - Score = 0 if alternative medium-term scenarios are not discussed. - Score = 2 if discussion is incomplete or irregular. - Score = 4 if alternative medium-term scenarios are discussed for all assumptions. - Sources: OECD, IBP, and ROSC. - (iii) Identification of separate impact of current vs. new policies in budget documents: - Score = 0 if no analysis is published. - Score = 2 if the analysis is partial or irregular. - Score = 4 if a comprehensive analysis is presented. - Sources: OECD, IBP, ROSC, and PEFA reports. ### Comprehensiveness (planning) - Dual Budgeting: - Score = 0 if there are separate budgets for recurrent expenditures and for capital investment. - Score = 4 if the budget includes both recurrent spending and capital investment. - Sources: OECD, ROSC, and FAD economists. - Extra-budgetary expenditure: - Score = 0 if unreporte d extra-budgetary expenditure > 10 percent of GDP. - Score = 1.33 if between 5–10 percent of GDP. - Score = 2.67 if between 2–5 percent of GDP. - Score = 4 if below 1 percent of GDP. - Sources: PEFA reports, OECD, and ROSC. - Inclusion of information on donor-funded projects: - Score = 0 if information is not included or seriously deficient. - Score = 2 if partial information is included. - Score = 4 if detailed information for a large share of donor-funded projects is included. - Sources: PEFA reports, OECD, and IBP. - Inclusion of information on government debt: - Score = 0 if data on outstanding domestic and external debt are not included in budget documents. - Score = 2 if partial information is included. - Score = 4 if comprehensive information is included. - Sources: IBP, OECD, and PEFA reports. - Overview of aggregate fiscal risk in budget documents: - Score = 0 if little or no formal disclosure/evaluation of fiscal risks. - Score = 1 if partial disclosure. - Score = 2 if fiscal risks are discussed comprehensively and significant quantitative information is included. - Sources: OECD, ROSC, and PEFA reports. ### Transparency (planning) - Classification of the budget: - Score = 0 if expenditures are only based on an administrative classification. - Score = 2 if based on administrative and economic classification. - Score = 4 if based on administrative, economic and sub-functional (or programmatic) classification. - Sources: IBP, PEFA reports, and ROSC. - Publication of the executive’s budget proposal (draft budget): - Score = 0 if draft budget is not published. - Score = 2 if only a few key parts are published. - Score = 4 if the draft budget is published entirely. - Sources: IBP, ROSC, and PEFA reports. ### Budget Approval — Top-down Budgeting - Limits to amendments by the legislature: - Score = 0 if legislature not entitled to make any amendments, or no clear limits on amendment rights. - Score = 2 if legislature can introduce fiscally neutral amendments. - Score = 4 if legislature can change composition of expenditures but cannot increase proposed budget deficit nor total expenditures. - Sources: OECD, IBP, ROSC, and FAD economists. - Top-down sequence of budget approval: - Score = 0 if legislature does not first approve overall annual budget framework for total revenues and expenditures. - Score = 4 if legislature first approves the overall annual fiscal framework, then votes on detailed expenditures within approved “top down” constraints. - Sources: OECD and FAD economists. ### Budget Approval — Rules and Controls & Sustainability - Time limits for budget approval: - Score = 0 if no clear time frame for presenting and approving the budget. - Score = 2 if budget must be approved before start of fiscal year (FY), but presented to legislature only 1–2 months before start. - Score = 4 if budget must be presented at least three months prior to start of FY and approved before start of year. - Sources: OECD, ROSC, and FAD economists. - Scope of legislative scrutiny: - Score = 0 if legislature not consulted on overall fiscal strategy or no functioning legislature. - Score = 1.33 if review only covers details of expenditure and revenue. - Score = 2.67 if review covers details of expenditure and revenue and fiscal policies and aggregates. - Score = 4 if review covers fiscal policies, the medium-term framework and spending priorities, and details of expenditure and revenue. - Sources: PEFA reports and OECD. - Information contained in budget document presented to the legislature: - Score = 0 if budget documentation covers little or no relevant information on policy objectives, macroeconomic assumptions, budget priorities, and medium-term priorities. - Score = 2 if partial information is included. - Score = 4 if comprehensive information is presented. - Sources: PEFA reports and OECD. - Public hearings on overall budget policy: - Score = 0 if no public hearings are held by the legislature on the overall budget framework. - Score = 2 if no public hearings are held but summaries or reports are published. - Score = 4 if public hearings are held. - Sources: IBP, ROSC, and IMF country economists. ### Budget Implementation — Top-down Budgeting and Controls - Appropriations received by line ministries: - Score = 0 if line ministries receive lump sum appropriations without sub-limits or guidelines. - Score = 2 if appropriations specify only some types of expenditures (e.g., capital expenditures). - Score = 4 if appropriations specify all expenditures. - Sources: OECD, FAD economists, and IMF country economists. - Existence and effectiveness of internal controls: - Score = 0 if commitment control systems are generally lacking or routinely violated. - Score = 2 if such controls exist but do not cover all expenditures or are occasionally violated. - Score = 4 if comprehensive expenditure commitment controls are in place and compliance with rules is high. - Sources: PEFA reports and ROSC. - In-year amendments to the budget: - Score = 0 if no rules or rules are rudimentary, unclear and not respected. - Score = 1.33 if rules exist but are often respected and allow for big reallocations. - Score = 2.67 if clear rules exist and are usually respected. - Score = 4 if clear rules exist which place strict limits on extent and nature of amendments, and are consistently respected. - Sources: PEFA reports and OECD. - Internal audit: - Score = 0 if there is no internal audit system. - Score = 2 if internal audits are functional for some entities and partially meet recognized international standards. - Score = 4 if internal audits exist for all entities and generally meet international standards. - Sources: OECD, PEFA reports, and ROSC. - External audit: - Score = 0 if audits cover less than 50 percent of total central government expenditures. - Score = 2 if at least 50 percent or more of total central government expenditures are audited annually. - Score = 4 if all expenditures are audited and the full range of financial audits is in compliance with auditing standards. - Sources: PEFA reports and IBP. ### Budget Implementation — Sustainability, Debt, and Arrears - Monitoring of public enterprises and subnational governments: - Score = 0 if no annual monitoring or it is significantly incomplete. - Score = 2 if partial monitoring and oversight of public enterprises and fiscal position of subnational governments. - Score = 4 if all major public enterprises submit fiscal reports, including annual audited accounts, to central government and net fiscal position of all levels of subnational governments is monitored at least annually. - Sources: PEFA reports and ROSC. - Recording and management of domestic and external debt: - Score = 0 if data on domestic and external debt are incomplete and inaccurate to a significant degree. - Score = 2 if such data are complete, updated and reconciled at least annually. - Score = 4 if data are complete, updated and reconciled on a monthly/quarterly basis with comprehensive reports produced. - Sources: PEFA reports and ROSC. - Stock and monitoring of expenditure arrears: - Score = 0 if stock of arrears exceeds 10 percent of total expenditure, or no data are available on arrears. - Score = 2 if stock of arrears is between 2–10 percent of total budgeted expenditure and partial data is available. - Score = 4 if there are no arrears, or the stock of arrears is low (below 2 percent of total expenditure), and comprehensive data are available. - Sources: PEFA reports. ### Transparency — Accounting, Reporting, and Audit - Accounting Standards: - Score = 0 if MoF or CBA determine standards, or standards are determined on an ad-hoc basis. - Score = 2 if standards are determined by an advisory board established by law or an independent standards board. - Score = 4 if generally accepted international accounting standards are followed. - Sources: OECD, FAD economists, and IMF country economists. - Completeness and timeliness of financial statements: - Score = 0 if a consolidated financial statement is not prepared or essential information is missing, and not submitted for external audit within 15 months of fiscal year end. - Score = 2 if consolidated but incomplete statement is prepared annually and made available for external audit within 10–15 months of year end. - Score = 4 if comprehensive consolidated statement is prepared annually and submitted for external audit within 6–10 months of year end. - Sources: PEFA reports and ROSC. - Legislative scrutiny of external audit: - Score = 0 if there is no examination of audit reports by the legislature. - Score = 2 if partial scrutiny by the legislature, but often with considerable delay. - Score = 4 if scrutiny of audit reports is comprehensive and generally completed within 3 months. - Sources: PEFA reports and IBP. - Scope and timeliness of in-year reports: - Score = 0 if quarterly reports are not prepared, or are issued with significant delay and do not allow comparison with original budget. - Score = 2 if reports are prepared quarterly but issued within 6–8 weeks of quarter-end and partial comparison to original budget is possible. - Score = 4 if reports are prepared quarterly or more frequently and issued within 4 weeks of quarter-end, and classification allows direct comparison with original budget. - Sources: PEFA reports, IBP, and ROSC. - Publication and scope of year-end reports: - Score = 0 if report not released or no explanation of differences between enacted expenditures and outcomes is provided. - Score = 2 if annual report is published but limited explanation of differences between enacted and actual expenditure levels is provided. - Score = 4 if annual report is published and there is detailed explanation of differences between enacted expenditure levels and actual outcomes. - Sources: IBP, ROSC, and IMF country economists. ### Appendix III. Sensitivity Analysis — robustness of constructed indices - Alternatives considered: - Indices with different weights across stages and categories, reflecting expert judgment that planning and implementation stages are relatively more important than approval; rules and controls and comprehensiveness are more critical across categories. - Indices with different assumptions about substitutability using a CES-type aggregation with parameter α: - Indices for stages: X_stage(·) = [ (1/3) * Σ (sub-index^α) ]^(1/α) with α ≠ 1 altering substitutability. - Indices for categories: X_category(·) = [ (1/5) * Σ (sub-index^α) ]^(1/α). - Alternative α values used: 0.4 and 2 (following Alesina et al. (1999)). - Effect of α: - α > 1: aggregate score higher for countries with high scores in some components and low in others. - 0 < α < 1: aggregate score lower for countries with high scores in some components and low in others; more balanced scores favored. - Multiplicative indices to capture complementarity between stages or categories: - Stage multiplicative form: X = (X_planning * X_approval * X_implementation)^(1/3). - Category multiplicative form: analogous multiplicative aggregation across categories with root of order equal to number of categories. - Caveat: multiplicative aggregation is sensitive to specification errors and penalizes a falsely low score in any single component. - Empirical findings: - Table A1 reports Spearman rank correlations for overall stage and category indices under alternative aggregations. - Spearman rank correlations between original additive indices and alternatives (including α = 0.4 and α = 2, and multiplicative forms) are high and significant at the one percent level. - Table A2 presents similar Spearman rank correlations for sub-indices; all correlations are significant at the one percent level. - Conclusion: country rankings are robust to alternative weighting and substitutability specifications; the original additive aggregation procedure is appropriate for empirical analysis and simple additive sub-indices can be utilized. *Source: Appendix II and Appendix III, _wp1080 - Appendix II. Dimensions, Scoring Methodology, and Sources of Data* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp1080.pdf_