Budget Rules Matter May 2008

8/14/2019 Budget Rules Matter May 2008

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Do Budget Rules Matter?

Benjamin E. DioknoPhilippine National Bank Professor of Economics

School of Economics, University of thePhilippines


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Budget Institutions

One can identify three phases in the budgetprocess:

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 thebudget; and the degree of transparency of the

budget May 2008Diokno I Budget Rules


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Budget Institutions

Focus on key trade-off between two types ofinstitutions: hierarchicaland collegial

Hierarchical institutions: those that attributestrong prerogatives to the Prime Minister (or the

Finance or Treasury Minister) to overrule spendingministers within intra governmental negotiations onthe formulation of the budget. Hierarchicalinstitutions limit in a number of ways the capacity ofthe legislature to amend the budget proposal of thegovernment.

Collegial institutions: emphasize the democraticrule in every stage, like the prerogatives of spendingministers within the government.

Hierarchical institutions are more likely to enforce

fiscal restraint, avoid large and persistent deficitsand implement fiscal adjustments more promptly. May 2008Diokno I Budget Rules


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Budget Institutions

Is the budget process transparent?Modernbudgets of OECD countries are extremelycomplicated, sometimes unnecessarily so. Is thecomplexity unavoidable or is it a way of creating

opportunities for creative budgeting? Typicallygovernments hide liabilities, by either shiftingthem to future budgets, or using funds which areoutside the budget. A related common practice isthat of adopting over optimistic projections of

macroeconomic variables, so that revenues areoverestimated and spending needs areunderestimated.

Two ways to deal with problem of transparency: (a)set standards to be followed; (b) have independent

agencies which provide a check on the accuracyof the bud et.

May 2008Diokno I Budget Rules


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Budget Institutions: Theory

Without any restrictions on procedures, without anystructure and rules, Arrows impossibility theoremimplies that a legislature would never produce abudget but only legislative chaos

The budget is the result of conflicting interests ofrepresentatives with geographically basedconstituencies. This addresses two problems: thedetermination of the size of the budget and theallocation of projects among different districts.

Effects of geographically based constituencies on theoverall size of budget: representatives withgeographically based constituencies ask for spendingprograms which benefit their district and are financednationwide. Thus, representatives systematicallydo not internalize the true costs of financingsuch projects. May 2008Diokno I Budget Rules


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Budget Preparation

1. The Development Budget Coordination Committeemeet to approve the macroeconomic assumptionsneeded for the Budget Call

2. DBM issues the Budget Call as guide for concernedagencies, corporations and local governments in thepreparation of their budget requests

3. Agencies prepares budget proposal and submit the

same to DBM

4. DBM conducts technical budget hearings for allagencies of government, consolidates requests anddraft budget proposal for discussion by the Cabinet.



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Budget Preparation

5. Cabinet deliberates on the budget proposal.Through an iterative process, the proposed budgetundergoes several revisions.

2. On the basis of the Presidents final instructions,DBM prepares the draft BESF, the Budget Messageand other budget documents

3. The President submits the BESF and other budgetdocuments to the Speaker of the House ofRepresentatives, copy furnished the SenatePresident.



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Approval of the Budget and

the Role of the Legislature

The House prepares the General AppropriationsBill, 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 bicameralcommittee is formed; the report of thecommittee is voted by both Houses in itsentirety.

The President may approve or veto the bill. ThePresident has line-item veto power. [Note: theU.S. President does not have this power. Therewas an attempt to legislate this power, but theU.S. Supreme Court declared the lawunconstitutional.



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Budget rules are fiscally responsible

1. The House prepares the General Appropriations Billbased on the BESF or the Presidents Budget.

2. The budget bill is comprehensive covers all

agencies and funds, current and capitalexpenditures, and all foreign assisted projects boththe local counterpart and the loan proceeds. [Acomprehensive budget is superior to one wherethere are several appropriations bills voted onseparately (the U.S. practice); in theory, acomprehensive budget should result in smallergovernments and lower deficits]



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Congress may decrease but not increasethebudget as submitted by the President. [TheCongress may not increase the appropriationsrecommended by the President for the operationof the Government as specified in the budget.Article VI, Section 25(1)]

4. Reenactment of prior years budget: If, by theend of any fiscal year, Congress shall have failedto pass the general appropriations bill for theensuing fiscal year, the general appropriationslaw for the preceding fiscal year shall bedeemed reenacted and shall remain in force andeffect until the general appropriations bill ispassed by Congress. [Article VI, Section 25(7)]



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5. The President has line-item veto power: ThePresident shall have the power to veto anyparticular item or items in an appropriation,

revenue, or tariff bill, but the veto shall not affectthe item or items to which he does not object.[Article VI, Section 27(2)] The line-item veto powerallows the President to veto any item (budget line

or provision) that are inserted by legislators, whichthe Executive finds inconsistent with existing laws(for example, cuts on debt service) and budgetpriorities.

These budget rules, individually andcollectively, strengthen the Presidents abilityMay 2008Diokno I Budget Rules


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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, topreserve the governments creditstanding in the global community. Third,to get the best possible loan terms byreducing the risk of non-payment as aresult of executive-legislative gridlock.

But Congress is not helpless in limitingthe power of the President to contract orguarantee loans. The presidential powerto contract or guarantee loans is subjectto restrictions. May 2008Diokno I Budget Rules


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Restrictions

Congress has to be informed promptly: ThePresident may contract or guarantee foreign loanson behalf of the Republic of the Philippines with theprior concurrence of the Monetary Board, and

subject to such limitations as maybe provided bylaw. The Monetary Board, shall, within thirty daysfrom the end of each quarter of the calendar year,submit to the Congress a complete report of itsdecisions on applications for loans to be

contracted or guaranteed by the Government orgovernment-owned and controlled corporationswhich would have the effect of increasing theforeign debt, and containing other matters asmay be provided by law [Article VII, Section 20]



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Restrictions

Full disclosure: Foreign loans may only beincurred in accordance with law and theregulation of the monetary authority.Information on foreign loans obtained orguaranteed by the Government shall be madeavailable to the public. [Article XII, Section 21]

Existing budget laws provide that all

loans --domestic or foreign, their loanproceeds and local counterpartrequirements --should be disclosed in theBudget of Expenditures and Sources ofFinancing , and approved by Congress.



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Restrictions

Criminal and civil sanctions: Acts whichcircumvent or negate any of the provisions of

this Article [National Economy and Patrimony]shall be considered inimical to the nationalinterest and subject to criminal and civilsanctions, as may be provided by law. [ArticleXII, Section 22]



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Is prepayment of loans legal?

In recent years, the Executive department,invoking the automaticity of debt payment, hasprepaid some foreign loans without congressionalapproval. Whats the National Treasurers legal

basis for prepaying some national debts which arenot yet due and demandable?

This practice undermines Congress power ofthe purse. It is also, under certain conditions,

poor economics. For example, the governmentincurred huge losses when it prepaid foreign loanswhen the peso exchange rate was P50:US$1 saytwo years ago, when we it could pay now atP41:$US1. In addition, the budget prioritization was

changed when more was spent for debt service May 2008Diokno I Budget Rules


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Concluding remarks

Do budget rules matter?They should, butthey dont. Despite the fiscally responsiblebudget rules in the Constitution and existing

budget laws, deficits have ballooned in recentyears. Why? The President has chosen to ignorethese rules and Congress has failed to assert itspower of the purse.

The Executive Department has probably abusedthe automaticity of debt service payment by (a)prepaying public debt without congressionalimprimatur and (b) creating indebtedness whichtranslates into money to be paid out of the

Treasury in the future -- without prior approval byMay 2008Diokno I Budget Rules


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Education Budget, 2008 and

2009 For 2008, Congress approved a budget ofP140 billion (inclusive of P2 billion forschool buildings).

For 2009, DepEd had proposed a budgetof P241.4 billion for a whoppingincrease of 77%

For locally funded projects alone, DepEdproposed an increase from P8.4 billion in2008 to P36.3 billion in 2009, for adizzying increase of 330 %

For 2009, DepEd proposed to hire 39,762May 2008Diokno I Budget Rules

Documents

Budget Rules Matter May 2008