economic policy committee the president medium term expenditure frameworks and performance...

Economic Policy CommitteeThe President

Medium term expenditure frameworks and performance budgeting: Elements of the Quality of

Public Finances

Dr. Christian Kastrop

President of the Economic Policy Committee, European Union


The Quality of Public Finances

Quality means improving the growth and employment effects of public resources

Expenditure Side: Focus on long-term growth ("investment in the future")

Revenue Side: Taking negative financing effects into account

Institutions: Modern budget and accounting system

It’s important to consider both: Effectiveness & Efficiency

Effectiveness: Doing the right things

Efficiency: Doing the things right


SGP is the fiscal framework of the EMU aims at ensuring budgetary discipline through two main requirements:

– Treaty requirement to avoid excessive deficit positions (3% deficit and 60% debt of GDP)

– Requirement to achieve and maintain the medium-term budgetary objective (MTO)

At first sight clearly quantitative aspects: But improving the quality of public finances can enhance business and growth conditions, while at the same time allowing a better control of the overall public spending at the national level.

Quality is an important factor in fulfilling the requirements of the SGP

The European Perspective:Quality of Public Finance and the

Stability and Growth Pact


• During the meeting of the European Council in Lisbon in 2000, the Heads of State or Government launched a "Lisbon Strategy" aimed at making the EU the most competitive and the most dynamic knowledge-based economy in the world by 2010

• As quality of public finances means improving the growth and employment effects of public resources, it is also a key contribution to the Lisbon strategy

The European Perspective:Quality of Public Finance and the

Lisbon Strategy


European Commissions Roadmap for Deriving a Conceptual Framework and a Set of Indicators

Quality of public financesThe way forward (1)

Goal

Composition, efficiency and

effectiveness of expenditure

Structure and efficiency of

revenue systems Fiscal governance

Fiscal position and sustainability

Level of expenditure and

revenues

Public finance policies impacting

on market functioning and

business environment

Layer 1: Public finance processes

Layer 2: Public finance outcomes

Long-term economic growth

Environmental Dimension


Layer 1 dimensions of quality of public finances

InstitutionsExpenditure

Quality of public financesThe way forward (2)

• Long term trends in the composition of public spending

• Efficiency and effectiveness for individual spending areas(infrastructure, R+D, health, education)

• Fiscal Rules (debt rules, medium term budgetary frameworks)

• Performance budgeting and evaluations

• Efficiency of public administrations (HRM, information and communication technologies)

Revenue

• Tax expenditures

• Alternative tax bases, tax shifting across tax bases

• Microeconomic and macroeconomic effects of taxation on personal and corporate behaviors


Budget and Accounting System:Starting Point for

Efficiency Improvements

A modern budget and accounting system must:• enable strict priorization • provide for a consistent system of reporting on

public activities, including purposes, content and costs

• provide sufficient information concerning the political objectives and strategies as well as the degree to which objectives are met

• include long term financial consequences of decisions


Use of Performance Information

• The road from incremental budgeting towards results-based budgeting is proving to be long and difficult

• Results information will never completely replace the discussion on inputs, but will shift the focus

• Most OECD countries cannot imagine operating a budget system today without PI. Countries evolving their performance approach rather than discarding

• There is a need for more realistic expectations and greater efforts to get all stakeholders on board


EU-ComparisonIndex of Budgetary Procedures

Source: EU Commission, Public Finance Report 2007

The overall total index of budget procedures incorporates amongst others:

•Budget transparency

•multi-annual planning

horizon

•process top-down budgeting

•prudent economic assumption

•performance budgeting

•numerical fiscal rules


Current Institutional Reforms in Germany

Commission on the Modernisation of Federation-Länder Financial Relations (FöKo II): Reform of constitutional rules governing public finances

Federal Ministry of Finance is working on a reform of the Federation’s budgetary and accounting system with the aim of improving expenditure efficiency


Medium term expenditure frameworks and performance budgeting: Elements of the Quality of

Public Finances

Dr. Christian Kastrop

President of the Economic Policy Committee, European Union

economic policy committee the president medium term expenditure frameworks and performance...

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