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Efficient Fiscal Governance

for Sustainable Economic Growth in Asia

ADBI-UNESCAP, April 24, 2019

Fiscal Institutions in Asian Countries:


Issues and Options

John M. Kim (jhrv@kipf.re.kr)


Korea Institute of Public Finance

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the
Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
Governance? Institutions?

• PFM innovations:
Spectrum from specific & doable to abstract/problematic
 Enhanced fiscal reporting Transparency, accounting & treasury

 Budget process rules Ex ante/post eval., procedures for decisions

 MTFFs/MTEFs Longer-term perspective, priorities

 Fiscal Rules Simplification to suppress deficit bias


 Fiscal Councils ?

• The ultimate success of any PFM innovation depends on the


political will to implement it.

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Governance?

• Abstract & “problematic”? Probably mainly because of “politics”.


 “Lack of a budgetary theory,” V.O. Key (1940), Amer. Pol. Sci Review 34
 Pigou, Wildavsky, Schick, Rubin …: politics, economics, social,
administrative, …
 Barbara Neuby, “On the lack of a budgetary theory”, Public Admin.
Quarterly, Summer 1996
“why is there no commonly accepted and debated theory of budgeting? Implicit in the
literary debate are several factors inhibiting theory development. There is no consensus
as to what budgeting actually is, whether it is a political, economic or social process.
There is no agreement on the scope of a budget theory, no agreement upon the
dominant methods or techniques of budgeting, disagreement about the approach a
budget theory should take, and no agreement about the status of theory itself.”

 Kahn & Hildreth (eds.), Budgetary Theory in the Public Sector,


Quorum Books, 2002.

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Fiscal Institutions (Councils): Why?

• Fiscal Rules have to be… (IMF/FAD & EU/OECD)


 Simple (tendency to rigidity)
 But, flexible (escape clauses; don’t close all the loopholes)

• Weaknesses in the fiscal rule approach


1) Political will: How to make decisions (fiscal rules) self-binding?
• Early examples emphasized “rule” (e.g., “Golden Rule”, fiscal balance
“over the cycle”), leaving room for flexibility

• Lately, we ask whether the rule is “binding” (as law), and also
favor numerical rules
2) Design issues: flexible/practical vs. simple/rigid
⇨ Better rules (e.g., German Debt Brake)

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Fiscal Councils: Why?
• The German Debt Brake tries to make the fiscal rule more practical,
but its motivation also shows the political problem.

“Political Will” Problem


• Technical conformity
with fiscal rule
• But goes against the
spirit of the rule
(political expediency)

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Fiscal Councils: What is their role?
• Fiscal councils can complement fiscal rules to alleviate the political
will problem (difficulty of self-binding decisions)

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Fiscal Councils: What is their role?

• With regard to the “political will” problem, the key role of a fiscal
council is to reduce bias by providing a neutral (or at least a third-
party) assessment
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The spread of fiscal councils

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Limitations?

• Capacity?
Staffing, expertise & access to timely information?

• Neutrality?
Many are PBOs (independent? non-partisan?)
Mandate? (role in budget process may be more “involved”)

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Case study) The UK’s OBR

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Case study) The UK’s OBR

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Case study) The UK’s OBR

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Case study) The UK’s OBR

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Survey of Asian Fiscal Responsibility Laws
(PEMNA 2018)
Q8: What are the elements of your country's fiscal responsibility
arrangements? (Select all that apply)
Answered: 9 Skipped: 2

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Survey of Asian Fiscal Responsibility Laws
(PEMNA 2018)
Q14: What are the main characteristics of the fiscal council? (Select all
that apply)
Answered: 5 Skipped: 6

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Returning to the “self-binding” problem…

“Enforcer”
Type of fiscal rule Examples
= “Enforcee”?

Supra-national Stability & Growth Pact (EU) No

National (Cen. Gov.) Some Asian countries Yes

Sub-national Many Asian countries No

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Fiscal Institutions (Councils) in Asia

• At the national level, effectiveness of (and need for?) fiscal councils


may still be limited.
 Yet they will probably help improve budgetary transparency and
policy decisions.
 Many governments in the region have, or are in the process of,
strengthening fiscal responsibility; often such efforts are centered
around MoF or the budgetary authority.
 Role for international donors in this regard?

• For sub-national fiscal responsibility, the central budget authority


(together with other central agencies) can provide important oversight
and assistance as “fiscal councils” with respect to SNGs.
 Thailand, Malaysia, Indonesia, Myanmar, Philippines, and others

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Thank you!

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