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Reforming Ireland’s Fiscal Framework: Expenditure Aspects
Introduction
Robert Watt Secretary General, Department of Public Expenditure & Reform
30 May 2011
Public Expenditure: Managing, Planning, Performing
Reforming Ireland’s Fiscal Framework30 May 2011
Ronnie DownesDepartment of Public Expenditure & Reform
Department of Public Expenditure & Reform
Outline of PresentationExisting Fiscal / Expenditure Management FrameworksStrengths & Shortcomings Themes for ReformSpecific ProposalsQuestions to be addressed…
Department of Public Expenditure & Reform
Legal ContextLong-established domestic legal framework
Exchequer & Audit Departments Act, 1866Public Accounts and Charges Act, 1891Comptroller and Auditor General Act, 1923Constitution of Ireland, 1937Central Fund (Permanent Provisions) Act, 1965
Evolving EU frameworkMaastricht Treaty, 1992Stability & Growth Pact, 1997EU governance reforms, 2010-2011
Fiscal Responsibility Law, due for 2011
Department of Public Expenditure & Reform
Existing Budget processAnnual Estimates / Budgetary Process
One-year focus – little attention to medium termBudget Strategy Memorandum in JulyAutumn Estimates/Budget process
Final expenditure level / allocations not decided until then
Annual Stability Programme Update“three year” focusIndicative, not normative
Process starts ‘from scratch’ in following year
Department of Public Expenditure & Reform
Strengths?Effective annual controlTransparent – cash-basedFamiliar
TraditionalTest of time?
Department of Public Expenditure & Reform
Shortcomings?Leads to pro-cyclical expenditure policy
Double-digit growth in 2000’sBased on boom-time tax revenues
Weak credibility of medium-term projectionsLittle structured engagement with outsiders
independent commentators / economistsOireachtas Committeese.g. to inform policy-formulation processor provide a critique of proposed fiscal stance
Department of Public Expenditure & Reform
Deviation of Actual Gross Current Expenditure from Budget Projections
-5
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 Average
Budget year
% D
evia
tion
Year 1
Year 2
Year 3
Department of Public Expenditure & Reform
also: Stability & Growth PactPreventive Dimension
“Medium-term budgetary objective”Country-specific Safety Margin against incurring excessive deficit
“Close to balance or in Surplus”
Corrective Dimension3% G.G. Deficit/ 60% G.G. Debt to GDPConvoluted procedure involving Cion, Council & Periodic Reporting
Has not proven effective
Department of Public Expenditure & Reform
Drivers of ReformIMF, OECD, Commission
Calls for “top down” multi-annual frameworkEU economic governance reforms
driven by Greek bond crisis, early 2010National drivers
Special Group – multi-annual spending ceilingsNational Recovery Plan 2011-2014Independent Review Panel – D/FinanceGovernment Programme 2011-2015
EU / IMF Programme of AssistanceBudget Advisory CouncilBinding multi-annual expenditure ceilingsFiscal Responsibility Law
Department of Public Expenditure & Reform
EU Economic Governance Reforms 2010, 2011
Commission / Van Rompuy Group - SGP reformstronger preventative dimension
greater ex ante coordination – “European semester”“prudent economic management” – expenditure rulegreater analysis of risks / imbalances
stronger corrective dimensionnumerical targets for deficit / debt reductionpolitical and financial penalties
draft Directive on fiscal frameworksneed for strengthened national medium-term frameworksrole of independent Fiscal Council
Department of Public Expenditure & Reform
Performance dimensionWe know how much is spentWe don’t know how much is bought
Effectiveness of public service deliveryWeak linkage between resources and outputs / outcomesDáil scrutiny of allocations
Ex ante – weak, superficialEx post – strong, substantive
Difference: poorer information
Department of Public Expenditure & Reform
Annual Output StatementsIntroduced in 2007Considered alongside annual Estimates (ex ante process)“Programme” structure
Same as Statement of StrategyDifferent from traditional Subheads
Information overloadQuality of performance information
Have not proven fully effective
Department of Public Expenditure & Reform
OECD Report, 2008Qualified support for AOS approachImprovements in quality and consistencyBetter integration into resource alocation process“Performance dialogue”
Department of Public Expenditure & Reform
Key Themes of reformStronger medium-term framework
Overall fiscal managementExpenditure management in particular
Stronger performance focuswithin each Government Dept / bodywithin D/PERwithin Dáil Committeeswithin public discourse more generally
Core themes of new Govt Programme
Department of Public Expenditure & Reform
IMF: effective medium-term expenditure frameworks…
MTEFsFour pre-requisites1. Credible Annual Budget2. Prudent Medium-term Macroeconomic
Projections3. A Stable Medium-term Fiscal Framework4. Comprehensive & Unified Budget Process
What MTEFs Do How They Do It Who Benefits
1. Reinforce aggregate fiscal
discipline
By constraining budget appropriation & execution in
future years to levels consistent with the
Government’s medium-term fiscal objectives
Finance Ministers
Taxpayers
Future Generations
2. Facilitate a more strategic allocation of
expenditure
By abstracting from the immediate pressures and legal and administrative constraints that impinge upon the annual budget
process
Prime Ministers
Planning Ministers
Parliamentarians
3. Encourage more efficient inter-
temporal planning
By providing greater transparency and certainty
to budget holders about their likely future resources
Line Ministries
Agencies
Local Governments
Department of Public Expenditure & Reform
Overview of Proposals - Expenditure management
Stability Programme is promoted to fully-fledged medium-term frameworkExpenditure ceilings are built into the overall frameworkAnnual Budget / Estimates processes must comply with the framework
Department of Public Expenditure & Reform
Stability ProgrammeDraft version early in year
Opportunity for engagement, critique
Final version by end-AprilFiscal plans and projections for next 3 years
Multi-annual expenditure limits and ceilingsmedium-term budgetary objectivewill include sensitivity analysis, risk assessment
Policy constraintsmust comply with Fiscal Rules
Department of Public Expenditure & Reform
Expenditure Limits and CeilingsAggregate Expenditure Level
must conform to Expenditure Growth rulebroken into Ministerial Expenditure CeilingsAnnual Estimates must comply with ceilingsMajor structural reform
Move away from purely annual focusPromotes commitment by line Depts to Govt’s multi-year budgetary strategyencourages medium-term planningespecially for structural reforms with little or no short-term savings
Department of Public Expenditure & Reform
Flexible and realistic approach is needed …
Full responsibility of Minister to manage their own ceilings5% carryover of unspent ceiling allocation from year to year…… but overruns treated as an advance of following year’s allocationceilings have continuity from year to year
… but cyclically-sensitive allocations can be reviewed more regularlycontingency fund within overall budgetary arithmetic
Department of Public Expenditure & Reform
Allocations must be chosen carefully
Comprehensive Review of Expenditure
every 2-3 yearsroot-and-branch examination by reference to new / revised Programme for Govt
Drawing upon international modelsWill integrate reform agenda To be completed in Setember
Department of Public Expenditure & Reform
Overview of Proposals - Performance agenda
Integrate performance information into the traditional EstimateDevelop Performance Reports as a standard tool of accountability for all State bodiesInstitute performance dialogueapproach as between D/PER and other Departments/ agencies
Department of Public Expenditure & Reform
Performance budgeting – international approaches
Spectrum of approachesBasic presentational model
Supporting information is made availablePerformance-informed budgeting
Integration of performance and financial information in decision process
Full performance-based budgetingAllocations are linked to delivery of performance objectivesContractual models
Department of Public Expenditure & Reform
Pilot Project 2010/20112011 Estimates for D/PER, D/Finance, D/Agriculture prepared on integrated basisOld subhead format replaced with Strategic Programme basis
Same as Statement of Strategy, AOSClear presentation of funds, staffing, resultsAddresses “information overload”
“Headline” outputsContext and impact indicators
Department of Public Expenditure & Reform
Taking the project forwardGet feedback from stakeholdersRoll out to other DepartmentsPerformance information
Needs critical engagement to come aliveDáil Committees, Departmental managers, D/PER, public and media
Performance continuumOrganisational, Divisional and individual
Department of Public Expenditure & Reform
Questions… (1)Are we ready for a major shift to medium-term expenditure ceilings?What other structural elements / incentives need to be in place to make it work?Is it better to build on existing frameworks, or re-design from scratch?How can the multi-year ceilings withstand pressures from economic, cyclical shocks?
Department of Public Expenditure & Reform
Questions… (2)How should the ‘performance budgeting’ be modified to achieve its objectives?Should responsibility for selecting performance measures be shifted from Depts to D/PER?How can public / political engagement in this process be maximised? Can performance budgeting subsist within administrative system, if there is no public / political engagement?