Budget Institutions and Fiscal Responsibility: Parliaments and the Political Economy of the Budgetary Process in Latin America

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Budget Institutions and Fiscal Responsibility
Parliaments and the Political Economy of the
Budgetary Process in Latin America

• Carlos Santiso
• Governance adviser, United Kingdom Department for
  International Development (DFID) Political
  economist, Johns Hopkins School of Advanced
  International Studies (SAIS)
• XVII Regional Seminar on Fiscal Policy
• United Nations Economic Commission for Latin
  America and the Caribbean (ECLAC)
• Santiago de Chile, Chile, 24-27 January 2005

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I - Introduction

• Key question
• Can parliaments make an effective contribution to
  the budget process while preserving and
  reinforcing fiscal discipline?
• Central challenge
• Latin Americas difficult combination
  presidential systems of government and highly
  centralised budgetary systems
• How to retain the advantages of strong executive
  authority required to ensure fiscal discipline,
  while providing the institutional checks and
  balances that guarantee accountability.

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(2)

• Main purpose
• Underscore the risks of excessive executive
  discretion in public budgeting and the benefits
  from a more balanced relationship between the
  executive and the legislature in the budget
  process.
• Suggest ways in which the contribution of
  parliaments to budget oversight and financial
  accountability could be enhanced in a fiscally
  responsible manner.
• Find an adequate balance between executive
  prerogatives and legislative oversight in public
  budgeting.

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(3)

• Parliaments as budgetary institutions
• Conceptualise the governance of the budget.
• Focus on role of parliament as an actor in the
  budget process.
• Focus on the interaction of executive and
  legislature.
• Understanding the governance of the budget beyond
  the executive.
• Understanding the governance of the budget along
  the different phases of the budgetary process.
• Structure of study
• Reviewing a consensus Hierarchical budget
  institutions and centralisation of budgetary
  systems.
• Assessing the scope of legislative budget
  authority.
• Evaluating the effectiveness of legislative
  budget oversight.
• Main findings and recommendations.

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II - Budgetary institutions and government
accountability

• Parliaments as institutions of fiscal governance
• Legislative budget institutions and
  second-generation reforms greater focus on
  transparency, responsibility and accountability.
• First generation reforms in governmental
  financial management.
• Focus on internal systems budgeting, cash
  management, accounting, financial reporting,
  internal control and auditing.
• Example of Simafal.
• Second generation reforms in public finance
  management
• Greater appreciation of external systems
  external auditing, legislative oversight and
  societal accountability.
• Budgetary systems as part of broader systems of
  fiscal governance and financial administration.
• Contribution of parliaments as part of a wider
  system of fiscal control and financial
  accountability.

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Accountability cycle of the budgetary process
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(2)

• Fiscal governance and legislative institutions
• Political institutions, budgetary processes and
  fiscal outcomes (Alesina and Perotti 1996,1995
  Acosta and Coppedge 2001).
• Controversy on what is the most appropriate role
  of parliaments in budget policymaking and
  oversight.
• Foundational fiscal pact (Cepal 1998) and
  wicksellian connection of public finances
  (Breton 1996) but
• Dysfunctional fiscal effects of unrestrained
  legislative budgetary powers on fiscal
  management.
• Fiscal responsibility and political
  accountability tensions and complementarities.

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(3)

• Fiscal discipline and hierarchical budget
  institutions
• Institutional solution Centralisation of
  budgetary powers and limitation of prerogatives
  of parliament in the budget process.
• Centralisation of the budgetary process within
  the executive (central budget office of finance
  ministry) is more likely to guarantee greater
  fiscal discipline (Alesina and Perotti 1996
  Alesina 1999 Stein 1998).
• Institutional features of fiscal governance
  three institutional arrangements are more
  conducive to fiscal restraint (i) ex ante
  numerical constraints on deficits (ii)
  top-bottom or hierarchical procedural rules and
  (iii) transparent procedures (Alesina 1999).
• Political features of fiscal governance
  extensive and largely unchecked use of executive
  decrees and delegation of legislative budget
  powers to the executive.

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Index of budgetary institutions
Stein et al (1998). Average figures for 1990-1995
on a scale from 0 to 1, from the least to the
most centralised.
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(4)

• Risks of hierarchical budgetary arrangements
• Hierarchical budgetary arrangements tend to allow
  for excessive executive discretion in public
  budgeting, which tends to
• Undermine the public legitimacy of the budget as
  a policy-setting tool and its credibility as an
  instrument of strategic-planning (MTEF)
• Weaken the incentives for fiscal transparency and
  external scrutiny, which makes fiscal discipline
  and expenditure control harder to achieve
  (quasi-monopoly of the executive on financial
  information)
• Undermine the resoluteness of fiscal policy and
  budgetary management, while nevertheless allowing
  for greater flexibility and decisiveness
  (especially in times of crisis) (Haggard and
  McCubins 2001)
• Overemphasise aggregate fiscal discipline over
  the other goals of public budgeting, namely
  allocative and operational efficiency (Schick
  1998), and the ability to implement
  counter-cyclical fiscal policy.

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(5)

• Accountability functions of parliaments in public
  budgeting
• Ex ante accountability
• Ensure that budget allocations adequately reflect
  policy priorities.
• Concurrent accountability
• Oversee the execution of the budget by the
  executive.
• Ex post accountability
• Hold government to account for performance and
  results.
• Transparency and credibility
• Improve the credibility of the budget by
  enhancing transparency in fiscal information and
  scrutiny of fiscal policies and
• Redress the information asymmetries between the
  state and society.

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III - Legislative budget authority Legal
framework

• Overview of legislative budget powers
• Vary along the four main phases of the budget
  cycle (formulation, adoption, execution, and
  control).
• Gap between formal powers and actual performance.
• Uncommon executive prerogatives in public
  budgeting.
• De jure or de facto restrictions on legislative
  budget powers.
• Legislative taxation powers (de facto
  delegation).
• Legislative budgetary powers (de jure
  delegation).
• Key variables
• (i) whether parliament is legally empowered to
  intervene,
• (ii) whether it is endowed with the required
  technical capacities,
• (iii) whether it possesses the necessary
  political incentives, and
• (iv) whether the governance environment is
  conducive.

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(2)

• Legislative powers along the budget cycle
• Budget formulation
• Constraint Exclusive right of initiative of the
  executive.
• Budget review and approval
• Amendment powers of parliament,
• Veto powers of the president (package and line
  item veto powers),
• Over-ride powers of parliament,
• Location of the reversion point,
• Legislative process and structures (internal
  rules and legislative capacities),
• Time, timing and sequencing of the budgetary
  process.

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Constitutional restrictions on legislative budget
authority
Source Alesina et al 1999 World Bank 2001
Casar Pérez 2001 Payne et al 2003 Rodríguez and
Bonvecchi 2004.
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Time for budget review
Based on Gutiérrez 2001 Chapter III World Bank
2004 for Nicaragua and 1992 organic budget law
for Argentina.
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(4)

• Budget execution
• Oversight of budget execution,
• Scrutiny of budget re-allocations,
• Control of executive decrees.
• Budget control
• Ex post review of public expenditure,
• Certification of public accounts.

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IV - Legislative budget oversight Actual
performance
(1)

• Budget transparency
• Perceptions of performance
• Index of budget transparency (aggregate)

IBP 20035.
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Index of budget transparency (disaggregate)
Based on IBP 20033.
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(2)

• Internal constraints (institutional arrangements)
• Organisation of legislative committee work
• Finance, budget and public accounts committees
  full committees or sub-committees
• Interaction with sectorial committees and special
  or ad hoc committees (inquiry commissions)
• Joint committees in bicameral systems

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(3)

• Legislative technical advisory capacity
• Staff levels of budget-related legislative
  committees
• Members of parliament with professional staff
  dealing with budgetary issues

OECD World Bank Budget Database (2003), Question
2.10.h.
OECD World Bank Budget Database (2003), Question
2.10.h.
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(4)

• Political parties in the legislature with
  advisory capacity
• dealing with budgetary issues
• Number of technical advisory staff serving
  political parties and
• dealing with budget issues  

OECD World Bank Budget Database (2003), Question
2.10.f.
OECD World Bank Budget Database (2003), Question
2.10.g.
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(5)

• Legislative budget research capacity
• Cases of Chile (2003), Mexico (1998), Venezuela
  (1997), Peru (2002)
• Legislative budget offices

OECD World Bank Budget Database (2003), Question
2.10.e.
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(6)

• External constraints (governance context)
• Legislative oversight and external auditing
• Elusive and dysfunctional linkages.
• Economic governance and budget execution
• Insulation of economic policymaking,
• Extensive use of executive decrees,
• Frequent budget re-allocations.
• Political governance and legislative budgeting
• Nature of political regime (presidential or
  semi-presidential),
• Incentives provided by electoral rules
  (majoritarian versus proportional systems,
  district magnitude, open and closed lists,
  preferential voting),
• Impact of quality of political party systems
  (coherence and cohesion).
• Political opposition and government
  accountability
• Technical capacities and political incentives.
• The case of Mexico since 1997

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V - Concluding remarks Politics of Public
Budgeting

• Enhancing political accountability while ensuring
  fiscal discipline Can it be achieved?
• Legislative budget powers How much is enough?
  How Much is too much?
• Finding the adequate balance between executive
  prerogatives and legislative powers
• Executive dominance in the formulation and
  management of the budget is more likely to ensure
  fiscal prudence
• Legislative oversight is critical to enforce
  accountability in the execution and control of
  the budget.

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(2)

• Parliaments and systems of fiscal control
• Strengthening institutional synergies in the
  national systems of integrity.
• Institutions of horizontal accountability
  effective internal control and independent
  external auditing.
• Mechanisms of vertical accountability electoral
  rules, party system and political incentives.
• Processes of societal accountability public
  transparency, social control and external
  oversight.
• Legislative hierarchical budget institutions
• Institutional devices can help legislatures
  reconcile budgetary activism with fiscal
  prudence.
• Rationalising and centralising the legislative
  amendment process (Brazil).

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(3)

• Technical capacities and political incentives
• Question of strategy Should parliaments
  technical capacities be built first? Or should
  political incentives be enhanced first?
• Capacities and incentives ought to be addressed
  simultaneously capacity constraints partly
  explain why parliaments do not exercise their
  budgetary powers effectively, governance
  constraints tend to explain why they sometimes do
  not exercise them responsibly.
• To build effective legislatures, mobilising
  political power is more important than increasing
  technical skill (Carothers 1999181).