Introduction
Budget credibility is a crucial concept in public financial management (PFM) that determines how reliable and transparent government spending is. In turn, high budget credibility improves public trust in the official fiscal strategy, reduces the risks of corruption, and represents more accurate monetary planning and financial policies. Ultimately, the current essay thoroughly examines the notion of budget credibility and associated concepts, such as fiscal transparency, national budget, and expenditure drift.
Fiscal Transparency and Budget Credibility
Fiscal transparency is the concept that guarantees the public access to reliable and relevant information about the government’s spending. Its primary components include clarity, timeliness, periodicity, relevance, openness, and reliability, all of which are essential to budget credibility (International Monetary Fund, 2018). Moreover, fiscal transparency is the core driver of public trust and confidence in the government’s actions and economic policies (Sarr, 2015). The principal-agent approach is one of the theories that suggest that agents generally act in their interests, and it is crucial to control the acting party to mitigate risks (Bjurstrøm, 2020). Since the principal-agent model is associated with low trust, fiscal transparency acts as a mediator to improve public confidence in the government’s policies (Bjurstrøm, 2020). In summary, it implies that the reliability and openness of financial reporting are essential to budget credibility and public trust.
Consequently, it is possible to measure the levels of budget credibility and fiscal transparency via various models and equations. In public financial management, two of the estimation methods include aggregate (PEFA PI-1) and compositional (PEFA PI-2) budget credibility (Mustapha, 2019). The former evaluates the difference between the actual spending and the projected estimations to identify fiscal deviations (Mustapha, 2019). The latter calculates the financial movement between various budgets and how this variance affects the overall effectiveness of the spending (Mustapha, 2019). Regardless of the approach, independent evaluation is crucial for budget credibility and fiscal transparency estimation to remove potential bias. For instance, International Monetary Fund (2018) suggests utilizing fiscal councils and other autonomous instruments to achieve an unbiased measurement of various financial characteristics, including reliability, credibility, and transparency. Consequently, the comparison between independent forecasts and the government’s projections can provide more accurate information about monetary factors and policies.
Lastly, governments can improve fiscal transparency via the budgetary planning phase. In the context of fiscal forecasting, budgetary documentation should report accurate and reliable information about public spending (Sarr, 2015). It implies that the government should provide data about the general fiscal strategy, budget estimates, legislation, medium-term budget framework (MTBF), fiscal framework (MTFF), and other crucial objectives (International Monetary Fund, 2018). In this sense, reliable budget documentation during the initial planning phase will inevitably enhance the overall transparency of all fiscal characteristics.
National Budget and Expenditure Drift
As mentioned before, budget credibility is essential in ensuring reliable public spending and building trust. It implies that the guarantee of the national budget enhances democratic legitimacy in the country. For instance, Jena and Sikdar (2019) examined the importance of national budget credibility in India. The results demonstrated that the barriers to transparent budget documentation included the disorganized structure of the public financial management system (PFM), uncertainty in future projects, and lack of competencies among experts (Jena and Sikdar, 2019). Hence, enhancing the effectiveness of the budgeting system can mitigate these drawbacks. The list of potential improvements includes more attention to financial forecasting, independent evaluation of the budget via external audits, and continual evaluation of government institutions (International Monetary Fund, 2018). Ultimately, it is crucial that the government recognizes flaws in its budget planning and address internal issues to improve national budget credibility. As a result, this approach will not only provide direct benefits to fiscal policies but also build public trust and ensure democratic legitimacy.
Expenditure drift or budget framework variance/deviation designates the difference between the projected estimations and actual costs. Minimizing expenditure drift and achieving forecasted numbers is one of the top priorities in all budget frameworks (Naert and Goeminne, 2013). A lack of credibility and other associated problems, such as inadequate technical aspects, political risks, and the absence of an independent evaluation, inevitably lead to gaps in budget planning and expenditure drift (Naert and Goeminne, 2013). One of the ways to mitigate this issue is by implementing medium-term budget frameworks to reinforce budget credibility (Conteh, 2016). According to the research, “for a government budget to be credible, the expenditure programs must be sustainable at least over the medium term” (Conteh, 2016, p. 45). Hence, the implementation of medium-term frameworks is one of the ways to control and monitor budget credibility that might reveal gaps in the planning phase or other associated risks.
Conclusion
Public financial management is a complex process that determines how effective government financial policies are. In this context, the credibility of budgets and fiscal transparency are crucial concepts due to their substantial impact on budget planning, forecast costs, and even public trust and democratic legitimacy. Moreover, the neglect of the mentioned factors might lead to corruption, political risks, lack of public confidence, and deviating expenditure drift. Ultimately, the PFM sector must ensure budget credibility to improve the effectiveness of government fiscal policies.
Reference List
Bjurstrøm, K. H. (2020) ‘Principal–agent or principal–steward: how ministry–agency relations condition the impact of performance management in the steering of government agencies’, Public Performance & Management Review, 43(5), pp. 1053-1077.
Conteh, P. S. (2016). The credibility of government budget: The case of Sierra Leone. Doctoral Dissertation. Walden University.
International Monetary Fund. (2018) Fiscal transparency handbook, 2018. Washington: International Monetary Fund.
Jena, P. R., and Sikdar, S. (2019) ‘Budget credibility in India: Assessment through PEFA framework’, National Institute of Public Finance and Policy, 284.
Mustapha, S. ed., (2019). In: PEFA, public financial management, and good governance. Washington: World Bank Publications, pp. 61-92.
Naert, F., and Goeminne, S. (2013). Credibility of fiscal policy and politics: An empirical assessment. Web.
Sarr, B. (2015) ‘Credibility and reliability of government budgets: Does fiscal transparency matter?’, International Budget Partnership, 5.