Do Budget Rules Matter?

Benjamin E. Diokno
Philippine National Bank Professor of Economics School of Economics, University of the Philippines

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

Diokno I Budget Rules

May 2008

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 the Finance or Treasury Minister) to overrule spending ministers within intra governmental negotiations on the formulation of the budget. Hierarchical institutions limit in a number of ways the capacity of the legislature to amend the budget proposal of the government. Collegial institutions: emphasize the democratic rule in every stage, like the prerogatives of spending ministers within the government. Hierarchical institutions are more likely to enforce fiscal restraint, avoid large and persistent deficits and implement fiscal adjustments more promptly.
Diokno I Budget Rules May 2008

Budget Institutions
Is the budget process transparent? Modern budgets of OECD countries are extremely complicated, sometimes unnecessarily so. Is the complexity unavoidable or is it a way of creating opportunities for creative budgeting ? Typically governments hide liabilities, by either shifting them to future budgets, or using funds which are outside the budget. A related common practice is that of adopting over optimistic projections of macroeconomic variables, so that revenues are overestimated and spending needs are underestimated. Two ways to deal with problem of transparency: (a) set standards to be followed; (b) have independent agencies which provide a check on the accuracy of the budget.

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Budget Institutions: Theory

Without any restrictions on procedures, without any structure and rules, Arrow s impossibility theorem implies that a legislature would never produce a budget but only legislative chaos The budget is the result of conflicting interests of representatives with geographically based constituencies. This addresses two problems: the determination of the size of the budget and the allocation of projects among different districts. Effects of geographically based constituencies on the overall size of budget: representatives with geographically based constituencies ask for spending programs which benefit their district and are financed nationwide. Thus, representatives systematically do not internalize the true costs of financing such projects.

Diokno I Budget Rules

May 2008

Budget Preparation
1.

The Development Budget Coordination Committee meet to approve the macroeconomic assumptions needed for the Budget Call DBM issues the Budget Call as guide for concerned agencies, corporations and local governments in the preparation of their budget requests Agencies prepares budget proposal and submit the same to DBM DBM conducts technical budget hearings for all agencies of government, consolidates requests and draft budget proposal for discussion by the Cabinet.

2.

3. 4.

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Budget Preparation
5. Cabinet deliberates on the budget proposal. Through an iterative process, the proposed budget undergoes several revisions.
6. On the basis of the President s 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

What s the procedure?
The President submits to Congress within 30 days after the State of the Nation address (on the 4th Monday of July) a Budget of Expenditures and Sources of Financing (BESF). [In fact, the President submits at least four documents: BESF, Budget Message, National Expenditure Program (NEP), and Staffing Summary] The power of the purse belongs exclusively to Congress: All money bills (tax, tariff and budget) must originate in the House of Representatives, thus the BESF goes to the House first, but a copy is sent to Senate on the same day of submission.
Diokno I Budget Rules May 2008

Approval of the Budget and the Role of the Legislature

The House prepares the General Appropriations Bill, based on the 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 its entirety. The President may approve or veto the bill. The President has line-item veto power. [Note: the U.S. President does not have this power. There was an attempt to legislate this power, but the U.S. Supreme Court declared the law unconstitutional.

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Budget rules are fiscally responsible

1. 2.

The House prepares the General Appropriations Bill based on the BESF or the President s Budget. 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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Budget rules are fiscally responsible

3.

Congress may decrease but not increase thebudget as submitted by the President. [ The Congress may not increase the appropriations recommended by the President for the operation of the Government as specified in the budget. Article VI, Section 25(1)] Reenactment of prior years budget: If, by the end of any fiscal year, Congress shall have failed to pass the general appropriations bill for the ensuing fiscal year, the general appropriations law for the preceding fiscal year shall be deemed reenacted and shall remain in force and effect until the general appropriations bill is passed by Congress. [Article VI, Section 25(7)] But what s the meaning of reenactment ?
May 2008

4.

Diokno I Budget Rules

Budget rules are fiscally responsible

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 President s 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 constitutional provision on the non-impairment of contracts. Second, to preserve the government s credit standing in the global community. Third, to get the best possible loan terms by reducing the risk of non-payment as a result of executive-legislative gridlock. But Congress is not helpless in limiting the power of the President to contract or guarantee loans. The presidential power to contract or guarantee loans is subject to restrictions.

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Restrictions
Congress has to be informed promptly: The President may contract or guarantee foreign loans on behalf of the Republic of the Philippines with the prior concurrence of the Monetary Board, and subject to such limitations as maybe provided by law. The Monetary Board, shall, within thirty days from the end of each quarter of the calendar year, submit to the Congress a complete report of its decisions on applications for loans to be contracted or guaranteed by the Government or governmentowned and controlled corporations which would have the effect of increasing the foreign debt, and containing other matters as may be provided by law [Article VII, Section 20]

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Restrictions
Full disclosure: Foreign loans may only be incurred in accordance with law and the regulation of the monetary authority. Information on foreign loans obtained or guaranteed by the Government shall be made available to the public. [Article XII, Section 21] Existing budget laws provide that all loans --domestic or foreign, their loan proceeds and local counterpart requirements --should be disclosed in the Budget of Expenditures and Sources of Financing , and approved by Congress.

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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 to the 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 the automaticity of debt payment, has prepaid some foreign loans without congressional approval. What s the National Treasurer s legal basis for prepaying some national debts which are not yet due and demandable? This practice undermines Congress power of the purse. It is also, 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$1 say two years ago, when we it could pay now at P41:$US1. In addition, the budget prioritization was changed when more was spent for debt service than what was actually due, and less for investment in human capital and public infrastructure.
Diokno I Budget Rules May 2008

Concluding remarks
Do budget rules matter? They should, but they don t. 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 and Congress 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) creating indebtedness 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 and budget implementation phases of the budget process. Intervention at the legislative or authorization process is too late 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 likely useful areas of intervention: first, at the project preparation stage (responsibility of line departments), second, loan negotiation phase (responsibility of oversight agencies such as NEDA,DBM and DOF or other agencies empowered by the President), authorization (Congress one House is sufficient to block) and project implementation (line agencies and donors with focus on transparent, procurement methods and monitoring 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 P241.4 billion 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
Diokno I Budget Rules May 2008