Effective Budget Negotiations (L7)

Richard Allen and Jacques Charaoui

METAC Budgeting Workshop

Dead Sea, Jordan, October 12-15, 2015

Outline of the Presentation

I. Context

II. Key Questions

III. How do Countries Rate?

IV. Conclusion

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I. Context: Negotiation is essentially a Political Process

“Budgets cannot be divorced from politics. Most political systems work to resolve resource allocation disagreements so as to promote convergence between what policymakers decide to spend and what the constituent population wants. But, with the inevitable compromises required by such decisions, divergences remain.”

J. Diamond, 2013, “Policy Formulation and the Budget Process”, Chapter 9 in R. Allen, R. Hemming, and B. Potter, The International Handbook of Public Financial Management, London: Palgrave Macmillan

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II. Key Questionsa. What is meant by “Budget Negotiation”?

Perhaps:

“The process by which the budget is agreed / approved within the Executive Branch, and then by the state Legislature, in accordance with the Constitution and other legal requirements, after taking account of the views of all relevant groups and entities (e.g., other political parties, special interest groups, NGOs)”

How close to reality in the METAC countries is this definition?

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II. Key Questionsb. What are the Objectives of Negotiation?

Perhaps:

“To achieve a budget that meets the government’s requirements”, and/or

“To deliver the budget on time”

But what are these “requirements” – political, financial? What is meant by “on time”? Where are the requirements set out? What happens if the requirements of the MoF and other parties differ?

What are relevant considerations in METAC countries?

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Example – the Case of the U.S.A

In some countries, notably the U.S.A, the Executive’s objectives are never met – the Budget is never delivered on time and the Executive’s budget proposal is totally rewritten by the Congress (legislature)

What does this imply about budget negotiations in the U.S. – that they are dysfunctional/ worthless? That the budget is in the hands of special interest groups and lobbyists? That the Congress has far too much power relative to the Executive?

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II. Key Questionsc. What is the Output of the Negotiations?

Perhaps:

“A budget that is approved by the state legislature, according to the requirements laid down in the Constitution and the laws on public finance and budgeting”

Is this an accurate/useful definition in the METAC countries? Might there be any other outputs?

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II. Key Questionsd. Are the Negotiations formal or informal?

Formal rules/procedures of budget negotiation may be set out in the Constitution, public finance laws and regulations, or decrees issued by MoF. And in the procedural rules of the Legislature.

Some negotiation procedures may not be defined at all in a formal sense, i.e., they take place by informal agreement of the parties concerned.

What kind of rules and procedures are used in METAC countries?

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II. Key Questionse. What are the Theaters of Negotiation?

Negotiations take place in various “theaters”. These may coincide with the phases of the budget cycle, each of which has a defined output or outputs. For example:

i. Internal discussions among the MoF departments/units concerned – budget department, macroeconomic forecasting, etc.

ii. Discussions with other central departments, e.g., President’s Office, Ministry of Development / Economy

iii. Discussions with line ministries on their budget submissions

iv. Discussions and approval of the draft budget within the Council of Ministers

v. Discussions with the legislature, leading to final approval of the budget

What theaters of budget negotiation are used in METAC countries? Which are most important? What outputs are produced?

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II. Key Questionsf. Internal Discussions within the MoF?

Advanced countries use budget specialists (c. 80-100 staff in large countries) and various techniques and tools to promote productive and efficient discussions, e.g.:• Analysis of the gap between spending proposals by line

ministries and the approved budget• Analysis of the credibility of the budget (gap between

projections and outturns of revenue and spending)• Costing of existing spending (“baseline”) and new spending

proposals• Norms to calculate unit prices of standard spending items

(stationary, class rooms, etc.)• Methodology of medium-term forward estimates

What techniques/tools are used in METAC countries?

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II. Key Questionsg. Negotiating Power in the Executive?

Within the Executive, different entities may exercise power in budget negotiations:• Ministry of Finance• President’s Office / Council of Ministers• Ministry of Economy/Development• Line Ministries?

Which entities have the most negotiating power in the METAC countries? Are the powers of the various entities well balanced? Or skewed?

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II. Key Questionsh. Is there a Balancing Mechanism?

Within the Executive, is there some mechanism for reconciling differences between the entities involved in budget negotiations?

What form does that mechanism take, and where does it lie – e.g., in the MoF, the President’s Office, the Council of Ministers?

How are different political objectives on budget priorities balanced or reconciled in METAC countries? Has a formal (or informal) balancing mechanism been established? How effective is it?

II. Key Questionsi. Fiscal Power of the Legislature?

Source: J. Wehner. 2010. Legislatures and the Budget Process. NY: Palgrave Macmillan. 100 = full institutional capacity, 0 = no institutional capacity.

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II. Key Questionsj. Can Negotiations be made more Open?

By publishing more information on the budget?

By opening up the budget negotiations to NGOs and other outsiders?

By increasing the legislature’s powers to scrutinize the budget proposal, and budget execution?

By establishing a parliamentary budget office such as the CBO in the US?

Do these mechanisms help/hinder effective budget negotiations?

What is the experience of such mechanisms in METAC countries?

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II. Key Questionsk. What makes a “successful” negotiation?

• One that helps the government achieve its overall fiscal targets and objectives (MoF’s preference)

• One that achieves political “balance” (President or Prime Minister’s preference)

• One that creates more spending room for key sectors and development projects (line ministers’ preference)

• One that satisfies constituents and special interest groups (Legislature’s preference)

• One that satisfies special interest groups (NGOs’ preference)

Which is the dominant influence in METAC countries?

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III. How do Countries Rate?

UK USA France Sweden METAC

Negotiations support good economic and fiscal policies

Yes No Yes Yes ?

High level of consensus on budget objectives

Yes No Yes Yes ?

Balanced powers between Executive and Legislature

No No No Yes ?

Disciplined negotiation procedures and timetable

Yes No Yes Yes ?

Participation of special interest groups and NGOs

Limited Strong Limited Strong ?

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IV. Conclusion

1. Budget negotiations are key to effective decision making on the allocation of resources

2. Negotiation theaters and practices vary widely from country to country – some rely primarily on formal arrangements, others on informal arrangements

3. Some countries skew negotiations toward the Executive Branch, others to the Legislative Branch; finding an appropriate balance between these two branches, while also taking account of the views of other parties (e.g., NGOs), is difficult

4. Balancing mechanisms need to be developed if budget negotiations are not to lead to sub-optimal outcomes