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

SIGMA, Support for Improvement in Governance and Management A joint initiative of the OECD and the European Union, principally financed by the EU

This document has been produced with the financial assistance of the European Union. The views expressed herein are those of the author, and can in no way be taken to reflect the official opinion

• f the European Union, and do not necessarily reflect the views of the OECD and its member countries or of the beneficiary countries participating in the SIGMA Programme

INTERNATIONAL SYMPOSIUM On

THE CHANGING ROLE OF PARLIAMENT IN THE BUDGET PROCESS

8-9 October 2008 Korel Thermal Hotel, Afyonkarahisar,

Session Three Accountability of Government and Financial Transparency

by

Manuela FERREIRA LEITE Professor, Former Minister of Finance, Portugal

2 Summary The importance of the role of Parliament in budgeting control has been recognised for a long time. Nevertheless, there is a recent interest in promoting public access to information on budget and financial activities, as a means of ensuring that governments submit their reports about the state of public accounts. In order to meet such requirements, deep alterations have been introduced in the budgeting process and in accounting systems. Nevertheless, there is a current tendency to adopt

• pposite procedures and Parliaments should be fully aware of such strategies. In fact, the heavy

pressure to reduce budget deficits has brought about the development of procedures leading both to a deliberate underestimate of public expenditure and to project finance initiatives. The former

• bjectively aim at turning the budgeting process less transparent. The latter practises are decisive

instruments in the structural alteration of public sector management but they demand a minimum knowledge of associated charges and risks, which is seldom the case. In the context of present day budget control, these are the major challenges to which Parliaments must respond. Biography Manuela Ferreira Leite, economist, graduated from the Institute of Economic and Financial

• Sciences. She is a Professor at the Superior Institute of Management from 2005. From 1986-90

Ms Ferreira Leite was General Director of Public Accounting in the Ministry of Finance and held the position of Secretary of State of the Budget from 1990-91 then was Minister of State and

• Finances. From 1993-95 she was Minister of Education and during the period 1995-99 she was

Chair of the Economic Finance and Planning Committee of the Portuguese Parliament. From 2006-2008 Ms Ferreira Leite was a Member of the State Council and she is currently President of the PSD as from May 2008.

3

• I. INTRODUCTION

Parliament is, par excellence, the institution that exercises control over a government, especially its financial activities. There has consequently been a growing movement worldwide demanding that political power should be exercised in an increasingly open and transparent manner. This movement is manifest in people’s growing desire to be able to get precise, detailed and up-to-date information about their governments’ financial activities. And this is hardly surprising seeing that it’s only with this information that they can evaluate not just a government’s political intentions and priorities but also how it fulfils its obligation to render accounts to parliament. It is obvious that people can only be in a position to understand and evaluate the political decisions that have an impact on their daily lives if they have timely access to this information. The issue only became really important and drew the attention of the international community when a series of financial crises during the 1990s made it clear that a great deal of what was happening was due to a lack of transparency and accountability on the part of governments of countries affected by these crises. In response to these concerns, the International Budget Project-IBP emerged. It was set up in 1997 in order to help a large number of organisations in civil society, journalists, researchers, political leaders and specialists in economic development, who wanted to identify and secure effective financial responsibility in public sectors and a better way to use society’s resources. In that work, attempts were made to evaluate to what degree different governments were willing to make budget documents known and to present relevant information so that policies could be examined, as well as how governments encouraged people and the legislative powers to participate in the budget debate. In the last few years, the IBP has worked with civil society and academic partners in 59 countries to collect comparative information in a questionnaire and analyse the feedback. The questionnaire consists of 122 multiple-choice questions and is the first to offer an independent, non-governmental view of budget transparency of the respective central governments. The questionnaire considers key documents in the budget process that governments should make known during the annual budget circle. I believe the most important of these documents to be:

• The macro-economic framework that underpins the planning of the budget.
• The budget proposal.

4

• The in-year report.
• The mid-year assessment of budget execution.
• The end-of-year report
• The Auditor’s report

This work is not just restricted to examining the type of information that exists, but of information that is publicly available, that is to say, information that each and every citizen can obtain on request from the authorities that issued the document. It was seen that certain countries regularly make documents about the budget available and present very comprehensive information on the whole, as is the case of France, New Zealand, Slovenia, South Africa, the United Kingdom and the United States. Even so, there are also countries that provide important information but could still improve on this, as is the case of Sweden and Norway, especially by means of reports relating to mid-year budget revision. While governments in other countries fail to provide both the public and parliament with information that would allow the wider public to understand the budgets and the policies underpinning them. But the most noteworthy conclusion was that improvement in transparency is limited in most countries and that this depended basically on the willingness of the government to be accountable to its citizens. In fact, it is always possible to improve significantly in transparency, even with few resources and in short periods of time. Apart from this, serious lacunae were found in external audit institutions. In many countries neither executive nor legislative powers seem inclined to use the means available to them to involve and inform people about the budgets planned for them. Besides, governments often fail to make information available to the public, although this information already exists for internal use or even for investors. In other words, transparency and accountability can be improved on if existing information were simply made known to the public at large. This investigation substantiates the suspicion that when governments fail to provide information, it’s more a decision to withhold information than any impossibility or incapacity to produce it. Many countries now make their budget documents available on the Internet. The Internet has the advantage of being an efficient way for the government to make numerous and diverse facts known to interested parties.

5 However, governments should do a great deal more in order to pass on information especially bearing in mind people who have no access to the Internet, and there are still many of them. In any case, budgets are very rarely explained in a way that a layperson understands. Because of this, civil society organisations all over the world have shown a growing interest in laws on “the right to information”. This is the first essential step towards strengthening the capacity for people to obtain, in practice, the information they want. Stronger commitment to improving services is arousing people’s interest in getting detailed information on matters such as school fees, for instance, or the healthcare centre in their neighbourhood. This detailed information is not usually included in documents that accompany a country’s budget.

• II. BUDGET PROCESS REFORMS

What I believe to be of the greatest relevance in this matter is the fact that these reforms, and an awareness of their importance, are now extending to most countries, including to less developed countries that weren’t receptive to these questions in the past. Nowadays, there is a growing awareness that good governance is essential to progress, particularly in countries with few natural resources. Many people now realise that it’s with this capital that they earn the trust and credibility that allows them to build partnerships and mobilise the human, financial and institutional resources that are needed for development. Many people have become aware that it is only when these needs are met that it’s possible to attract necessary foreign investments for countries to develop their economy. In fact, the international community has been looking at good governance as an increasingly significant key factor in economic and social development. This observation is becoming more and more influential and decisive in advancing a flow of resources from developed countries to less developed ones Today, an increasing number of developed countries and international financial institutions channel, or not, resources to developing countries taking into consideration, as one of their basic decision-making criteria, the quality of public management. Transparency in public management is one of the key components of good governance and is of enormous importance in fighting corruption.

6 This being the case, for countries that need foreign investment to accelerate their development, having a high level of good management is a comparatively important advantage, not only to mobilise resources for development but mainly to attract and promote investment. Consequently, the following are of special importance: a) The financial regime of public services. b) The chart of accounts. c) Strengthening the role of the Audit Court. d) Public accounting legislation is based on principles of legality, transparency, responsibility and the separation of functions that are usually associated with setting up the functions of “financial comptroller”. e) Budget framework diplomas that allow budget regulations to be better suited to new accounting principles and the adaptation of new instruments and mechanisms of management, from the standpoint of the introduction of a Budget-Programme, that is to say, management by objectives. f) Insofar as better management of public money, it is also important to modernise the systems of public acquisitions and contracts and set up a priori and a posteriori control system, thereby reinforcing mechanisms for the prevention of corruption. g) Developing activities with inspection functions to reinforce the internal control of the State. One of the most visible results of good management is the change from the system of public aid by financing projects with assigned funds to a system of public aid by means of financing from the State Budget. This new mechanism of foreign financing, which can already be seen in some less developed countries, has substantially reduced costs linked with mechanisms for the prevention of corruption, usually adopted by foreign investors who worry that their money might disappear. It also ensures a more rational management of the State Treasury, avoiding delays in public works projects as a result of bureaucratic difficulties in paying back foreign investments. Many countries, however, have a legal framework in force which fails to ensure that there is transparency in the budget process, or participation, with accountability. One of the great weaknesses in a great deal of legislation currently, in force lies in the excessive powers given to the government, and especially the Minister of Finance, without there being proper monitoring systems. In many cases, there is no legal framework for fiscal discipline, public tenders and public debt management, which leads to budget overspending and then obtaining parliamentary approval with

7 the retroactive effects of extra-budgetary spending and the contracting of new domestic and foreign debts. Decisions on some expenses are taken in a rather ad hoc manner. Apart from this, the lack of information, or then inadequate information, about extra- governmental activities contributes towards the lack of transparency in the budget process. Information about additional expenses, and also about the capitalisation of public companies, is

• ften made known to the public a long time after the event.

For these reasons, parliament must be empowered to alter and approve budgets and play an active part in making decisions and supervising the budget. But the most important thing in the whole process is to realise that the responsibility to consolidate actions for financial reform lays in everyone’s hands, especially in those who are the main political actors, the deputies. Yet, it is undeniable that all reforms of budget processes and accounting systems that have been adopted in numerous countries move towards overcoming these questions and huge progress has been made.

• III. NEW CHALLENGES THAT BUDGET TRANSPARENCY CURRENTLY FACE

Despite all these indications and a growing awareness, that budgets must be presented with the greatest of transparency, the problem is still far from being solved. On the contrary, it continues in many countries and is even a growing source of dispute in parliaments. All budget forecasts, whether medium or long term, indicate the need for the state to reduce significantly the weight of public spending, especially public consumption, so that it can deal with spending linked with the aging population, which inevitably increases expenditure on pensions, healthcare and support for Third Agers, as well as on the public debt service. Structures for a budget framework to include these inter-temporal factors have yet to be created in many countries, and this has allowed too great a rise in public expenditure, which reaches levels that go beyond what the economy can sustain in the long term. This fact shows that current mechanisms are insufficient to frame and control the budget not only insofar as there is a “systematic failing to include certain expenditures in the budget”, but also and mainly for sustainable development of budgeted expenses. In fact, the tendency was for public services to grow above average economic growth during expansionist phases and reach levels that were difficult to lower. These rises eventually led to higher taxes, which, if maintained, could reach intolerable levels. As a result of efforts to frame the budget in the long term and assess the development of these kinds of expenses, all industrialised countries began to take steps to curb public expenditure.

8 This development is not always taken into consideration because of the economical situation and structural reasons. Consequently, a budget framework cannot be focused exclusively on the technical level with accounting that fails to honour commitments and, on the political level, debate cannot be restricted to short-term options about either revenue or expenditure. In fact, one of the most serious lacunae in any system of budget framework is the lack of fiscal responsibility in those in government, except when it’s very short term. From this standpoint, governments are allowed to increase expenditure and announce tax reductions because this is always the most advantageous solution in political terms. The negative consequences only emerge in the medium term, when circumstances become less favourable. However, shedding responsibility will achieve nothing especially when faced with the inevitability of having to reduce public expenditure. Pressure to reduce expenditure has resulted in the development of different accounting practices, which means that parliament must ensure tougher and tighter control, which is absolutely essential for it to be effective. These practises are of two kinds. Some practices are merely intended to make the political decision-making process even less clear and are engaged in for different reasons: either because it puts the principles of prudent macroeconomic management at stake, or else there is a wish to conceal decisions that go against proper regulation of the economy or competition. For instance, the accumulation of delayed payments by the state due to insufficient budget allocations, or granting public companies subsidies when it’s not very clear where the funds came from nor where they are going. Apart from this, commitments that were made are frequently not controlled. Other practices that are currently widely known are “project finance” and all forms of collaborations between the public and private sector. But these are essential instruments for the structural change needed for the public sector to abandon activities involving the direct production of goods and services, and concentrate on its

• wn functions, which are related to well-being, social equity and the workings of the market.

The combination of private and public initiative develops when the risk of the undertaking and the volume of capital to invest begin to exceed the private sector’s financial capacity, which makes it necessary for the public sector to step in. At the same time, when the problem of deficits and public debt cannot continue to grow indefinitely, then it’s necessary for private funding to cooperate with the state.

9 This association between public and private financing is based on contracts that establish the responsibilities of the public sector and private enterprises, as well as the distribution of risks between them. However, parliaments don’t always know about those aspects. In these cases, the problem of budget control would be solved if the state adopted an accounting system that recorded the commitments entered upon and prepared an annual balance of activities. This practice has been adopted in certain countries, but is somewhat complicated technically as it requires the right entities to evaluate them and these don’t always exist. What is crucial in this matter is to inform parliament about the anticipated commitments to be made for the entire period of life of their respective contracts, including the amount of annual budget charges, as well as the assembling of capital planned for each year and each project. Private-public partnerships – PPPs - can contribute greatly towards achieving the aim of relieving the public sector of the excessive weight it has taken on. However, this instrument is only effective if framed within a system of responsible budget control. In fact, as there has been excessive use of projects in “project finance” within the scope of PPPs, which allow investments to be made at no expense “there and then”, it could be a strategy that merely postpones the expense to a future date and becomes very rigid with regard to the public expense. For this expense to be under parliamentary control, which it often isn’t, governments must, in these cases, provide parliament with: a) Information on the benefit-cost analysis on projects in question. b) The financing model adopted for each undertaking. c) Foreseen planning from the invitations to tender until the start of the undertaking. d) Multi-annual payments/receipts foreseen for the period of the contract. e) Criteria for risk distribution between public and private sectors. This question is far from being transparent in most countries where this kind of project exists. This is the case of Portugal. Control over PPPs is vital on the part of parliament, because companies seek to maximise their profits and the State doesn’t always try to get the most out of public money. It is thus necessary that parliaments don’t just control, but that they exercise more and more pressure on governments to govern better.

10

• IV. CONCLUSIONS

In short, a budget cycle must be kept simple so that it can be easily understood by government institutions and civil society organisation, that is to say, by all actors involved in the taxation and control of public accounts. Find out about and examining the budget should be enough to make it possible for external

• bservers to check if the distribution of resources and its application reflect social choices and

adhere to criteria of equity and justice. However, the production of accessible and updated information on how public resources are used remains inefficient, which is rather a paradox considering the “information era” and Internet “explosion” of the last ten years. What is really overdue is an independent and objective State Audit, or public management, to be carried out by an auditor and aimed at adding value, improving the results and operative processes

• f the organisation.

This undertaking would entail a structured examination of policies, budget programmes, activities, projects, functions and tasks of state organisations aimed at measuring and providing information about the financial and efficient use of resources employed, the manner in which the set objectives were achieved and legal compliance. We should keep in mind that the state budget is increasingly a budget of transfers. Subsequently, the audit scope should also widen gradually to take in the possibility of auditing

• rganisations that receive transfers or funding from the state budget and assess how effectively

they are used. This aspect greatly increases the scope of the control unit’s work. The auditing of public money will allow the politician to assume his or her responsibilities with the people and allow parliament to do its job of exercising control fully.