6048031 Budget Rules Matter May 2008

8/6/2019 6048031 Budget Rules Matter May 2008

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Do Budget Rules Matter?

Benjamin E. DioknoPhilippine National Bank Professor of EconomicsSchool of Economics, University of the Philippines


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Budget Institutions

One can identify three phases in the budget process:

The formulation of a budget proposal within the

executive;

The presentation and approval of the budget in the

legislature; and

The implementation of the budget by the bureaucracy

Two issues are crucial: the voting procedures leading to the

formulation and approval of the budget; and the degree of

transparency of the budget

May 2008Diokno I Budget Rules


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Budget Institutions

Focus on key trade-off between two types of institutions:hierarchical and collegial

Hierarchical institutions: those that attribute strong prerogatives

to the Prime Minister (or theF

inance orTreasury Minister) tooverrule spending ministers within intra governmental

negotiations on the formulation of the budget. Hierarchicalinstitutions limit in a number ofways the capacity of thelegislature to amend the budget proposal of the government.

Collegial institutions: emphasize the democratic rule in every

stage, like the prerogatives of spending ministers within thegovernment.

Hierarchical institutions are more likely to enforce fiscal restraint,avoid large and persistent deficits and implement fiscaladjustments more promptly.



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Budget Institutions

Is the budget process transparent? Modern budgets ofOECDcountries are extremely complicated, sometimes unnecessarilyso. Is the complexity unavoidable or is it a way of creating

opportunities for creative budgeting?Typically governmentshide liabilities, by either shifting them to future budgets, or

using funds which are outside the budget. A related commonpractice is that of adopting over optimistic projections ofmacroeconomic variables, so that revenues are overestimatedand spending needs are underestimated.

Two ways to deal with problem of transparency: (a) setstandards to be followed; (b) have independent agencies whichprovide a check on the accuracy of the budget.



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Budget Institutions: Theory

Without any restrictions on procedures, without any structure andrules, Arrows impossibility theorem implies that a legislaturewould never produce a budget but only legislative chaos

The budget is the result of conflicting interests of representativeswith geographically based constituencies. This addresses twoproblems: the determination of the size of the budget and theallocation of projects among different districts.

Effects of geographically based constituencies on the overall size of

budget: representativesw

ith geographically based constituenciesask for spending programs which benefit their district and arefinanced nationwide. Thus, representatives systematically do notinternalize the true costs of financing such projects.



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Budget Preparation

1. The Development Budget Coordination Committee meet to approve

the macroeconomic assumptions needed for the Budget Call

2. DBM issues the Budget Call as guide for concerned agencies,

corporations and local governments in the preparation of theirbudget requests

3. Agencies prepares budget proposal and submit the same to DBM

4. DBM conducts technical budget hearings for all agencies ofgovernment, consolidates requests and draft budget proposal for

discussion by the Cabinet.



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Budget Preparation5. Cabinet deliberates on the budget proposal. Through an

iterative process, the proposed budget undergoes several

revisions.

6. On the basis of the Presidents final instructions, DBM prepares

the draft BESF, the Budget Message and other budget

documents

7. The President submits the BESF and other budget documents to

the Speaker of the House of Representatives, copy furnished

the Senate President.



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Approval of the Budget and

the Role of the Legislature

The House prepares the General Appropriations Bill, based onthe BESF

The Senate may concur or propose amendment to the bill. Is

amendment by substitution valid? In case of conflicting versions, a bicameral committee is formed;

the report of the committee is voted by both Houses in itsentirety.

The President may approve or veto the bill. The President has

line-item veto power. [Note: the U.S. President does not havethis power. There was an attempt to legislate this power, but theU.S. Supreme Court declared the law unconstitutional.



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Budget rules are fiscally responsible

1. The House prepares the General Appropriations Bill based on the

BESF or the Presidents Budget.

2. The budget bill is comprehensive covers all agencies and funds,

current and capital expenditures, and all foreign assisted projects

both the local counterpart and the loan proceeds. [A

comprehensive budget is superior to one where there are several

appropriations bills voted on separately (the U.S. practice); in

theory, a comprehensive budget should result in smaller

governments and lower deficits]



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3. Congress may decrease but not increase thebudget assubmitted by the President. [The Congress may notincrease the appropriations recommended by the President

for the operation of the Government as specified in thebudget. Article VI, Section 25(1)]

4. Reenactment of prior years budget: If, by the end of anyfiscal year, Congress shall have failed to pass the generalappropriations bill for the ensuing fiscal year, the generalappropriations law for the preceding fiscal year shall bedeemed reenacted and shall remain in force and effect untilthe general appropriations bill is passed by Congress. [ArticleVI, Section 25(7)] But whats the meaning of reenactment?



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5. The President has line-item veto power: The President shall

have the power to veto any particular item or items in an

appropriation, revenue, or tariff bill, but the veto shall not

affect the item or items to which he does not object. [Article

VI, Section 27(2)] The line-item veto power allows the President

to veto any item (budget line or provision) that are inserted by

legislators, which the Executive finds inconsistent with existing

laws (for example, cuts on debt service) and budget priorities. These budget rules, individually and collectively, strengthen the

Presidents ability to control the size of the budget and the

budget deficit.



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Debt service is automatically appropriated

Rationale: The first is to comply with the constitutionalprovision on the non-impairment of contracts. Second,

to preserve the governments credit standing in theglobal community. Third, to get the best possible loanterms by reducing the risk of non-payment as a result ofexecutive-legislative gridlock.

But Congress is not helpless in limiting the power of the

President to contract or guarantee loans. The presidentialpower to contract or guarantee loans is subject torestrictions.



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Restrictions

Congress has to be informed promptly: The President maycontract or guarantee foreign loans on behalf of the Republic ofthe Philippines with the prior concurrence of the MonetaryBoard, and subject to such limitations as maybe provided bylaw. The Monetary Board, shall, within thirty days from the endof each quarter of the calendar year, submit to the Congress acomplete report of its decisions on applications for loans to becontracted or guaranteed by the Government or government-owned and controlled corporations which would have theeffect of increasing the foreign debt, and containing othermatters as may be provided by law [Article VII, Section 20]



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Restrictions

Full disclosure: Foreign loans may only be incurred inaccordance with law and the regulation of the monetary

authority. Information on foreign loans obtained orguaranteed by the Government shall be made available tothe public. [Article XII, Section 21]

Existing budget laws provide that all loans --domestic orforeign, their loan proceeds and local counterpart

requirements --should be disclosed in the Budget ofExpenditures and Sources of Financing , and approved byCongress.



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Restrictions

Criminal and civil sanctions: Acts which circumvent or

negate any of the provisions of this Article [National

Economy and Patrimony] shall be considered inimical tothe national interest and subject to criminal and civil

sanctions, as may be provided by law. [Article XII, Section

22]



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Is prepayment of loans legal?

In recent years, the Executive department, invoking theautomaticity of debt payment, has prepaid some foreign loanswithout congressional approval. Whats the NationalTreasurers legal basis for prepaying some national debts whichare not yet due and demandable?

This practice undermines Congress power of the purse. It isalso, under certain conditions, poor economics. For example,the government incurred huge losses when it prepaid foreign

loans when the peso exchange rate was P50:US$1 say two yearsago, when we it could pay now at P41:$US1. In addition, thebudget prioritization was changed when more was spent fordebt service than what was actually due, and less forinvestment in human capital and public infrastructure.



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Concluding remarks

Do budget rules matter? They should, but they dont. Despite

the fiscally responsible budget rules in the Constitution and

existing budget laws, deficits have ballooned in recent years.

Why? The President has chosen to ignore these rules andCongress has failed to assert its power of the purse.

The Executive Department has probably abused the

automaticity of debt service payment by (a) prepaying public

debt without congressional imprimatur and (b) creatingindebtedness which translates into money to be paid out of

the Treasury in the future -- without prior approval by Congress.



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Timing

The best time to intervene is at the budget preparation andbudget implementation phases of the budget process.Intervention at the legislative or authorization process is toolate because the legislature as an institution is weak and the

President has line-item veto power.

In the case of foreign funded projects, there are four likelyuseful areas of intervention: first, at the project preparationstage (responsibility of line departments), second, loannegotiation phase (responsibility of oversight agencies such as

NEDA,DBM and DOF or other agencies empowered by thePresident), authorization (Congress one House is sufficient toblock) and project implementation (line agencies and donorswith focus on transparent, procurement methods andmonitoring system).



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Education Budget, 2008 and 2009

For 2008, Congress approved a budget of P140

billion (inclusive of P2 billion for school buildings).

For 2009, DepEd had proposed a budget of P241.4billion for a whopping increase of 77%

For locally funded projects alone, DepEd proposed

an increase from P8.4 billion in 2008 to P36.3 billion

in 2009, for a dizzying increase of 330 %

For 2009, DepEd proposed to hire 39,762 new

teachers and construct 7,012 classrooms


Documents

6048031 Budget Rules Matter May 2008