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Public Financial
Management and its
Emerging Architecture


Teresa Curristine,

Fiscal Affairs Department,
IMF



The Exchange Public
Financial Management
Forum, Abu Dhabi

13
-
15 May 2013


Overview of Presentation


1) What is Public Financial Management?

2) The purpose of this book

3) Trends in key PFM innovations

4) Conceptual
framework
and levers of reform

5) Individual
innovations: Issues
challenges and lessons
learned
-

Fiscal Rules, Medium
Term
Budget
Frameworks
(MTBF),
Fiscal councils, Performance
budgeting,

6
) Key lessons from the crisis

7) General
conclusions and lessons
for
reforming
PFM
systems




1) What is Public Financial Management?


In its traditional sense PFM is concerned with established phases
of budgeting

formulation, approval, and execution.


Broadened its focus to all aspects of managing public resources


It is an “umbrella” definition, covering a set of systems aimed at
producing information, processes, and rules that support fiscal
policymaking and provide instruments for its implementation


Sound PFM is about having information, procedures, and rules in
place which incentivize and regulate the behavior of politicians
and public servants so that they achieve the key PFM objectives.


Key objectives:


maintaining a sustainable fiscal position


effective allocation of resources


efficient delivery of public goods and services


2) Purpose of book


Main motivation: importance of PFM especially now


“many governments are now struggling with restoring sustainable public
finances: the way governments manage their budget today will have
profound economic impact in the years ahead. The crisis highlighted the
importance of sound public financial management for generating well
-
designed fiscal policies and ensuring they are implemented effectively




Main objectives:



Take stock of innovations developed and adopted in a growing number of
countries over the last two decades.


Look at public financial management as an integrated framework in
which the elements mutually reinforce each other.


Draw some lessons , particularly in light of recent financial crisis to help
reformers has they move ahead .



3)
Key Innovations



Fiscal responsibility legislation and fiscal rules: Countries with
fiscal rules has risen from 5 in 1990 to 76 in 2012.


Medium Term Budget Frameworks (MTBF): the number of
countries with MTBF has increased from fewer than 20 in 1990
to more than 130 in 2008.


Fiscal Councils: from about 6 in 1990 to around
28
in 2013.


Fiscal Reporting: countries reporting at least a financial
balance
sheet to the IMF has increased from 21 in 2004 to 41 in 2011.


Performance information: since 2007, 80 % percent of OECD
countries produce performance information, and in 2011 about
2/3 have a performance budgeting framework.


Since 1999, 111 countries have undergone a “Fiscal
Transparency ROSC,” and by the end of 2011, 126 countries
had
undertaken
a
PEFA
diagnostic
assessment.




4) Comprehensive Conceptual
Framework







PFM has three types of instruments
-

information, processes and
rules
-

for changing the behavior of politicians and public servants and
outcomes


The three instruments form a logical sequence


Information is the essential first step. It rests on the expectation that
providing better information to policy makers will produce better
outcomes


Processes offer inducements for policymakers to make prudent,
effective decisions


Rules prescribe or proscribe certain actions by policymakers or
outcomes

Each Instrument has its limitations


Information: essential but can be costly,
and become
an end by itself,
and stir conflict


Processes: innovations tend to be dominated by routine and
bureaucratic inertia


Rules: can be procedural and/or restrictive










5) The number of countries with fiscal rules rose from 5 in 1990
to 76 in 2012 most countries have more than one rule

5) Fiscal Rules: Challenges and lessons
learned


Issues and Challenges


Rigidity in adjusting to shock , lack of flexibility


Poor
enforcement
mechanisms
-
failure of countries to save in good
times.


Incentives to bypass rules and engage in creative accounting


Lack of supporting institutions


During crisis many rules suspended


Lessons Learned


Flexibility to adopt to changing economic circumstances


Importance of design features


escape clauses


Need for integrated framework and supporting budgetary institutions


Adopt to countries capacity and

specific circumstances


Importance of political commitment


New generation of rules post
-
crisis, explicitly combine sustainability
objectives with more flexibility to accommodate shocks and set
budgetary targets in cyclically adjusted terms. But more complex and
require greater technical capacity

5) MTBF: Issues and Challenges and Lessons learned

Issues and Challenges


Some countries treat MTBF as separate rather than integrated part of budget
process


Some countries with indicative frameworks treat out
-
year ceilings as floors and
make overly optimistic projections.


During crisis, difficult to keep to this year’s budget totals let alone future years


Lessons Learned


There is no single MTBF model.

In deciding on model countries face trade offs
between objectives, coverage , specify and certainty


Design features are key for success and need to be adjusted to country
circumstances


Binding Frameworks more effective in promoting fiscal discipline but require higher
capacity.


Preconditions: need creditable annual budget process, based on prudent
macroeconomic assumptions, guided by transparent fiscal objectives, and top down
budgeting.


Enforcing credibility of MTBF requires regular updates of medium term projections,
adequate safety margins, and firm control over multi
-
year commitments .


During crisis countries with advanced MTBF used it to show markets how it will
implement plans to achieve sustainable fiscal targets in medium term.




5) The
number of countries with fiscal councils grew from
6 in 1990 to 28 in 2013
..

0
5
10
15
20
25
30
1960
1980
1995
2005
2013
European
NonEuropean
1

3

6

7

20


f

5) Fiscal Councils: Challenges and Lessons Learned

Issues and Challenges


Obtaining and maintaining Independence
-

walking the independence
tightrope


Influencing fiscal policy
-
and promoting fiscal discipline
-

I
s information
enough?


L
imited resources

Lessons Learned


Wide diversity among councils, adopted to country circumstances


Importance of not just legal but also operational independence


Works better with fiscal rules, helps monitor rules.


Councils need an active media strategy and time to build up their
credibility and reputation.


Political support is important as is political and public support for sound
public finances


Well defined mandate and technically qualified staff.


Councils seen as a solution but important not to oversell them still too
early to disentangle impact on fiscal outcomes




5) Trends
in Performance
Budgeting and Management

Percentage of spending ministries that use performance information in budget negotiations

How spending ministries and ministries of finance use performance information

5) Performance Budgeting: Challenges and Lessons Learned

Challenges


Improving quality of Performance Information(PI) and receiving relevant
information in timely manner.


Aligning incentives to promote performance improvements.


Engaging Politicians to use PI in decision making.


Changing culture and behavior of key actors to focus on results.


Mixed use of PI during the crisis depends on individual countries circumstances
move towards spending reviews.

Lessons Learned


Importance of leadership at a political and institutional level


Importance of ownership and engaging those in the front line delivering
services.


Evolving and adopting performance systems as political and economic
circumstances change.


Changing and evolving incentive structures to avoid gaming and performance
reforms becoming about compliance.






6) Key Lessons from the Recent Crisis



Pre

crisis innovations not yield excepted results
-

governments
did not save in good times.


Many innovations not well entrenched or fully implemented


Innovations introduced in a piecemeal fashion without
understanding links between different reform initiatives and
need for supporting reforms.


Rigid systems and rules broke down


Controls insufficiently tight


basics not in place


Information insufficient

Quality, Coverage, Timeliness
-

government unaware of the true state of public finances


Transparency and Accountability at Risk


governments poor
understanding of fiscal risks

7) General Conclusions and Lessons



Modern PFM is a set of increasingly complex processes, rules, and
systems, intrinsically linked to one another.


Importance of viewing PFM as an integrated framework .


Context matters and adjusting reforms to individual country
circumstances.


Reform prospects influenced by: sequencing of reforms; the
impact of context and differing institutional and technical
capacities and political economy factors
-

especially in developing
countries where reform architecture is critical.


Reliable, timely, comprehensive information is essential but it
may lead to information overload and in some cases not sufficient
to change behavior

7) General Conclusions and Lessons


The relative emphasis of PFM has shifted
toward fiscal sustainability vis
-
à
-
vis efficiency
and effectiveness.


Thus, the focus on medium/long term and fiscal
risks.


The architectural design identifies constituent
elements and provide general considerations.
Going beyond that would be pretending to have
discovered a magic formula that does not and
cannot exist.


Thank you

This impressive book offers insightful perspectives on the challenges of managing public money
and will inspire and inform reform ideas across the globe for years to come. Academics and
practitioners alike should keep a copy close at hand. I certainly will.

Matt Andrews

Associate Professor of Public Policy,

Kennedy School of Government, Harvard University

...This [book] couldn

t come at a better time, as leaders and analysts alike will need better
guideposts to help nations achieve more sustainable and rationalized public finances in the
tumultuous years to come.

Paul L. Posner

Director, Public Administration Program, George Mason University

...This timely publication provides an impressive overview of country practices, reforms, and
innovations in the area of public financial management and is a rich source for practitioners in
public administrations as well as for the academic community and the interested public.

Gerhard Steger

Director General of the Budget, Ministry of Finance, and Chair, OECD

Working Party of Senior Budget Officials

This much
-
needed book seeks to avoid simplistic prescription and fosters awareness of the
coherence and context of budget institutions. It is an indispensable guide for postcrisis fiscal
designers.

Joachim Wehner

Associate Professor of Public Policy,

London School of Economics and Political Science

Reviews for

Public Financial Management and Its Emerging
Architecture