The IMF has today published a Board Paper on Budget Institutions in G-20 Countries. The 2008 global economic crisis left many G-20 countries facing large and long-term fiscal consolidation needs. A substantial body of evidence suggests that institutional arrangements for budgetary decision-making are an important factor if the success or failure of fiscal adjustment. In this context budget institutions are defined as the structures, rules, and procedures that govern the formulation, approval, and execution of government budgets. These institutions include arrangements for understanding the government’s fiscal position, developing a credible consolidation plan, and implementing that plan through the budget process.
The paper (i) identifies a set of institutions that support the planning and delivery of successful fiscal consolidations, (ii) reviews G-20 countries progress in strengthening these institutions since the crisis; (iii) analyzes the contribution of these institutions to G-20 countries’ post-crisis fiscal performance; and (iv) makes recommendations for further institutional reform across the G-20. The main paper is accompanied by a supplement which provides evaluations of the state of each G-20 country’s budget institutions.
The paper’s key findings include:
• That budget institutions have been strengthening across the G-20 since 2010 but that reforms have been most prevalent among advanced countries, especially those in Europe. This is creating a growing gap in institutional strength between advanced and emerging G-20 countries. Particular improvements have been seen in the areas of independent fiscal agencies, fiscal objectives, and MTBFs especially in advanced countries, but emerging markets have also led the way in some areas, including strengthening fiscal risk management and performance budgeting.
• That G-20 countries with stronger budget institutions overall have tended to plan and deliver more fiscal adjustment. Specifically, countries with comprehensive fiscal reporting, forecasting, and risk disclosure seemed to better understand their post-crisis fiscal position and prospects. Those with more credible medium-term frameworks, performance budgeting systems, and intergovernmental fiscal arrangements were quicker to announce adjustment plans and better at protecting public investment. Countries with more unified and disciplined budget processes more effectively implemented plans.
• That despite recent progress, significant weaknesses remain in budget institutions across G-20 countries and at all phases of the adjustment cycle. Further reform will be a critical element in both supporting ongoing fiscal adjustment in advanced countries and helping emerging markets to weather any fiscal storms on the horizon. Specifically, many G-20 countries still do not have a complete and reliable picture of their fiscal position and prospects. In addition, while fiscal adjustment plans are increasingly underpinned by comprehensive medium-term fiscal and budgetary frameworks, these need to be supported by mechanisms which combine multi-year discipline with the flexibility to respond to shocks. Finally, while procedures for preparing and executing budgets are relatively strong, more can be done to improve budget coverage, engage legislatures, and limit the scope for budget overruns.
Budget institutions are broadly defined as processes, procedures, systems, legal frameworks and organizational entities which contribute to the budget process. The set of 12 budget institutions included in the analysis are: Fiscal Reporting, Macro-Fiscal Forecasting, Fiscal Risk Management, Independent Fiscal Agencies, Fiscal Objectives and Rules, Medium-term Budget Frameworks, Performance Budgeting, Intergovernmental Arrangements, Budget Unity, Top-Down Budgeting, Parliamentary Approval, and Budget Execution.