The expenditure management system, which traditionally had been confronting the problem of inexorable growth of expenditure, began to face a new situation during recent decades that came to be called as a fiscal stress. The revision of the oil prices in the early seventies, and the subsequent periods of high inflation and stagflation contributed to additional fiscal strain; dependence on borrowing, both in domestic markets and the international market, contributed to ‘‘crowding out’’, increase in the interest rates, and to greater shares of expenditure devoted to debt-servicing. Each increase in the interest rates, which the central banks introduced as a part of their anti-inflation campaigns, contributed to further increases in debt servicing. And each such increase reduced, correspondingly, the flexibility available to budgeting in the allocation of resources. Other categories like entitlements also contributed to increasing rigidity and the whole pheno- menon of government expenditures came to be considered, at least for a period, as uncontrollable. This anguish, and the inability to address the problem of expenditure growth in the short-term, together provided a fresh impetus for a search for new approaches that would, somehow, help bring a modicum of control of expenditure growth.
The nature and dimensions of the fiscal stress was such that it became abundantly clear that the traditional methods of nip and tuck, or a cut here or there in the sectoral allocations, would not serve the purpose. Indeed, such approaches were tried in the early stages, but the futility and the total inadequacy of the systemic response was too transparent that efforts had to be devoted in other directions. What was needed, it became clear, was a total revision of the way in which governments carried out their operations, and changes in the underlying political philosophy. Limits were needed on the range of activities undertaken by governments; similarly, changes were also needed, not merely in the expenditure management area, but in the very underlying assumptions, in that the operations had to be subjected to market tests and the application of principles of competition. It was also clear that mere systemic changes would not be adequate and that these had to be combined with deficit reduction packages, primarily comprising a severe reduction in the staff employed and divestment of selected activities to lower levels of government or to be performed by a nongovernmental organizations.
Public Expenditure Management: Selected Themes and Issues g 27
The measures taken in the light of above recognition covered several areas, ranging from policy measures to a variety of improvements in the expenditure management system, including the selective applications of the new management philosophy. These measures, together with their features, are summarized in Table 2.1. To be sure, many of the features of systemic innovations, such as medium term expenditure planning, recognition of performance links, cash management, selected applications of corporate practices, emphasis on improved governance through greater fiscal trans- parency and enhanced framework of financial and program accountability, were drawn, either in their original form or in a slightly modified form, from the previous practices. The distinction was in the way in which these instruments were packaged with other ingredients, such as greater emphasis on the rule of law (in the event through fiscal responsibility legislation or other similar legally enforceable limits that would, in principle, exercise a major restraining influence on public policy making), emphasis on the application of accrual budgeting and accounting, and reorganization of gov- ernment though establishment of task-oriented, managerially accountable organizations, and improved budget making through the formulation of cen- trally devised resource ceilings. As a whole, the new measures were expect- ed to contribute to a moderation in the rate of expenditure growth, to greater efficiency in spending, and to improved accountability in governments.
The expectations may have been, in the event, over pitched. Many of the measures, by their very nature, were such that they had little capability to moderate the growth of expenditures. The real impact in terms of short term reductions in expenditure came from the policy packages, such as reduction in the personnel, reform of pension systems, and reductions in subsidies and defense outlays. Systemic measures had no such immediate direct influence. The fiscal responsibility legislation, as is clear with the implementation of the Maastricht treaty in the European cities, did not, in the event, have much restraining influence. In Latin American countries, particularly in Argentina, it had very little impact, as is evidenced in the fiscal crises experienced in late 1990s. On the other hand, the legislation had a good deal of rigidity in that it did not permit the pursuit of timely counter cyclical policies. Similarly, medium term expenditure planning, which provided greater clarity about the changing profiles of expenditure, did not have any discernible impact on moderating expenditure, as most adjust- ments were back loaded. The one systematic measure that in theory had a major potential for securing economies was the deployment of fundamental reviews of selected government activities. Very few developing countries adopted this approach. India, which appointed a National expenditure commission, was one of the very few that adopted this approach, but most expenditure reductions were made along established lines, such as
Table 2.1 Changes in Expenditure Management
Area Changes Remarks
Resource allocation policy measures
Deficit reduction packages Comprised several measures that included wage freeze, reduced borrowing, reduced defense spending, etc.
Improved policy planning
(i) Fiscal responsibility legislation
Introduction of legislation aimed at reinforcing restrictive legal mechanisms that would also have a restraining influence of governments in planning future budgets.
(ii) Preparation of medium term fiscal outlook
This is intended to facilitate fiscal adjustment over the medium term and expected to supplement the annual budget process, while clarifying policy goals.
(iii) Preparation of medium term rolling expenditure budgets
As an integral part of above, rolling expenditure budgets are prepared for all programs.
(iv) Formulation of functional or program resource ceilings
In the light of above assessment, ceilings are prescribed within which individual agency demands are formulated.
Annual budget 1. Recognition of risks and associated measures
As a part of annual budget formulation, macroeconomic risks are recognized and contingent measures are contained.
2. Formulation of priorities and strategies
Priorities determine the categories of expenditures that could be given up in the event of revenue shortfall.
3. Explicit recognition of performance links
Linkage between resource allocation and expected results outlined.
Search for economies
Fundamental or periodic reviews Periodic reviews are undertaken to reduce expenditures through abandonment or modification of existing programs.
Explicit recognition of liabilities and costs
Introduction of accrual budgeting and accounting
The accrual system is expected to facilitate an explicit recognition of all liabilities, and the computation of costs through the application of depreciating accounting and capital changes.
Balance sheets produced as a result are expected to provide improved information on the overall status of public finances.
(continued)
PublicExpenditureManagement:SelectedThemesandIssuesg29
Area Changes Remarks Resource utilization
Budget releases Cash management (Treasury manage- ment)
Is expected to smooth the process of budget implementation while linking up with debt management.
Exposure to market principles
Most activities are subjected to contra- cting in which internal agen
cies also can participate
Greater resort to contracting is expected to lead to a refinement of the buyer–provider nexus and to improved delivery of services.
Expenditure tracking Introduction of expenditure tracking systems
As the value chain between provider and funding agency expands, it becomes necessary to ensure that the budgeted funds reach the intended destination and that the administrative overheads are held to a minimum.
Payment Electronic payment system Traditional methods of payment are being abandoned in favor of cheaper, effective and quick payment systems.
Payrolls, pension payments and debt servicing tasks are being privatized even.
Performance Performance measures are specified to enhance accountability,
In some cases, performances data are provided.
Periodic financial reporting
Data are now periodically provided to facilitate an assessment of the fiscal policy posture
More and more governments are trying to adhere to international guidelines on reporting.
Resource-use accounting
Annual accounts Where accrual accounting is
introduced. Balance sheets and other statements are proposed
This change from routine appropriation accounts is expected to facilitate a better assessment of the fiscal situation.
Establishment of cost and responsibility centers
To shore up fiscal discipline and as a part of the overall design, these centers are also organized
TheContextofPublicFinancialManagement
Supporting administrative infrastructure
Corporate practices Creation of task organized agencies
In several countries, supporting administrative infrastructure arrangements have been made, mostly drawn from the new management philosophy and from selected corporate practices.
Provision of managerial autonomy
Performance contract Client orientation Improved
governance
Fiscal transparency International guidelines have been formulated in this area.
Enhanced accountability Emphasized: no guidelines are provided.
Ethical practices Emphasized: Attention limited to the establishment of anti- corruption bureaus.
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reduction in personnel and scaling down of subsidies, while controversial and unproductive programs were left generally untouched.
The emphasis on performance in the delivery of services was an important and much needed improvement. By its very nature, the speci- fication of a desired level of performance also implied that necessary resources had to be allotted for this purposes. Thus, it was also a basis of allocation of resources and, as such, it had a greater potential for ratcheting up the level of expenditures from time to time rather than moderating the growth rate of expenditures. More or less the same could be stated about the impact of the introduction of new management philosophy. The introduction of centrally managed ceilings on the allocated resources generated the false feeling that, as a result, the expenditure growth rate may have been somewhat moderated. A deeper examination shows that the formulation of ceilings, while restraining the urges of spending agencies to periodically seek additional allocations, may have made them far more conscious of the need for pitching their initial needs with a higher built-in slack to accommodate the later needs. In the process the central agencies lost a valuable opportunity to review the operations of the spending agencies in detail. The convenience associated with the determination of individual ceilings came with a price tag — loss of detailed control which hitherto was the main vehicle of control of central agencies.
The emphasis on the proper compilation of national assets and liabilities, including contingent liabilities was, again, an important step. Many coun- tries, both at the national and sub national levels, enacted new legislation governing the provision of guarantees and the arrangements for risk sharing. As a result, an annual review, generally as a part of the budget making process, of the contingent liabilities is being undertaken. But the general introduction of accrual budgeting and accounting has not gained much acceptance even in the industrial world, except for four countries.
In the United States the application of accrual basis is limited to accounts.
Some governments continue to contend that application of accrual accounting, with depreciation accounting and capital charges, makes more sense where commercial transactions, with profit motive, are undertaken.
There is also little evidence to suggest that publication of balance assets would be helpful in making governments, and the public, debt averse.
Indeed, the experience of the last four years suggests that the trend is on the opposite side, in that many governments have opted for the soft constraint of debt, rather than engage in the mobilization of additional revenue measures. In any event, the experience with the introduction of accrual budgeting and accounting is so limited that it does not provide a reasonable basis for optimism.
The emphasis on the virtues of competition, and therefore on contracting, is in a way continuation of an old theme, but with the difference that, as a
part of the reform package, contracts were extended to the service area and to personnel management. As the range of services provided by govern- ments expanded, there was recognition that, instead of expanding govern- ment agencies, it might be more advantageous to rely on other sources such as non-governmental organizations, where the buyer-seller contractual arrangements could be made an effective tool for the delivery of services.
Experience shows that, traditionally, contracting has proved to be an Achilles heel for governments, as they have always found it difficult to overcome the wily strategies of the contractors. It appeared that they always had a way of taking advantage of governments, and the built-in advantage of the biggest buyer was not always effectively exploited. In that context, extending contractual arrangements to other areas, particularly to organiza- tions which did not have viable legal administrative infrastructures, did not prove to be a welcome departure from the practice with a potential for saving money. It was also doubtful whether the non-governmental organi- zations were more effective in the provision of services. It also became clear that many of the developing countries did not have the traditions or laws that contribute to the smooth implementation of contractual agreements.
In the circumstances, reliance on this technique brought a whole new slew of problems without solving any of the existing issues.
The above discussion should not, however, lead to the misleading conclusion that no improvement had taken place. Available evidence, primarily in the form of reports issued by the international financial insti- tutions, shows that major improvements took place in the transition com- panies which opted for many of the legislative controls found in the western democracies. Their efforts concentrated on endowing more powers in the legislatures and their committees, in approving and modifying the budget proposals, and in having a continuing oversight on budget implementation.
In addition, many developing and transition countries have also introduced multi-year rolling expenditure planning as a part of an effort to improve policy planning. Among the industrial countries, France, which hitherto did not choose multi-year estimates, began to produce them. In the United States reliance continued to be placed on expenditure projections although, at the level of congressional appropriation committees, more data were made available on the medium term profile of experience.
In sum, the attempts yielded minor results in term of moderating the expenditure growth. As a result of wage and grade freeze, and reduction in force, the rate of growth of expenditure decelerated in the OECD coun- tries during the early 90s but, like a catapult held on high leash, the pre- vious path of expenditure growth continued during more recent years, contributing in turn to greater budget deficits. The lack of success in the central objective of expenditure management is attributable in part to the very nature of systemic improvement sought and in part to the changing
Public Expenditure Management: Selected Themes and Issues g 33
economic climate. Emphasis on performance based approaches was not compatible with the approaches to moderate expenditure growth or with concerns of macroeconomic stability. Meanwhile, to contend with the changing climate, and to reckon with frequent revenue shortfalls, many governments relied on underfunding as a way out of fiscal problems. But underfunding contributed to greater discontent over the delivery of sources, and raised even more questions about the credibility of governments and the adequacy of their expenditure management systems.