Budget process requires a focus on systems for basic fiscal management

13Jun 2016
Muharram Macatta
The Guardian
Budget process requires a focus on systems for basic fiscal management

A ‘basic enough’ budget process requires a focus on systems for basic fiscal management (clear input controls, functioning treasury systems that can execute and manage payments,

accounting and reporting systems that capture overall expenditure patterns) and straightforward high-level allocation decisions.

Other elements of budget best practice –for example strong internal and external audit, a focus on improving operational delivery and investments in the strategic phase of the budget –are less important.

However, even such a ‘basic enough’ budget might be challenging to deliver in many low-income and low-capacity developing countries, Tanzania being one of them.

In order to manage revenue and expenditure, our country has a budget of some kind. While there are numerous frameworks for what constitutes an ideal budget, relatively little consideration has been given to what might constitute a ‘basic enough’ budget for low-income and low-capacity country of this category.

A key element of state effectiveness –indeed, a marker of its existence at all–is the ability to raise and deploy financial resources in pursuit of its policy objectives of which rampant embezzlement and misuse of public funds has historically been an overriding driver in the Tanzanian context.

A country that cannot undertake some elementary economic and financial management –that is, deliver a basic budget is unlikely to be on the path to rapid economic and social development, and at the extreme may risk collapse.

What constitutes the nature of a budget can be described as plan for public expenditure lasting one year that is approved by a legitimate authority which is the existing national parliament. The discussion in this critique will follow this approach and focus only on the expenditure aspect of national budget, rather than the government’s plan for revenue rising.

Budgets offer two main theoretical benefits compared to a system of fully discretionary and ad hoc spending: they can be a tool for increased efficiency, and a tool to generate a contract between funders and executors of the budget.

Regarding efficiency, budgets increase the likelihood that government will deliver its aims by requiring competing priorities to be traded off against available resources and providing a mechanism to coordinate action among disbursed actors across the public sector.

In terms of contracting, budgets represent a social contract setting out what the minister of finance delivered in his speech that the government will deliver in return for resources as a way of ensuring support (or at least acceptance) for the government’s tax and spending plans.

The Budget speech 2016/17 as presented by Dr Philip Mpango, the Minister of Finance; this is a praiseworthy ‘perfect’ budget and exemplary masterpiece work, well performed and would deliver both of these and in doing so be relevant and credible as a planning and contracting tool.

Nevertheless, the fact that formal budgets endure in all countries suggests that they have some advantages in delivering these twin objectives compared to having no system at all.

What makes a basic enough budget is interesting for a number of reasons. Firstly, low-income and low-capability developing country budgeting systems are widely thought to be weak, and –importantly –have been so for many years.

Studies from decades ago, the more recent past, and from contemporary low-income and fragile environments continue to point to actual budget practice that continues to fall short of good practice; that is, over exploiting tobacco, beer and similar items consumers that affect most people with very low income per capita.

As a result, and given the long-standing problems many countries experience in this regard, there is merit in considering in more detail the nature of a national budget that explicitly aims to do just enough to deliver a relevant and credible budget.

Secondly, while there is a great deal of advice that conceptualises what an ideal budgeting system should look like, there is a gap in the discussion of what ‘just enough’ might look like.

It can help budget managers in low-income and low-capacity environments, and their external supporters, to focus their attention on the most important of the core functions of budget management and therefore prioritise their scarce resources.

Thirdly, and related to the above, there has been a broad change in the academic approach in public financial management and budgeting reform. The debate has moved away from recommending ‘best practice’ solutions, often based on replication of contemporary developing countries’ institutions, and towards ‘best fit approaches that build iteratively on existing systems, however flawed they may be, over the long term.

This move follows a broader shift in governance thinking in development practice from the importance of delivering ‘good governance’ to fostering ‘good enough governance’ and avoiding the almost inevitable implementation failure that accompanies overly ambitious institutional reform.

A basic enough budget discussion can usefully take this approach to governance reform and apply it to the budgeting context. The ministry of finance is the lead actor with oversight of the end-to-end process.

It is this institution that will likely determine what level of sophistication should be used. As a result, considering the implications of a basic enough budget from the ministry of finance perspective is most useful.

Within the two overall benefits of budgets discussed above (more efficient management; more effective contracting), a national budget is often seen as having three overall objectives: Fiscal control to support macroeconomic stability, a locative efficiency, and operational efficiency.

These are typically presented in a hierarchy of importance, with fiscal control being more important than allocative efficiency, which in turn takes precedence over operational efficiency.

To a degree this ordering is perhaps logical. Only once overall fiscal control (the first objective) is established can there be a discussion about sustainably allocating resources to priorities (the second objective); and similarly there is questionable benefit in aiming for operational efficiency if the wrong priorities are being made maximally efficient (the third objective).

Above all, even perfectly delivered operational and locative efficiency will ultimately unravel if overall fiscal policy is unsustainable. This suggests that basic enough budgets should therefore prioritize those systems and operations that will support fiscal control above systems that support the other two objectives.

Putting in place the systems that can deliver fiscal control will be a significant step towards making the budget relevant and credible at a high level, even if not necessarily at an allocative/operational efficiency level. It suggests a secondary focus on basic a locative efficiency.

Translating this into the context of a basic enough budget, it could usefully focus on the high-level allocative issues by economic category (e.g. debt; wages; recurrent; capital) that are common across government and relatively easy to aggregate, and perhaps on understanding of the key administrative divisions that government typically use to allocate broad types of expenditure (e.g. allocation to individual ministries).

It is often suggested that provision of finance at the right time and right place is necessary but not sufficient for efficient service delivery, and again that a large number of non-financial factors determine how and if services will be delivered.

Overall, it suggests that even if a ministry of finance can provide important inputs for the right purposes at the right time, a whole host of other factors must also be in place if efficient services are be delivered (e.g. the right policies, the right workforce, the right motivational incentives).

These are typically beyond the control of the ministry of finance, which would usually look to a sector ministry to lead on these ‘softer’ issues. If a basic enough budget requires prioritization of activities, it is better for the finance ministry to focus on those things that are within its control, rather than things for which it lacks direct levers.

This would suggest a focus on fiscal control and basic allocative efficiency, where the ministry of finance has real levers and instruments to determine outcomes, rather than assuming a large role in delivering operational efficiency.

A national budget can be conceptualized as working through a well-recognized sequence of events. This cycle and typology can also help inform the nature of a basic enough budget.

Typically, a budget cycle has a number of stages taking the process through from formulation to evaluation, the outcome of which will then feed into the next year’s budget.

Most important, this would be (1) execution and controlling expenditure so as to not exceed certain key totals(supporting fiscal control), and (2) accounting and reporting so as to know the in-year and end-year fiscal position and broad allocations (to further support fiscal control and monitor basic allocation).

Experience of multi-year national planning in developing countries is not encouraging in terms of countries’ ability to link strategic plans to budget policy…

Muharran Macatta is a retired civil servant, a graduate in liberal arts majoring in economics and political science. He once served as a director of internal and international trade, import and export section, with the then Ministry of Commerce and Industries, which later became to be the ministry of commerce and cooperatives.

He also served as principal marketing officer assigned to several marketing boards. Established state motors corporation and also founder of regional offices and first director of the Saba Saba International Trade Fairs.
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