Budgeting in Chile - Camila Vammalle, OECD

BUDGETING IN CHILE Camila Vammalle Budgeting and Public Expenditures Public Governance and Territorial Development Directorate Organisation for Economic Cooperation and Development 37th Annual Meeting of OECD Senior Budget Officials Stockholm, 9-10 June 2016

• Very centralised budget system, strong role of DIPRES (Central Budget Authority)

• System tailored for (and successful in) ensuring fiscal stability

• Allocative efficiency could be improved

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In a nutshell

1. A little bit of background

2. A structural fiscal rule

3. Policy coordination vs. allocative efficiency

4. Impact of evaluations on budget / programme structure of the budget

5. Other issues Fiscal advisory council

Cash management

Budgeting for the military

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Outline

• After 10 years of sustained economic growth, growth fallen and is expected to remain at lower levels

– The fall of copper price in particular will have a great impact on government revenues

• Fiscal position remains sound

• Citizens’ expectations have increased

– Strong pressure to deliver more and better services

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Economic and social context

• Strong political commitment to fiscal sustainability

• DIPRES (the budget authority) has strong powers both in relation to line ministries, and in relation with the Congress. – Only the executive can initiate new public

expenditure

– Congress has limited role in budget process

– Large in-year adjustments

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A historically centralised budget process

focused on ensuring fiscal sustainability






Cash management


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Outline

• De Facto since 2001, in law since 2006 Fiscal Responsibility Law – 2001-2006: 1% structural surplus

– Since 2006: each President sets his/her target

• Two independent panels calculate the trend GDP and the long-term price of copper

• The methodology for calculating the trend GDP based on these inputs – is developed by DIPRES

– and is changed regularly

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Characteristics of Chile’s structural

fiscal rule

• Allow for escape clauses rather than modifying the target set by the President

• Stabilize the methodology, consider delegating this responsibility to an independent institution

• Setting fiscal target

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Possible improvements of the fiscal rule





5. Other issues

Fiscal advisory council

Cash management


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Outline

• Strong centralisation of budget process

– DIPRES has a strong role vis-à-vis line ministries

– Little role for the Congress in budget discussions

• Helps policy coordination and aligning budget with Presidential priorities

• But may reduce allocative efficiency

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Policy coordination vs. allocative

efficiency

• Capacity of staff in DIPRES is seen as higher than in line ministries

• Staff in DIPRES tends to be very stable, while staff in line ministries have high turnovers – Asymmetries of information in favour of DIPRES

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Lack of capacity of line ministries …

• Start building greater capacity in line ministries

– Professionalising higher management

– Creating a career senior public service

• Slowly move from ex-ante to ex-post controls

– Consider pilot projects

• Still very limited role of Congress in budget discussions – Can only reduce budget allocations proposed by

the executive

• Improving the capacity of Congress – Joint Committee on budget made permanent in

2003

– Budget Advisory Unit created

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… and lack of capacity of Congress

Improve capacity in Congress to discuss the budget

• Large number of detailed budget annotations (glosas)

– Very detailed instruction on how funds should be spent

– Pragmatic approach to lack of “programme budgeting”?

– Budget vs. permanent legislation?

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Budget restrictions and annotations

(glosas)

Define clearly what should be in the budget, and what should be discussed in Congress and included in permanent legislation






Cash management


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Outline

• Ex-ante: – All new and reformulated programmes must be

submitted in a standard format – Evaluations by the Ministry of Social Development

(social programmes) or DIPRES (other programmes) before competing for funds

• Ex-post: – Evaluations of government programmes (design,

processes, resource use, results) – Impact evaluations – Institutional evaluations (comprehensive expenditure

evaluations)

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Strong culture of evaluations

• Mismatch in the definition of programmes for evaluations, and programmes as used in the budget

• Therefore:

– Separates strategic planning and budgeting

– Reduces transparency in allocation of resources to policy objectives, and readability of the budget

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Mismatch between operational and

budgetary programmes

Gradually move towards a more comprehensive programme structure of the budget






Cash management


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Outline

• Chile created a Fiscal Advisory Council in 2013

• Mandate: discuss, analyse and provide recommendation to the MoF and DIPRES on the application of the cyclically adjusted balance rule to the budget

• Composed of 5 members, usually academics, not remunerated

• Members are appointed by the Minister of Finance and can be replaced at any time

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Chile’s Fiscal Advisory Council (FAC)

The independence of the FAC could be strengthen, and it’s mandate could be broaden

• Each government entity maintains its own bank account

– 180 accounts and 5000 sub-accounts

– Balances represent 2.3% of GDP (31/12/2015)

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Cash management

Use the Treasury Single Account not only for revenue collection, but also for expenditure - Line ministries authorise payments, Treasury executes them

• Reserved copper law

• Military receives 10% of the sales of CODELCO – Transferred in similar shares to army, navy and air

force

– Minimum-revenue guarantee / no ceiling

– Funds transferred to secret accounts

=> Lack of transparency, inefficiencies and sub-optimal allocation of resources

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Budgeting for the Military

Include military expenditure in the regular budget process

THANK YOU!

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Budgeting in Chile - Camila Vammalle, OECD