The Secret Weapon for Fiscal Strength—Strong Budget Institutions
IMF Blog, May 29, 2014
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Bibliographic details
- Authors: Holger van Eden
- Published: May 29, 2014
Core findings on institutions and fiscal performance
- The study identifies 12 institutions that are commonly viewed as important for the effectiveness of fiscal policy.
- Institutions are grouped into three groups: those that help identify fiscal challenges, those that help develop appropriate adjustment plans, and those that support implementation of adjustment plans.
- Evidence from G-20 country analysis indicates:
- Countries with stronger institutions overall seem to recognize the need for fiscal adjustment, in line with the IMF’s assessment of the required consolidation effort.
- Countries with strong implementation institutions carry out much more of their announced adjustment plans than countries with weak institutions.
- Countries with strong budgetary planning institutions tend to develop and announce their adjustment strategies more rapidly.
- Countries with strong planning institutions protect capital expenditure more successfully during consolidation.
Examples of institutional functions and assessment approach
- The fiscal reporting system is highlighted as an important institution for identifying fiscal difficulties; weaknesses include incomplete coverage of the public sector, untimely reporting, and limited assurances of data integrity.
- For all 12 institutions the study set out criteria to assess relative institutional strength, encompassing processes, procedures, systems, legal frameworks, and organizational entities.
Evidence limitations and caveats
- The analysis covers a relatively small group of countries and a short period: 2010–13.
- Establishing causality in institutional analysis remains problematic.
- The analysis does not determine whether the fiscal policy effort undertaken was appropriate for the stage of the economic cycle.
- Further analysis and confirmation of results will be necessary in the coming years.
Reform patterns across G-20 countries
- G-20 countries are pursuing reforms, especially those under fiscal pressure after the crisis, but reform effort has been uneven across country groupings and across institutions.
- Advanced G-20 economies, especially those in Europe, and countries with specific consolidation plans were the strongest reformers.
- Emerging market economies did relatively well on improvements in fiscal risk management and performance orientation.
- Overall there has been a widening of the gap in institutional strength between advanced and emerging G-20 countries.
Popular reforms and those lagging
- Popular and consequential reforms since the crisis include:
- Independent fiscal agencies
- Fiscal objectives and rules
- Medium-term budgetary framework
- These reforms have contributed to less biased economic forecasts, more credible fiscal frameworks, and more sustainable fiscal policy; they also facilitated fiscal policy coordination in the eurozone.
- Reforms requiring greater administrative or political effort have seen less progress, including:
- Changes in fiscal reporting
- Improvements in fiscal risk management
- Changes to intergovernmental financial arrangements
- Extra-budgetary funds and other earmarks, captured under the “budget unity” institution, continue to limit budget flexibility in many countries.
Policy implication and priorities
- The country evaluations set out priorities for further institutional reform for each of the G-20 countries.
- Overall message: institutions matter, and G-20 countries would do well to continue to reinforce their institutional architecture for fiscal policymaking to improve recognition of fiscal challenges, design of adjustment strategies, and implementation of consolidation plans.
Source: IMF blog—The Secret Weapon for Fiscal Strength—Strong Budget Institutions
Content in this bundle
- Budget Institutions in G-20 Countries: An Update; IMF Policy Paper, April 7, 2014
- Budget Institutions in G-20 Countries: Country Evaluations; IMF Policy Paper, April 7, 2014
