THE CHANGING ROLE OF PARLIAMENT IN THE BUDGET PROCESS 8-9 October - - PDF document

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INTERNATIONAL SYMPOSIUM On

THE CHANGING ROLE OF PARLIAMENT IN THE BUDGET PROCESS

8-9 October 2008 Korel Thermal Hotel, Afyonkarahisar, Turkey Session Four

The Monitoring Function of the Parliament in the Budget Implementing Stage: The Role of the Committees and the Budgetary Research Capacity

Strengthening parliamentary capacity for scrutiny and oversight of the budget: experiences from the Netherlands by

Jan Pieter LINGEN

Head of Private Office/Netherlands, European Court of Auditors

2 Summary There are many different ways parliaments can exercise their rights of approval of the budget, of amending budgets, of monitoring and controlling the implementation of the budget and of giving discharge to the implementing authority. In this paper some experiences will be presented from the Netherlands. After a short overview of the constitutional and political setting of parliament in the Netherlands, the different roles and functions of committees are described, focussing on budgetary scrutiny and oversight. These are sketched against the background given by two major programmes that substantially strengthened the grip of Dutch parliament on the budget: the action plan to improve the financial information and the financial control infrastructure from 1987

• nwards, and the improvement of the quality of budgetary information and accounting

information through the Dutch type of performance based budgeting: policy budgeting and policy accounting. Both programmes were to a large extent successful thanks to the strategic partnership of parliament (and mainly its budgetary control committee), the Court of Audit, and the Ministry of

• Finance. They supported each other and kept each other awake. The budgetary control committee

inside parliament was largely able to maintain the balance between its own competence and the competences of standing committees, contributing to the strengthening of budgetary scrutiny mainly through its advisory role carried out by its budgetary expert staff. The committee, according to the rule of procedure responsible for the contacts with the Court of Audit, was also able to strengthen its relations with the Court, whilst at the same time the Court moved into the direction of working closely together with parliament as its main client, without compromising its independence. The Dutch model is not a model to be copied - but it probably contains elements that can inspire

• ther parliaments making efforts to strengthen their budgetary scrutiny and oversight function.

Biography Jan Pieter Lingen (1950) studied social geography at the Free University in Amsterdam. He started his career at the Royal Tropical Institute, and since 1980 worked as an assistant to the Second Chamber of Dutch Parliament, first for the Development Assistance Committee, and later for the Standing Committee on Finance and the Budgetary Control Committee. In 1998 he was appointed political advisor to the State Secretary for Health Care. In 2000 he joined the European Court of Auditors as the Head of Cabinet of the Dutch Member of the Court. In that position he has been actively involved in numerous support and review activities in the area of audit and financial control, especially in candidate and potential candidate countries.

3 Introduction There are many different ways parliaments can exercise their rights of approval of the budget, of amending budgets, of monitoring and controlling the implementation of the budget and of giving discharge to the implementing authority. These differences may vary according to different constitutional arrangements, political culture, tradition and practices, and will often evolve over

• time. Ideal arrangements for effective monitoring and oversight do not exist: it very much

depends on the circumstances which arrangements are best suited for a given parliament to effectively exercise its functions of budgetary scrutiny and oversight. In order to select appropriate arrangements, it is useful to see how other parliaments have operated in this respect. In this paper some experiences will be presented from the Netherlands. The focus will be on the internal organisation of parliament and on its relations with the supreme audit institution and the ministry of finance in the Netherlands. These will be preceded by some general observations on government budgeting and budgetary management. General observations The budget It may be useful to recall the major principles of, and requirements for the budget in democracies: the budget should be public, the budget should be universal, including all expenditure and revenue separately, the budget should be authorized by the legislature before implementation, the budget should cover a fixed period of time (a year usually), and the budget should be presented in a clear and structured way. The budget should reflect in financial terms the political priorities adopted by

• parliament. It should therefore allow parliamentarians to recognize how these priorities have been

translated into budgetary terms. In his contribution to the World Bank reader on Budgeting and Budgetary Institutions, published in 2007, Jürgen von Hagen gives a brief overview of the literature on public finance in the context

• f fiscal performance1. He rightly states that the core of public finance is that some people spend
• ther people’s money and that in democracies voters delegate the power over public spending to

elected politicians: parliament's "power of the purse". In public finance theory the relationship between voters and politicians is defined as a principal-agent relationship: the voters give a mandate to politicians, politicians are under instruction of the voters. However, voters are not in a position to determine completely which projects politicians should spend public money on. In principle, this is counterbalanced by the possibility for voters to hold elected parliamentarians to account during the next elections. A similar relationship exists between elected politicians, parliamentarians, and government. Again, in democracies parliamentarians are to hold government to account for their acts, including public expenditure. This demonstrates the importance of the role of parliament in scrutinizing the budget and in keeping oversight of the implementation of the budget: on behalf of their voters parliamentarians are to see to it that public money is spent in a way corresponding to the wishes of

1 Budgeting institutions for better fiscal performance, in: Anwar Shah (ed.), Budgeting and Budgetary Institutions,

World Bank, Washington, 2007, p. 27-51.

4 the voters. But also parliamentarians are not in a position to determine completely how and on what public money is being spent. The challenge for parliament is to organize itself in such a way that in the relationship between parliament and government the gap between government and parliament in terms of information, resources and organization is reduced as far as possible. Although parliament in principle is in a disadvantageous situation, this may also counterbalanced by parliament's power to call for a confidence vote if it has such power and if it fundamentally disagrees with expenditure made by the government. The Netherlands The setting Dutch parliament, the States General, consists of two Houses. The Second Chamber (Lower House) with 150 members is elected directly, the First Chamber (Upper House) with 75 members is elected by the members of the provincial assemblies. The Second Chamber is the main political body, with extensive rights (absolute right of information, right to adopt, change, or reject draft laws, including budget laws, right of initiative to propose laws, right to call ministers to hearings

• r meetings, right of parliamentary enquiry with the obligation for everybody to appear as a

witness, to name a few. The First Chamber does not have the right to amend laws, it can only adopt or reject a draft law. The First Chamber usually does not play a major political role, it accepts that the Second Chamber with its direct mandate from the voters, is the main political body. Within the Second Chamber the work is organized in a committee structure. Standing committees (or sectoral committees) exist for policy areas, largely along the lines of ministerial departments

• r ministerial portfolio's. Parliamentary control is thus to a large extent exercised by standing

committees on the respective departments and their political bosses. The committees scrutinize draft laws, hold policy debates with the responsible minister(s) and also scrutinize draft budgets, which have the formal format of a draft law. There have never been majority parties in the Netherlands: the political landscape is rather fragmented, with nowadays 11 political parties represented in the Second Chamber. Governments are therefore always coalition governments, which can only function properly and stably on the basis of rather detailed programme agreements at the beginning of their term. These programmes are formally programmes of the cabinet, the government, but are materially and thus politically supported by the political parties in parliament that form the coalition government. These coalition programmes have a big financial component. Fiscal policy objectives are laid down, like budget deficit or surplus goals, funding and cut back priorities with amounts to be achieved spelled out, tax proposals, etc. The financial component of such coalition programmes are analysed by the Central Planning Bureau, an independent financial and economic research institution, and their comments are made public2. In fact, critical comments are usually prevented

2 The Central Planning Bureau, established in 1945, formally is a part of the Minister of Economic Affairs, which

secures access to budget and policy proposals and not yet disclosed data. However, it is functionally independent, and widely respected as an independent economic policy analysis institute. It’s about 150 staff are engaged in academic research on economic policy – not on planning the economy as the name of the Bureau would suggest. In the budget process the Bureau analyses policy proposals and amongst others translates those into budgetary terms. See for more information CPB’s website: http://www.cpb.nl/eng.

5 by the political parties negotiating on a coalition programme by modifying the contents in such a way that the Central Planning Bureau is satisfied. In the beginning of the 1980's the annual budget deficit increased to highs never witnessed before. It reached 8,3% of GDP in 1983. It was realized, at least by most of the financial experts that severe measures needed to be undertaken in order to stop the derailment of public finances. Due to economic slow down, leading to lower tax revenue and higher expenditure on social benefits, and fierce opposition from all sorts of interest groups and their political allies in parliament the budget process became chaotic or at least turbulent. What triggered the improvement of parliamentary oversight of the budget in the late 80-ies? In 1983 the largest ship building company in the Netherlands, RSV, went broke although the Dutch government had subsidized the company during a number of years, totalling € 1,2 billion. Parliament started an enquiry and concluded that apart from not having been informed adequately by government it also lacked sufficient expertise to monitor budget implementation and identify holes in the information supplied by government. This enquiry led to the establishment in 1985 of a committee of parliamentarians that proposed a number of improvements in parliamentary procedures and parliamentary support. These improvements were introduced from 1986 onwards. One of these measures was the introduction of a permanent staff of three budget experts for the parliamentary committee on budgetary control. This was the starting point for substantial strengthening of parliamentary budgetary control in the Netherlands. The establishment of this support unit coincided with the initiative by parliament to speed up the submission of the accounts and to pay more attention to the discharge procedure. In 1985 the accounts for the budget year 1978 were submitted to parliament demonstrating an enormous negligence in making up the accounts, a negligence that was also demonstrated by the lack of reliable, complete, and up to date financial information. This was considered unacceptable by

• parliament. Also, the Dutch Supreme Audit Institution, the Court of Audit, in its Annual Report

published in 1985 had drawn attention to these shortcomings in the basic financial information

• structure. In 1985 parliament had therefore requested radical improvements of the financial

information and the financial control and audit infrastructure3. This resulted in an action plan submitted to parliament in the beginning of 1987. The action plan and its implementation: contents and role of parliament

3 Financial control and audit are different animals, but they are nevertheless closely related. Financial control is a

component of internal control, which can be defined as a process effected by an organization's structure, work and authority flows, people and management information systems designed to help the organization accomplish its specific goals or objectives. It is a means by which an organization's resources are directed, monitored, and measured. Audit is an independent assessment of the functioning of internal (financial) control. Internal audit is a function within an organization, with a high degree of independence and professionalism, assessing internal control and giving advice to management on risk strategy and governance issues. As a management tool it is part of the internal control

• arrangements. External audit is from a legal point of view more independent, as it is situated outside the organization,

and aims at assessing the reliability of financial and performance information submitted by an organization, and issuing public opinions on that basis. It is an essential ingredient for a system of confidence and accountability.

6 The action plan had four main components4: 1 administrative organization and internal control: laying the foundations for orderly and effective budgetary management, including an integrated accounting system based on both commitments and cash payments. 2 improved information provision: efficient and real time information concerning budget preparation, budget implementation and accounting within ministries, between ministries and the ministry of finance, and between government and parliament. 3 budget presentation: clearer presentation and more elaborated division of the budget in budget lines and categories, enabling parliament to exercise its budget right more easily and effectively. 4 audit: the introduction of internal audit in a structured way in all ministries, with the requirement that all ministerial accounts were to be accompanied by an audit opinion from the internal audit department. The Court of Audit, as the in dependent external auditor, could progressively rely on the audit work carried out by the internal audit departments, avoiding overlap. Success factors in the implementation of this action plan were the commitment of the three major players: the ministry of finance, the Court of Audit, and the parliamentary committee on budgetary control. It is important to stress that the whole committee supported this action plan, irrespective of political affiliation. The three major players supported each other and kept each

• ther awake. The ministry of finance had an additional argument for the action programme, not

necessarily shared by the two other major players. The ministry of finance hoped that the implementation of the action programme would strengthen its position towards line ministries, by laying the foundation for more fiscal discipline by simply improving its information position. This made it acceptable for the ministry of finance that the action programme as such was quite costly, and it also led to its position that no top down approach, with instructions from the ministry of finance, should be followed. Instead line ministries were free to choose the IT-solutions they considered best suited, as long as these solutions led to the desired result in terms of information to be submitted to the ministry of finance and parliament. It is interesting to note that this strategy proved successful. The “investment” made by the ministry of finance, allowing relatively high costs for developing tailor made solutions per line ministry, did indeed create sufficient support from line ministries, without which the action programme could never have been successfully implemented. Within Dutch parliament (Lower House), the budgetary control committee (BCC) took the lead, but tried to involve the standing committees as much as possible. The BCC, supported by its expert staff, developed procedures for budgetary scrutiny by the responsible standing committees. Budget proposals for individual ministries were analysed by this staff and their reports with suggestions for questions were circulated amongst the members of the relevant standing committee to help them prepare for a public committee meeting with the minister and his civil

4 See for a more detailed description: J.K.T. Postma, The accounting system operation: laborious, time-consuming,

but successful, in: I.C. Thijsseling and P.G.J. van Uden, Made in Holland, Dutch public finance: lessons and experiences, Sdu, The Hague 2004, pp. 35-44.

7

• servants. During these meetings the members of parliament asked for explanations, for instance

for remarkable differences in a specific budget line from the current budget in comparison with the budget proposal for the next budget year, both for expenditure and for revenue. The minister, supported by his civil servants were forced to go relatively deep into details. Replies were given either orally, or in writing after the meeting. This served at least one purpose: at the highest political and civil service level everybody was forced to learn about the set up of the budget and the technicalities of and tricks behind the forecasts in the budget. It has also led to more and better articulated proposals from parliamentarians to amend the budget, and raised the profile of both politicians and civil servants dealing with public finance. Particularly important was the link with the action plan to improve financial information and financial control. The link ensured that feed back was given from parliament to government during the implementation, enabling fine-tuning between the two branches of the legislature, and further stimulating each other's interest in the issues at stake. This resulted in a lasting improvement of the financial information infrastructure, a raised awareness of the regular and effective budget implementation, more fiscal discipline, and greater attention for accountability. The budgetary control committee: its role and functioning The committee has two major roles: it is on the basis of the rules of procedure of the parliament the committee responsible for the handling of reports from the Court of Audit, for legislation in the area of the budget and budgetary control, and for the general discharge. The second role is to serve the other committees in giving them advice, both on own initiative and on request, in budgetary and budgetary control matters. This second role is more complicated as it may interfere with the responsibilities of other parliamentary committees. This is partly a natural tension between the generalists in a budgetary control committee and the specialists in the standing committees, more committed to proposing new plans and expenditure programmes than in monitoring the implementation of previously adopted policies. But it is also due to the competition between politicians and between committees on influence and power. To a large extent this second role is mandated to the staff of the committee. Under the umbrella of the political power of the committee, the staff members prepare reports on budget proposals, audit reports, but also on government proposals for major infrastructural projects or major policy and policy instrument changes. Standing committees can propose to parliament to designate such proposals as "grand project". In the specific procedure for these projects, the budgetary control committee and its staff play an important supportive role, but the major characteristic of the procedure is that a detailed information structure is agreed between the responsible ministry and the responsible standing committee enabling the latter to carry out its control function properly. Part of this agreement is the inclusion of independent checks on the reliability of the information by auditors. This gives the parliamentary committee an additional assurance that the information

• n which it is to base its decisions (agree with a proposal, disagree, agree with proposed

amendments - including budget - during implementation) is correct. After parliament has agreed with a project proposal and its financial consequences, the procedure foresees in regular monitoring information on the implementation of a project. This information is analysed by the expert staff of the budgetary control committee, and the responsible standing committee uses these analyses in hearings with the responsible minister.

8 During the late eighties, when the action plan for improvement of the financial information structure and financial control infrastructure was being implemented, the committee took the initiative to support all members of parliament and their assistants in budgetary affairs by providing them the opportunity to follow courses on how to read, understand, and amend budgets. These courses were given by the expert staff of the committee together with experts from the Court of Audit, the Ministry of Finance, and Financial directorates from other ministries. Also parliamentary journalists were invited to attend. Ever since, after elections, similar courses are

• ffered to all (new) members of Parliament, and it certainly contributed to greater awareness

amongst parliamentarians of their fundamental budget rights and increased their knowledge on how to exercise these rights in practice. The lectures were assembled in a book that is regularly updated and still serves as an introduction to the budget.5 The finance committee The Standing committee on finance is the responsible committee for setting the overall fiscal

• policy. The committee consists of all financial spokespersons of the political parties in the Second

Chamber, and deals as well with tax legislation, banking and financial markets. The most important annual debate on fiscal policy and the budget in general is on the budget memorandum submitted by the Minister of Finance the third Tuesday in September. At the same time all draft budget proposals for the individual ministries are submitted to parliament. On the basis of the outcome of the general debate modifications are presented to the draft budget

• proposals. These changes are however proportionally rather small. The finance committee has two

more opportunities for a general budget debate, in June when the Spring Budget Memorandum is submitted, and in December after the Autumn Budget Memorandum is presented. Obviously, the December debate cannot lead to any changes in the budget for the current budget year (Jan-Dec), but it may give some guidance for changes in the budget of the next year. The financial spokespersons of any political group are member of the standing committee on

• finance. Within their political group they fulfil a certain “minister of finance” role. Usually,

certainly in the larger political groups, they have a responsibility for keeping the fiscal discipline within their political group. They are to control that fellow members of their group do not go

• utside the budgetary framework the party has set for itself.

Given the political context with a coalition government, the financial specialists of the governing political groups together with the group leaders negotiate what changes they want to have in the draft budget. The outcome of these negotiations more or less determine the result of the general budget debate, but opposition parties can be successful in amending the budget if they are able to

• rganize sufficient political support, and if they follow the secret rule of the game: never propose

to increase a budget line without indicating which budget you want to reduce in order to have a neutral outcome in the end. This is so to say part of the political culture of the Netherlands, and it is hard for political groups to take a different route and be successful in the end. The role of sectoral committees

5 See for the latest edition: Toegang tot de Rijksbegroting ("Access to the Government Budget"), 9e geheel herziene

druk, SDU, Den Haag, 2005.

9 With the ceilings set after the general budget debate, it is the role of the sectoral committees to scrutinize the budget proposal for the ministry they are competent for. Before the debate in the plenary a committee meeting is held where the draft budget is carefully analysed at a sometimes quite detailed level. The debate is prepared through written questions by the committee members and answers from the ministry. As indicated before, for their questions the committee members can use the analysis prepared by the staff of the budgetary control committee. Of course, such analysis is a technical one that does not go into the political debate. However, the analysis will not avoid sensitive issues if from the point of view of budgetary control it needs to be ensured that members of the sectoral committee should at least be aware. One of the items especially interesting for members of parliament is to know where possible sources are to fund more expenditure for their policy priorities. A careful analysis of previous forecasts, realizations and reasons for differences in the budget documents may give rise to the identification of possible structural overestimates for specific expenditure budget lines, or underestimates for certain revenue budget lines. From the parliamentary point of view, these are

• pportunities to propose amendments to the budget making the budget right of parliament come to
• life. To give an example: in the beginning of the 1990’s the ministry of justice structurally

underestimated the revenue from fines in the draft budget, obviously to create a margin for their

• wn purpose. Parliament however, having identified this feature, used this “secret” room for its
• wn policy priorities and amended the budget accordingly.

Relation with the Court of Audit Over the years the relations between parliament and the Court of Audit have substantially improved and intensified. The Court of Audit, with its constitutionally guaranteed independence, has since the beginning of the 1980-ies become more and more aware that the impact of its audits can be increased through fostering the relations with parliament, for instance by looking more carefully to the political agenda when selecting and planning its audits. Suggestions from parliament for selected audit tasks are welcomed, and taken on board if it fits into the overall audit strategy of the Court and if resources allow. Also requests for specific audits, usually on politically sensitive issues, are generally accepted. For these requests a specific procedure has been established in the rules of procedure of parliament. In this procedure the budgetary control committee is to consult the Court on a draft request in order to make sure that the Court is competent to carry out an audit and to agree on audit questions and time frame. This type of request audits takes place quite frequently, and both demonstrates and maintains the good relationship. Another demonstration of the good relationship is the regular secondment of staff from the Court

• f Audit to the support staff of the budgetary control committee. It increases the capacity of this

budgetary support unit, and also allows auditors from the Court of audit to get more acquainted with the political flavour of working in the political environment, contributing to increased sensitivity for the needs of parliamentarians. From policy budget to policy accountability In 1997 the BCC in parliament, as a component of its work programme, started an initiative to speed up the submission of the accounts and to increase its information quality and value. At that time accounts were submitted together with the draft budget at the third Tuesday in September,

10 already an enormous improvement compared with the initial situation in 1985. In principle, this date could offer the opportunity to discuss the draft budget taking into account the implementation

• f the budget the year before. But in practice the attention focussed almost entirely on the draft

budget, and the accounts did not receive the attention it merited. The BCC initiated an informal working group, chaired by one of its staff, and composed of representatives from the ministry of finance, the Court of Audit, and high level civil servants from several line ministries. This working group delivered a report, “the annual report in the political arena”, which, as the title already suggests, contained a number of proposals to increase the political impact of the accounts and the accompanying annual report. The report, published in 19986, started at the beginning: the budget itself. In order to have relevant and politically interesting information on the performance of government in the accounts, the budget itself should contain quantified policy objectives and performance indicators. Only on the basis of explicitly agreed policy objectives and performance indicators would it be possible to effectively make government accountable for its policy performance. Again the partnership between parliament, the Court of Audit and the Ministry of Finance proved to be successful - at least initially. In 1999 the Minister of Finance submitted detailed proposals

• n how to improve the information value and accessibility of budget and accounting documents,

with a view of putting policy budget and policy accountability at the centre. This was to be realized by putting the following questions for the budget to the forefront: what do we want to achieve, what do we need to do to achieve it, and what should it cost. Accordingly, in the accounting documents the following questions should be answered: have we achieved what we intended to achieve, have we done what we should have done to achieve it, and did it cost what we had expected. In order to create the opportunity for full political attention for the accounts the budget cycle was to be shortened aiming at the submission of the accounts, plus the accompanying reports and opinions from the Court of Audit on the third Wednesday in May. The first full implementation of this new procedure, with the accounts based on the new principles took place in May 2003. But the political attention could not be maintained. Since then new initiatives have been undertaken to try to increase the political attention, with some limited result in May 2008 when the 2007 accounts were debated. Concluding remarks Parliamentary scrutiny of the budget in the Netherlands has been strengthened substantially in the past twenty years, to a large extent because parliament itself realized that it was to its advantage to take its budget rights more seriously. At the same time, however, continuous attention is needed to maintain the discipline needed to continue with this kind of parliamentary work. The role of the budgetary control committee in the Dutch Second Chamber has been crucial, especially through its support services for standing committees. It has tried to keep the balance between standing committees and itself, not interfering with issues that are the competence of other committees, but stimulating these to take up their own role in the budget process. An important feature has been that the budgetary control committee and the standing committee of Finance have never competed with each other - maybe because the composition of both committees is to a large extent the same.

6 Werkgroep Kwaliteit financiële verantwoordingen, Jaarverslag in de politieke arena. Naar een nieuwe stijl van

verantwoorden, Den Haag 1998.

11 The way Dutch parliament has organized its procedures for budgetary scrutiny and oversight is anything but permanent. Adaptation is regularly needed, already because the political environment is a very dynamic one. The "Dutch model" is certainly not a panacea for any other

• parliament. But elements that have worked in the Netherlands may work as well in other
• parliaments. That's why it is useful to know a bit more about the Dutch experience. I hope this

paper fulfils that role.

12 Summary There are many different ways parliaments can exercise their rights of approval of the budget, of amending budgets, of monitoring and controlling the implementation of the budget and of giving discharge to the implementing authority. In this paper some experiences will be presented from the Netherlands. After a short overview of the constitutional and political setting of parliament in the Netherlands, the different roles and functions of committees are described, focussing on budgetary scrutiny and oversight. These are sketched against the background given by two major programmes that substantially strengthened the grip of Dutch parliament on the budget: the action plan to improve the financial information and the financial control infrastructure from 1987

• nwards, and the improvement of the quality of budgetary information and accounting

information through the Dutch type of performance based budgeting: policy budgeting and policy accounting. Both programmes were to a large extent successful thanks to the strategic partnership of parliament (and mainly its budgetary control committee), the Court of Audit, and the Ministry of

• Finance. They supported each other and kept each other awake. The budgetary control committee

inside parliament was largely able to maintain the balance between its own competence and the competences of standing committees, contributing to the strengthening of budgetary scrutiny mainly through its advisory role carried out by its budgetary expert staff. The committee, according to the rule of procedure responsible for the contacts with the Court of Audit, was also able to strengthen its relations with the Court, whilst at the same time the Court moved into the direction of working closely together with parliament as its main client, without compromising its independence. The Dutch model is not a model to be copied - but it probably contains elements that can inspire

• ther parliaments making efforts to strengthen their budgetary scrutiny and oversight function.