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Prioritisation and Fiscal Responsibility: How to Involve Politicians in Expenditure Management

Author: Oxford Policy Management
Date: 1999
Size: 12 pages (60 KB)

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Summary

In the run up to an election, the adoption of imprudent expenditure plans or the simple avoidance of difficult decisions are commonplace occurrences. The principal problem is to manage the quality of interaction between politicians, the broader polity and the fiscal system by creating incentives for fiscal discipline and reprioritisation of public expenditure and more informed political decisions.

This Issue Paper summarises the different approaches for fiscal discipline that have been used in OECD countries such as Australia, New Zealand and the United States and explores the extent to which similar institutional controls and incentives could be established in developing countries. It focuses on ‘governance’ or ‘constitutional’ frameworks rather than ongoing ‘political’ decision-making which takes place within these frameworks.

The tension between short-term political interests and the longer term need for fiscal stability and service delivery is apparent in all governance systems. Political expediency may promote unproductive capital investment resulting in still-born projects which were neither viable, nor in the public interest. Findings from the experiences of some OECD countries include:

• A strong central agency, such as a Cabinet Secretariat, or Office of the President or Prime Minister, underpins and enforces budget decision-making processes by creating collective accountability for decisions
• Within sectoral budgets, enhanced authority to make allocative decisions increases individual accountability for ministers, and encourages them to stay within their agreed budgets
• Improved financial reporting can enhance the credibility of policy by increasing transparency of fiscal policy changes and fiscal outcomes
• Medium term expenditure frameworks, where any new policy proposal is evaluated against existing and authorised policies over a three to five year period, assist politicians to adapt a longer term perspective
• Fiscal rules are rarely self-enforcing. A body, such as the Treasury, must be empowered to enforce guidelines through a veto mechanism.

In order to introduce the types of accountability mechanisms described above, it is necessary that prior conditions be met to underpin these structures. For example, proper external controls need to be in place before devolution of managerial decisions, and the annual budget needs to be credible before embarking on medium term expenditure frameworks. Other implications include:

• Information is critical to successful reform. Budget systems, financial management information and accounting systems, and performance systems must be set up to supply the appropriate information. An absence of well functioning systems leads to information of poor quality
• A strong central agency could play a potentially important role in developing linkages and information flows across agencies. This function would require additional policy analysis capacity
• Because reforming the interface of politicians with the budget process requires that the lines of political vis-à-vis managerial accountability be clearly delineated, and requires supporting reforms in the budgeting, financial management and information systems, it is likely to be associated with substantial political risk
• A pragmatic approach would seem to suggest that both the basic technical and governance issues need to be addressed to improve the efficacy and efficiency of public expenditure in developing countries. The focus then falls on the sequencing of such reforms to ensure that they are feasible both in terms of political realities and implementation.

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Source: Oxford Policy Management, July 1999, 'Prioritisation and Fiscal Responsibility: How to Involve Politicians in Expenditure Management', Issue Paper 2, Oxford Policy Management, Oxford.
Author: Oxford Policy Management (OPM), http://www.opml.co.uk