1. PRINCIPLES FOR PUBLIC
FINANCIAL MANAGEMENT
Seminar on International Finance
Ministry of Finance, Taipei
1 December 2015
Hans van Rijn
Office of the Director General, Independent Evaluation
Asian Development Bank

2. Presentation Outline
 Role of PFM in Macroeconomic Management
and Fiscal Policy
 Objectives of PFM
 Key characteristics of good PFM
 Key principles for strategic budgeting
 Budget cycle management
 Intergovernmental Fiscal Frameworks

3. I. Role of Public Finance in
Macroeconomic Management
 Long term strategic vision for the economy
 Learning from doing during implementation
(targets, monitoring, feedback loops)
 Transparency and accountability over
policies, spending and results

4. II. What are the Objectives of
Public Financial Management?
 Fiscal discipline
 Strategic resource allocation
 Operational efficiency

5. Aggregate
Fiscal
Discipline
Allocative
Efficiency
Operational
Efficiency
Operations Service
Delivery
Directorates, programmes, projects at
the level of line managers
Resource Allocation
Strategic areas (intersectoral)
Interministerial coordination
Within strategic areas
Programmes-Activities prioritisation
Overall Expenditure
Control
Strong role of the Ministry of Finance
Macroeconomi
c
Policy
Objectives
Operational
Performance
Basic
objectives
Levels of budget
management
Type of
objective
PFM objectives, budget
management and macroeconomic
and fiscal policy

6. Budget year T: Budget years T +1,2,3:
Total revenues
Total expenditure
Budget deficit
Increase in costs
of total debt
Total revenues
Increase in total expenditure
Increase in budget deficit
Further increase in costs
of total debt
Interestpayments
Sustainable Fiscal Policy

7. III. Main Characteristics of Good
PFM
 Comprehensive
 Predictable
 Accountable
 Transparent
 Clear, consistent, affordable
 Political engagement

8. Underlying Problem: The Budget as
a Common Property Resource
 National budget is subject
to the tragedy of the
commons;
 For every stakeholder, the
incentive is to maximise
spending rights, because
the cost is paid by pooled
resources
 Detrimental to collective
welfare

9. Mitigation Against Common Property
Dilemma
The “Budget Institutions Solution”:
 Formal commitment to a common fiscal policy and
development strategy before negotiating individual
shares
 Therefore a “bounded” (restricted) negotiation
strategy
 Maximum transparency over the Fiscal Policy, the
Strategy, the Budget & Results

10. Budget vs. Budget Process
 Important
distinction
 Budget is a legal
document
 Budget process
identifies the steps
for preparation,
implementation
and monitoring of
the document

11. Policy
formulation
Policy
statement
Budget
compilation
Outcomes
Expenditure
on activities
Budget
Revenue
collection
Process Product Process Product Process Product
IV. From Policy to Outcomes:
The Budget Cycle

12. Linking Policy to Delivery
Long-Term Development Plan
MTFF /
MTBF
Annual Budgets
Goods and Services

13. Budget Classification System
Administrati
ve
Classificatio
n
Economic
Classificati
on
Functional
Classificati
on
Title Chapter Section Article Paragraph
Main
Function
Function
Secondary
Function
Ministry
Managing
Unit
Main
Classificatio
n
Subclassifi
cation
Suppl
Information
Division Group Class
Agriculture &
Forestry
DG for
Agriculture
Expenses
Employee
Compensa
tion
Wages and
Salaries in
Cash
Economic
Affairs
Agriculture,
Forestry,
Fisheries,
Hunting
Agriculture
2 characters
2
characters
1 character
1
character
2
characters
3 characters 1 character 1 character

14. V. Strategic, Policy-Based
Budgeting
 Wide but structured participation in the
budget process, within a carefully crafted
time-table (“fiscal calendar”)
 Comprehensive, multi-year perspective in
fiscal planning, and budget management
(minimize off-budget and quasi-fiscal
activity)
 Medium Term Fiscal Framework, Medium
Term Budget Framework

15. Q1: REPORTING
Spending statement; results
reports
Q2: STRATEGIC PHASE
Fiscal policy, strategy, ceilings
Q3: DETAILED
PREPARATION
Sector submissions (within
ceilings), negotiation with MoF
Q4: APPROVAL
Cabinet legislature
Budget
Circular
No. 1
Budget
Circular
No. 2
Cabinet
Decision on
Ceilings based
on agreed
fiscal policy &
strategy
V-a. A Structured Budget Calendar

16. V-b. Medium Term Fiscal Framework
 Aggregate 3-5 year framework, covering the
key aggregates of Central Government
Financial Operations
 Revenues, expenditures, planned deficit or
surplus, levels of borrowing
 Illustration: Table 2 in the IMF’s Article IV
Consultations

17. V-c. Medium Term Budget
Framework
 Breakdown, by MDA, of expected revenues
and spending
 Baseline scenario and new measures
(possible changes in revenues and/or
spending)
 Latter especially relevant for windfall
economies and/or economies vulnerable to
exogenous shocks

18. V. Strategic Planning
 Setting the Government’s medium-term policy
agenda (coherence of objectives!)
 Accompanied by corresponding budget
allocations
 Within the boundaries set by the MTBF

19. VI. Effectiveness in Budget
Execution
 Good budget preparation
(comprehensiveness, credibility)
 Predictability and control (minimize
leakages)
 Accurate accounting, recording and
reporting
 External oversight (audit, public accounts
committees)

20. VI-a. Controlled Budget Execution
in Five Steps
Authorisation
Commitment
Verification
Payment authorization
Cash payment

21. VI. External Audit

22. Policy
formulation
Policy
statement
Budget
compilation
Outcomes
Expenditure
on activities
Budget
Revenue
collection
Process Product Process Product Process Product
From Policy to Outcomes:
The Budget Cycle

23. DESIGN PRINCIPLES
FOR AN INTER-
GOVERNMENTAL
FISCAL FRAMEWORK
Ministry of Finance, Taipei (1 December
2015)

24. Local Government: Current
Political Landscape

25. Structure, Composition, Legal
Framework
 22 major administrative regions (6 special municipalities,
3 provincial level municipalities, 13 county level
municipalities)
 Article 118 of the Constitution and Article 9, paragraph 1
of the Amendment to the Constitution.
 Local Government Act (1999, amended)
 Finance matters are described in Section 5 of the Local
Government Act (clauses 63-74)
 Act Governing the Allocation of Government Revenues
and Expenditures (1951, last amended 1999)

26. Decentralized Governance: Big
Picture
Sector
Ministries
Ministry of
Local
Government
MoF / NPA
Sector
Agencies
Local
Government
Citizens
National
Local

27. Intergovernmental Fiscal
Framework
and Public Financial Management
 An IGFF can be compared with a plumbing system,
with different size pipes representing different
sources and volumes of finance that are available
to different levels of government
 A PFM system regulates how the sources flow

28. A Taxonomy of Intergovernmental Transfer Programs
Method of determining the total divisible pool
Method of allocating
the divisible pool
among eligible units
Share of
national
tax
revenues
Ad hoc
decision or
programme
specific
Reimburseme
nt of
expenditures
Allocation based on
estimates/measures of
the relative total LG
expenditure needs and
revenue mobilisation
capacity
1. Origin of collection
of the tax
A -- -- --
2. Formula B1 B2 -- B3
3. Total / partial cost
reimbursement
C1 C2 C3 --
4. Ad hoc decision D1 D2 -- D3
5. Performance
based (maybe
combined with 1-4).
E1 E2 -- E3
Taxonomy of Fiscal Transfers
Drawn from: Steffensen, Jesper. Introduction to the Principles for the Design of
Intergovernmental Fiscal Transfer Systems, Copenhagen, 2007

29. Key Issues Underlying An IGFF
 What services should be provided at which level of government (the
expenditure assignment)
 What are the sources of finance for the provision of these services
(the revenue assignment)
 How to respond to the imbalance between revenues and
expenditures (vertical imbalance, corrected by inter-governmental
fiscal transfers)
 How to respond to inequalities in needs and capacities between
units operating at the same level of government (horizontal
imbalance, corrected by equalisation grants)

30. What Are The Objectives of an
IGFF?
 Compensating local governments for
complying with central government
requirements
 Correcting or adjusting externalities
with public goods provision
 Coordinating, harmonizing and
influencing local government
spending with central government
goals
 Ensuring efficiency in local government
revenue mobilization
 Providing central government with
adequate flexibility to pursue
macroeconomic stabilization policy
and influence the overall activity level
within the local government sector

31. So What Are Good IGFF Design
Principles?
 Clearly define fiscal domain of LGs
 No undermining of LG fiscal autonomy
 All transfers on-budget (revenue, expenditure)
 All transfers accompanied by clear objectives
 Predictability in allocations and/or revenue shares
 Reduce the scope for unwarranted fiscal discretion
 Regulate borrowing by LGs
 Avoid asset transfers
 Introduce a single treasury account
 Ensure timely audits

32. References for Good Practices
Public Financial Management
http://www1.worldbank.org/publicsector/pe/StrengthenedApproach/
http://www.oecd.org/dac/effectiveness/pfm.htm
http://um.dk/en/about-us/e-learning/intro-public-financial-procurement/
http://www.imf.org/external/pubs/ft/gfs/manual/gfs.htm
Open Budget Index
http://internationalbudget.org/opening-budgets/open-budget-initiative/open-
budget-survey/
Fiscal Decentralization Indicators
http://www1.worldbank.org/publicsector/decentralization/fiscalindicators.htm
http://www.oecd.org/tax/federalism/oecdfiscaldecentralisationdatabase.htm