UNDERSTANDING THE

POLITICS OF BUDGET

Lorena Pineda

Overview Why does political

economy matter? Why does better

political understanding matter?

Sound budgetary systems

The Budget Process Politics of Budgeting Conclusion

Understanding the politics of the budget is central to appreciate the institutional factors and governance context that influence the actual functioning of budgetary systems and their reform. A political understanding of fiscal governance and public budgeting is important to encourage and support “good enough” reforms in public financial management and accountability; identify drivers of pro-poor change, strengthen checks and balances and support demand for good financial governance from within and outside government; and improve aid effectiveness by informing donor support and instruments.

It does not seek to provide a one-size-fits-all toolkit to be rigidly applied, as realities differ from one country to another and each country exhibits a unique combination of strengths and weaknesses. Budget reform initiatives, too, vary in scope, sequencing and speed. While on national-level budget politics, understanding the politics of budgeting at the local level and the interaction between the two levels is critical.

Power relations shape budget processes and political incentives explain the disjuncture between formal rules and informal practices. We need to understand better the real incentives of the various actors, as sometimes poorly functioning systems suit powerful people very well. Not all good things go together, they don’t necessarily reinforce each other, some budgetary weaknesses are more amenable to swift progress than others, especially in the short run, and small successes can quickly degrade.

While technical improvements can help resolve capacity constraints, political incentives often explain why technical resources are not deployed effectively or used responsibly. In turn, political incentives are shaped by the nature of political systems, the degree of political competition and the breadth of political accountability. What accountability mechanisms are particularly suitable for coping with the reality of the political economy, vested interests and power differentials?

WHY DOES POLITICAL ECONOMY MATTER?

Politics make a difference. It is not possible to separate technical budget reforms

from the wider governance environment required to make them work and the political system in which they are embedded.

Effective reforms are those that are technically sound, administratively possible, and politically feasible. 

It is important to bring power and politics into policy analysis.

Political economy issues influence the scope and timing of reform, as well as governments’ abilities and incentives to embark on reform. They determine the choice of reform alternatives and the capacity to implement it. The electoral cycle often shapes the policy space for reform.

Budget politics drive public budgeting and shape the rules of the budgetary game, including the ownership, timing and sequencing of reforms and government’s commitment to them.

Budget politics offer both challenges and opportunities.

Getting the politics right is central for ensuring developmental success.

Politics is not only a risk to mitigate but also an opportunity to seize.

Understanding the politics of the budget therefore helps improve aid effectiveness. In particular, political and electoral cycles often shape the policy space for reform.

WHY DOES BETTER POLITICAL UNDERSTANDING MATTER?

Political economy factors affect the trajectory of change and the credibility of governments’ commitment to reform.

The studies underscore that demand for better governance and greater accountability is a key driver of change in budgetary systems. This demand emerges from both the formal institutions (such as parliaments or general audit offices) and informal systems of budget oversight (such as civil society, the media and citizens). However, these institutions and mechanisms are often weak and ineffectual.

They can be circumvented or subverted. Formal institutions can only effective if informal institutions reinforce, rather than undermine them.

Sound budgetary systems are crucial to make progress in reducing poverty and tackling inequality. They are central to governments’ ability to deliver services and reduce poverty. They are also critical to fight corruption and build effective states with the necessary degree of capability, responsiveness and accountability.

Public budgeting is a central function of the state and the budget process involves a wide range of stakeholders beyond government, including parliament, oversight agencies, civil society and donors.

Better political understanding of budget systems can thus help to:

asseimprove aid effectiveness and

assess gaps in budget practices.

Politics matter in understanding how budget institutions work in practice and how they

change over time.

There can be a significant gap between formal processes and informal practices, between the formal rules of the budget process and the informal institutions shaping budget outcomes. For example, volatility in the disbursement of funds has important implications for the delivery of social services, in particular in health and education.

Interactions between formal and informal

institutions Outcomes

Effective formal governance

Ineffective formal governance

Convergent objectives between formal and informal institutions

Complementary Substitutive

Divergent objectives between formal and informal institutions

Accommodating Competing

THE BUDGET PROCESSDuring the budget process, instead of Congress

approving, or judiciously trimming, the budget submitted by the executive branch, congressmen insert more “pork” into departmental budgets with stipulations that they will identify the projects, choose the contractor and suppliers, etc. Kickbacks may be as much as half the price of contracts awarded, and contractors, in order to squeeze any profit from their half of the project funds, are forced to use substandard materials and labor, cheating the government and hindering national development.

The budget is the single most important policy statement of government and the battles of who gets what is at the heart of the political process. In January, almost two years before the start of the federal fiscal year on October 1, the Office of Management and Budget presents long-range forecasts of revenues and expenditures to the president. The president and the OMB develop guidelines for all federal agencies, which prepare and submit budget requests by July. The OMB reviews agency requests and holds budget hearings in August through September of the year before. In November and December, the OMB presents a revised budget to the president and a budget message is prepared and presented to Congress in January of the year in which the fiscal year starts.

From February through May the Congressional Budget Office reviews the budget and reports to the House and Senate budget committees. From May through June these committees establish the "first concurrent resolution," which sets the overall total for budget outlays in major categories. From July through September, appropriations committees and subcommittees draw up detailed appropriations and submit them to the congressional budget committees for the "second concurrent resolution." The full House and Senate pass the second concurrent resolution, reconciling the overall budget targets of the House and Senate. In September and October the House and Senate pass the actual appropriations bills funding the departments and agencies of government. Since the fiscal year begins October 1, Congress often must pass "continuing resolutions" to fund government in the interim until the appropriations bills are passed.

The budget process has to accommodate a range of competing demands and is subject to inherent tensions. The main objectives of public financial management systems are to achieve aggregate fiscal discipline, operational effectiveness and allocative efficiency. For example, budget theory and evidence suggest that fiscal discipline is best achieved by centralising the budgetary system in the executive branch under the tight supervision of the Department of Finance and its central budget office. However, excessive executive discretion in public budgeting tends to hamper fiscal transparency and financial accountability. It weakens external scrutiny and legislative oversight, and limits opportunities for citizen participation.

The Politics of BudgetingA good bureaucratic politician cultivates a base of support for

requests among the public and among people served by his/her agency; develops interest, enthusiasm, and support for his/her program among top political and congressional leaders; wins favorable media coverage for his agency and uses strategies that exploit opportunities.

Budgeting is incremental, accepting as legitimate the previous year's expenditures and focusing instead on requested changes. Reformers have proposed such schemes as zero-based budgeting and sunset laws to try to force Congress to consider base expenditures and whether agencies should be renewed at all, but Congress is taxed to the limit simply to consider requested changes. Decision-making is further hampered because submitted budgets are non-programmatic—that is, budget requests are usually grouped into generic categories like "personnel" and "supplies," cutting across policy programs. Seemingly, program budgeting would remedy this, but this is difficult to implement for a variety of reasons (bureaucratic resistance due to added paperwork or perceived loss of power, difficulty in assigning overhead expenses to specific programs, and overlap of program functions served by the same resource).

CONCLUSIONIt is therefore important to identify the formal rules

and informal practices shaping the budget process and the institutional and political contexts in which budgetary systems are embedded; assess the overall trajectory of change and the agents of change in the budget process; and, ensure that budget reforms are adequately prioritized, realistically sequenced and tackle the root causes of weak public budgeting.

Understanding political risk is particularly important for budget support. Where we are considering direct budget support, with funds passing into and through national systems, more robust political analysis is critical. The joint evaluation of general budget support recommended donors improve their understanding of the influence of political factors on budgetary processes and, therefore, budget support and fiduciary risk.Politics of the budget reviews help identify and support drivers of pro-poor change in public finance management.A challenge for donors, reflected in the case studies, is translating knowledge into action through, for example, country programming, budget support, or conditionality. Actionable recommendations will obviously depend on country circumstances.

Power relations and political dynamics determine how budget decisions are made and how policy is implemented. Political incentives affect the process of making and implementing budget policy. The budget is the result of political negotiations that reflect underlying power struggles between competing social forces.

THANK YOU!