Overseeing Budget Sustainability: A New Tool for Watchdogs
by Daniel Baksa, David Mihalyi, and Balazs Romhanyi— Mar 28, 2017
Budget watchdogs have a difficult task when it comes to monitoring the sustainability of public finances. While governments will often justify large current budget deficits based on expectations of a brighter future, they rarely share with the public all the details underlying the decision. One often has to interpret shifting decisions, vague policy statements, limited or inconsistent data, and overoptimistic forecasts to make sense of what’s really going on. This problem is even more pronounced in countries with weak governance, where governments may be more inclined to maintain their monopoly on information.
Let’s take a specific example. Mongolia — with an Open Budget Index score of 51 — has a history of booms and busts. It recently had to turn to an IMF bailout to stay afloat after coming to the verge of bankruptcy for the second time in eight years. Despite a fiscal rule and commitment to budget sustainability in place, overly optimistic expectations of revenues from new copper and gold mines led the government to spend funds that failed to materialize.
The Challenge of Monitoring Budget Sustainability
Mongolia’s story is far from unique. There are dozens of countries around the globe facing similar problems. Civil society organizations (CSOs) looking to monitor budget sustainability, however, are in a tough position: the macro-fiscal modelling required to conduct independent analysis can be dauntingly complex, especially in the absence of solid information.
For this reason the Natural Resource Government Institute, in cooperation with IBP partner Fiscal Responsibility Institute Budapest, started a project to build a tool to help tackle these sort of analyses. The tool, first piloted in Mongolia, has a number of innovative features that makes it particularly well-tailored for budget oversight actors to use across the globe.
How the Tool Works
The tool establishes a baseline scenario of a country’s economy, and the trajectory of public finance, over a 30-year horizon. As a first step, this baseline can be used to assess whether current policies are sustainable over the long run. As a second step, users can use the baseline to evaluate the impact that external shocks or policy changes are likely to have on budget sustainability over the long term.
It has three distinct parts:
- A macroeconomic model: The tool’s macroeconomic model is well suited to countries where data availability is more limited or incomplete. It uses standard economic theory to determine the key variables such as GDP, private and government consumption, investment, export, import, inflation, exchange rate, interest rate, number and average wage of private sector employees.
- A fiscal block: This block includes ten revenue categories, six expenditure types, and four different instruments for financing government debt. It models the budget data that public finance watchdogs in-country will know best. This block can be used flexibly, is easy to update, and data can be aggregated or disaggregated into indicators tailored to the fiscal policy issue in question.
- A mineral sector block: This block helps users assess the economic ramification of a particular megaproject, or unconventional economic development, by zooming in on a particular sector or issue. In the case of Mongolia, this was the mineral sector, where the finances of five large mines were modelled from the bottom up. But it could also be adapted to capture developments from an oil discovery, a major infrastructure project, a change in food prices, or a tourism boom. By incorporating detailed sector estimates into the model, oversight actors can question the government’s assumptions in this area as well.
The tool does require data and an investigative watchdog willing to uncover the ins and outs of how the budget works. But once up and running it enables CSOs to engage in sophisticated and evidence-based debates on fiscal policy. Watchdogs can use it to review the fiscal proposals presented by the government and other actors, detect serious inconsistencies in official data and forecasts, examine different spending and revenue options, assess fiscal risks, explore ways of preparing for declining fortunes, and monitor whether a set of fiscal rules are likely to be followed.
Built for Adaptability
While many macroeconomic modeling packages require extensive training and expensive software to run, we purposely designed this tool to be easy-to-use, accessible, and adaptable to different contexts. We used a powerful program called Matlab to build the underlying macroeconomic model, but have released the final version in Microsoft Excel. We have also produced detailed documentation on the economic assumptions behind the tool, as well as a manual on how to use it. All of this is freely available to download and repurpose here.
The tool is already proving useful in Mongolia. We conducted a two-day training workshop with over 20 participants across government, civil society, academia, and private sector. This was followed by a roundtable to discuss policy options to avert an economic crisis with senior representatives from the government and international institutions. In collaboration with our local partners, we will be monitoring how the new IMF program is being implemented.
The tool is available under an open license here. We welcome any questions and feedback on the model. We would particularly like to hear from budget watchdogs interested in applying the tool in other countries.
Contact the Authors
Economic Analyst, Natural Resource Governance Institute
Director, Fiscal Responsibility Institute Budapest
Senior Economist, Fiscal Responsibility Institute Budapest, Central European University, and Centre for Economic and Regional Studies of the Hungarian Academy of Sciences