Quality Budget Institutions

Executive summary

Increased levels of public debt and rising spending pressures in OECD countries have heightened the need for effective budgeting in government. Ageing populations and other long-term challenges are adding further strain on public finances at a time when governments face spending pressures on priorities such as defence, health and social care. Meeting these demands requires strong fiscal management to maintain the long-term sustainability of public finances.

The OECD Spending Better Framework provides 10 principles that underpin quality budget institutions. This report elaborates on those principles, drawing on OECD survey data and good practices, and discusses each principle in turn. These principles are closely interconnected and, together, contribute to a holistic approach to strengthen budget institutions.

Top-down and medium-term budgeting

An effective budget process aligns expenditure with fiscal objectives and policy priorities. It supports a top-down process that allocates resources from budget aggregates to detailed appropriations. It controls spending within these limits while detailing the government’s policy priorities. Extending budget planning and controls over a medium-term period (typically 3-5 years) shows the medium-term costs of public policies, helps plan resource allocations across sectors, and offers line ministries greater certainty to provide public services effectively and efficiently.

Four principles within top-down and medium-term budgeting are:

• Clear fiscal objectives: Governments use laws and administrative measures to set limits on key aspects of the budget such as the budget balance, public debt, and total expenditure. These provide an anchor for fiscal policy over the medium-term and set a benchmark to hold government accountable.

• Objective economic assumptions: Governments use economic and fiscal forecasts to guide budget planning. This involves many assumptions about key variables, such as economic growth, which should be open to independent scrutiny to avoid bias that may lead to revenue shortfalls or unplanned spending pressures.

• Multi-year expenditure baselines: Budget decisions need to be made with an understanding of the costs of continuing existing policy. Expenditure baselines provide a bottom-up estimate of the future costs of current policy before new measures are adopted in the budget.

• Top-down expenditure ceilings: The budget process should agree the overall envelope for public spending that will be allocated to different priorities. This ceiling reflects the constraints identified through analysis of fiscal objectives, economic forecasts, and baseline estimates.

Top-down expenditure ceilings are established for the medium term, either consistent with the government’s term of office or on a rolling basis. Expenditure is updated to identify emerging pressures, enabling the government to adjust policies or reallocate resources while remaining within fiscal limits. Extending budget planning and control to multiple years balances firm limits with flexibility to accommodate changing economic conditions, evolving policy priorities, and implementation risks.

Informing decisions about allocation and reallocation

Regular spending reviews have been established in nearly all OECD countries. They are used to develop recommendations to reallocate expenditure, align spending with government priorities, and control total expenditure. Effective spending reviews are inherently linked to the budget process. They have clearly specified objectives, scope and governance arrangements, and conclude with recommendations.

Performance and results information, budget impact analysis and public policy evaluation are other tools that are used routinely in OECD countries to help make informed spending decisions and improve expenditure performance. A key challenge for all of these tools is to integrate them effectively into the budget process to support spending decisions.

When making informed spending decisions, governments should consider all forms of expenditure on an equal footing. This includes appropriations authorised in the annual budget, expenditure authorised in standing legislation and tax expenditure. In addition, governments carry out significant activity through loans and guarantees, which should be managed together with other fiscal risks that could affect the government’s budget plans.

Ensuring better spending in budgeting improves how the central budget authority (CBA) and line ministries work together. Such improvements require the CBA to see line ministries as partners in the budget process and to support the development of the line ministry finance function, which can act as the main interlocutor between the finance and line ministry on budget related matters.

Transparency and budget oversight

Budget transparency supports budget oversight and public understanding. This encourages ministries to stay within budget limits and to improve the results from public spending. As a guiding principle, all revenues and expenditures, assets and liabilities should be reported in a comprehensive, timely, routine and reliable manner. OECD Members do this through a range of documents that span the budget cycle. The advance of digital technologies has transformed the accessibility of budget information, allowing users to find the data they need and ask the questions they want answered.

Parliamentary authority over the budget is a key feature of modern democracy. To support effective budget oversight, parliament and its committees should provide for a realistic debate on budgetary choices. This is facilitated by timely access to all the information parliament needs to be able to properly scrutinise government spending. Independent fiscal institutions have been established in most OECD countries and can play a significant role in enhancing parliamentary oversight alongside the longstanding role of supreme audit institutions.