It is difficult to compose a primer on the budget that is useful for all countries. As much as different countries' budget systems have in common, they also can be quite dissimilar. Recognizing that differences in budget systems can be substantial, this appendix attempts to lay out some budget basics. Because we are most knowledgeable about the United States budget system, our descriptions sometimes reflect that bias.
This appendix first discusses the various stages of the budget process that are common to most countries, keeping in mind that these stages have relatively more or less importance depending on the country. Secondly, the political and institutional framework for budgets is examined. This appendix concludes with a glossary of relatively common budget terms and concepts as well as a short list of key background documents on budget issues put out by international organizations.
A. Stages of the Budget
The budget process usually has four stages: (1) Budget formulation, when the budget plan is put together by the executive branch of government; (2) Enactment, when the budget plan is debated, altered, and approved by the legislative branch; (3) Implementation, when the features of the budget are carried out by the government; and (4) Auditing and Outcome Assessment, when the actual expenditures on the budget are accounted for and assessed for their effectiveness.
The different stages of the budget offer different opportunities for the input of civil society. For example, it is frequently during the enactment stage that short and timely analyses can have the most impact. The main point to keep in mind, though, is that typically there are many times throughout the year when civil society budget work can have an effect. That is, there is not simply one point in time in which budget work is best undertaken; rather, important budget work can be undertaken throughout the budget cycle. Stages one to three are now discussed in more detail.
Budget Formulation
Initial formulation of the budget tends to occur almost exclusively within the executive branch of the government. In general, budgets are not built from the ground up every year. Instead, budgets tend to use the most recently enacted budget as a baseline, with changes measured from that. This is not to say that most budgets are purely incremental; the budget can be altered considerably from year to year due, for instance, to changes in the macro-economic situation, or a shift in government priorities.
Budget formulation often begins with projections of key parameters - such as economic growth, inflation, or demographic changes - that influence revenues or expenditures. Budget formulation also occurs in the context of broad goals. These goals or targets are binding on budget decisions to different degrees; in many cases, the targets determine how allocation decisions are made. Civil society can participate in, and make valuable contributions to, the discussion of these targets. Budget goals can be to maintain the deficit or debt at certain levels, to raise or reduce taxes, or to increase expenditures for certain priority areas.
The key features of the budget formulation process include the timing and nature of decisions made internally; how sectoral or departmental budgets are reconciled with overall budget targets; the role of multi-year projections or plans; the baseline from which expenditures are negotiated; and the level of expenditure at play in the negotiations.
The initial stages of budget formulation are often the most closed part of the budget process. The executive branch of government normally formulates the budget behind closed doors, permitting the legislature and civil society little access to these discussions. Since, however, this is often the most important stage of the process (in many countries, and typically in parliamentary systems, this is when the key budget decisions are made and there is no real opportunity to reverse them), it is essential that civil society be creative about getting their voices heard during these deliberations. Probably the most efficient way is to have as full command as possible of the previous year's budget, since this frequently is the starting point and will influence much of the decision in the budget under preparation.
This can also occur through establishing relationships with the government officials making the decisions and by conducting analyses that apply pressure on the executive branch. During this period independent researchers might produce analyses regarding the possible general priorities of the budget, and attempt to have executive branch policymakers take these analyses into account in their deliberations.
Budget Enactment
The second stage of the budget process occurs when the budget is enacted into law. During this stage, the executive branch of government proposes its budget to the legislature, and the legislature debates and adopts it. The nature of this debate is constrained in many countries by the following factors:
Although the nature of the legislative debate is substantially constrained in many countries, the budget enactment stage typically is when information about the budget is made broadly available and when civil society is able to weigh in with its analysis. So this is an important stage for civil society to focus on. Its analyses can both assess particular aspects of the budget and advance the case for a budget process in which the legislature plays a strong role, thereby permitting a full and open debate.
Budget Execution - Implementation, Monitoring and Control
The budget is rarely implemented in the exact form in which it was approved. Sometimes the differences between the enacted and implemented budgets are justifiable. The executive branch may have been given some flexibility in implementation that it has exercised responsibly, perhaps because of changes in economic conditions. In a disturbing number of other cases, however, the differences between the enacted and implemented budgets are dramatic, and cannot be justified on the grounds that they reflect sound policy. The executive branch may choose to ignore its responsibility to follow the budget law, or inadequate or incompetent administration may mean that funds are not spent as intended.
Consequently, an efficient, accurate and transparent monitoring system for budget implementation is important. Such monitoring needs to recognize that implementing the budget requires striking a balance between responding to changing circumstances and adherence to statutory structures. At the same time, it needs to be established with the understanding that in many countries the executive branch has gone too far in not abiding by budget law.
Monitoring budget implementation is an area where independent budget analysis can be important. For example, independent research can help inform the design of appropriate and binding rules for the use of unallocated reserves, or in the case where there are no reserves, independent analysis can assess similar rules for the reallocation of spending categories. To mention a specific example, work by the group DISHA in India has focused productively and successfully on pointing out the significant discrepancies between what the government said it was going to spend on programs to help the poor and what it actually spent on programs to help the poor.
B. The Political and Institutional Framework for the Budget
The functioning of a budget system is to a large extent determined by the institutional and political framework in which it operates. From the perspective of the ability to engage in independent budget work, probably the most important feature of the framework is access to budget information. An environment with easy access to budget information obviously is more conducive to budget analysis than a non-transparent budgetary system.
Various factors can contribute to the flow of free and accurate budget information. A tradition of free access to information in public affairs can be an important factor in one country, a transparent budget process can be significant in another, and an independent institution that makes for checks and balances in the budget process can be the significant factor in a third. This section is both an explanation of a number of institutional approaches that can facilitate greater openness, as well as a guide to the type of budget systems that NGOs might want to encourage in their own countries.
Freedom of Information
One fundamental characteristic that influences a country's budget process is the extent to which there is free access to public information. Some countries have a strong tradition of openness and of the public's right to information about all government activities. Other countries are less revealing. In many cases this secretiveness might reflect administrative traditions rather than deliberate decisions.
A tradition of openness, or a deliberate policy to promote openness, will inevitably influence the operations of all levels of government. Progressive rules and regulations regarding public availability of information can therefore have a strong impact on the budgetary system, and have strong implications for institutions and organizations outside government that are working on budget issues. The European Union charter reflected in the example below does not relate directly to the budget process, but it is a good example of how to improve upon the institutional environment by making government information readily available to the public.
Example:
"Green paper on public sector information in the information society." European Union, 1999.
http://www2.echo.lu/info2000/en/publicsector/gp-index.html
This site includes comprehensive information about most aspects of public sector information.Transparency and Opportunities for Participation
(this discussion of the importance of budget transparency is drawn from the Transparency and Participation Scorecard Report prepared by IDASA and the International Budget Partnership)
The second general concept to be discussed is "budget transparency and participation." Good governance dictates that government operations and decisions should be made openly, and with the active participation of those people influenced by them. Indeed, it can be argued that the public has the basic right to information about the budget and to have its views considered in budget decisions. The provision of comprehensive, accurate, timely and frequent information on a country's budget policies is desirable because:
Meaningful transparency is not only about the availability of information, but its use. Real transparency must provide a sufficient opportunity for the legislature and civil society to participate in the budget process. This is important because:
In many countries, one of the most important aspects of NGO budget work is to assess the transparency of the budget process, and to suggest improvements. Transparency and participation was the theme of the Cape Town International Budget Conference and was also the theme of a workshop for Russian regional work held in St. Petersburg in June 1999. For the Cape Town conference, IDASA and the International Budget Partnership prepared a "Transparency and Participation Scorecard" for South Africa. The report (see below) may serve as an approach that would be of use to researchers in other countries who are interested in assessing how the principles of transparency and participation could help inform and improve the budget process in their nations. A full version of this paper will be available in the fall of 1999.
Also below is a short description of the IMF Code of Fiscal Transparency, which was published in 1998 and lays out some useful transparency principles.
Example:
"The Fiscal Transparency Site of the International Monetary Fund." IMF, 1998.
http://www.imf.org/external/np/fad/trans
This site includes the Code of Fiscal Transparency developed by the IMF, as well as several supporting documents of interest. This code has four general principles of fiscal transparency and has begun to attract attention worldwide. The IMF describes these principles as follows:"The first general principle - Clarity of Roles and Responsibilities - reflects the importance of clear boundaries within government between fiscal, monetary, and public enterprise activities, and between the public and private sectors. However, the Code does not advocate any particular allocation of responsibility among government agencies.
The second general principle - Public Availability of Information - is concerned with the need for both comprehensive fiscal information and for governments to commit themselves to publish fiscal information at clearly specified times.
The third general principle - Open Budget Preparation, Execution, and Reporting - encompasses traditional standards relating to the coverage, accessibility, and integrity of fiscal information. Considerable emphasis is placed on the development and harmonization of international statistical and accounting standards for government reporting.
The fourth general principle - Independent Assurances of Integrity - emphasizes the traditional means of providing such assurances through external audit and statistical independence, but then goes beyond this and calls for openness by governments to allow independent scrutiny."
Example:
"Transparency and Participation in the Budget Process: The South African Case Report." Presentation to the 1999 conference. http://www.internationalbudget.org/conference/idasa299.pdf
This report on transparency and participation in South Africa's budget process is a joint effort of the Budget Information Service of the Institute for Democracy in South Africa and the International Budget Partnership.Budget Law
Another important factor that can affect a country's budget system and that can be a way of ensuring transparency is the existence of a budget law. When a budget process undergoes major reform, it is common that the legislature adopts a comprehensive budget law regulating most aspects of government economic activity. This has occurred in a number of countries. These laws typically regulate procedures for budgeting, economic reporting, auditing, etc., and the stipulated requirements have, in many cases, improved information on the budget. Two well-known examples occurred in Australia and New Zealand, which have adopted legislation to ensure transparency. These budget laws have frequently been used as models for other countries.
The Australian Charter of Budget Honesty of 1998 has four main parts: (1) Principles of sound fiscal management. Policies should be set in a sustainable medium-term framework and financial risks should be identified. (2) Fiscal strategy statement. This part includes a number of reporting requirements whose main purpose is to increase public awareness of the Government's fiscal strategy and to establish a benchmark for evaluating the Government's conduct of fiscal policy. (3) Annual Government reporting. The Government is obliged to produce an annual, midyear economic and fiscal outlook and a final budget outcome. (4) An Intergenerational report to assess the long term sustainability of current Government policies is also stipulated.
(See http://www.dofa.gov.au/bestinfo/charter/charter.pdf )The primary objective of the New Zealand Fiscal Responsibility Act of 1994 was to entrench sound fiscal policies and make it difficult for governments to deviate from them. The Act is a unique legal document. It aims to achieve, by legislation, a future orientation to the budget process. It does so not only by mandating specific fiscal targets, but also by putting in place a framework for setting fiscal objectives, monitoring governments' actions against those objectives, and establishing transparency about government finances in general.
(See http://www.treasury.govt.nz/pubs/bmb/fra/toc.htm .)Checks and Balances in the Budget Process
The last topic of a general nature that we wish to introduce is checks and balances in the budget process. In both presidential and parliamentary systems, the ideal budget process does share certain important characteristics, including a range of checks and balances. These checks and balances can be defined and accomplished in a number of different ways. But regardless of the political system, they should include the provision of impartial information and they should make budget decisions more transparent and understandable.
These fundamental characteristics fit well into a description of the overall objective of the U.S. Congressional Budget Office (CBO), one of the most well-known institutions that provides checks and balances in the budget process. Throughout the American federal budget process, CBO is Congress's main source of budgetary information. The depth and breadth of its information increase Congress's influence in the budget process relative to the President's; its existence ensures that not all budget information comes from the executive branch.
There are only a few countries that have institutions just like the United States' CBO, but the same or similar functions as CBO's are sometimes carried out by other institutions and organizations. One common and important example of such an institution is the Auditor General which, depending on the country, has a more or less independent role vis-a-vis the executive branch. However, the Auditors normally concentrate on post-budget analysis and auditing, on outcomes and results; they do not concentrate on providing or assessing budget information in the formulation stage or on the scoring of policy proposals.
Example:
"About CBO. CBO's major responsibilities."
http://www.cbo.gov/respon.shtml
This site includes substantial information about CBO's mission, history and responsibilities. It also includes numerous reports and documents.Example:
"Reforming Israel's Budget Process: Assessing the Establishment of a Knesset
Budget Office and other Options." Adva/IBP, Cape Town Conference, 1999.
http://www.internationalbudget.org/conference/adva-ibp.htm
The aim of this paper is to examine the possibilities for reforming the Israeli budget process, so that it becomes more transparent, contains more checks and balances, and allows for a truly democratic debate through more meaningful involvement of both the legislature and civil society. A wide range of reforms is considered, with a special emphasis on the potential creation of a source of budget information and analysis that is independent of the executive branch of government, a "Knesset Budget Office."Participatory Budgeting
In Brazil, there is a growing movement that allows for the direct participation of the public in the budget decision-making process at the municipal level. There are a variety of models for such participation, but they typically include open meetings in which the public can register its opinions about the budget and directly participate in the decision-making process. There are now more than 100 municipalities in Brazil in which participatory budgeting is occurring.
The Brazilian Institute of Social and Economic Analyses (IBASE) both studies the participatory budget process and provides training about the budget to the public and other local actors involved in the process. At the Cape Town conference, IBASE representatives gave a presentation on participatory budgeting that can be found at http://www.internationalbudget.org/conference/brazil.htm In August of 1998 there was an international conference in Brazil that focused on participatory budgeting, as well as on the closely related subjects of budget democracy and transparency. A summary of this conference can be found at http://www.utexas.edu/academic/uip/budemo.html
C. Glossary
Many governments include information about basic budget concepts in the national budget, and in some countries this information is available on-line. Budget terminology can differ considerably between countries and it is not possible to compile a common glossary for all systems. Nevertheless we have compiled a small sample glossary and we have chosen to point to some on-line glossaries that we find particularly useful. Our sample is copied mainly from the IMF example, but also from some U.S. sources. We relied heavily on the IMF glossary because its terminology is what you are most likely to encounter in the international public finance literature.
We recommend the following sample glossaries:
1. Manual on Fiscal Transparency, IMF
http://www.imf.org/external/np/fad/trans/manual/gloss.htm2. The United States Senate, Committee on the Budget.
The congressional budget process - an explanation
http://www.senate.gov/~budget/republican/reference/cliff_notes/cliffc1.htm
3. Budgetary Concepts: National Association of State Budget Officers (NASBO). United States, 1997.
http://curricula.mit.edu/~nasbo/mod10/con01.html4. Glossary of the Australian budget
http://www.dofa.gov.au/bestinfo/estmanage/guidelines/glossary.htm5. United Kingdom, HM Treasury.
www.hm-treasury.gov.uk/pub/html/budgetmore.htmlSAMPLE GLOSSARY:
Note: this glossary frequently quotes directly from the IMF's glossary.
Accrual Accounting Systems and Cash Accounting Systems - Accrual accounting systems recognize transactions or events at the time economic value is created, transformed, exchanged, transferred, or extinguished - and all economic flows (not just cash) are recorded.
Cash accounting systems recognize transactions and events when cash is received or paid. Unlike accrual accounting, they do not recognize non-cash events.
Appropriation - Appropriation refers to an authority granted to the executive by the legislature to spend public funds for a specified purpose. Annual appropriations are made through annual budget laws. Supplementary appropriations are sometimes granted subsequent to the annual law if the annual appropriation is insufficient to meet the purpose. "Standing appropriation" is sometimes used for authority extending beyond a single budget year under separate legislation (such as social security legislation).
Authorization - In the United States, the term "authorization" is used to denote a general law setting up a program and permitting the adoption of (but not actually granting) appropriations for spending on the program. In most countries, departments require specific executive authorization (called an "apportionment, allotment, or warrant") to actually incur an obligation against appropriation.
Balanced Budget - A balanced budget occurs when total revenues equal total outlays for a given fiscal year.
Budget - A budget is a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.
Budget Deficit - Deficit is the amount by which the government's total budget expenditures exceed its total receipts for a given fiscal year.
Budget Surplus - Surplus is the amount by which the government's revenues exceed its expenditures for a given fiscal year.
Contingency Funds or Reserves - Contingency funds are a separate fund or budget provision set aside to meet unforeseen and unavoidable requirements (such as meeting loan guarantee obligations) that may arise during the budget year.
Debt - The federal debt has two components:
Debt held by the government represents the holdings of debt by federal trust funds and other special government funds.
Debt held by the public represents, for the most part, the total of all annual federal deficits, minus any annual surpluses, over the years. This is the net of the cumulative amount of money the federal government has borrowed from the public, through the sale of notes and bonds of varying sizes and time periods.
Discretionary Spending - Discretionary spending is a category of spending subject to the annual appropriations process. It includes such things as funding for transportation, environmental programs, job training, and education programs.
Extrabudgetary Funds/Accounts (EBFs) - The term generally refers to sets of government transactions that are not included in the annual budget presentation. These may not be subject to the same level of scrutiny or accounting standards as the annual budget (though they should be). A wide variety of extrabudgetary arrangements are used, including funds (such as social security funds) set up under separate legislation, commodity funds that use proceeds of commodity aid, and earmarking specific kinds of revenue for specific purposes. (It is important for civil society to track EBFs and to seek to have them included in government documents.)
Fiscal Policy - Fiscal policies are federal government policies with respect to taxes, spending, and debt management that affect macroeconomic outcomes, particularly with respect to employment, the size of the economy, price level stability, and equilibrium in balance of payments. The budget process is a major vehicle for determining and implementing federal fiscal policy.
Fiscal Year - The fiscal year is the government's accounting period and is often named after the year in which it ends.
Line-item Budgeting - A general term used to describe a relatively unsystematic budgetary chart of accounts that relies on a listing of various expenditures. In addition to standard "lines" for items such as "salaries and wages," separate lines for new requirements are introduced as they arise, thus giving rise to lengthy, ad hoc forms for appropriating and accounting for spending.
Mandatory Spending - Mandatory spending refers to spending for programs that is governed by formulas or criteria set forth in authorizing legislation rather than by periodic appropriations.
Medium-term Budget Framework (MTBF) - This approach to budgeting provides for budget estimates for the current year as well as for several years into the future. It provides a framework for integrating fiscal policy and budgeting over a few years by linking a system of aggregate fiscal forecasting to a disciplined process of maintaining detailed medium-term budget estimates by ministries reflecting existing government policies. Forward estimates of expenditures become the basis of budget negotiations in the years following the budget and the forward estimates are reconciled with final outcomes in fiscal outcome reports.
Program Budgeting/Program Classification - "Programs" are groupings of government activities by specific government objectives. Program classification applies this principle across all government activities. Program budgeting attempts to apply cost-benefit analysis to the allocation decision, allocate expenditures by program, and assess the results of programs in relation to objectives. A full system of program budgeting (or subsequent proposals such as zero-based budgeting) has not been successfully realized in any country, in large part because of the high information and complex management requirements of such systems.
Quasi-fiscal activities (QFAs) - Activities (under the direction of government) of central banks or other public financial or nonfinancial institutions outside general government that are fiscal in character - that is, in principle, they can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures, even though precise quantification can in some cases be very difficult. Examples include non-commercial or directed bank credit, or non-commercial public services provided by an enterprise through cross-subsidization.
Revenues - Revenues are collections from the public arising from the government's power to tax. They include individual and corporate income taxes, social insurance taxes, excise taxes, etc.
Tax expenditures - Concessions or exemptions from a "normal" tax structure that reduce government revenue collection and, because the government policy objectives could be achieved alternatively through a subsidy or other direct outlays, the concession is regarded as equivalent to a budget expenditure. Precise definition and estimation of tax expenditures thus require definition of the normal base as well as determination of the most appropriate way of assessing costs (i.e., by revenue forgone or the expenditure required to achieve the policy objective).
Unified Budget - The unified budget is the presentation of the budget in which revenues from all sources and outlays to all activities are consolidated.
D. Key International Budget Documents
We recommend the following texts on budgets and public finance. The publications are available on-line and they are written for an international audience. The texts are relatively advanced, but should also be of interest to those with a limited background on budgets.
1. "Public Expenditure Management Handbook." World Bank, 1998.
The handbook provides a broad framework for thinking about public expenditure management and how it affects budgetary outcomes.
http://www.worldbank.org/publicsector/pe/pehandbook.htmThe World Bank also has a comprehensive web site focused on public expenditure issues http://www.worldbank.org/publicsector/pe/. The site, the Public Expenditure Knowledge Center, is a useful resource for groups and researchers who are searching for information on budgets and public finance.
2. "Budgeting and Policy Making." SIGMA papers: No. 8, OECD/SIGMA, 1996.
This is a reference book and training manual for public administrators in the transitional economies, and in particular for officials with budgeting and policymaking responsibilities. SIGMA is an OECD project and the acronym stands for Support for Improvement in Governance and Management in Central and Eastern European Countries.
http://www.oecd.org/puma/sigmaweb/pubs/pubnos/pubno8.htm3. "Manual to the IMF Code of Fiscal Transparency." IMF, 1998.
The Manual on Fiscal Transparency provides guidance on the implementation of the IMF Code of Good Practices on Fiscal Transparency. It also is a comprehensive reference material that can be used for a number of budget related issues.
http://www.imf.org/external/np/fad/trans/manual/index.htm