Assessing Budget Credibility
About the Project
Budget credibility describes the ability of governments to accurately and consistently meet their expenditure and revenue targets. When governments fail to implement budgets as planned, real costs are incurred. For example, the economy may be negatively impacted by deficits that are larger than forecasted, or health and education services may be compromised.
However, governments may have good reasons to deviate from their original budgets, especially when macroeconomic shocks disrupt plans, or government managers realize that there are better and more efficient ways to provide services. The study of budget credibility examines the extent and nature of deviations from planned budgets, and of their causes and consequences.
In recent years, there have been various attempts to measure budget credibility. The multi-donor Public Expenditure and Financial Accountability (PEFA) program examines budget credibility in its country assessments, by looking at how executed budgets deviate from approved budgets. However, PEFA analysis is performed at a high level of aggregation, and usually examines only the 20 largest budget heads. Budget credibility is also examined in the International Monetary Fund’s (IMF) Fiscal Transparency Code and Fiscal Transparency Evaluations. Some scholars have drawn on PEFA data to undertake their own analyses of budget execution (Addison 2013), while others have collected data at country level to complement what PEFA offers (Simson and Welham 2014; Williams 2015).
Nevertheless, there are still gaps in our knowledge about the types of credibility challenges that exist and the extent to which they reflect a broader dysfunction in the PFM system. Moreover, the literature has not investigated in detail two of the most important issues at the heart of how we understand and interpret budget credibility: the quality of the reasoning and justifications behind these deviations, and the allocative or distributional implications of changing budgets mid-year.
These two core issues are of the utmost relevance for the broader community interested in budget credibility and are undoubtedly part of the reason why greater attention is being paid to budget credibility today. For example, if the degree to which budgets are implemented is now an indicator in the Sustainable Development Goals (SDG), it is almost certainly because achieving these goals is hampered when countries budget for them but do not implement those budgets. At the International Budget Partnership, we want to understand why this happens (the explanation for deviations) and whether money is being diverted to different priorities than those agreed to in the original budget (the allocative consequences of deviations).
The study of budget credibility examines the extent and nature of deviations from planned budgets, and of their causes and consequences.
The International Budget Partnership’s Assessing Budget Credibility Project proposes to address certain knowledge gaps in the literature and has the following objectives:
- To deepen global understanding of the nature of the budget credibility challenge, with a particular focus on understanding when, where and why budget credibility is a problem, how well budget deviations are justified and explained by governments, and what their implications are for resource allocation and performance in priority sectors.
- To create and coordinate a global community of practice consisting of civil society organizations, governments, international institutions, and others interested in budget credibility to better understand the challenges.
- To work with the community of practice and other national partners to identify and promote jointly owned solutions to budget credibility challenges as appropriate.
- Prepare background reviews of existing literature on the extent of the budget credibility challenge and issues in defining and measuring credibility challenges.
- Form a reference group to help guide research. Members of the reference group will include actors with a demonstrated knowledge and interest in budget credibility.
- Conduct country level research and cross-national quantitative research in partnership with the World Bank’s BOOST program to establish the extent and causes of budget credibility challenges, the current state of transparency of and explanation for deviations, as well as the allocative implications of these deviations from budget.
- Develop materials, tools, and standards for measuring budget credibility, reporting on and justifying budget deviations and assessing their allocative impact, to inform debate and advocacy campaign materials and to allow partners to undertake their own analyses.
Throughout the two-year research period, the International Budget Partnership will convene and coordinate a global community of practice to discuss the research findings as they are produced and work together toward a set of global advocacy objectives. These meetings will enable the group to build a shared understanding of the causes and consequences of lack of budget credibility and develop mitigating strategies. If you are interested in being involved in the ABC project’s community of practice, please email Guillermo Herrera, Project Coordinator, at email@example.com. Ultimately, the Assessing Budget Credibility project—its products and ideas—can help shape our collective understanding of and ways to address problems associated with budget deviations.
Ultimately, the Assessing Budget Credibility project can help shape our collective understanding of and ways to address problems associated with budget deviations.
What do We Know about Budget Credibility?
Budget credibility describes the ability of governments to accurately and consistently meet their expenditure and revenue targets. As part of laying the groundwork for the Assessing Budget Credibility project, the International Budget Partnership commissioned two research pieces that provide some preliminary findings that the project could build on.
This paper compiles raw expenditure and revenue outturn data for 74 countries using the most recent publicly available Public Expenditure and Financial Accountability (PEFA) reports. The analysis finds that, on average, aggregate spending projections are more credible than aggregate revenue projections; however, the average results hide great variation among countries. The analysis also examines explanations provided for budget deviations in PEFA reports and finds many explanations given are not sufficient.
This paper approaches the issue of budget credibility from a transparency perspective, looking at the extent to which budget execution reports (In-Year Reports, Mid-Year Reviews and Year-End Reports) include detailed information comparing final outturns to original budgeted amounts for expenditure and revenue, and explanations for any significant deviations. The analysis focuses on publicly available budget documents collected through the Open Budget Survey for 24 countries. The majority of countries analyzed do provide budget credibility data – in particular in Year-End Reports – but analysis and explanations of deviations are a lot less common.