Managing Public Money – Essay by Bogdan Craciun

About Bogdan Craciun

Aggregate Discipline – a lost battle for 2006’s budget

As an aspirant country for EU integration, Romania must respect the Maastricht criteria for fiscal constraints (a deficit lower than 3% GDP and the Public Debt lower than 60% GDP).

The Law of Public Finance (LPF) enacted on 2002 introduces the medium-term expenditure framework (MTEF) based on Programme Budgeting (PB) approach in order to attain these criteria.

According to LPF the ministries should make their budgetary proposals within the ceilings received from Ministry of Finance (MoF), after these ceilings were approved by Government. Ministries attach a list that informs about their estimates on programs for the next three years. In the process of Parliament’s budgetary authorization these estimates have only informational character; they do not constitute authorative baselines for work on the future years’ budgets.

The Parliament Report (1) reveals that on the next years the budget proposals for ministries do not relate in any way to the previously forecast estimates. This fact makes the effort of estimating superfluous. And generates lack of credibility for the procedure.

Starting from previous situation, I consider that Romania has a very low level of fiscal discipline (FD), throughout the full process of budgeting.

The first solution to tighten the FD could be the amendment of the LPF. Instead of informative estimates for next three years I suggest to have authorized estimates by Parliament used as binding in the respective years. Romania can benefit from Australia’s and Sweden experience in this area.

My solution makes sense if we take into account the fact that now Romania promotes a lax fiscality, unlike the moment when the LPF was enacted – when fiscal prudence was promoted. According to Schick, “constrictive rules might be appropriate in countries where institutional arrangements promote or tolerate fiscal laxity” (Schick, 1998, p. 55).

The fiscal laxity was introduced by the change of the governing party after 2004’s elections with a new – and long debated – law on reduced taxes on income.

The non-correlation between the relaxed fiscality, and tight, compulsive estimates for line ministries, resulted on an unrealistic 2006 budget. The poor predictability of the budget induced four budgetary rectifications so far. The deficit was raised from the prognosed 0.5% GDP to 2.5% GDP at the last rectification. The successive rectifications indicate both the shift in policy (the supplementary spending was directed to investments), as well as lack of accuracy in revenues forecasting (their collection was much higher than anticipated). The raise of deficit proves once more – according to van Hagen’s study conclusion – (cited by Schick, 1998, p. 60) – that Romania has a fiscal relaxation, and its high deficit is subject to macro-economic instability danger.

The second solution regards reducing the uncertainties and it implies cost assessments for policies and programs. Strong accounting practices and periodic control of the result of expenses are needed.

Romania’s formal rules comply with Emus purviews for a strong aggregate FD (see Timeline Table 2). But the informal rules show the lack of FD. It is highly doubtful the way the medium-term approach is applied in Romania, as long as the budget is subject to changing circumstances and it shows more to be input focused and less policy based.

Parliament authorizes more spending than requested by government (see Spending Authorization Table 1), while ministries themselves make exaggerated budget proposals (BP) right under the PB practice. Even though the BP must be justified through PB – according to LPF – as Parliament Report, the primary BP from line-ministries can be up to 30% more than the actual need, and are still based on the assumption that MoF will operate a reduction.

Collegial rules for budget preparation favor compromise and these are exactly the causes that enforce the spread of practices for influence and self-interests pursuing.

The fragmented government (based on a coalition with many issues in dispute) has virtually little capacity to support the measures required by strong FD.

The third solution required to improve the FD it is a mix of measures: transparency for politicians and managers’ activities and a powerful judicial system that punishes the abuse. During the four years of legislature, the deputies and senators have judiciary immunity. The law must be changed so that the politicians answer in front of law for corruption charges. Otherwise the budget remains just an opportunistic one, despite all formal rules that show commitment to aggregate budget long-term orientation.

Allocative Efficiency – between new rules and old practices

Romania applies PB approach to budgeting for line-ministries since 2000. At present, according to Parliament Report, half of ministries base their budget proposals entirely on PB. The same report reveals poor knowledge in elaborating and prioritizing the programs. When analyzing the allocative efficiency, (see Timetable Table 2) results that the formal rules of implementing MTEF are in place. The allocation process takes into account the government’s objectives. But reallocation stirs up political conflicts. The last budgetary rectification is seen by the governmental coalition as a successful and daring orientation to investments, while the Opposition Parties see the reallocation as a sign of poor forecast of expenditures.

Starting with 2006 cash-accounting is replaced by the accrual-accounting (AA) at all public institutions levels. The benefits of AA are only to be seen in the future. Main challenge for AA implementation seems to be the undertrained staff for both the new principles of AA and for the required IT skills.

The 2006 budget shows both recurrent and capital components. At present the functional classification (FC) of the budget complies with GFS/COFOG standards. The new FC brought difficulties for public institutions on situating certain expenses. But the effort worth it as this classification is powerful instrument in analyzing the allocations of resources inside and among sectors. If we take as example the total amount of subsidizes, transfers and social allocations for 2006 that rise up to 38.96% of total expenses we can understand where government spends the money - for sustaining inefficient State-owned-enterprises or ineffective state guarantees. And this is a valuable piece of information. But only if there is enough managerial will to use the information for improvement. The burden imposed by state guarantees (40.6% of the public debt in 2005) could be reduced by establishing maximal ceiling for guarantees´ total amount with an explicit list of guarantees. The arrears (40% GDP in 2000) became important impediment for macro-stability. The echeloning of the debts of inefficient companies as reply to the social pressure should stop.

As the unused funds cannot be retained by ministries, they tend to make the majority of their spending to the end of the year just not to lose the extra-money. The irregularity of expenses could be overcome only by rigorously applying the PB procedures.

Operational Efficiency – shift from inputs to outputs evaluation

Operational efficiency shifts the focus of evaluation and control from inputs on outputs produced. This approach it is new to Romania’s PEMS.

Traditionally Romania’s public finance control is based on inputs, with little care for results. Outputs evaluation implementation needs time. Special attention is required because - as the November Corruption Perception Index from Transparency International reveals - Romania is considered second highest corrupt country from the surveyed ones.

I consider that at present Romania is simply forbidden to implement at this moment the managerial accountability. As Schick advises on “A Contemporary Approach to Public Expenditure Management”, first should be implemented external control, then the internal control and only after that entrusting the managers with accountability.

Romania’s young auditing institutions (created on 2002) formal rules comply with the EU demands, but their activity shows lack of consistency in evaluation. The auditing institutions are independent but seem incapable to work on their own initiative. So far, the only notorious case submitted to auditing was examined in 2004 at Prime-Minister’s request – at EU’s complaint – for conflict of interests in SAPARD program, where wives of the members of commission that granted the funds were managers of the companies that gained the contracts. As a result new rules where implemented to avoid these situations.

The scarcity of well-trained professionals is another problem: at present, out of 4000 auditor’s job openings, only 2650 are held. Adding the poorness of IT information, it can be understood the low level of operational efficiency.

The performance indicators are just being stated and implemented in Romania. By PB – where the expected performance indicators are enclosed in - could be the starting point for generalizing their usage. The experience of UK – that separated the policy making from service delivery could be in future a good practice for increasing the operational efficiency. But this means more accountability for managers, so this practice could be used only after the basis of external and internal auditing is solved. Otherwise the separate service delivery will only increase the corruption with its mix of nepotistic favors and personal interests.

Conclusion

Important things are still to be done for improving Romania’s PEMS. In my opinion the most important reform’s goal is the training of skilled professionals.

If on a future assessment of Romania’s PEMS “spenders would conserve resources, allocators would reallocate, and managers would perform, not just comply” (Schick, 1998), then it can be considered that the reform of PEMS was successful.

Bibliography:

1. Ministry of Finance, Romania, (2005) “Report regarding the macro-economical status for 2006 and projections for 2007-2008”, Accessed November 25^th, - referred on this paper as “Parliament Report”

[http://www.mfinante.ro/buget/buget2006/pdf/Raportbuget2006definitiv_Parlament.pdf]

2. Schick, A., (1998) “A Contemporary Approach to Public Expenditure Management”, Accessed October 29^th, [http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/02/02/000012009_20060202122216/Rendered/PDF/351160REV0Contemporary0PEM1book.pdf]

Spending Authorization Table 1

	Original	Ceilings	Budget
Spending Units (SU)	proposals	approved	Approved
		by Government	by Parliament
	2006	2006	2006
TOTAL Budget	55,883.80	38,268.48	37,946.34
Presidential Administration	29.04	29.00	29.00
Romania’s Senate	123.85	87.37	84.37
Deputy Chamber	318.53	190.44	170.44
Prime – Minister Court	583.86	528.90	528.90
Government General Secretary	292.83	238.64	241.14
External Affairs Ministry	439.80	401.14	401.14
European Integration Ministry	99.62	95.64	95.64
Public Finance Ministry	1,366.11	1,000.00	997.50
Ministry of Justice	2,459.48	1,390.00	1,390.00
Ministry of Defense	7,190.66	5,978.94	5,978.94
Ministry of Internal Affairs	10,785.80	4,708.07	4,696.57
Ministry of Labour	7,275.40	5,440.00	5,090.00
Ministry of Economy and Trade	1,309.70	1,245.00	1,245.00
Ministry of Agriculture	3,715.50	2,858.90	2,843.90
Ministry of Environment	1,483.80	526.70	527.70
Ministry of Transports	6,098.50	4,950.20	4,950.20
Ministry of Education	6,131.09	3,868.44	4,048.90
Ministry of Health	1,276.06	1,336.00	1,337.16
Ministry of Culture	915.80	429.40	443.00
Ministry of Communication	84.60	12.10	12.10

Source: annex to budget law 2006

Timetable Table 2

Date/Period	Action
1. By 31st of March	Elaboration of macro-economical and social indicators
2. By 1st of May	MoF sends to Government the fiscal and budgetary policy objectives plus the expenses ceilings
3. By 15th of May	Government approves the above and sends them to Parliament’s commissions for finance, banks and budget
4. By 1st of June	MoF sends to spending units a letter specifying the macro-economical context, methods and the expenses ceilings approved by Government
5. By 15 of July	The spending units send to MoF their proposals referring the budget project and annexes, including the forecasts for next 3 years
6. By 30th of September	MoF sends the project of budget to Government
7. By 15th of October	The projects are send to Parliament’s debates and approval

Source: LPF (500/2002)

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