Government financial management and reporting in times of crisis

 Introduction

Good budgetary governance – that is the institutions, processes and structures for allocating resources to government policies, delivering them and reporting on the financial outcomes – is critical at all times to support the timely and efficient delivery of government policies, while at the same time ensuring appropriate transparency and accountability of government action. Accordingly, the OECD Recommendation of the Council on Budgetary Governance (OECD, 2015[1]) sets out ten principles supporting a coherent and effective budgetary governance system. These include managing budgets within clear, credible and predictable limits for fiscal policy; closely aligning budgets with the medium-term strategic priorities of government; actively planning, managing and monitoring budget execution; and presenting a comprehensive, accurate and reliable account of public finances.

The ongoing coronavirus (COVID-19) outbreak has put governments across the OECD under considerable pressure to deliver emergency support to the healthcare sector, households and several sectors of the economy, whose activity were temporarily frozen. Virtually all OECD countries responded swiftly in mobilising additional budgetary resources. The OECD estimates that the average initial response period was slightly less than four weeks (26 days) from when a country reported its first case. After this initial response, budget measures adopted by OECD countries increased in size and scope as the sanitary, economic and social impacts of COVID-19 unfolded. Further, as the full impact of the crisis is still to be determined, governments’ unprecedented policy support will need to continue (OECD, 2020[2]).

The traditional conduct of budgeting has been altered in most OECD countries. Given the extreme economic uncertainty, governments have found it difficult to plan budgets around transparent macroeconomic assumptions, opting instead to delay the publication of strategic forecasts or publishing a range of scenarios in lieu of one central planning baseline. Ministries of Finance had to operate without a fixed budget calendar and process and had to cost, fund and deliver resources for policies that evolved and adapted to the evolution of the pandemic. Legislatures were asked to adapt their budget oversight to swift government action (OECD, 2020[3]). These challenges are not without similarities with those experienced during the global financial crisis a decade ago (Schick, 2009[4]), although arguably on a larger scale.

This policy brief provides an overview of how OECD countries’ financial management and reporting systems have coped and adapted to the demands and pressures brought about by COVID-19, within the broad challenges for budgetary governance systems noted above.1 It focuses on financial management and reporting activities of Ministries of Finance where the greatest pressures have been felt, based on preliminary discussions with OECD member government officials. These four activities are as follows: 1) Funding COVID-19 spending in the course of the budget year; 2) Allocating resources to evolving emergency policies; 3) Executing in a timely manner emergency spending; and 4) Enabling transparency and accountability.2 In the last section, this policy brief examines the preliminary lessons learned that Ministries of Finance should consider.

Unless a specific reference is cited, the observations in this brief were accumulated from a short questionnaire sent to members of the Senior Budget Officials (SBO) Network on Financial Management and Reporting during the second quarter of 2020.3 This paper will be edited and improved over time as more information becomes available and further consultation with the SBO Network on Financial Management and Reporting proceeds.

 Funding COVID-19 policies

Most OECD countries have a range of instruments available – often called flexibility measures – that gives them some room to accommodate new fiscal developments or changes in government policy priorities during the fiscal year. Typically, these flexibility measures include the possibility for the government to reallocate funds across budget lines or programmes within clear limits.4 During the COVID-19 crisis, these measures have been used in particular in the first weeks of the governments’ responses. Most OECD countries also include in their annual budget a reserve to be used in the event of emergency or unexpected spending pressure.5 These reserves have been mobilised in the first days of the response to the pandemic, for example in Australia, Greece, Hungary, Japan and Lithuania.

In some cases, greater flexibility or discretion than is usually the case was granted to governments during the COVID-19 crisis in using their reserves and in re-allocating funds. For example, in Lithuania, the so-called Action Plan for Economic Stimulus and Mitigation of Consequences of Coronavirus Transmission provided additional powers to the government in using the State reserve and in re-allocating budget appropriations. In Portugal, an amendment was introduced to the budget bill granting cabinet the authority normally reserved to parliament to transfer appropriations across programmes within the budget. In Slovenia, exceptional budget flexibility measures were authorised by the legislature, such as authorising reallocations above the thresholds set in the annual Budget Act.

In all countries, however, reallocations and reserves embedded into budgets fell short from providing the funding required by very large COVID-19 fiscal packages. In particular, reserves embedded in the annual budget are typically aimed at funding “small size” unexpected events rather than absorbing large shocks. In the event of a large shock, countries would have to rely on larger “rainy-day funds”. However, only seven OECD countries have established such funds (Figure 1), and rules governing the use of these resources may be highly constraining. One country, Norway, was able to tap into its fund as part of their response to the crisis, in accordance with the fund’s rules-based management tied to the economic cycle.

Consequently, virtually all countries had to seek Parliamentary approval on new spending and new funding. For example, Israel, which typically funds new spending with re-allocation of appropriations, took the unusual step of amending its Basic Law and presenting a supplementary budget law to the legislature.

In some countries, governments had to remove or modify expenditure ceilings for the budget year, as well as relax or suspend fiscal rules to create the fiscal space required by new spending. Denmark, for instance used an exemption clause to remove the annual expenditure ceiling embedded in its Budget Law to fund its initial responses to COVID-19. Another example is Italy, where the Parliament authorised a temporary deviation from the adjustment path towards the medium-term deficit and debt objectives. In Germany, the government introduced a supplementary budget that would not comply with the budget balance policy implemented since 2015. This was approved by Parliament based on “exceptional circumstances”.

 

Figure 1. OECD countries: Contingency and reserve funds

Note: Data for the United States are not available; Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

Source: OECD, Budgeting and Public Expenditures in OECD Countries, 2019, http://dx.doi.org/10.1787/888933946742.

In addition to the extraordinary immediate spending needs generated by the sanitary emergency, governments had to prepare budgets amidst unprecedented economic uncertainties. In some cases, governments did not provide usual analysis or forecasts with the budget, with the agreement of the legislature. For example, in Finland, the usual requirement for updated economic and fiscal forecasts was dropped and no reference to the financing of expenditures was included in the budget. Similarly, in the Netherlands, the supplementary budget was approved without the usual updated forecast for budgetary balance and national debt. In other words, spending was sometimes approved without a clear understanding of how government would raise the necessary resources and of its ultimate impact on the level of public debt.

Finally, in some cases, the government used decree powers or exceptional emergency expenditure and law-making authority to authorise urgent unforeseen expenditure. In most cases, such powers were granted to the government due to the declaration of a “state of emergency”, declared in roughly half of OECD countries (OECD, 2020[3]). For example, in Belgium, reductions and expirations of statutory unemployment benefits were frozen by royal decree. In Canada, the Act respecting certain measures in response to COVID-19 empowered the cabinet with broad spending authority and granted the federal Minister of Employment and Social Development powers to change the Employment Insurance Act.

 Allocating resources to policies

It was not always the case that governments could precisely define all new policies required to support the economy and households while knowing how additional funds would be spent at the time when the first supplementary budget law was still being tabled in Parliament. This is a situation very similar to what happened in the wake of the global financial crisis a decade ago, during which emergency packages were assembled in emergency and new ones prepared before the previous one had been fully implemented (Schick, 2009[4]). During the present crisis, this high level of uncertainty has been handled in a number of ways, described below, which sometimes had the effect of limiting the time and scope for parliamentary oversight (OECD, 2020[3]).

Some countries tabled successive supplementary budget laws. For example, the Swedish Government presented a series of supplementary budget bills for parliamentary approval, in addition to the regular supplementary budget bill that accompanies the Spring Fiscal Policy Bill. Sweden introduced 11 supplementary budget bills as the crisis unfolded. Korea took an unusual step by introducing three supplementary budget for the first time in 50 years.

In some countries, the legislature provided an authorisation to incur expenditures in advance of a subsequent appropriation, when government will make the subsequent details of the spending available for Parliament’s scrutiny. Such authorisations were granted to government in Australia, New Zealand and the United Kingdom. In Belgium, the quarterly budget included a so-called supplementary provision for expenditure related to COVID-19, with transfers from this provision approved by Royal Decree after approval by the Finance Minister.

In some cases, legislation did not specify a ceiling on COVID-19 spending. In Canada, the Parliament approved omnibus bills enabling COVID-19 policy measures, with authorisation granted to the Minister of Finance and Minister of Health to incur all necessary health-related spending without a ceiling. Legislation also granted the Minister of Finance the ability to authorise the borrowing of money without parliamentary approval for a defined period.

Extra-budgetary funds have been used to channel responses to COVID-19. In Hungary, two extra-budgetary funds have been set up: the Economy Protection Fund, aimed at restarting the economy and support the job market, and the Disease Control Fund, aimed at financing health-related expenditures, such as purchasing medical equipment, building temporary emergency hospitals (a container hospital). Resources for these funds come from a number of sources including transfers from the State budget and taxes on multinational companies and the financial sector.

It is notable that governments have relied heavily on non-cash (also called balance sheet) measures to provide support to households and corporations. In particular, very large guarantee schemes have been announced in most countries (Figure 2) that will not impact the current year’s deficit but generate significant fiscal risks for the future. Countries with a fiscal risks management framework covering the approval, funding and monitoring of new guarantees, such as the Netherlands, had safeguards in place during the crisis that allowed “channelling” government interventions.

 

Figure 2. OECD countries: loan and guarantee schemes announced by governments (% of 2019 GDP)

Source: OECD estimates based on publicly available information by end of September 2020.

 Delivering emergency spending

During the COVID-19 pandemic, rapid delivery of emergency policies was key to the success and effectiveness of government action. In some countries, existing processes and controls were considered suitable to address demands for crisis response. In Australia, entities were expected to have appropriate awareness of the heightened risk of fraud in the COVID-19 operating environment and to deploy appropriate controls to mitigate such risks. A similar approach was taken in Japan. In Sweden, agencies that administer significant sums of COVID-19 expenditure were allocated extra funding to administer this increased activity as a means of maintaining the integrity of processes.

In some countries (OECD, 2020[5]), simplified processes were authorised by legislation in the case of an emergency, in particular concerning procurement. This is the case in France, where a “compelling emergency” is discussed in the Procurement Code and authorises streamlined procurement processes. There, the adoption of procurement procedures notably included the creation of a unit within the Ministry of Finance to control the “fiscal compliance” of businesses contracted during the COVID-19 crisis – i.e. accounting officers verify that companies comply with tax obligations for central and local government authorities. In Lithuania, the Law on Public Procurement was amended to include COVID-19 emergency-specific procedures.

Other countries sought to speed up the execution of COVID-19 spending beyond what legislation would normally allow by cutting corners, with the challenge of ensuring that speed would not become expediency (OECD, 2020[6]). Countries adopted a variety of “new” practices, such as fast-tracking of COVID-19 budget allocation and execution. Where such fast-tracking of resource allocation for COVID-19 response was used, the intention was that speed would come with stricter monitoring by decision makers. For example, in Austria, fast-track was used for budget appropriations with stricter controls than usual and with approval by the Vice Chancellor (Seiwald and Polzer, 2020[6]). In Korea, the Second Vice Minister presided over the Financial Management Meeting, where line ministries discussed programmes implemented as part of the supplementary budget on a weekly basis, with the aim to quickly resolve any administrative issues and accelerate execution. Fast-tracking was also used for the approval and control of individual expenditures. In Canada, a priority approval process was established and processes were streamlined to expedite routine approvals in a primarily telework/virtual environment, for example by replacing ink signatures on hardcopy approvals with electronic approvals in email-based workflows. In Poland, the timing for the transfer of funds to entities in some sectors was shortened.

Payment delays have been shortened in some cases to provide liquidities to businesses servicing the government in crisis. For example, in Denmark, to help maintain appropriate levels of liquidity in businesses, public sector entities were authorised to process payments immediately, to prepay suppliers when possible; and to remove penalty charges for those services that could not be delivered on time. France followed a similar approach by suspending penalties for suppliers that were unable to provide a product or service because of COVID-19. In Italy, service providers were granted the permission to ask for advances from the Treasury, and cash advances from the central government were provided to local governments to ensure liquidity for the payment of commercial debts. In Slovenia, payments to private entities were processed within 8 days (as opposed to 30 days usually).

 Enabling transparency and accountability

Against a background of exceptional budget procedures and, sometimes, challenges with trust in government action (OECD, 2020[7]), clarity on new spending decisions and transparency on actual implementation has been a major concern for most governments. It has been handled in different ways by OECD countries, depending on their national circumstances.

To flag COVID-19 related spending measures in the budget documentation, some countries have created specific programmes or chapters. In Germany, the so-called “protective shield to manage the coronavirus pandemic” is identified separately in the budget and comprises all COVID-19 new spending, including a detailed costing of each measure, eligibility criteria and presentation of administrative processes by measure. In France, COVID-19 programmes (including short-term employment and support to self-employed) were included in the programme-based budget nomenclature, with monitoring of performance through indicators that measure the speed of disbursement and the impact on employment. Similarly, in Japan and Slovenia, the programme-based nomenclature was adapted to identify separately COVID-19 related spending, as well as guarantees in the case of Slovenia.

Where such specific programmes or budget chapters were not created, tagging systems have sometimes been used, such as for example in Canada and Slovenia. In Finland, the supplementary budget law tabled in the Parliament included itemised details of additional spending. In Greece, a new earmarked budget code was created for appropriations in relation to the implementation of protection measures from COVID-19.

Ensuring accessibility of information to citizens and clarity on the objectives for new spending measures were shared objectives of governments. For example, in Korea, for each new spending proposal, an overview, an explanatory statement, a performance statement, and a gender-sensitive analysis were made available on the National Assembly’s website. In Lithuania, all institutions involved in the COVID-19 response were required to publish information on their websites concerning the rules, requirements and funds allocated for the measures specified in the Response Plan. The government also provided consolidated information on a dedicated website. Iceland and the United Kingdom adopted similar approaches.

The identification of COVID-19 spending is not mandated by accounting regulations or standards, unless budget chapters or budget lines are created for that purpose in the budget nomenclature, as noted above. Such reporting was however considered desirable for transparency and accountability by governments themselves, independent watchdogs or the legislature. In Canada, for instance, the Office of the Controller General initiated a new reporting requirement to capture government-wide new expenditures related to the COVID-19 response on a monthly basis.

Financial reporting practices and ambitions have varied across the OECD in terms of their objectives, frequency or content, sometimes due to technical constraints with IT systems or charts of accounts. In some cases, COVID-19 expenditures are just reported in the usual monthly or quarterly budget outturns, without specific identification. In addition, these outturns have been sometimes delayed due to teleworking and other technical constraints (e.g. Lithuania or Poland).

In other cases, countries have established ad hoc reporting processes on COVID-19 spending for the legislature. In Austria, for example, the implementation of COVID-19 measures voted in the supplementary budget law are reported monthly, within four weeks after the end of the month. In Canada, the Minister of Finance agreed to provide a bi-weekly report to the Standing Committee on Finance until 20 April 2020 on all actions undertaken under legislation enacted as part of the government’s COVID-19 response. In Belgium, a threshold system has been used with all federal public services and institutions instructed to report expenditures related to the COVID-19 crisis on a monthly basis. In New Zealand, the government provides information on COVID-19 spending and measures on a monthly basis and at year-end as part of the commentary in the financial statements (i.e. outside of the audited financial statements).

In some countries, specific attention was paid to the tracking and monitoring of balance sheet (or non-cash) measures, such as guarantees and loans. In countries that have an accrual-basis accounting framework, liabilities and contingent liabilities are recorded as part of the usual accounting processes but the data is often published only at year end.6 Therefore, further steps have sometimes been taken to provide more timely and regular data. In Austria, for example, COVID-19 related guarantees are handled by a new agency, and such measures are reported quarterly by the Ministry of Finance. In Germany, records of guarantees and loans are updated and reconciled monthly, as well as published along with the names of beneficial owners. In the United Kingdom, the contingent liability approval framework provides for internal reporting and reporting to Ministers on a weekly basis.

Concerning transparency on the stocks of guarantees as well as the risks associated with them, steps have been flagged already by some countries. In Lithuania, the Treasury is tasked with controlling and registering all government guarantees and loans, and monitoring the repayment and fulfilment of other loan-related financial obligations as part of the COVID-19 response. In Switzerland, the possible loss expected from COVID-19 bridging loans guaranteed by the Confederation has been estimated for the period 2020-24. Provisions will be made in the 2020 accounts with regards to the estimated total loss.

 Preliminary lessons learned and future challenges

Financial management and reporting systems of OECD countries seem to have been effective in supporting effective government response to the COVID-19 crisis. In virtually all countries, these systems have been able to tackle immediate challenges posed by the pandemic, including estimating and finding the financial resources needed to deliver the new policies, disbursing funds in a timely manner and reporting on the resources deployed.

However, as agility and speed became the order of the day, legislative oversight as well as control have sometimes become secondary concerns. In most cases, important features of an orderly budget process – the fixed budget calendar, clear allocation of resources and channelling of all spending in the budget, etc. – could not been maintained. In particular, as the pandemic developed:

• the uncertain environment made it increasingly challenging if not impossible to forecast the economy, removing the traditional building block for the whole budget process in virtually all OECD countries;

• the scale of the crisis generated fiscal stimulus needs that went beyond what traditional flexibility measures would allow, leading to successive revisions of budget plans and financing needs;

• the emergency situation made it difficult to maintain regular financial and management processes, leading to “improvisations” in terms of safeguards and internal controls on financial operations.

Regular financial management and processes should be resumed as quickly as possible. Although the uncertain economic environment will persist and the pandemic is on-going, raising the possibility that new lockdown measures will be established, governments should try resuming normal processes to the extent possible. It may the case however that some elements of the budget process need to be revised or strengthened – e.g. new fiscal frameworks and fiscal rules may be necessary and as forecasting the economy and public finances will remain challenging, having a clear understanding of existing and new risks to the fiscal forecast will be crucial for decision makers to draw realistic spending plan (OECD, 2020[10]).

Given the enormous magnitude of emergency support announcements and the high uncertainty surrounding them, it is more important than ever that governments disclose in real time the data on the actual take-up of relief payments and actual implementation of spending announcements. Initial reports of take-up and implementation show drastic differences between plans and implementation. For example, Canada’s Emergency Wage Supplement was originally expected7 to cost CAD 83 billion, but an enhanced version is now expected8 to cost only CAD 60 billion as the result of lower-than-expected take-up. The United Kingdom’s budget deficit after six months is setting record highs, but is nonetheless smaller than expected9 by the Office for Budget Responsibility as recently as July 2020. Decision makers within government and the stakeholders who hold them accountable require up-to-date information on implementation to know how much additional fiscal capacity is available to fight the second wave and provide additional emergency and recovery programmes.

Ex post stocktaking and audit exercises on how financial management and reporting systems coped with the crisis are necessary. In each individual country, ministries of finance should take stock of how well their financial management and reporting system has performed in times of crisis and economic uncertainty. External audits taking on board the perspectives of all key stakeholders – ministry of finance, delivery units, parliaments, external auditors, etc. – will also be necessary. For example, in the United Kingdom, the National Audit Office established a COVID-19 programme of work that will be looking at government preparedness for the pandemic, the spending on the direct health response and the wider emergency response, among other topics.10

Stocktaking and audit exercises should inform decisions on how to better handle emergency situations in the future. Governments need to build institutional resilience in case of future crises and shocks. For example, in tracking and reporting emergency COVID-19 spending, New Zealand has taken account of previous emergency episodes and lessons learnt from reporting the 2010 Canterbury earthquake-related expenses. In addition, ministries of finance, like the whole of government, will need to envision novel ways of working – as shown in a forthcoming study of the OECD on The Future of Work in the Public Service – and further digitalisation of processes, in order to avoid future large-scale disruptions such as the one that was just experienced.

Already, previous reform efforts in the wake of the Global Financial Crises have paid off. Country examples mentioned in this policy brief highlight for example that where fiscal risks management frameworks were in place, decisions on new guarantee schemes have been better channelled, with appropriate costing and risks analysis (OECD, 2020[10]); where performance budgeting has been implemented, the identification and tracking of COVID-19 spending was facilitated; where accounting frameworks have transitioned to accruals, stocks and flows of loans and guarantees that were a significant component of fiscal packages are being tracked and measured as part of the regular accounting processes (IFAC; ZHAW; IPSASB, 2020[11]). This pleads for continuing and deepening financial management and reporting reforms.