Public Finance Reform in Slovakia

1
Public Finance Reform in Slovakia
Ministry of Finance Slovak Republic September 6,
2005

Roland Clarke World Bank
2
Overview

• Objectives of Public Expenditure Management
  systems
  
• Rationale and difficulties of Reform
• Institutional vs. technical reform
• Achievements and challenges in Slovakia
• Conclusion the elements of success

3
Three Objectives of Public Expenditure Management
Systems

• Macrofiscal discipline and stability
• Avoid public finance crises
• Support economic growth and stability
• Entry to EMU adoption of Euro
• Strategic allocation of resources
• Match government policy with programs,
  objectives
  
• Resources flow to programs, aligned with budget
  priorities
  
• Information flows for informed decision making
• Technical efficiency
• Getting the most from each Koruna spent
• Improving service delivery

4
Why were reforms necessary?

• Policy Development (particularly in area of
  social welfare) unrelated to resources
  
• Short term focus (annual budgets)
• Emphasis on controlling details not on policies
• No incentives in the system for managers to be
  efficient
  
• Previous systems were unsustainable

5
Experience of Reforms technical and institutional

• WB has supported budget reforms in many countries
  of Eastern Europe and Central Asia
  
• Sometimes slow or not very successful because
  of
  
• Lack of ownership
• Belief that reform is technical rather than
  institutional and political
  
• Lack of institutional basis and lack of capacity
• Impatience changing institutions takes time

6
Changes in budget roles

• Before Reform
• Ministry of Finance
• Issues broad guidance at start of process, with
  cost increases
  
• Cutting spending requests across the board
• Heavy involvement in line item totals
• No idea of out-year implications
• Line Ministries
• Develop requests in vacuum
• Request is wish list incentive to ask for more,
  hoping that after cuts will have enough
  
• Little discretion to allocate funds in own
  budget
  
• Little incentive to focus on current programs,
  reallocate
  
• Minimal policy content in budget request
• Low likelihood of getting budget levels during
  year
  

• After Reform
• Ministry of Finance
• Issues broad guidance with multi-year sector
  ceilings at start of process (cabinet approved)
  
• Cuts spending requests only if above ceiling,
  leave most details to line ministry (though with
  recommendations)
  
• Little involvement in setting line item totals,
• Clearer picture of future implications of current
  choices
  
• Focus more on policy and objectives, performance
  assessments
  
• Line Ministries
• Clear resource framework for planning
• Request must prioritize between current and new
  programs
  
• Wide discretion to allocate funds in own budget
• Potential for larger policy content in budget
  request
  
• Higher likelihood of receiving budget levels
  during year

7
Achievements in Slovakia so far

• Firm macroeconomic basis to the budget not just
  good models but new institutions (external
  review, restructuring of FPI) more important
  
• Medium term approach policies costed over 3
  years. Institutional changes lock in out year
  estimates of budget.
  
• Reorganised MOF focus on policy (fiscal policy,
  expenditure priorities, debt policy) and not
  processes and technical details
  
• Establishment of Treasury and Debt and Liquidity
  Management Agency
  
• Sectoral ministries becoming responsible for
  outputs and outcomes (process is slower as it
  requires institutional and organisational changes
  within all agencies)
• Overall increased transparency and accountability
  in the whole process

8
Challenges for the future

• Linking policy making to budgeting in all
  chapters
  
• Stronger mechanisms for prioritization at the
  centre of Government
  
• Deepening of the results oriented (programatic)
  approach
  
• Internal reorganisation of chapters for to
  achieve the above
  
• Development of accounting reform

9
Slovakias achievements in context

• Still some way to go to meet OECD best practice
• .but now among the most advanced of the EU
  accession countries.
  
• One of the most rapid reform processes (starting
  1998 and accelerating in 2002)
  
• Important to maintain momentum

10
Conclusion conditions for success

• Strong leadership and political commitment
• Emphasis on institutional as well as technical
  aspects of reforms
  
• Recognition that the process is slow
• Effective communication of the rationale for the
  reforms and their benefits