Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

01 May 2012

IMF: Fiscal consolidation in south-eastern European countries - The role of budget institutions


This paper assesses the relative strengths and weaknesses of fiscal institutions in 10 south-eastern European countries, using recent benchmarking methodologies developed by the IMF's Fiscal Affairs Department (FAD).

The assessment evaluates each country’s understanding of the scale of the fiscal adjustment challenge, its ability to develop a credible consolidation strategy, and its capacity to implement the strategy. Key institutional arrangements are generally in place, including top-down budgeting and medium-term budget frameworks. Other institutional arrangements require further attention, including macro-fiscal forecasting, fiscal risk analysis, setting fiscal objectives, presence and role of independent fiscal agencies, and top-down parliamentary approval.

Fiscal policy-making and the institutions that support it in the 10 Southeastern European countries surveyed in this paper (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia FYR, Moldova, Montenegro, Romania and Serbia)  have been severely tested during the current global financial crisis. From an initial emphasis on stabilising financial markets, stimulating economic activity, and stemming the rise in unemployment, the focus of fiscal policy has now turned to the challenges of consolidating public finances and restoring long-term sustainability. The theoretical and empirical literature both suggest that well-designed and efficiently managed budget institutions can play a central role in the success of fiscal consolidations.

This paper identifies 10 fiscal institutions that can support the fiscal consolidation process at three key stages: (i) understanding the scale and scope of the fiscal challenge; (ii) developing a credible consolidation strategy; and (iii) implementing that strategy through the budget process. The paper then evaluates the institutional preparedness of south-eastern European countries to respond to fiscal challenges, and identifies priorities for institutional reform. Individual countries show great variations in terms of the strength of the 10 institutions. This within-country variation is greater than the overall variation across countries. Hence, there is room for improvement in all countries. The analysis presented in the paper highlights the priorities for institutional reform to support the fiscal consolidation required in the 10 countries.

Improvements in the breadth, depth and timeliness of fiscal reporting and more systematic analysis of the risks surrounding fiscal forecasts would contribute to better understanding of the scale and scope of the fiscal challenges. While basic fiscal reporting is in place in virtually all south-eastern European countries, less than complete coverage of institutions and transactions, and long reporting lags reduce its impact on policy-making in many countries. Multi-year macro-economic and fiscal forecasts are the norm but tend to be limited to a single scenario. Although fiscal risks are increasingly being disclosed, quantification and control are typically limited to explicit guarantees and tend to ignore implicit guarantees and contingent liabilities.

Consolidation planning needs to be supported by more clearly articulated fiscal objectives, more comprehensive and binding medium-term budget frameworks, greater independent scrutiny, and a stronger focus on performance. While most south-eastern European countries set medium-term objectives for fiscal policy, these are not often formulated and monitored in a manner which enables the public to hold the government to account for their realisation. Medium-term budget frameworks are in place in nearly all countries but need to be expanded in coverage and impose more binding constraints on future budgets. Independent fiscal agencies providing input into fiscal policy-making remain uncommon in south-eastern Europe. While all south-eastern European countries have introduced elements of performance budgeting, performance information needs to be more systematically integrated into budget decision-making processes in most countries.

Finally, implementation of consolidation plans would benefit from a more rigorous top-down approach to budgeting, stronger parliamentary endorsement of consolidation strategies, and more explicit contingency arrangements. Budget preparation follows a top-down approach in most south-eastern European countries to a degree, but budgetary rigidities and circumvention of the budget process diminish its disciplining impact. Parliamentary ownership of the government’s fiscal strategy is limited by a traditional bottom-up, chapter-by-chapter approach to budget approval in most countries. While controls over budget execution are relatively strong, management of contingency reserves and controls on multi-year spending commitments need to be strengthened in order to keep consolidation plans on track.

Full working paper



© International Monetary Fund


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment