Contemporary Theory and Practice in Budgeting

SYLLABUS

CONTEMPORARY THEORY AND PRACTICE IN BUDGETING

PUAF 688D Allen Schick Fall 2014 Tel.301-405-7609 Tuesday: 9:15-11:45 am [email protected] Office Hours: By appointment

This course focuses on the contemporary study and practice of budgeting and public financial management. It recognizes that budgeting is a process in which practice strongly influences theory, and theory often induces innovation in practice. It recognize that budgeting is addicted to reform; it is perennially a work in progress that undergoes frequent adjustment. Many of the topics identified in this syllabus have experienced reform efforts in recent decades.

Prior coursework in budgeting is not required; it is important, however, that students have an interest in the subject, and are willing to critically review and build on what others have written. Toward this end, students will prepare literature reviews that compare different points of view and developments in budgetary theory , and discuss issues that warrant further study.

Course Requirements

The course does not have exams, but students are expected to be active participants; the course grade will be influenced by participation scores.

Each student will submit two papers covering a single budget practice or issue. The first paper will present an annotated bibliography on the selected topic; the second paper will assess relevant theory and practice.

A list of potential topics is appended to this syllabus. At the second class meeting each student should rank 3-5 topics in order of preference; the instructor will endeavor to assign topics according to student preferences, but this may not be possible if many students have the same interests .Students may propose topics not listed on the syllabus; actual selections will be made in consultation with the instructor.

Paper 1. Annotated Bibliography (due October 14)

Each student should submit an annotated bibliography of relevant publications on his/her assigned topic .Identify articles, books, reports or other material that are important because they recommend or describe theory or practice. Aim for a bibliography with 10-15 entries. For each entry, submit annotation that summarizes the main argument of findings, and assesses its contribution to theory or practice. The annotation may also raise questions for further consideration. 2-3 paragraphs should suffice for each entry.

1 Paper 2. Critical Review (due November 18 or December 9)

Present a 15-25 page paper (single-spaced) that reviews the linkage of theory and practice, compares the views of various authors, and (if relevant) the practices of different countries. You should discuss the extent to relevant theory has (or has not) been validated in practice; you may also point to additional research that may be appropriate.

Your paper should be thematically integrated; it should not merely be a compilation of book reports. The paper should discuss aspects on which authors disagree or where practice deviates from theory.

The instructor will have substantial responsibility in guiding students and reviewing their progress. Toward this end, the instructor will set aside significant blocks of time to meet with students during the semester.

Students have the option to submit the paper no later than November 18, and to receive comments from the instructor and resubmit the paper by the end of the semester. Students who submit the paper beyond Nov 18 will forego the resubmission option.

Assigned

Prior to certain sessions, students will submit brief (one page, single-spaced) memos that discuss a particular aspect of the week's topic .Memos should be submitted electronically no later than 6PM the evening before the scheduled class. Four memos will be assigned; the three highest grades will be included in the course grade.

Course Grades

Grades will not be curved. Every student who earns an "A" will receive an "A". The course grade will be weighted on the basis of the following elements.

Annotated Bibliography 20%

Critical Review 50%

Participation 15%

Assigned Memos 15%

Assigned Readings

2 Many of the readings will be posted on CANVAS; others will be distributed in class. Students will be asked to purchase only one book.

Marco Cangiano (ed) Public Financial Management and its Emerging Architecture, International Monetary Fund

International Monetary Fund, Budgetary Institutions in G-20 Countries (distributed to students)

Allen Schick, Evolutions in Budgetary Practice (distributed to students)

COURSE SESSIONS

I am likely to adjust the course sessions as the semester progresses; The schedule will give greater prominence to assigned readings early in the semester and to student presentations later in the semester.

Sept 2 The Growth of Government and the Evolution of Budgeting

Contemporary budgeting is a byproduct of the modern state. As the footprint and expenditures of national governments expanded, budgeting was transformed from a means of controlling and limiting public expenditures into an instrument of economic and program management. This opening session surveys course objectives and requirements, initiates the selection of paper topics, and examines trends in the expansion and role of government.

Readings

Trend data on government revenues and expenditures (distributed)

Vito Tanzi & Ludger Schuknecht, Public Spending in the 2oth Century, Chaps 1 & 2

Anwar Shah (ed) Budgeting and Budgetary Institutions, Chap 4

Sept 9 Budgetary Principles and Diagnostics

Leading international organizations have recently formulated and promoted principles and standards of good budgetary practice .These statements are used to assess budget systems of developed and developing countries, and to spur reforms. The International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), and the Public Expenditure and Financial Accountability project (PEFA) issued revised statements during 2014

3 Readings

IMF, Fiscal Transparency Code

OECD, Principles of Budgetary Governance

PEFA, Diagnostic Guidelines

IMF, Budgetary Institutions in G-20 Countries

Sept 16 Frameworks for Assessing Budget Systems

This session compares two typologies, developed 40 years apart, for classifying and interpreting budget processes. Differences between the frameworks indicate the evolution of budgeting from an administrative process that regulates government expenditures and activities into a broad policy instrument for steering the economy and establishing public priorities.

Readings

Allen Schick, "The Road to PPB: The Stages of Budget Reform," Public Administration Review, 1966. in Hyde (ed) Government Budgeting, pp.47-65

Allen Schick, "Reflections on Two Decades Of Public Financial Management Reforms", in Cangiano, pp.21-76

Sept 23 The Budget As an Instrument of Economic Policy

The growth of government inevitably transformed budgeting into a means of shaping economic conditions. During the post World War II boom, many countries embraced Keynesian notion of economic stabilization trough countercyclical fiscal policies. The Keynesian consensus has been challenged, and uprooted in many countries, by the recent global financial crisis.

Readings

Mark Blyth, Austerity: The History of a Dangerous Idea, Chap 3

Alan Blinder, After the Music Stopped: The Financial Crisis, the Response and the Work Ahead, pp.409-37

Allen Schick, "Repairing the Social Contract" OECD Journal On Budgeting

4 Sept 30 Budgeting Is a Political Process

Budgeting is inherently a political activity that reflects the distribution of power and mobilization of interests in a country. Focusing on a few countries, this session examines how differences in governance affect budgetary behavior.

Readings

David Good, The Politics of Public Money Chaps 1 & 4

Mark Hallenberg & others, Who Decides the Budget: A Political Economy Analysis of the Budget Process In Latin American Countries, Chaps 1 & 10

John Wanna and others, Managing Public Expenditure in Australia, Chap 1

Oct 7 Fiscal Discipline

For generations, constraints on aggregate revenues and expenditures, and on the budget deficit and public debt were informal. During recent decades they have been formalized through fiscal rules and fiscal responsibility procedures. Fiscal rules have been introduced in more than 80 countries, including the Stability and Growth Pact adopted by the European Community.

Readings

Cangiano, Chaps 2,3, 5 & 6

IMF Board paper on fiscal rules

Schick, Evolutions, Chaps 11 & 13

Banco D'Italia, Rules and Institutions for Sound Fiscal Policy After the Crisis, Chaps 9 & 14

Oct 14 Effective Allocation

Efforts to rationalize budget allocations, and to bolster their congruence with government priorities as well as with evidence on program effectiveness have been among the most persistent and frustrating themes of contemporary budget reform. Program evaluations, spending reviews, and outcome and impact indicators are among the methods devised to facilitate reallocations from less to more effective uses.

Readings

5 Schick, Evolutions, Chap 16

Marc Robinson, OECD paper on Spending Reviews

Cangiano, Chap 4

Joseph Wholey & others, Handbook of Practical Program Evaluation, selections

Oct 21 Meetings With Students

To enable each student to meet individually with the instructor, this session (and other times during the week) will be set aside to discuss paper assignments (both the previously submitted first paper and the send paper) with each student.

Oct 28 Performance Management

Performance budgeting (PB--allocating money on the basis of actual or expected results--is a simple idea that has had a disappointing history. Many PB efforts have failed because government cannot budget for results if it does not manage for results. For this reason, next week's session on PB is preceded by this week's discussion of managerial dimensions of performance

Readings

Colin Talbot, Theories of Performance, Chap 1

Allen Schick, Evolutions, Chap 10

Jon Pierre & Guy Peters, Governance, Politics and the State, Chap 3

Jonathan Boston and Others, Public Management: The New New Zealand Model Chap 2

OECD, Government of the Future, Chap 1

Nov 4 Performance-Based Budgeting

Readings

Schick, Evolutions, Chap 14

Cangiano, Chap 7 6 Schick, "The Metamorphose of Performance Budgeting, OECD Journal of Budgeting

Marc Robinson, Performance Budgeting, chaps 1 & 15

OECD, Performance Budgeting in OECD Countries, Chaps 3 & 4

Nov 11 Financial Accountability and Transparency

Budgeting is generally a closed-process, in which government announces the results of internal decisions when it release the budget. Recent reforms have sought to open the process to outside interests and stakeholders.

Readings

Cangiano, Chap 8

The Open Budget Initiative

Anwar Shah, Participatory Budgeting, Chaps 1 & 3

Nov 18 Time Frames

The annual budget has structured the cyclical routines of budgeting for more than a century. However, recognition that this short time frame may induce politicians and managers to disregard future implications of current decisions has led to two innovations--medium-term expenditure frameworks (MTEF) and long-term sustainability projections.

Readings

Cangiano, Chap 4

Schick, Evolutions, chap 13

World Bank, Beyond the Annual Budget: Review of Global Experience With Medium- Term Expenditure Frameworks, excerpts

Nov 25 Fiscal Risks

A budget is a financial plan for an uncertain future; ever fiscal year has the potential to turn out differently than planned in the budget .Governments face two types of risks: that actual economic conditions may vary from assumed levels; and that contingent liabilities may compel 7 unbudgeted expenditures.

Readings

Cangiano, Chap 5

IMF Board paper on fiscal risks

Hana Brixi & Allen Schick, Government at Risk , chaps 1, 3, and conclusion

Dec 2 The Budget Roles of Legislatures and Independent Fiscal Institutions

The budget role of legislatures differs significantly among countries, but there is a definite trend to greater parliamentary activism, accompanied in some countries by enlargement of legislative budget staffs and establishment of independent fiscal institutions that shadow the government's fiscal policies and assumptions.

Readings

Schick, Evolutions, Chap 6

Joachim Wehner, Legislatures and the Budget Process, Chap 3

Cangiano, Chap 6

George Kopits, "Independent Fiscal Institutions: Developing Good Practices"

Lars Calmfors & Simon Wren-Lewis, "What Should Fiscal Councils Do"

Dec 9 Budgeting in Developing Countries

Most budget innovations were devised in highly developed countries, but have been transplanted to developing countries, including some that have extremely low per capita incomes. Economic (and sometimes political) volatility complicates budget tasks in developing countries.

Readings

Cangiano, Chap 14

Anwah Shah, Budgeting and Budgetary Institutions, Chaps 12-15

James Savage, Reconstructing Iraq's Budgetary Institutions, excerpts 8 PROPOSED PAPER TOPICS

(1) Accrual Accounting and Budgeting

Application of the accrual basis (in contrast to the cash basis) to financial statements or budgets Some form of accruals has become standard in financial reporting, but few countries budget on the accruals basis

(2) Incremental Budgeting

Normative and descriptive arguments that budgeting is inherently incremental--almost all expenditure decisions deviate only marginally from the previous year's allocations. Initially associated with the writings of Aaron Wildavsky, incrementalism has spawned a vast literature .

(3) Fiscal Decentralization

The concept or norm that the central government should assign significant revenue and expenditure authority, along with responsibility for major publics services, to subnational governments. This idea has often been actively promoted by international organizations for developing countries.

(4) Fiscal Rules

Preset limits on key fiscal aggregates, such as total revenues or expenditures, public debt or the budget deficit. More than 80 countries have adopted fiscal rules, including members of the European Union.

(5) Fiscal Risks/Contingent Liabilities

Accounting or budgeting for contingent liabilities, including the risk that actual fiscal outturns will differ from assumed or budgeted amounts. Countries differ significantly in their budgetary treatment of contingent liabilities.

9 (6) Tax Expenditures

Subsidies or other benefits provided through tax preferences (such as credits and deductions) rater than through direct expenditures such as grants. Many countries report tax expenditures in the budget.

(7) Long-Term Fiscal Projections

Projections of the revenue and expenditure implications of current policies that extend 30 or more years ahead, and may also estimate policy changes required to maintain a sustainable fiscal position. Long-term projections have not been standardized, and may include fiscal gap analysis and intergenerational accounting.

(8) Program Evaluation

Systematic or ad hoc assessment of the cost or effectiveness of proposed or existing programs, as well as methods for feeding evaluative findings into budget decisions.

(9) Spending Reviews

Strategic review of public expenditures to determine whether they should be terminated or modified. These reviews typically are sponsored by political leaders and aim to reduce public expenditures. They differ in purpose and method from conventional evaluations.

(10) Performance Based Budgeting

Allocation of budget resources on the basis of actual or expected results, and the systematic inclusion of performance information in the budget. Governments differ significantly in the extent to which they use performance information in deciding the budget.

(11) Medium-Term Expenditure Frameworks (MTEF)

Extension of the time frame of budgeting from a single fiscal year to the medium-term, typically the next 3-5 years. The MTEF is not just a projection; its key purpose is to constrain budget decisions on the basis of estimated future impacts.

10 (12) Evidence-Based Budgeting

Use of randomized controlled trials (RCTs) to sientically assess the impacts of policy interventions. T his method differs from program evaluation in that it is based on comparisons of groups using different policy instruments.

(13) Participatory Budgeting

Procedures that give citizens a formal (but limited) role in allocating budget resources. These efforts typically occur at the local level, mostly in Latin American countries

(14) Countercyclical Fiscal Policy

The notion that government should use revenue and spending policies to stimulate the economy when it is weak and restrain the economy when it is at or near full employment. This concept has been questioned in the aftermath of the global financial crisis.

(15) Independent Fiscal Councils

In recent years, more than a dozen countries established independent fiscal councils (IFIs) to monitor (or substitute for) the government's fiscal policies and assumptions. In some countries, these institutions are responsible to parliament, in others they are free-standing entities.

(16) Parliament's role in Budgeting

The budget role of the national legislature depends on the structure of government. Parliaments have recently become more active and independent on budget matters.

(17) Integrated Financial Management Information Systems

Modern IT makes it feasible to integrate separate financial management processes, for example, payroll, procurement, accounting and cash management. Integrated systems are popular, but not always successful.