Budgeting and Fiscal Governance
Faculty of Economics and Political Sciences
Cairo University
Budget as a public policy tool
• The budget is a policy document and tool for allocating public
resources.
• Fiscal policy and budgets are important instruments for redistribution
of public resources (benefits/losses)
• Budget decisions are political decisions (institutions, actors, incentives,
etc. ). Accordingly, budget outcomes are political outcomes.
 The budget is a pivotal instrument of public policy and a critical arena
for political bargaining between the executive and the legislature.
 The budget is more than a law; rather, it is a continuous policy process.
Indeed, at any point in time, at least three budget cycles overlap: the
preparation of next year’s budget, the execution of current year’s
budget, and the control of last year’s budget.
Governance of Budget
• The literature suggests that the budget process, actors and budget
institutions matter a lot in promoting Fiscal Governance.
o Budget institutions and processes determinate fiscal outcomes
and fiscal performance.
o Both state and non-state actors seek to influence budget
outcomes in their preferred direction.
• We therefore use the concept of the governance of the budget to
Checks and Balances throughout different stages of budget process. In
anther meaning, to capture the dynamic aspect of budgetary cycles,
the institutional dimensions of public budgeting and the political
economy of public finance management.
The governance of the budget can be defined as
encompassing the interests and incentives of
individuals and institutions governing the
formulation, approval, execution and oversight of
the Budget.
Budget Process
Budget Process has four Stages (Budget cycle)
1- Budget formulation stage, when the budget plan is put together
by the executive branch of government.
During the formulation stage:
 the economic forecast and the program and financial plans
are prepared for the various departments.
 Economic data and statistics are utilized in developing
projected revenues for the upcoming fiscal year.
Budget Process
Budget Process has four Stages (Budget cycle)
2- Budget review and approval Stage is the process in which the
Legislature discusses, modify, and adopt the budget.
During the Enactment stage:
 Public expenditure may be increased and redistributed.
 Public revenues may be increased or decreased.
Budget Process
Budget Process has four Stages (Budget cycle)
3- Execution Stage, when the policies of the budget are carried
out by the government.
During the execution stage:
 funds which appropriated are released.
 Amendments or Supplementary budgets be introduced for
enactment into law.
Budget Process
Budget Process has four Stages (Budget cycle)
4- Auditing and assessment Satge, when the actual expenditures of
the budget are accounted for and assessed for effectiveness.
During the assessment stage:
 departments / agencies are evaluated to identify areas in
need of improving compliance procedures with applicable
laws and regulations.
 Financial transactions, accounts and reports are assessed and
analyzed to improve accountability, effectiveness, and
efficiency in the achievement of goals and objectives.
 Economic use of the resources is assured.
Actors in Budget process
 The executive has the exclusive right to initiate the budget process and draft
the budget bill. It is also the only branch of government that possesses the
required technical capacity and information base for doing so. Accordingly,
The executive has a predominant role in the formulation of the budget and
the drafting of the budget bill presented to parliament for review and
adoption.
 Once agreed within government, the draft budget bill is submitted to
parliament for consideration, review and approval. As for any other piece of
legislation, the executive’s budget proposal must be approved parliament to
become law.
 The central budget offices of the finance ministries are responsible for
overseeing budget execution by spending agencies and line ministries(Exante auditing). Access to and control over governmental financial
information gives them an undisputed advantage both over the legislature
and the other ministries and executing agencies within government.
Actors in Budget process
 Constitutions give parliaments an important role in the oversight
of the execution of the budget, the scrutiny of budget reallocations, and the ex post review of public accounts.
 In practice, however, legislative oversight of budget execution is
still embryonic, undermining its contribution to concurrent
budget accountability.
 Legislatures exercise only a limited monitoring of the
government’s compliance with formal budget rules and
procedures as set in the budget law.
 They are even more ill-equipped to monitor the performance of
public spending and enforce results based budgeting.
Budget Institutions
budgetary institutions are ‘all the rules and
regulations according to which budgets are
drafted, approved implemented, and audited.
Executive versus legislative budget powers
 In theory, increased legislative budget powers ought to enhance transparency,
accountability and integrity in public expenditure management.
 Immature legislatures and unstable party systems are often the source of
dysfunctional economic governance, budget deficits, fiscal imbalances, and
public debt. Overspending and under-taxation are likely results.
 At the same time, however, unconstrained executives and autocratic
presidents tend to abuse their constitutional authority and delegated powers,
left largely unchecked by amenable parliaments. The use, misuse and abuse of
executive discretion in public budgeting have often lead to serious economic
mismanagement, pervasive corruption and state capture.
Common pool’ dilemma of public budgeting
 The core of the argument linking institutional arrangements to fiscal
performance resides in the ‘common pool’ dilemma of public
budgeting. while the costs are borne by the general fund, benefits go
to specific groups, sectors, or localities.
 Every government faces a Common Pool Resource (CPR) Problem.
This problem arises when policy-makers consider the full benefits of
their spending decisions on their constituencies but only part of the
tax burden. In practice, the problem permeates decision-making.
Policy-makers for sound political reasons do not have an incentive in
most cases to consider the implications of their spending decisions
upon the full tax burden.
Common pool’ dilemma of public budgeting
Common pool’ problem can be minimized by
assigning control over the budget to agents with
incentives to internalize the costs of the programs
the state finances. Institutional checks and
balances help mitigate those risks throughout The
introduction of procedural and numerical budget
constraints and the strengthening of transparency
and integrity.
Common pool’ dilemma of public budgeting
and Fiscal Governance
Fiscal Governance: Definitions and Forms
 Fiscal governance can be defined as those rules, regulations and
procedures that influence on how budgetary policy is planned,
approved, carried out and monitored.
 There are four forms of Governance:
fiefdom form of governance
2. Delegation
3. Commitment or contract
4. mixed form of governance
1.
Common pool’ dilemma of public budgeting and
fiefdom form governance
 If policy-makers do little to address Common pool
problem, then a fiefdom form of governance
predominates. Policy-makers consider their domains
their “fiefdoms,” and they policy decide spending levels
more or less in isolation from one another.
 A fiefdom form of governance, in which the decisionmaking process is decentralized, exists when government
ministers set their own budgets. Ministers do not
consider the full tax implications of their decisions, and
the result is a severe common pool resource problem.
Common pool’ dilemma of public budgeting and the ideal forms of
fiscal governance
 There are, however, two “ideal” forms of governance conducive to
solving the Common Pool Resource (CPR) Problem, a mode of
delegation and a mode of commitment.
 Delegation involves vesting the Finance Minister with significant
decision-making powers over public monies.
 Under commitment a group of agents with similar decision making rights
enters an agreement, or a “fiscal contract,” to commit themselves
strictly to budgetary norms, i.e., targets for budget aggregates set for
one or several years.
 A third form of governance that solves the CPR problem, which is
found in minority governments only and that combines elements of
both ideal forms, I define to as mixed.
Common pool’ dilemma of public budgeting and the ideal
forms of fiscal governance
 Each of these forms of governance to solve the Common Pool Resource
(CPR) problem has distinct implications for the adoption, and for the
effectiveness, of fiscal institutions.
 In delegation states, the emphasis is on improving the discretion of the
finance minister in the budgetary process.
 One expects formal or informal rules that enhance the position of the
finance minister.
 Moreover, spending targets such as caps on personnel costs, explicit
mechanisms to deal with open-ended expenditures, and the like that
make the budget more manageable for the finance minister are likely.
Common pool’ dilemma of public budgeting and the ideal
forms of fiscal governance
 In contrast, in commitment states one expects a range of formal rules to
maintain the fiscal contract among the political parties who make the
initial agreements.
 This mode of governance is more rule-based, and a range of multiannual targets and sub-targets as well as rules to deal with unexpected
shocks so that the initial agreement is not broken should be common.
 The mixed form of governance has elements of delegation in the budget
deliberations that take place within the cabinet and elements of
commitment in the “contracts” the government signs with one or more
opposition parties in parliament.
Ideal forms of Fiscal Governance
 Reviewing budget processes in Europe reveals that
centralization follows two basic approaches.
 The first is centralization based on delegation, the
second is centralization based on contracts.
 These two modes of fiscal governance conducive
to greater fiscal discipline, a mode of delegation
and a mode of contracts.
 An important insight is that the effectiveness of a
given form of fiscal governance depends crucially
on the underlying political system.
Ideal forms of Fiscal Governance
 Delegation functions well when there are few, or
no, ideological differences among government
parties, whereas contracts are effective when there
are many such differences.
 Electoral institutions have an impact on the form
of governance
 One party majority delegates budget to a strong
MoF.
 Multi-party coalitions forge a contract or commit
to a specific budget.
Ideal forms of Fiscal Governance
 Delegating the budget a strong MoF would mean potential
political frictions.
 With delegation, the rules of the executive planning stage of
the budget process lend special authority to a central agent
who determines the broad parameters of the budget and
enforces them using selective punishments for defecting
spending ministers.
 Typically this agent is the finance minister, who can be
expected to take the most comprehensive view of the budget
among all members of the executive, and, therefore, to
internalize the common pool externality.
Ideal forms of Fiscal Governance
 At the legislative approval stage, the delegation approach
lends large agenda-setting powers to the executive.
 At the implementation stage, centralization requires that
the central agent be able to monitor and control the flow
of expenditures during the year, to prevent spending
departments from overspending their appropriations.
 Furthermore, centralization puts tight limits on any
changes in the budget law during the fiscal year and limits
the use of supplementary budgets.
Ideal forms of Fiscal Governance
 In contrast, the contract approach emphasizes binding
budgetary agreements on a set of fiscal targets negotiated
among all members of the executive at the onset of the
executive planning stage.
 Here, the bargaining process serves as a mechanism to
internalize the common pool externality.
 In practice, the targets are often derived from medium-term
fiscal programs or coalition agreements among the ruling
parties.
 The finance ministry’s role under this approach is to evaluate
the consistency of the individual departments’ spending
plans with these limits.
Ideal forms of Fiscal Governance
 Thus, the finance minister has information
advantages but no extra strategic powers.
 At the legislative stage, the contract approach places
more weight on the role of the legislature monitoring
the faithful implementation of the fiscal targets and
less on controlling parliamentary amendments.
 At the implementation stage, finally, the contract
approach resembles the delegation approach in that
it requires strong monitoring and control powers of
the finance minister.
Ideal forms of Fiscal Governance
 It is quite obvious that the delegation approach relies on
hierarchical structures within the executive, and between the
executive and the legislature, while the contract approach builds
on a more even distribution of authorities in government.
 In democratic settings, hierarchical structures typically prevail
within political parties, while relations between parties are more
even.
 This suggests that the institutional choice between the two
approaches depends on the number of parties in government.
 Delegation is appropriate for single-party governments, while the
contracts approach is appropriate for multi-party coalition
governments.
Ideal forms of Fiscal Governance
 There are two reasons behind this conjecture.
 First, the delegation of strategic powers to the finance minister
would create a new principal agent problem for coalition
governments.
 Cabinet members are likely to have very different views on
spending priorities and the finance minister could abuse any
special powers he has to promote the political interests of his own
party at the cost of others.
 This problem does not arise in one-party governments, where
spending ministers can be reasonably sure that the finance minister
shares their basic spending preferences.
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Ideal forms of Fiscal Governance
 Second, delegation and contracts use different enforcement
mechanisms. Under delegation, the ultimate punishment for a
defecting spending minister is his dismissal from office.
 This punishment is heavy for the individual, but light for the
government as a whole. It can be used, if the prime minister has the
authority to select and replace cabinet members, which is typically
not true in coalition governments.
 Breaking up the coalition is the ultimate punishment in coalition
governments. This punishment is heavy for the entire coalition.
 Finally, commitment to fiscal targets is per-se much less credible
for one-party governments, who can always walk away from the
targets with no further consequences.
Ideal forms of Fiscal Governance
 These different enforcement mechanisms also explain
the different relations between the executive and the
legislature.
 When a single ruling party enjoys a majority in
parliament, the main concern of the legislative stage is
to limit the scope of defections from the budget
proposals by individual members of parliament.
 This can be achieved by limiting the scope of
parliamentary amendments to the budget proposal.
 With multi-party coalitions, in contrast, each party
involved in the coalition will want to watch carefully
that the executive sticks to the coalition agreement.
Ideal forms of Fiscal Governance
 Therefore, the contract approach typically vests the
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legislature with more information rights and stronger
amendment power than the delegation approach.
Elections based on plurality rule promote the
emergence of two-party systems and one-party majority
governments.
In contrast, proportional representation is consistently
characterized by multi-party coalition governments.
This suggests that countries are more likely to opt for
the contract approach, if their elections are based on
proportional representation (and low thresholds).
while they are more likely to opt for delegation, if their
elections based on plurality rule.
Ideal forms of Fiscal Governance
 Thus, different electoral rules demand different institutional
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solutions to the common pool problem.
In presidential systems of government, the president does not rely
directly on the legislature for his position as leader of the
executive.
Voters can, and often do, support a president from one party while
denying his party a majority in the legislature.
The role of the executive in the budget process is not much
different in presidential systems. Since the president typically
appoints the members of his
administration—with confirmation by the legislature where
applicable—the structure of the administration lends itself more to
a delegation approach than to a contract approach to centralizing
the budget process.
Ideal forms of Fiscal Governance
 The relationship between the president and the legislature,
however, is often more difficult, since the two are conceived to be
more equal political institutions than in parliamentary forms of
governments.
 As a result, centralization of the budget process in presidential
systems emphasizes two institutional dimensions.
 One is the internal organization of the legislature. Here,
centralization can be achieved by creating a strong leadership in
parliament, through an elevated position of the speaker and
through a hierarchical committee structure.
 The other dimension regards the relation between the executive
and the legislature. The more the constitution puts the two
institutions on an equal footing, the more budget agreements
between the two must rely on the contract approach.