Open Budget Processes
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The budget process and the information presented in the budget documentation are central to fiscal transparency. Almost without exception, the annual budget is the government's main instrument for setting fiscal policy. It is the occasion on which the government presents its expenditure proposals and the means by which it will finance them, within the context of explicit statements of its policy intentions. Alongside the formal set of line-item allocations of spending organized by administrative unit, which forms the core of information needed by the legislature to scrutinize and approve spending, the government uses the budget to detail its proposals for revenue collection and borrowing, placed in a historical framework, and explains how these proposals will help achieve its objectives.
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Information provided at the time of the annual budget should cover all fiscal activities, irrespective of the institutional arrangement under which they take place. Only if such elements as extrabudgetary funds, quasi-fiscal activities, and tax expenditures are included in the budget presentation is it possible to review the full extent to which public resources are allocated according to announced policy objectives and programs. Information should also be readily available on how budgets are prepared and executed, including the role of such documents as budget circulars. The type of information required for fiscal transparency-including functional and economic presentations-is described further in Chapter III; it will be referred to only selectively in this chapter.
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Although the principles and practices outlined in this chapter are described primarily in the context of the central government, they have parallels for levels of subnational government that have tax powers and expenditure responsibilities, receive or make transfers to the central government, and may themselves have borrowing capacity. Transparency considerations apply in regard both to the need to provide sufficient information to the central government to carry out its responsibilities for determining overall fiscal and macroeconomic policy and to assessing the implications for its own budget and the rest of the public sector to ensure their own public accountability. InPage 36 a similar vein, the information provisions documented in Chapter III apply in large measure also to subnational governments.
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Principles and practices relating to openness of the budget process concern budget preparation, documentation, and presentation, as well as procedures for budget execution, fiscal reporting, and auditing. Many of the OECD Best Practices for Budget Transparency apply particularly to this pillar of the Code, and they are referenced here when they extend significantly beyond the good practices described in this pillar.54
2.1 Budget preparation should follow an established timetable and be guided by well-defined macroeconomic and fiscal policy objectives.
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The Code includes good practices relating to (1) budget calendar; (2) medium-term framework for the budget; (3) impact of budget measures; (4) fiscal sustainability and fiscal risks; and (5) coordination of budgetary and extrabudgetary activities.
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Basic requirements under this principle are to ensure that
* realistic budget proposals are presented to the legislature according to a prescribed timetable;
* the likely costs and effects of new expenditure and revenue measures are clearly explained; and
* a consistent multiyear fiscal framework is provided, based on realistic economic assumptions.
2.1.1 A budget calendar should be specified and adhered to. Adequate time should be allowed for the draft budget to be considered by the legislature.
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An important feature of a transparent budget preparation process is the availability of a reliable and publicly available calendar, along with associated procedures, to which the executive rigorously adheres. This helps ensure fair and full access to the budget process. Such provisions do not, however, require the executive to deny itself space for careful deliberation and decision making before making available the full details of its budget proposals for legislative and public consideration. This is particularly important for tax policy changes. But there should be predictability about when the executive's proposals-in either consultative, draft, or final form-will be made public. Normally the draft budget itself should be made public when the executive submits its budget for legislative approval.
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The OECD best practice guidelines suggest that a pre-budget report should be presented to the legislature and published no later than one month prior to the tabling of the annual budget. This report should state the government's medium-term economic and fiscal intentions, and highlight total revenue,Page 37 expenditure, the deficit or surplus, and debt.55 Such a report can usefully facilitate legislative and public debate on overall fiscal policy objectives and strategy.
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Once the draft budget has been formally submitted, the scope of the amendments that the legislature can make varies according to the type of political system. Nevertheless, as a general rule, the detailed budget proposals should be presented to the legislature in sufficient time to allow careful deliberation, including by committees and subcommittees where mandated, before any legal deadlines for adoption of the necessary legislation. The OECD best practice guidelines suggest presentation of the draft budget to the legislature no less than three months prior to the start of the fiscal year, and approval of the budget prior to the start of the fiscal year.56 Where there is a role for subnational governments, the budget preparation calendar for subnational governments should allow adequate time for consultation at the local level and the timely provision of the necessary information for the central government budget process.
2.1.2 The annual budget should be realistic, and should be prepared and presented within a comprehensive medium-term macroeconomic and fiscal policy framework. Fiscal targets and any fiscal rules should be clearly stated and explained.
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Although the preparation of the budget has an annual perspective, it is important to place it within broad fiscal policy objectives and the sustainability of fiscal policy over the longer term. At the very least, the budget documentation should indicate how the annual government budget will help achieve the government's broader objectives regarding government or public sector finances, and longer-term deficit and debt targets. Such statements are more helpful if they include quantitative detail on government or public sector finances and the longer-term fiscal outlook. In general, this information should be provided in a background paper that is part of the budget documentation.57
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A range of factors combine to determine whether or not a budget proposal is realistic. Of crucial importance is that the underlying macroeconomic framework be based on a set of mutually consistent assumptions that are plausible, have a reasonable prospect of occurring, and are not prone to bias. This will provide a solid basis for projecting the budgetary cost of statutory obligations such as unemployment and other social benefits. Revenue projections should be realistic in the sense that they should be consistent with recent trends, and the contribution of new measures and/or administrative improvements should be credible (Box 7). The implications of both existing and new policies and programs should be fully reflected, as well as those of any extrabudgetary funds, significant tax expenditures, and quasi-fiscal activities.
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Box 7. Revenue Forecasting
There are four main approaches to revenue forecasting.
Effective rate approach. Under this approach, the forecast for each tax is made by multiplying a forecast of the tax base by the corresponding effective tax rate. The effective tax rate is calculated by dividing the tax collected for the most recently available period by the estimated tax base. For transparency, it is necessary to disclose how the effective tax rate is calculated, the economic assumptions underlying the tax base forecast, and any adjustments that are made to reflect any of the aforementioned changes.
Elasticity approach. This approach establishes a stable empirical relationship between the growth in revenue for each tax and the growth in the corresponding tax base, which is specified as an elasticity. The increase in revenue is then forecast by multiplying the forecast increase in the tax base by the elasticity and adding the estimated impact of changes in the tax structure and tax administration and compliance. For transparency, these components of the revenue forecast should be shown separately.
Model-based approach. Some advanced economies use aggregate general equilibrium models to produce revenue forecasts that take into account the...
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