Corruption in the budget process

Budgeting involves several stages including:

  • Long-term planning at the political level.
  • Annual budget formulation in the executive branch
  • Debate and passage of the budget in parliament.
  • Implementation by various ministries and government agencies.
  • Oversight and control by several institutions.

Ideally, the public budget process should allocate public resources in a strategic, transparent, accountable, fair, and democratic way.

Unfortunately, this ideal is rarely met. In the worst-case scenario the budget is “theatre” with no impact on the real allocation of public money. The 2004 article Budget as theatre argued that the budget process in Malawi did not provide any realistic estimate of revenues or spending. The budget process was nothing but a theatre that masked the real distribution of revenues and disbursements.

In other cases, large funds are allocated outside of the budget: see for instance the US Department of State 2020 Fiscal Transparency Report, which lists those governments that were found not to meet the minimum requirements of fiscal transparency. This public money is not subject to oversight, insight, audit, or external control. A non-transparent, non-accountable budget process opens up for funds to be set aside for later misappropriation.

The consequences of this planned misallocation of public resources is that expenditures for development and social safety nets are reduced, and that funds are allocated to areas that benefit very few people: the power-holders and their political allies. Corruption in the budget process makes government planning biased and ineffective, and public confidence in the rule of law is undermined along with government legitimacy.

Budgeting is only one part of the broad area of public financial management (PFM), which encompasses all aspects of public finances and government spending. Budgeting comes in between revenue mobilisation and collection (for instance from taxation and customs), and the actual spending of government funds (for instance on procurement, government services, and payroll). Budgeting is the planning and approval stage in this process. Accounting and auditing of government expenditures (e.g. internal and external controls) comes in later.

The budget process is the process through which government incomes and expenditures are determined and allocated. This process is usually divided into four or five stages, and corruption may influence all of them.

Budget planning

Planning and programming normally precede the formal budgeting stages. In most developing countries, planning is divided into one overall multi-year plan and a public investment programme. In principle, the budget should build on the policies, aims, and strategies that are set out in these plans.

The problem is often that the planning process has not involved the legislature, civil society or stakeholders, and that links between long- and short-term planning are lacking. Plans can also be little else than shopping lists – used to extract funding from donors but without much effect on public expenditures.

In principle, the planning stage lays the foundation for the further process. It is an arena dominated by political concerns, where particular interests and political corruption can thwart the subsequent, formal process. A poorly formulated planning stage will have repercussions later in the budget process – creating future opportunities for corruption and embezzlement.

Budget formulation

The formulation stage should consist of three steps:

  1. Economic overview and revenue forecast for the budget year
    This will give directions for total recurrent and capital spending and preferably also assess how a budget deficit should be financed. This is an analytical job taken care of by the inner echelons of the ministry of finance, occasionally assisted by technical expertise and consultants. There is not much scope for corruption at this stage, but it is possible to prepare for future favours in taxation and resource allocations.
  2. Budget policy outline
    This represents the bridge between the multi-year plans and the annual budget. This outline of current priorities is usually prepared at the political level of the ministry of finance. It describes in broad terms the policies and strategies that the current budget should emphasise, and how. In this stage the scope for corruption is higher as there are more possibilities for the incumbents to prioritise their political needs, in isolation from the public eye.
  3. Budget reparation by the Ministry of Finance
    In this step, policy statements are moulded into concrete numbers and budget allocations. These allocations should be based on clear plans, macro frameworks, budget policy outlines, etc. But there are several factors that thwarts and corrupts this process. The cabinet discusses and approve the proposed allocations in a political process where the allocations are distributed in-between cabinet ministers according to their status and clout. This opens up for the allocation of opportunities for corruption and embezzlement, again in isolation from the public eye. The problem is that there can be rather frivolous expenditures, exaggerated figures, fake, fraudulent and repeated items in the budget.

Corruption at this stage is primarily political, and it is aggravated when the distribution of powers between the executive and legislative branch of government is weak. Unchecked and excessive executive powers tend to produce opportunities for political corruption.

Example: 'Budget padding'

The concept of budget padding comes from Nigeria, where President Buhari said he had never even heard the words before he discovered fraudulent budget items and wholesale injection of questionable items into the budget between when he approved it and when he delivered it. 'Padding the budget' means increasing the expenses and getting the approval of artificially high levels of funding for certain projects. It is some sort of irresponsible foresight. In Nigeria, a ‘budget mafia’ had been busy padding out the budget with billions of naira, which the president (allegedly) knew nothing about. He later fired the Head of the Budget Office (see the March 2016 commentary by Mohamed Wehliye: Corruption starts from the budgetary process, and his comments on budget padding in Kenya: How budget is made a tool of corruption).

Parliamentary adoption (enactment)

Adoption of the budget by parliament is where the democratic debate should ideally have a strong impact. The budget should go through painstaking committee work and plenary debates in the national assembly before the final adoption, with amendment-by-amendment votings in parliament.

The more authoritarian the country, the shorter and less consequential the parliamentary budget adoption process is. However, even in relatively democratic developing countries, there is very little capacity, political will, or time to do a proper parliamentary budget adoption. There is usually only room for some horse-trading between parliamentarians over the geographical distribution of allocations, where the more influential representatives can “bring back more beef” to their constituencies. Even where members of parliament lack the knowledge and influence to effectively monitor the budget, the parliamentary approval process can be a “buffet” of large-scale political corruption in the form of trading in insider information, bribes paid by private interests to get the approval of certain project, and in parliamentarians positioning their own business interests.

Nonetheless, it is during the parliamentary adoption (and to some degree in the budget formulation stage) that civil society organisations (CSOs) can help improve budget policies by providing information on public needs and priorities through their connections with citizens, communities, and sectors. One good example is the approach of the International Budget Partnership. In situations of democratic deficits and a lack of political will to tackle corruption, direct civil society engagement might be the only way for citizens to influence the budget.

Budget execution

At the budget execution stage, it is mainly the ministry of finance and its treasury department that makes the financial transactions. This is when money changes hands.

Not all government income and spending go through the standard budget execution process. Some governments will have extra-budgetary funds – special accounts that receive replenishment from budgetary resources or are kept separate from the budget altogether for legitimate (or not so legitimate) reasons. Sometimes, state- or military-owned companies and parastatals (state majority-owned enterprises) may also have substantial income and cover expenses outside of the budget, controlled by the president, minister of finance or some other regime insider.

If a government operates a cash budget where the presidency authorises spending based on funds available, this spending will be completely dominated by the daily political concerns of the ruler and ruling elite. With such arrangements, cash is sometimes physically collected by the spending unit’s director.

Approaches

Corruption in the budget process is mainly dealt with as a technical and bureaucratic problem. A multitude of public financial management reforms have been tried, again and again. Many of these reforms have had little impact on corruption and abuse, as they have addressed the technical and fiscal level only, and not touched upon the political incentives and drivers of corruption. Political necessities (eg buying friends to stay in power) tends to trump most technical and bureaucratic barriers aimed at preventing abuse. Without the political will to curb corruption in the budget process, there are few chances that reforms and safeguards will succeed.

Principles

If there is political will to curb corruption in the budget process, three factors stand out as essential:

  1. Transparency.
  2. Objective criteria for the allocation of burdens and favours.
  3. Legitimate decision-making processes.

To achieve this, we have adapted and slightly reformulated the six factors that the World Bank (in a 2018 book) and the UN (In a 2019 report (PDF)) and others have put up to contribute to a good budget process:

Comprehensiveness

No agency of the public sector should administer public funds outside of the budget. The budgetary principle of comprehensiveness, integration, and inclusion demand that all revenues and all expenditures are accounted for in the proposed budget. A comprehensive budget reduces the risk that public spending outside the budget could redirect resources from the approved budget.

Transparency

Budgetary transparency makes the common-pool problem and the agency problem less likely by increasing the degree of accountability. Fostering budget transparency is increasingly seen as vital to promoting integrity in public governance and strengthening anti-corruption policies.

Policy-based budgeting

The more public expenditure is aligned with public goals, the higher the probability that the budget will respect the originally approved allocations as well as the fiscal and macroeconomic framework defined by government.

Internal control in budget execution

Internally, commitment control can ensure that financial resources for purchasing goods and services are committed only up to the budgeted amounts, and that non-used funds are made available for other purposes. Internal verification should check whether the goods and services paid for are actually delivered according to contracts, on time, and with quality.

Accounting, recording, and reporting

Timely, adequate information on expenditure flows and debt levels strengthens the capacity of government to decide and control budget totals as well as to manage long-term fiscal sustainability and affordability of policies.

External scrutiny and audit

Budgets should ideally be controlled by a number of external control mechanisms. Parliamentarians and external audit agencies’ scrutiny – the Auditor General being the most important – of government’s budgeting and implementation may motivate for better quality in budgetary processes. Media and civil society’s external control is pivotal.