2. Fiscal Responsibility and Accountabilitythe fiscal process. ... • A moral category instead of a...
Transcript of 2. Fiscal Responsibility and Accountabilitythe fiscal process. ... • A moral category instead of a...
2. Fiscal Responsibility and Accountability
Marco Cangiano
Rome, February 6-8, 2017
Outline
• Preview• Definingresponsibilityandtransparency• Whyresponsibility/accountabilitynow
PartII• Roleofinformation
Ø CoverageØ Timeliness,frequency,quality,andintegrityØ Theartofconsolidation
• Concludingremarks
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(f)
GGGrossdebtreportedinDec2009
GeneralGovernmentdebtexcludingreclassifiedSOEs,PPPsorfinancialsector*
SOE&PPPreclassificationspostDec2009
Financialsectorbailouts
GeneralGovernmentGrossDebtArrears
FinSector
SOE&
PPPreclassificati
on
60%debt
SOE&PPPdebtoutsidetheGeneralGovernmentsector
Deficit
Debtdynam
ics
3%deficit
Anything that could go wrong did go wrong
Definition(s)
Fiscal ResponsibilityFiscalresponsibilityisdefinedas:
anagreedsetofpolicies,processes,orarrangementsintendedtoimprovefiscaloutcomes,discipline,transparency,andaccountabilitybyrequiringgovernmentstocommittomonitorable fiscalpolicyobjectivesandstrategies.
• Oftenstatedonlegislation(FRL)• Constraindiscretion• Reputationalinvestmentandcosts• AdequatePFMsystems
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Government, public interest, governance, accountability
• Togettheconversationgoing,whatisagovernment?– Isitallinprovidingpublicgoods?Butwhatarethese?Isitallrelative?
• Howdowedefinepublicinterest?– Acontextualtermthatrequiresmorespecificdefinitionthattheonestypically
foundinnationalconstitutionalmandatesorreligiousprescriptions.– Inotherwords,thequestforanobjectivedefinitionofpublicinteresthas
provensomewhatillusory,asitrequires,forinstance,anexplicitvaluejudgmentonincomeredistributionwithinagivensocietyaswellasontherole,function,andsizeofgovernment.
• Whatisgovernance?– Normative(valuebased)vs.positive(fact-based)approach
• Howcangovernmentsbeaccountable?– Information– Independentevaluation– Increasingpublicparticipation 7
Governance
• Thegeneralexerciseofauthority• Thearrangementswherebyintendedoutcomesforstakeholdersare
definedandachieved.• Government’sabilitytomakeandenforcerules,andtodeliver
services(Fukuyama(2013).
– Problemintryingtomaketheconceptoperational.
– Verylittleagreementonwhatconstituteshigh-qualitygovernment,”Fukuyama,2013.
– Confusionbetweengoodgovernance—ameanstoanend—andwhatisgovernment—whichraisestheissueofitspoliticalarrangementsandpursueofsocialobjectives.
– Defineandpossiblycontextualizetheconceptinasmuchoperationaltermsaspossible
Budgeting
• Governanceandbudgetingoftenusedinterchangeablyinagendaaimedatreformingpublicmanagement—functionaldefinition.
• Budgeting—”attemptstoallocatefinancialresourcesthroughpoliticalprocessestoservedifferenthumanpurposes,”Wildavski 1975.
• Publicfinancialmanagement—broadercontext(publicsector);analysisoffiscalrisks;transparency.
• Legitimatetocompareacrossdifferentcontexts?
Types of FRLs• Fiscalresponsibilityprinciples (transparency,accountability,andsustainability),butdoesnotidentifyindetailedtermshowtheseprinciplesaretobemet.
• Proceduralrules,bothforfiscaltransparencyandthefiscalprocess.
• Rulesforthestanceoffiscalpolicyorplaceslimitationsonkeyfiscalpolicyaggregates.
Allofthemrelyontransparencyandgoodqualityinformation
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KeyPFMRequirements
• Well-structuredcabinetdecision-makingoverthemediumterm• Fiscalpolicyanalysisandabilitytosetfiscaltargets• Crediblebudgetformulationandpreparation• Reasonablyreliablemacroandfiscalforecasting• Effectiveanddisciplinedbudgetexecution• Accurate,timelyandreliablefiscalmonitoringandreporting• Independentreviewoffiscalpolicyoutcomes• Acrediblemedium-termfiscalframework(MTFF/MTBF)andamonitorable
fiscalstrategy• Costingofnewandexistingpolicymeasuresoverthemediumterm,i.e.,
definitionofbaseline• Settingandexecutingfiscalpolicyinlinewithtightlydefinednumerical
limits
Transparency: IMF 2012• Fiscaltransparency:theclarity,reliability,frequency,timelinessandrelevanceofpublicfiscalreportingandtheopennesstothepublicofthegovernment’sfiscalpolicy-makingprocess.
• Publicfiscalreporting:thepublicationanddisseminationofsummaryinformation aboutthepast,present,andfuturestateofthepublicfinancestocitizensintheformof:– fiscalforecastsandbudgets;– governmentfinancestatistics;and– governmentfinancialstatementsoraccounts
• Fiscalrisks:factorsthatleadtodifferencesbetweenagovernment’sforecastandactualfiscalposition
Whyearlierattemptsdidnotdeliver?
Italy—2002ROSC
https://www.imf.org/external/pubs/ft/scr/2002/cr02231.pdf
Empirical evidence not overwhelming• Onaverage,moretransparentcountrieshavebetterfiscal
outcomes,butdoestransparencycausetheimprovementinfiscaloutcomes?
• Orarecountrieswithbetterfiscaloutcomesmoreinclinedtopublishinformationonpublicfinances?
• Ordoother,underlyingdifferencesamongcountriesleadtodifferencesinbothfiscaloutcomesandtransparency?
• Somestudiesfindevidencethatfiscaltransparencyleadstobetteroutcomes,butcausalityremainsanissue:– AltandLassen(2006):transparencyleadstolowerdebt,controllingfor
otherinfluences– Arbatli andEscolano (2012):transparencyimprovescreditratings,
directlyandindirectly• Butitispossibletodevelopmodelsinwhichtransparencyis
actuallyharmful(seeJustinFox,2006)
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Did we get the right incentives?• Transparency(apositivemessage)confusedwithant-corruption/goodgovernancecampaign(lesspositive).
• Amoralcategoryinsteadofameanstoanend—fiscalresponsibilityandaccountability.
• Anotherrich/westerncountries’imposition.• Goodyearsarenotconducivetochange.• ROSCs runoutofsteamasveryrarelybecamesubjectofsurveillance/conditionality…
• …althoughtheydidflagtherightissues,perhapsinasomewhatcrypticway.
• Other(toomany?)diagnostictoolsemphasizedmoretheformoverthesubstance—betspracticesbias.
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Is it always a good idea?
• “Sunlightisthemostpowerfulofalldisinfectants”(Brandeis)• “Theremaybetrade-offsbetweenthevalueofsunlightandthe
dangerofover-exposure”(Heald)• Dumpingextremelydetailedandlargeamountofdatamaycreatea
veilthatfogsratherthanshedslightonfiscalevents.• Informationhastobevetted—withsomedegreeofautonomyand
independence—tomakeitcomprehensive,reliable,timely,andmostofallreliable.
• Riskofcomplianceorformvs.substance:OBI,RevenueWatch,andPublishWhatYouPaymayprovideaneasywayoutforgovernmenttoperformwellontheirindexeswithoutmakingadentonfiscaltransparencyandaccountability.
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The illusion of transparency
• Publishingonlypartialinformation– Netbutnotgrossspending– Noinformationonoff-budgetgovernmententities– Revenuesandspending,butnotassetsandliabilities
• Publishinginformationthatisdifficulttounderstand– Withoutsummarytablesorexplanatorytext– NotonInternet,noteasytobuyorborrow
• Exploitingweaknessesinaccountingrules– Sellingassetsandtreatingtheproceedsasrevenue– Borrowingbyissuingoff-marketderivativeswhenderivatives
don’tcountasdebt
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Layers of transparency?
• Onecanlookattwolevelsoftransparency:
– Themostimportantoneisfordecisionmakerstorealizetheirtrue(andfair)fiscal(financial)position.
– Thefactthatsuchinformationshouldbepubliclyavailablegoeswithoutsayingbutbelongtoadifferent—equallyimportant—level.
• Transparencyisalsoaprerequisite(necessarybutnotsufficient)for:
– Accountability,whichrequiresclearobjectivesandresponsibility– Participation,withincabinet,betweenexecutiveandlegislature,civilsociety,butcausalitynotobvious 19
Whynow?
Why Transparency now?
• 2008financialcrisis…butithappenedbefore…• Fiscaladjustmentmaybecomeanillusion• Governmentstendtodisappearbecauseof:
– hiddenborrowing:pensionschemes– disinvestment:privatization,securitization– deferredspending:cash/accruals,leases,PPPs– foregonedepreciation/investment
• Financialmarketsalsoseemtocare—whichwillprovidefurtherincentivesforsoundfiscalpolicies
Lessons from the Recent Crisis
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SourcesofUnexpectedIncreaseinGeneralGovernmentDebt(percentofGDP,2007-2010)
FRA DEU NLD ESP PRT GBR USA GRC IRL ISL AVE*
Underlyingfiscalposition 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0
Revisionsto2007deficit&debt 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7
Changestogovernmentboundary -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1
Cash-accrualadjustments 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2
Exogenousshocks 8.4 12.8 14.2 15.4 8.1 17.0 6.3 40.0 60.2 39.5 9.8
Macroeconomicshocks 8.3 4.7 5.2 13.0 4.4 8.9 3.8 38.4 35.7 -3.3 6.0
Financialsectorinterventions 0.0 8.1 9.0 2.5 3.6 8.1 2.5 1.6 24.5 42.8 3.8
Policychanges 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7
Otherfactors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9
TotalUnforecast IncreaseinDebt 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4
*GDP-weighted average
UnreportedDeficits
SoEs & PPPs
Arrears
Macroeconomic Risks
Contingent Liabilities
Stimulus / Consolidation
IssuesRevealedbytheCrisis
Main lessons
• Countriesdidnotknowtheirtruefiscalposition.
• Fiscaladjustmentturnedouttobeanillusionasliabilitieswentundetectedandaccumulatedoutsidethetraditionalperimeterofcentralgovernments’budgets.
• Inotherwords,therewaspoorqualityinformationonfiscaldevelopments.
• Butfinancialmarketsstartedtocare—whichcould providefurtherincentivesforsoundfiscalpolicies.
Markets seem to care ……FiscalTransparency&FiscalPerformance FiscalTransparency&FiscalCredibility
R²=0.00575
R²=0.20281
R²=0.25164
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AverageDe
bt/G
DPRatio,1997-2007
IMFIndexofFiscalTransparency
HighIncome
MiddleIncome
LowIncome
Linear(HighIncome)
Linear(MiddleIncome)
Linear(LowIncome)
R²=0.25032
R²=0.04893
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AverageCD
SSpread
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IMFIndexofFiscalTransparency
HighIncome
MiddleIncome
Linear(HighIncome)
Linear(MiddleIncome)
……and do not seem to forget
AverageAnnualImpactof“FiscalGimmicksandOne-offMeasures”inEurope(1993–2003;PercentofGDP),andrelationshiptoCDSSpreadsinJanuary2011
Source:Koen andvandenNoord (2005,AnnexTableA1),Bloomberg,Irwin.
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0.030.03
0.080.140.140.16
0.220.230.25
0.330.350.36
0.650.69
2.36
0.0 0.5 1.0 1.5 2.0 2.5
DenmarkGermany
United KingdomFranceAustria
LuxembourgSwedenFinlandIreland
NetherlandsSpain
BelgiumPortugal
ItalyGreece
Ireland
Spain
Belgium
Portugal
Italy
Greece
0
100
200
300
400
500
600
700
800
900
1000
0 0.5 1 1.5 2 2.5
CD
S s
prea
d,Ja
nuar
y 20
11 (B
asis
poi
nts)
Accurate macro-forecasts
PortugalArrears≈3%ofGDP
95%fromoutsidetheCGbudget
GreeceArrears≈4.3%ofGDP
91%fromoutsidetheCGbudget
Arrears: execution and reporting failures
Inbothcountries,arrearsemergedfromoutsidethebudgetperimeter
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LocalGovt
Others
Hospitals
SocialSecurity
BudgetaryCentralGovt
LocalGovt
RegionalGovt
Hospitals
BudgetaryCentralGovt
Others
Quasi-fiscalActivitybySoEs
RevisionstoDeficits
MacroeconomicShocks
UnreportedFlows
Exposure to Financial Sector
Exclusive focus on general government
Infrequentfiscalreporting
Biasinmacroeconomicforecasting
Lossesonasset&liabilityholdingsnotrecognized
Norecognitionofcontingentliabilities
Problem WeaknessinCurrentStandards
How to improve fiscal transparency?
Publication of fiscal data for public sector
Monthlyoperationalfiscalreports
Alternativemacro-fiscalscenarioanalysis
Recognitionofdoubtfuldebtsinsummary
aggregates
Recognitionofquantifiablecontingent
liabilities
Recommendation
Concludingremarks
Were problems addressed?
• Afterinitialsuccess,1998transparencyinitiativediedout…..• Astringof“good”yearsdidnothelp,but….• ….insufficientemphasiswasputinsurveillanceandconditionality
work.• Newemphasisafterthe2008financialcrisis,particularlyinEU:
– Firstchangesin2005toallowadjustmentinstructuralterms(FranceandGermany).ThenFiscalCompact,SixPack,andthentwoPack…
– Recognizemoreemphasisonexantesurveillance—preventivearm—andcertaintyonadjustmentpath—correctivearm.
– Alignstabilityplanswithnationalbudgetcalendars– Morerulesandbenchmarksondebtreductionandtotalspending– Minimumstandardsonaccounting,MTBFs,rules,etc.– A stricterandexpostsanctioningmechanism– Centralizedscrutinyonnationalbudgetsandindependentfiscalagenciesor
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Why problems persist
• Lackoffocusonpropersetofincentives….• ….. onecanleadahorsetowater,butcan'tmakeitdrink…..• Asinmostchangeprocesses,underestimatedcostdisruptionandstrengthof
incumbents….thetyrannyofstatusquo….• Publicgoodsvs.private/localizedproblems• Remediesnotadaptedquicklyenough—infact,keyaspectsremaintobeaddressed
(e.g.,basicaccountingstandardsorEPSAS)…..• …..butrelyheavilyonbestpractices—MTBFs,independentagencies,rulesand
moreruleswithexpostsanctionsratherthanexanteresponsibility—andaregulatoryapproach,thatisnoculturalchangeyet
• Asresult,reformsare largelycompliance-orientedexercises,drivenbyannouncementsratherthanaddressingmemberstates’realproblems
• Dejurevs.defactogapsrapidlywidenedasvirtuallyallnationallegislations(startingwithconstitutionallaws)amendedtotransposeEUprovisions
• Verylittlerealimprovements—letalonereforms—innationalsystemsalthoughmanyproblems(e.g.,expenditurearrears)persist….
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Selected references
• InternationalMonetaryFund,NewTransparencyCodeandEvaluation,2014,availableatwww.blog-pfm.imf.org/files/ft-code.pdf
• International Monetary Fund, Fiscal Transparency, Accountability and Risk, Policy Paper, Fiscal Affairs Department, August 2012, available at: www.imf.org/external/np/pp/eng/2012/080712.pdf
• Irwin,Timothy,2012,“AccountingDevicesandFiscalIllusions,“IMFStaffDiscussionNoteSDN/12/02(Washington:InternationalMonetaryFund).
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