Budget process and corruption:

4. What drives corruption in the budget process?

4.0 Laws, people, and informal institutions

The formal basis of the budget process is specified in laws and regulations. In reforming budget processes, a technocratic approach is often taken, by which the focus is on improving the formal rules and structure of the budget process. The technocratic approach largely ignores the fact that reforming the budget process, though it has important technical aspects, is also a social and political phenomenon driven by human behaviour and local circumstances. The incentives facing agents in the budget process influence the degree to which formal rules are adhered to. Moreover, in many countries informal institutions and practices often take precedence over formal rules. To go beyond the technocratic approach, this section therefore looks at both formal rules/regulations, incentives, and informal institutions as determinants of corruption:

CONTENT IN PART 4:

• 4.1 Laws and regulations
  
  
• 4.2 People and incentives
  
  
• 4.3 Informal institutions

4.1 Laws and regulations

The budget process must have a basis in laws/regulations and administrative practices. Practices differ between countries. For instance France and other continental countries tend to have practices and procedures codified in detail whereas the UK budget laws focus on broad principles of handling public funds, with the details being set out in administrative instructions. Developing countries have followed either the 'French' or 'UK' legislative model whereas countries in transition are in the process of building a legal framework. The legal and regulatory framework controlling the budget process consists of several levels as depicted in figure 1:

Figure 1. Hierarchy of budgetary system laws and regulations

Countries differ as to exactly where the legal instruments and regulations that govern the budget process are spelt out. It is fairly normal that the constitution deals with the existence and explicit roles of the President, Parliament and the Auditor General in the budget process. In some countries the constitution also establishes planning organs which may be involved at the strategic and macro levels of the budget process. In other countries a Budget Law may deal with the institutional division of roles. In other cases a Public Finance Act will do the same but usually also include more specific Treasury instructions. An important part of the lower level of regulations and instructions is the Code of conduct for Officials.

There is fairly wide consensus about the key elements of the formal framework. In terms of corruption, the IMF Manual on Fiscal Transparency captures four basic requirements:

• Clarity of Roles and Responsibilities - The structure and functions of government should be clearly specified. Relations between the government and non-governmental public sector agencies (i.e. the central bank, public financial institutions, and non-financial public enterprises) should be based on clear arrangements. If these dividing lines become blurred doubts as to which set of e.g. accounting rules apply may arise and open up possibilities for corruption. A state of society in which prevailing social norms make no distinction between private and public spheres - often called neopatrimonialism - is commonly associated with large scale inbred corruption.
  
  
• Public Availability of Information - The budget documentation, final accounts, and other fiscal reports for the public should cover all budgetary and extra-budgetary activities of the central government. The consolidated fiscal position of the central government should also be provided. The central government should publish full information on the level and composition of its debt and financial assets as well as the fiscal position of sub-national levels of government. The publication of fiscal information should be a legal obligation of government. If such information is not available the oversight function exercised by the press and the general public will be made difficult and corrupt activities remain hidden.
  
  
• Open Budget Preparation, Execution, and Reporting - The annual budget should be prepared and presented within a comprehensive and consistent quantitative macroeconomic framework, and the main assumptions underlying the budget should be provided. Budget data should be reported on a gross basis, distinguishing revenue, expenditure, and financing - with expenditure classified by economic, functional, and administrative categories. Data on extra budgetary activities should be reported on the same basis. There should be a comprehensive, integrated accounting system which provides a reliable basis for assessing payment arrears. Mid-term reports should be published. Final accounts should be legally required to be presented to the legislature within a year of the end of the fiscal year. Insight into the budget preparation will make the public aware of results to be expected from public spending, and thus create more awareness of deviations that may involve corruption. Unclear, imprecise, and delayed accounts may conceal cases of corruption.
  
  
• Assurances of Integrity - Budget data should reflect recent revenue and expenditure trends, underlying macroeconomic developments, and well-defined policy commitments. The annual budget and final accounts should indicate the accounting basis (e.g. cash or accrual) and standards used in the compilation and presentation of budget data. Specific assurances should be provided as to the quality of fiscal data. In particular, it should be indicated whether data in fiscal reports are internally consistent and have been reconciled with relevant data from other sources. A national audit body or equivalent organisation, which is independent of the executive, should provide timely reports for the legislature and public on the financial integrity of government accounts. Poor fiscal data impairs the chance of discovering corruption, and if the national audit body is a part of the executive - independent scrutiny of public accounts is likely to be prejudiced.
  

It is not only the absence of a legal framework which creates opportunities for corruption. Laws and regulations must also be clear and well known by relevant officers and the public, as well as being backed by a well-functioning enforcement machinery. Having rules and regulations in the statute book is of little use if judicial corruption is prevalent.

go to next page: 4.2 People and incentives

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