Reforms of Public Financial Management Finally, budgets are the true battleground for distributive decisions (see ÂDorotinsky and Pradhan 2007). In many ways, annual budgets are the official script of the social contract between rulers and citizens. Budget proposals go to legislatures, are debated, are voted on, and decide the amount and structure of revenue to be collected and public expenditure to be allocated in the coming fiscal year. Afterward, they are usually submitted to an audit institution that makes sure that commitments were adequately fulfilled. During the full budget cycle, the draft involves almost every political institution, from the presidency to the line ministries all the way to parliaments and specialized public accounts committees. Therefore, it is widely recognized that reforms entail building the mechanisms of accountability within and outside the government as much as they entail dealing with the technical issues related to resource management. Corruption and political clientelism (the usual suspects by now) go hand in hand with budget systems that lack capacity, internal controls, external accountability, and transparency. Beyond informal networks of patronage, the formal rules of the political systems create a whole world of incentives that shape the fiscal deficit levels, revenue shares, and expenditure allocations for certain constituencies. Presidential and parliamentary systems assign different powers to the legislature during the budget formulation and approval process. If a powerful executive is unchecked because the parliament receives the budget late for review—and is therefore deprived of key information on tax and spending—or because the legislature lacks the power to amend the budget draft, the accountability of the system is weak. Even the number of pages of budget proposals varies dramatically around the world, from one or two pages to thousands. The percentage of off-budget accounts in total spending also ranges from zero to over 60 percent. In many contexts, these accounts do not go through the legislative process, remaining entirely at the discretion of the executive. Without supreme audit institutions to trace budget implementation and ask for explanations in case of discrepancies, the government can engage in corrupt or clientelistic practices at will. Even when legislatures have a significant say in the budget process, electoral rules, the strength of political parties, and coalitional requirements create different incentives for members of parliament (MPs). For example, parliamentary regimes seem to lead to a larger government than presidential regimes do, as politicians have incentives to claim higher individual shares from a common-pool resource.2 Other political institutions such as federalism have been found to interact with fiscal policy outcomes in general, and expenditures in particular, in both developed and developing countries (see 26
Understanding Policy Change