PART 6 - World Bank



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5 BUDGETING AND FINANCIAL MANAGEMENT

6 IN SELECTED GOVERNMENTS

7 Table of Contents

I. Introduction 1

II. Cross-Country Summary 3

1. Assignment and Level of Expenditure 3

2. National Coordination Role 4

3. Legal Framework for Intergovernmental Transfers 5

4. Borrowing 6

5. Budgeting and Reporting 8

III. Country Summaries 10

1. Turkey 10

2. Australia 11

3. Colombia 13

4. Denmark 15

5. France 16

6. Greece 18

7. Indonesia 19

8. Korea 21

9. South Africa 22

8 List of Tables

Table 1. Legal Framework for Expenditure Assignments 3

Table 2. Definition of Expenditure Responsibilities 4

Table 3. Role of National Government on Overall Local Expenditure 4

Table 4. Content of Coordination Role of the National Government 5

Table 5. Role of National Government in terms of General Government Aggregates 5

Table 6. Legal Basis of the Intergovernmental Transfers System 6

Table 7. Limits on the Borrowing Activity of Subnational Governments 7

Table 8. National Government Guarantees on Subnational Debt 7

Table 9. Common Standards for Budgeting 8

Table 10. Common Financial Reporting Requirements 8

Table 11. Collection of Subnational Financial Reports 9

Table 12. Reporting of General Government Aggregates to Legislature 9

1 Introduction[1]

Over the past two decades, the trend towards devolution of spending responsibilities to lower levels of government is clear in federal countries and unitary states. The decentralization of public expenditure, as well as the subnational provision of goods and services, have a critical impact on the overall economic activity of a country, its resource allocation, and social equity. At the same time, financing lower-tier governments affects the levels and types of taxation, and subnational borrowing activities may influence monetary conditions and interest rates. [2] Thus, in decentralized settings, a clearly defined system of intergovernmental fiscal relations – including intergovernmental transfers -- is crucial.

It is also important to acknowledge that, in practice, the efficiency gains from decentralization can be undermined by various institutional constraints. A key challenge posed by decentralization of expenditure responsibilities is having coordinated budgetary and financial management policies across levels of government, so as to ensure correspondence with national macroeconomic objectives for inflation, growth, fiscal and monetary stabilization.[3]

To create adequate conditions for macroeconomic stability and aggregate expenditure control, spending, revenue raising, and borrowing plans among national and subnational governments should be coordinated. In addition, allocation and distributional goals are more likely to be met if there is agreement on resources allocated among spending programs. Agreed and accurate forecasts of expenditures, revenues, timing of cash flows, and borrowing needs, across levels of government are also important. But above all, for effective subnational service delivery, there must be a clear definition of expenditure assignments, thereby promoting accountability and avoiding duplication and wasted resources.

On the other hand, budget harmonization calls for comprehensive, standardized, and transparent budget classification and accounting rules shared across all levels of government. Also, accurate, reliable, and coordinated budget projections should be provided to subnational governments with sufficient time to be incorporated in preparing their budgets. Ideally, harmonized budget policies also require coordination of budget plans in aggregate.

For efficient budget implementation, clear budget authorization processes must be in place, along with an efficient payment system, and a suitable accounting framework. It is particularly important to have an integrated information system that allows monitoring and control of all phases of public expenditure management, as well as timely and accurate reports on budget implementation. Unfunded mandates imposed by higher levels of governments, and non-payment, sudden withdrawals or reductions of intergovernmental transfers must be avoided.

From a financial management perspective, coordinating the timing and amounts of borrowing across levels of government has several potential benefits: managing overall borrowing levels, avoiding excessive pressure on financial markets, allowing local governments to borrow at lower interest rates, providing a potential instrument to control subnational access to borrowing, and preventing unsustainable levels of debt. However, such practices can impede the autonomy of subnational governments, and many federal governments will have political as well as legal grounds to oppose such a consolidated approach. Whatever the case, benefits can be gained from transparency about subnational borrowing plans and levels. [4]

The conditions described above are rarely achieved in full in industrialized countries, and many gaps exist in developing countries as well. Consequently, experiences on subnational budgeting and financial management around the world reflect a wide range of responses to the challenges listed above. This note draws on the results of the OECD/World Bank Survey on Budget Practices and Procedures, launched in 2003 in over 60 countries. At present, more than 40 countries have responded to the survey or are in the process of finalizing their response.[5]

The note starts with a cross-country analysis of subnational budgeting and financial management practices. It reviews, in particular, the legal basis and practices on expenditure assignment, the coordination role of the central government, the legal framework for the intergovernmental transfers system, as well as common practices on subnational borrowing, budgeting and financial reporting. Finally, it summarizes in an annex the detailed survey responses for nine countries: Turkey, Australia, Colombia, Denmark, France, Greece, Indonesia, Korea, and South Africa.

2 Cross-Country Summary

1 Assignment and Level of Expenditure

The most common legal framework that defines the spending roles and responsibilities of subnational governments (”expenditure assignments”) is for the Congress to delegate functions to subnational governments through specific legislation, which is the case for Turkey. In about 20 percent of the countries in the survey, the Constitution lists the functions to be assumed by the national government, with the remaining (or residual) functions assigned to lower levels of government (see Table 1). [6] However, while the Constitution lists national government functions such as providing defense, printing money, and issuing patents, in practice national powers are broad and encompass numerous functions not specifically enumerated. This happens, for instance, in the United States.

Table 1. Legal Framework for Expenditure Assignments

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|The Constitution lists the functions to be covered by the national |8 |21 % |2 |17% |6 |23% |

|government. All the other functions are assigned to other levels. | | | | | | |

|The Constitution lists both the functions to be covered by the |2 |5 % |1 |8% |1 |4% |

|national government and the concurrent responsibilities. All the | | | | | | |

|other functions are assigned to other levels. | | | | | | |

|The Constitution lists the functions to be covered by subnational |1 |3% |0 |0% |1 |4% |

|governments. All the other functions are assigned to national | | | | | | |

|government. | | | | | | |

|The Legislature may delegate specific functions to subnational |16 |42% |6 |50% |10 |38% |

|through specific legislation. | | | | | | |

|Other, please specify |11 |29% |3 |25% |8 |31% |

|Total answers |38 | |12 | |26 | |

Even though two-thirds of the countries in the sample, including Turkey, claim that national and subnational governments have clear and separate roles for most expenditures, more than half of them also point out that there are concurrent and even overlapping responsibilities between the different tiers of government (see Table 2). Korea is a case in point: its survey response notes both that the national and subnational governments have clear and separate roles, but also that there are overlapping responsibilities and duplicated programs across government levels. In sum, there is a general lack of clarity on the expenditure roles of national and subnational governments. Lack of clearly defined expenditure assignments may become an an obstacle to implement decentralization effectively.

Table 2. Definition of Expenditure Responsibilities

| |Most of the |Some expenditure|Few expenditure |Total answers |

| |expenditure | | | |

|The national and subnational governments have clear and |67% |23% |10% |39 |

|separate roles. | | | | |

|There are concurrent responsibilities: national government |26% |56% |19% |27 |

|sets the policy strategy and lower levels decide on public | | | | |

|services within that context. | | | | |

|There are concurrent responsibilities: the national |32% |55% |14% |22 |

|government sets the nation-wide standards and the | | | | |

|subnationals decide on public services with those | | | | |

|constraints. | | | | |

|National and subnational governments’ responsibilities |20% |17% |63% |30 |

|overlap. Programs implemented in the same sectors by | | | | |

|different levels create duplications. | | | | |

|There is a central assignment of responsibility and a |12% |47% |41% |17 |

|decentralized provision of public goods | | | | |

According to the results presented in Table 3, in most of the countries the national government plays no role in determining the overall expenditure levels of subnational governments. This is specially true for OECD countries. In some countries, including Turkey, consultations regarding the level of subnational expenditures occur, but they are not binding.

Table 3. Role of National Government on Overall Local Expenditure

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|The national government has no role |21 |53% |6 |43% |15 |58% |

|The national government sets limits for the level of total |6 |15% |5 |36% |1 |4% |

|expenditure or the growth in total expenditure | | | | | | |

|The national and subnational governments conduct formal consultations|7 |17% |2 |14% |5 |19% |

|on the level of expenditure by lower levels of government, but these | | | | | | |

|are not binding | | | | | | |

|Other, please specify |10 |25% |1 |7% |9 |35% |

|Total answers |40 | |14 | |26 | |

2 National Coordination Role

In order to ensure consistency between budgetary policies and national macroeconomic objectives, 26 countries in the sample assign the central government the role to set targets for the deficit, expenditures, and primary expenditure for subnational governments (see Table 4). In over half of these cases, the national government also plays a monitoring role. In OECD countries, this role is generally related to the implementation of the budget, while in non-OECD countries, as well as in Turkey and Greece, the central government monitors budget trends.

Table 4. Content of Coordination Role of the National Government

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|To set the targets for subnational governments in order to ensure the|12 |46% |4 |40% |8 |50% |

|consistency of budgetary policies with national macroeconomic | | | | | | |

|objectives. | | | | | | |

|To set the targets and monitor the implementation of the budget, |7 |27% |1 |10% |6 |38% |

|publishing the relevant figures | | | | | | |

|To set the targets and monitor trends. To suggest corrections and, if|7 |27% |5 |50% |2 |13% |

|necessary, to enforce them | | | | | | |

|Total answers |26 | |10 | |16 | |

In most countries, the national government also plays a coordination role in generating aggregate fiscal data on general government. Usually, as is the case in Turkey, the national government has the power to ensure that budgetary policies are consistent with the country’s macroeconomic objectives. In Germany, Austria and Australia, the main aspects of budget policy are agreed within an institutional forum involving national and subnational actors; the forum then monitors the implementation of agreed plans. In over one-third of the countries in the sample, subnational government aggregates are not even calculated due to independent financial authority between national and subnational governments (see Table 5).

Table 5. Role of National Government in terms of General Government Aggregates

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|No, national and subnational governments are completely independent. |15 |38% |5 |42% |10 |37% |

|The general government aggregates are not calculated. | | | | | | |

|Supranational or domestic commitments make the general government |3 |8% |0 |0% |3 |11% |

|aggregate relevant. The main lines of budgetary policy are agreed | | | | | | |

|within a body in which all actors are involved. | | | | | | |

|Supranational or domestic commitments make the general government |21 |54% |7 |58% |14 |52% |

|aggregate relevant. The central government has the coordination power| | | | | | |

|to ensure the consistency. | | | | | | |

|Total answers |39 | |12 | |27 | |

3 Legal Framework for Intergovernmental Transfers

As shown in Table 6, of the 37 countries that responded to this question, all but Colombia define the legal framework for intergovernmental transfers by national law; most of them with the prior agreement of lower levels of government. In addition, 14 countries, including Turkey, also incorporate the principles for intergovernmental transfers in their Constitution. Colombia’s Constitution defines the elements of the intergovernmental transfer system such as rates and flows.

The existence of a legal framework for intergovernmental transfers, however, does not guarantee that the transfers are paid on a timely basis nor in full. Given their often heavy reliance on intergovernmental transfers, and generally weaker capacity, the predictability and stability of transfers is critical to subnational governments. To promote sound expenditure choices and strong financial management systems, subnational governments must be able to anticipate the level and timing of their transfers. Thus, it is crucial that transfers be predictable and stable, not only in their design, but also in their implementation.

Table 6. Legal Basis of the Intergovernmental Transfers System

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|The system is precisely determined by the Constitution |1 |3% |1 |8% |0 |0% |

|The principles are contained in the Constitution and the actual |14 |38% |4 |31% |10 |42% |

|criteria are approved with national law, with prior agreement of | | | | | | |

|lower levels of government. | | | | | | |

|The system is decided with national law, with the prior agreement of |15 |41% |4 |31% |11 |46% |

|lower levels. | | | | | | |

|The system is approved with federal law and lower levels have no |7 |19% |4 |31% |3 |13% |

|voice in its determination. | | | | | | |

|Total answers |37 | |13 | |24 | |

4 Borrowing

Subnational debt has grown significantly over the past decade, and when not managed responsibly, such debt has resulted, in some instances, in macroeconomic instability.[7] Indeed, 40 percent of OECD countries in the sample do not impose any limits on subnational borrowing, whereas non OECD countries are more likely to enforce some form of borrowing limits (

Table 7). Where subnational borrowing limits exist, they are either through a nationally defined maximum borrowing amount (18%), or national government approval of each subnational loan on a case-by-case basis (13%), as in Turkey.

In Norway, although there are no limits to local borrowing, subnational governments are only permitted to borrow for investments, but not for current expenditure.[8] This “golden rule” prohibiting local borrowing for operating purposes is common among industrial countries (e.g., Germany, Switzerland and the United States.) However, weaknesses in the formulation and application of such restrictions, or “creative accounting” or other financial gimmicks, can circumvent this rule, resulting in a “flexible” interpretation of what constitutes investment.[9]

Table 7. Limits on the Borrowing Activity of Subnational Governments

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|No. |9 |24% |0 |0% |10 |40% |

|The subnational governments have fixed the limits in their |3 |8% |0 |0% |3 |12% |

|Constitution or statute. | | | | | | |

|Lower levels of government are not permitted to borrow by the |2 |5% |2 |14% |0 |0% |

|national/federal Constitution. | | | | | | |

|The national government imposes maximum levels of borrowing for |7 |18% |4 |29% |3 |12% |

|subnational governments which cannot be exceeded. | | | | | | |

|Each loan must be approved by the national government on a |5 |13% |2 |14% |3 |12% |

|case-by-case basis. | | | | | | |

|The national and subnational governments hold formal consultations on|4 |11% |3 |21% |1 |4% |

|the level of borrowing (not binding). | | | | | | |

|Other, please specify |10 |26% |3 |21% |7 |28% |

|Total answers |39 | |14 | |25 | |

Moreover, in the majority of OECD countries (76%), the national government does not guarantee the borrowing activity of lower levels of government, neither explicitly nor implicitly (see Table 8). However, in Japan, Ireland, Mexico and the Netherlands, all subnational borrowing is implicitly guaranteed by the national government. In Turkey, Greece and Suriname, on the other hand, the national government generally guarantees subnational borrowing on a case-by-case basis. Guarantees on subnational borrowing occur only exceptionally in Colombia and Uruguay.

Table 8. National Government Guarantees on Subnational Debt

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|No |The national government does not guarantee the borrowing |26 |68% |7 |54% |19 |76% |

| |activities of lower levels, neither explicitly nor implicitly| | | | | | |

|Yes |All borrowing activities of subnational governments are |5 |13% |1 |8% |4 |16% |

| |implicitly guaranteed by the national government | | | | | | |

| |All borrowing activities of subnational governments are |0 |0% |0 |0% |0 |0% |

| |explicitly guaranteed by the national government | | | | | | |

| |Most borrowing activity by subnational governments is |3 |8% |1 |8% |2 |8% |

| |guaranteed by the national government on a case-by-case | | | | | | |

| |basis. | | | | | | |

| |In exceptional cases only, activity by subnational |2 |5% |2 |15% |0 |0% |

| |governments is guaranteed by the national government on a | | | | | | |

| |case-by-case basis. | | | | | | |

|Other, please specify |4 |11% |2 |15% |2 |8% |

|Total answers |38 | |13 | |25 | |

5 Budgeting and Reporting

OECD countries have varied practices on standardized budget and accounting systems. About two-thirds of them do not have common standards for budgeting, with roughly half of these countries setting the rules for subnational governments nationally, whereas the other half allow subnational authorities to define their own budget classification. The latter is the case for Turkey and Canada.[10] The remaining one-third of OECD countries in the sample have the same budget classification and accounting rules for national and subnational governments, and those standards are set by the national government. In contrast, over two thirds of non OECD countries have common budgeting standards for national and subnational governments.

Table 9. Common Standards for Budgeting

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|Use common |Set by the national government. |18 |47% |9 |69% |9 |36% |

|standards | | | | | | | |

| |Set by external body |0 |0% |0 |0% |0 |0% |

|Do not use common |Standards for the subnational levels are set by |11 |29% |3 |23% |8 |32% |

|standards |the national government. | | | | | | |

| |Each authority decides on its budget |9 |24% |1 |8% |8 |32% |

| |classification. | | | | | | |

|Total answers |38 | |13 | |25 | |

Non-OECD countries, except for Argentina and Surinam, have common financial reporting requirements for subnational governments, and these are defined by the national government. Less than half of OECD countries follow that practice. Instead, in four OECD countries, subnational governments agree upon their financial reporting practices, and over a third do not have common financial reporting practices.

Table 10. Common Financial Reporting Requirements

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|Common financial reporting requirements for lower levels of |24 |62% |12 |86% |12 |48% |

|government, set by the national government | | | | | | |

|Common financial reporting practices, agreed among lower levels of |4 |10 % |0 |0% |4 |16% |

|government. | | | | | | |

|Lower levels of government have different financial reporting |11 |28 % |2 |14% |9 |36% |

|practices | | | | | | |

|Total answers |39 | |14 | |25 | |

Sixty percent of the countries in the survey collect subnational taxation and expenditure budgets. In addition, OECD countries tend to collect annual audited financial statements and in-year reports (typically quarterly) on budget implementation. This is the case, for example, in Austria, the Czech Republic, Denmark, Hungary, Korea, and Portugal. South Africa and Israel are good examples of non-OECD countries that collect these three types of reports. On the other hand, Turkey, Sweden, the Slovak Republic, New Zealand, France and Australia collect annual financial statements from subnational governments, but not budgets nor in-year reports of their implementation.

In Canada, none of these reports are officially collected by the Federal Government, while in Italy local authorities are required to present their final statements of account to the State Audit Court, but not to the Central Government. In the United States, the Bureau of the Census in the Department of Commerce does a survey of state and local governments every five years with the primary purpose of collecting financial information. In between these periods, the Census and other agencies estimate spending and receipts for the State and local sector as a whole.

It should be noted that financial reporting plays an important role in ensuring local accountability, and hence such subnational reports should be shared with local citizens, in addition to being shared with higher levels of government.

Table 11. Collection of Subnational Financial Reports

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|Budgets of lower levels of government |18 |60% |6 |60% |12 |60% |

|Annual financial statements (audited) |16 |53% |3 |30% |13 |65% |

|In-year reports on the implementation of the |Not specified |4 |13% |3 |30% |1 |5% |

|budget | | | | | | | |

| |Monthly |0 |0% |0 |0% |0 |0% |

| |Quarterly |6 |20% |1 |10% |5 |25% |

|Biannually |1 |3% |0 |0% |1 |5% |

|Other, please specify |4 |13% |1 |10% |3 |15% |

|Total answers |30 | |10 | |20 | |

Most OECD countries, including Turkey, incorporate the general government aggregates in the budget document presented to the Legislature, but only for information purposes. Ireland, Bolivia, Cambodia, Kenya and Morocco include the aggregates to be voted by the Legislature. In the remaining countries (27%), the Legislature only examines the national budget.

In the United States, general government data, based on consolidating the federal budget and the state and local subsector in the National Income and Product Accounts, are published only for historical periods in the Historical Tables volume of the annual Federal budget.[11]

Table 12. Reporting of General Government Aggregates to Legislature

| |Total |Non OECD |OECD |

| |Freq. |Perc. |Freq. |Perc. |Freq. |Perc. |

|They are included |And voted by the Legislature |5 |12% |4 |29% |1 |4% |

| |For knowledge purpose |25 |61% |5 |36% |20 |74% |

|They are not included. |11 |27% |5 |36% |6 |22% |

|Total answers |39 | |14 | |27 | |

3 Country Summaries

1 Turkey

1 Assignment and Level of Expenditure

1 Legal basis

The Legislature may delegate specific roles and responsibilities of spending assignments to subnational through specific legislation.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles for most of the expenditure by lower levels of government. In a few cases, national and subnational governments’ responsibilities overlap, and programs implemented in the same sectors by different levels create duplications.

3 Role of national government on overall local expenditure level

The national government and lower levels of government conduct formal consultations on the level of expenditure by lower levels of government, but these are not binding.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor trends, to suggest corrections and, if necessary, to enforce them.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the co-ordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The principles of the system of intergovernmental transfers are contained in the Constitution and the actual criteria are approved with national law, with the prior agreement of lower levels of government.

4 Borrowing

1 Limits to borrowing activity

There are limits on the borrowing activity of lower levels of government. Each loan must be approved by the national government on a case-by-case basis.

2 National government guarantees

Borrowing by lower levels of government is guaranteed by the national government on a case-by-case basis. In practice, this applies to most borrowing activity.

5 Budgeting and reporting

1 Common standards

National and subnational governments do not use common standards. Each authority decides on its budget classification.

2 Common financial reporting requirements

Lower levels of government have different financial reporting practices.

3 Collection of subnational financial reports

The national government collects annual financial statements (audited) from lower levels of government.

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

2 Australia

1 Assignment and Level of Expenditure

1 Legal basis

The Constitution indicates that the Commonwealth has powers to make laws in relation to certain areas, and has concurrent powers with the States and Territories. Also, the list of powers given to the Commonwealth Parliament does not expressly refer to a number of important subjects including education the environment, criminal law, and roads - but this does not mean that those subjects are outside the Commonwealth's powers in so far as they relate to the subjects that are listed. Obviously the Australian Constitution does not necessarily use the exact categories expressed in this question. In some areas the expressed powers relate to only a portion of the categories ticked.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles for most of the expenditure. There are concurrent responsibilities for some of the expenditure, where national government sets the policy strategy and lower levels decide on public services within that context. For few of the expenditure, the national government sets the nation-wide standards and the subnationals decide on public services with those constraints. In some cases, national and subnational governments’ responsibilities overlap, and programs implemented in the same sectors by different levels create duplications.

3 Role of national government on overall local expenditure level

The national government has no role on the overall expenditure level of lower layers of government. Of total State expenditure, about 16% is funded by the Commonwealth through Specific Purpose Payments that have come conditions attached (e.g. policy guidelines or funding requirements by the States).

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor the implementation of the budget, publishing the relevant figures

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The main lines of budgetary policy are agreed within a body in which all actors are involved (institutional forum). The same body should monitor the implementation of agreed plans.

Non-borrowing general government aggregates are calculated and reported by the Commonwealth and some States and Territories for comparative purposes in annual budgets. No level of government has a defined reporting responsibility for these aggregates.

3 Legal Framework for Intergovernmental Transfers

The basis of the system of intergovernmental transfers includes federal legislation, often involving some consultation with lower levels of government. In relation to bulk and conditional grants, Specific Purpose Grants comprise the bulk of Commonwealth payments to other levels of government, and may or may not be subject to conditions. All GST revenue is provided to states and territories, and is distributed according to population share, adjusted by a relativity factor which embodies per capita financial needs based on recommendations of the Commonwealth Grants Commission.

4 Borrowing

1 Limits to borrowing activity

There are limits on the borrowing activity of lower levels of government. The national government and lower levels of government hold formal consultations on the level of borrowing, but these are not binding. The Australian Loan Council is a Commonwealth, State and Territory Ministerial Council that coordinates public sector borrowing. Present arrangements are voluntary and emphasise transparency of public sector financing rather than adherence to strict borrowing limits.

2 National government as guarantor

The national government does not guarantee the borrowing activities of lower levels, neither explicitly nor implicitly.

Bottom of Form

5 Budgeting and reporting

1 Common standards

The Commonwealth, States and Territories report against a uniform presentation framework (UPF). While many States and Territories continue to prepare their budgets using different budget classification and accounting standards, each jurisdiction will attach data to their Budgets in the UPF format.

2 Common financial reporting requirements

Lower levels of government have agreed upon their financial reporting practices.

3 Subnational financial reports collected by the national government

The national government collects annual financial statements (audited) from lower levels of government.

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

3 Colombia

1 Assignment and Level of Expenditure

1 Legal basis

The Legislature may delegate specific roles and responsibilities of spending assignments to subnational through specific legislation.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles in regard to expenditure by lower levels of government for most of the expenditure. The responsibilities are concurrent, for the national government sets the nation-wide standards and the subnationals decide on public services with those constraints. For some of the expenditure responsibilities overlap, and programs implemented in the same sectors by different levels create duplications. Also, in some cases there is a central assignment of responsibility and a decentralized provision of public goods. For few of the expenditure, the national government sets the policy strategy and lower levels decide on public services within that context.

3 Role of national government on overall local expenditure level

The national government has no role in regard to the overall expenditure level of lower layers of government.

2 National Coordination Role

1 Setting targets and monitoring

The national government has a coordination role to set the targets (deficit, expenditures, primary expenditure, etc.) for subnational governments (directly or in case of no agreement) in order to ensure the consistency of budgetary policies with national macroeconomic objectives.

2 Calculation of government aggregates

The national government does not have a coordination role in terms of general government aggregates. National and subnational governments are completely independent. The general government aggregates are not calculated.

3 Legal Framework for Intergovernmental Transfers

The system of intergovernmental transfers is precisely determined by the Constitution (rates, flows, etc.).

4 Borrowing

1 Limits to borrowing activity

There are limits on the borrowing activity of lower levels of government. The national government imposes maximum levels of borrowing for lower levels of government which cannot be exceeded. Subnational governments need the endorsement of the Minister of Finance to borrow (see below).

2 National government as guarantor

Borrowing by lower levels of government is guaranteed by the national government on a case-by-case basis. In practice, this applies in exceptional cases only

5 Budgeting and reporting

1 Common standards

National and subnational governments have the same budget classification and accounting rules, set by the national government.

2 Common financial reporting requirements

There are common financial reporting requirements for lower levels of government, which are set by the national government.

3 Subnational financial reports collected by the national government

Generally the national government collects budgets of lower levels of government (taxation and expenditure).

4 Reporting of general government aggregates to Legislature

The Legislature examines only the national budget. The general government aggregate is not included in any budget document.

4 Denmark

1 Assignment and Level of Expenditure

1 Legal basis

The Legislature may delegate specific roles and responsibilities of spending assignments to subnational through specific legislation.

2 Definition of expenditure responsibilities

National and subnational governments’ responsibilities overlap for most of the expenditure by lower levels of government. Programs implemented in the same sectors by different levels create duplications. For some of the expenditure, there are concurrent responsibilities, where the national government sets the policy strategy and lower levels decide on public services within that context. In some cases, the national and subnational governments have clear and separate roles.

3 Role of national government on overall local expenditure level

In regard to the overall expenditure level of lower layers of government, the national government and subnational governments conduct formal consultations, but these are not binding. In an economy whit a high degree of decentralization, it is a challenge to combine and coordinate macroeconomic control with local government authority. Since the late seventies Denmark has sought to balance these objectives through formalized budget. The budget cooperation works through annual negotiations between the central government and each of the two local government associations. The negotiations result in a framework agreement for each of the two levels of local government.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets (deficit, expenditures, primary expenditure, etc.) for subnational governments (directly or in case of no agreement) in order to ensure the consistency of budgetary policies with national macroeconomic objectives.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the co-ordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The system of intergovernmental transfers is decided with national law (budget or other law), with the prior agreement of lower levels.

4 Borrowing

1 Limits to borrowing activity

The national government imposes maximum levels of borrowing for lower levels of government which cannot be exceeded.

2 National government as guarantor

The national government does not guarantee the borrowing activities of lower levels, neither explicitly nor implicitly.

5 Budgeting and reporting

1 Common standards

National and subnational governments do not use the same budget classification and accounting rules. The standards for the subnational levels are set by the national government.

2 Common financial reporting requirements

There are common financial reporting requirements for lower levels of government, which are set by the national government.

3 Subnational financial reports collected by the national government

Budgets of lower levels of government, annual financial statements and in-year reports (quarterly).

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

5 France

1 Assignment and Level of Expenditure

1 Legal basis

The Legislature may delegate specific roles and responsibilities of spending assignments to subnational through specific legislation.

2 Definition of expenditure responsibilities

National and subnational governments’ responsibilities overlap for most of the expenditure by lower levels of government. Programs implemented in the same sectors by different levels create duplications. In some cases, the national and subnational governments have clear and separate roles.

3 Role of national government on overall local expenditure level

The national government has no role in regard to the overall expenditure level of lower layers of government.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor the implementation of the budget, publishing the relevant figures.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the co-ordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The principles of the system of intergovernmental transfers are contained in the Constitution and the actual criteria are approved with national law, with the prior agreement of lower levels of government.

4 Borrowing

1 Limits to borrowing activity

There are no limits on the borrowing activity of lower levels of government, but loans are exclusively destined to finance investment expenditures.

2 National government as guarantor

The national government does not guarantee the borrowing activities of lower levels, neither explicitly nor implicitly.

5 Budgeting and reporting

1 Common standards

National and subnational governments do not use the same budget classification and accounting rules. The standards for the subnational levels are set by the national government. The budgetary and accounting data aggregates follow the rules of the system of «comptabilité nationale» SEC 95, shared by EMU countries.

2 Common financial reporting requirements

Lower levels of government have different financial reporting practices.

3 Subnational financial reports collected by the national government

The national government collects in-year reports on the implementation of the budget from lower levels of government.

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

6 Greece

1 Assignment and Level of Expenditure

1 Legal basis

According to the constitution, the administration to local issues is assigned to local authorities. Legislation defines the categories of local issues and their distribution to municipalites and prefectures.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles for some of the expenditure by lower levels of government. For the other portion, they have concurrent responsibilities, by which the national government sets the policy strategy and the subnational governments decide on public services within that context.

3 Role of national government on overall local expenditure level

The national and subnational governments conduct formal consultations on the level of expenditure by lower levels of government, but these are not binding.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor the implementation of the budget, publishing the relevant figures.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the co-ordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The principles of the system of intergovernmental transfers are contained in the Constitution and the actual criteria are approved with national law, with the prior agreement of lower levels of government.

4 Borrowing

1 Limits to borrowing activity

There are no limits on the borrowing activity of lower levels of government.

2 National government as guarantor

Borrowing by lower levels of government is guaranteed by the national government on a case-by-case basis. In practice, this applies to most borrowing activity.

5 Budgeting and reporting

1 Common standards

National and subnational governments do not use the same budget classification and accounting rules. The standards for the subnational levels are set by the national government.

2 Common financial reporting requirements

There are common financial reporting requirements for lower levels of government, which are set by the national government.

3 Subnational financial reports collected by the national government

No data available.

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

7 Indonesia

1 Assignment and Level of Expenditure

1 Legal basis

The Legislature may delegate specific roles and responsibilities of spending assignments to subnational through specific legislation.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles for most of the expenditure by lower levels of government. There are also concurrent responsibilities, by which the national government sets the policy strategy and nation-wide standards and lower levels decide on public services within that context and with those constraints. In a few cases, national and subnational governments’ responsibilities overlap, and programs implemented in the same sectors by different levels create duplications.

3 Role of national government on overall local expenditure level

The national government has no role in regard to the overall expenditure level of lower layers of government.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor trends, to suggest corrections and, if necessary, to enforce them.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the coordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The system of intergovernmental transfers is decided with national law (budget or other law), with the prior agreement of lower levels.

4 Borrowing

1 Limits to borrowing activity

The national government imposes maximum levels of borrowing for lower levels of government which cannot be exceeded.

2 National government as guarantor

All borrowing activities of lower levels of government are implicitly guaranteed by the national government

5 Budgeting and reporting

1 Common standards

National and subnational governments have the same budget classification and accounting rules, set by the national government

2 Common financial reporting requirements

There are common financial reporting requirements for lower levels of government, which are set by the national government

3 Subnational financial reports collected by the national government

Generally the national government collects budgets of lower levels of government (taxation and expenditure).

4 Reporting of general government aggregates to Legislature

General government aggregates are not included in the budget documents presented to the Legislature. The Legislature examines only the national budget. The general government aggregate is not included in any budget document

8 Korea

Korean local governments have a two-tier structure, both levels are equally important, and have local legislative assemblies. Upper-level local governments include Seoul, Metropolitan city, and Do(province). Lower-level local governments are Si(city), Gun(county), and Gu(autonomous district).

1 Assignment and Level of Expenditure

1 Legal basis

The Constitution lists the roles and responsibilities of spending assignments to be covered by the national government. All the other functions are assigned to other levels.

2 Definition of expenditure responsibilities

The national and subnational governments have clear and separate roles for most of the expenditure by lower levels of government. However, in practice, national and subnational governments’ responsibilities overlap, and programs implemented in the same sectors by different levels create duplications. There are also concurrent responsibilities for some of the expenditure, where national government sets the policy strategy and lower levels decide on public services within that context.

3 Role of national government on overall local expenditure level

The national government has no role in regard to the overall expenditure level of lower layers of government.

2 National Coordination Role

1 Setting targets and monitoring

The national government has a coordination role to set the targets (deficit, expenditures, primary expenditure, etc.) for subnational governments (directly or in case of no agreement) in order to ensure the consistency of budgetary policies with national macroeconomic objectives.

2 Calculation of government aggregates

The national government does not have a coordination role in terms of general government aggregates. National and subnational governments are completely independent. The general government aggregates are not calculated

3 Legal Framework for Intergovernmental Transfers

The system of intergovernmental transfers is decided with national law (budget or other law), with the prior agreement of lower levels.

4 Borrowing

1 Limits to borrowing activity

There are limits on the borrowing activity of lower levels of government. Each loan must be approved by the national government on a case-by-case basis

2 National government as guarantor

The national government does not guarantee the borrowing activities of lower levels, neither explicitly nor implicitly.

5 Budgeting and reporting

1 Common standards

National and subnational governments do not use the same budget classification and accounting rules. The standards for the subnational levels are set by the national government.

2 Common financial reporting requirements

Lower levels of government have different financial reporting practices.

3 Subnational financial reports collected by the national government

Generally the national government collects budget reports, annual financial statements (audited), in-year report from lower levels of government.

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purposes.

9 South Africa

The Constitution of the Republic of South Africa makes provision for a 'Chamber of the Regions' known as the National Council of Provinces. The council is composed of a single delegation from each province consisting of ten delegates. It represents the provinces to ensure that provincial interest are taken into account in national government.

1 Assignment and Level of Expenditure

1 Legal basis

No data available.

2 Definition of expenditure responsibilities

With regards to expenditure by lower levels of government, the national and subnational governments have clear and separate roles for some of the expenditure. There are also concurrent responsibilities, by which the national government sets the policy strategy and nation-wide standards and lower levels decide on public services within that context and with those constraints.

3 Role of national government on overall local expenditure level

The national government and lower levels of government conduct formal consultations on the level of expenditure by lower levels of government, but these are not binding.

2 National Coordination Role

1 Setting targets and monitoring

The central government has a coordination role to set the targets and monitor trends, to suggest corrections and, if necessary, to enforce them.

2 Calculation of government aggregates

Supranational (EU, international organization rules) or domestic commitments make the general government aggregate relevant. The central government has the co-ordination power to ensure the consistency of budgetary policies with national macroeconomic objectives.

3 Legal Framework for Intergovernmental Transfers

The principles of the system of intergovernmental transfers are contained in the Constitution and the actual criteria are approved with national law, with the prior agreement of lower levels of government. The provincial share of the budget is allocated to the nine provinces on the basis of an 'Equitable Share Formula' that comprise of six components. The components relate to the provinces health, education and social welfare needs; economic activity; institutional capacity; and a backlog component.

Provinces receive 95% of their budget in the form of transfers from national government. Ten percent of these transfers are conditional grants with strict rules governing their disbursement and monitoring. Ninety percent of the transfers are in the form of the provinces equitable share (Equitable Share Formula). Although provinces have a greater say in the allocation of the equitable share, the disbursement thereof is largely determined by national policy.

4 Borrowing

1 Limits to borrowing activity

The national government and lower levels of government hold formal consultations on the level of borrowing, but these are not binding.

2 National government as guarantor

The national government does not guarantee the borrowing activities of lower levels, neither explicitly nor implicitly.

5 Budgeting and reporting

1 Common standards

National and subnational governments have the same budget classification and accounting rules, set by the national government.

2 Common financial reporting requirements

There are common financial reporting requirements for lower levels of government, which are set by the national government.

3 Subnational financial reports collected by the national government

Generally the national government collects annual financial statements (audited), in-year reports on the implementation of the budget, and budgets from lower levels of government (taxation and expenditure).

4 Reporting of general government aggregates to Legislature

General government aggregates are included in the budget documents presented to the Legislature, for knowledge purpose.

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[1] Prepared by Ines Kudo (PRMPS) for the World Bank’s Decentralization Thematic Group.

[2] Potter, B. (1997). “Budgetary and Financial Management.” In Teresa Ter-Minassian (Ed.), Fiscal Federalism in Theory and Practice. Washington, DC: International Monetary Fund.

[3] Ter-Minassian, T. (1997). Intergovernmental Fiscal Relations in a Macroeconomic Perspective: An Overview. In Teresa Ter-Minassian (Ed.), Fiscal Federalism in Theory and Practice. Washington, DC: International Monetary Fund.

[4] Potter, B. (1997). Op.Cit.

[5] To access the complete survey results, see

[6] Consistent with the OECD survey’s usage, this document uses the term “national” government to refer to the central government.

[7] See the case studies of Argentina and Brazil in Jonathan Rodden et al. Decentralization and the Challenge of Hard Budget Constraints (MIT Press, 2003.)

[8] However, under certain conditions, such as financial difficulties, the Ministry of Local Government and Regional Development may further restrict local governments’ possibilities to borrow.

[9] Ter-Minassian, T. and Jon Craig (1997). Control of Subnational Government Borrowing. In Teresa Ter-Minassian (Ed.), Fiscal Federalism in Theory and Practice. Washington, DC: International Monetary Fund.

[10] In Canada, provinces often voluntarily adhere to the standards of the Public Sector Accounting Board, the independent and authoritative standard-setting body for the public sector.

[11] It should be recognized that the Federal budget and the State and local subsector are measured with different concepts.

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