The Budget Process

Theresa Reidy and John Considine 7th December, 2010

The most discussed budget in decades in due today. The budget is the main feature in the Finance calendar in any country but this year, the Irish budget is likely to be the centre of international attention. Budget 2011 will be exceptional for a variety of reasons. It will be the first budget presented to the Dáil, subject to direct monitoring, under the terms of the EU and IMF bailout. In fact, the bailout is dependent upon the budget being passed. The ongoing crisis in the Euro area means that international markets, governments and institutions will all be observing the outcomes of the budget.

A great deal is known about the budgetary strategy of the Government and, the broad parameters of the adjustment are known for months. Again, this is unusual, secrecy is an overwhelming feature of Irish budgets. Against, the backdrop of the financial crisis, the Government and the Department of Finance, were forced into developing a four year budgetary plan. The plan provided headline figures for tax rises and expenditure cuts in each year. It also gave detail on the likely timeframe for new tax measures, so little is expected in the way of tax surprises.

Political argument on the four year plan and the Government’s shrinking majority led to considerable speculation about a pre-budget election or a post budget Government undoing some of the measures to be announced later today. Much of this speculation was divorced from the reality that the annual budget can take up to eight months to prepare. The initial expenditure estimates process begins shortly after the signing into law of the previous year’s Finance Bill.

The call for submissions for the expenditure estimates process is usually issued in late April. A wide variety of bodies, including the social partners, accountancy and legal representative bodies, and the main interest groups all make contributions. The critical stage in the process involves bilateral meetings between Finance and the individual spending ministries. This is the bargaining stage where spending ministries outline their plans for the forthcoming year. Input on tax policy comes from the Revenue Commissioners, the tax strategy group and final proposals are agreed by the Government. The backdrop to the expenditure and tax proposals, are the projections on economic growth for the coming years. These are developed within the Department of Finance and have been the subject of constant criticism in the past few years. The growth projections are essential to determine tax receipts and any push/pull factors on expenditure. Budgets in the last few years have been the subject of intense cabinet debate and discussion. This is in contrast with the boom years, when budget details were shared sparingly, especially during Charlie McCreevy’s term as Minister for Finance.

The White Paper on Receipts and Estimates is presented to the Dáil within a week of budget day. This document contains the estimates of income and expenditure. The centrepiece of the budget process is the speech of the minister in Dáil Éireann. The speech is known as the financial statement and contains the summary of budget measures, with most attention paid to tax and social welfare changes. The budget comes with considerable ritual and the budget document is only circulated to members of the Dáil, once the minister begins delivery of his financial statement.

The document includes the financial statement of the minister, a list of the budget measures, budget statistics and tables with multi year projections, a stability programme update, the white paper on receipts and expenditures and the estimates for public services and a summary of the public capital programme. Any immediate changes in taxation, usually excise measures, are contained in the financial resolutions which are passed on the evening of budget day. The Social Welfare Bill and the Pensions Bill are put through the Dáil in the following weeks and the final component, the Finance Bill is usually signed into law by April of the following year.

The budgetary process has evolved in the last number of decades. The White Paper on Receipts and Expenditure was delivered with the Budget statement for the first time in Budget 2008. The timing of the budget moved from April delivery to December over the last decade. However, the controlling role of the Department of Finance has been retained, albeit with some greater flexibility. While spending departments have secured autonomy over day to day expenditure decisions, Finance retains a veto on all major spending developments. In 2011, this veto is likely to transition to the EU and IMF monitoring group.

2 thoughts on “The Budget Process

  1. Good to have this posting on process

    However, one should the fact that the Dept of Finance leaves something to be desired according to Dan O’Brien, Economics Editor ITimes

    “….Broadly speaking, two factors determine the soundness of a country’s public finances: political will and focus of governments in general, and finance ministers in particular; and robust systems and procedures on raising taxes and resource allocation……… political will is the most important factor in sound management of the public finances.
    But budgetary frameworks and procedures matter too – those countries with such structures have a much better record on deficits and public debt. In this regard, how does Ireland compare with its peers, and who is culpable – politicians or officials – if systems are inadequate?
    ….In a pre-crisis report…. the European Commission came up with a detailed methodology to measure member countries’ proximity to accepted best practice….The result: Ireland’s overall arrangements were found to be the most deficient of the 19 countries which participated in the study. Second from bottom came Greece… in 2007. The study turned out to have considerable predictive power. In 2009, Ireland had the largest budget deficit among the EU 27 and Greece the second largest.
    Most damningly, the report found a total lack of foresight capacity….the study covered prudence…. to judge whether finance ministries had in place measures that would insulate the public finances from crisis or set warning lights flashing if one approached. Ireland not only came last among the 19 in this sub-section, uniquely, it was found not to have a single safeguard in place.
    While the commission’s 2007 study was the most comparative, it was not a one-off. In 2003 the OECD devoted most of its Country Report to needed reforms and modernisation …In 2005 the Department of Finance openly rejected an IMF suggestion that greater outside involvement was needed in its work…..
    Who is to blame? Ultimately, and again, it is political leaders. But that does not exonerate officials, and all the more so in a political system where top-down pressure for change is unusually lacking.
    Among the central questions… why officials,… did not do more to drive change, particularly in administrative and technocratic areas with few if any political implications…. Why was it beyond the ambition of senior officials to take advantage of this to beef up their own capacity and bring on board the sort of expertise that any finance ministry needs in a modern economy?..”
    “Looking back on a unique absence of foresight” Irish Times 28 June 2010

    UCD’s Dr. Niamh Hardiman also commented on our budgetary process
    “…Nevertheless, a number of OECD countries have rules of some sort to keep fiscal planning
    within specific parameters (OECD 2009). Ireland engages in some of these practices such as
    preparing medium-term fiscal estimates and devising multi-annual budget projections. But
    among OECD countries, Ireland stands out as having the least constrained political processes
    for fiscal decision-making, and the most autonomous Ministers for Finance (Hallerberg,
    Strauch and von Hagen 2009). This helps explain why Ireland tends repeatedly to have procyclical
    fiscal policy (Lane 1998; P Lane 2009).”

    “The Impact of the Crisis on the Irish Political System’ Statistical and Social Inquiry Society of Ireland Symposium on Resolving Ireland’s Fiscal Crisis 26 November 2009 p. 19

    Click to access Hardiman26-11-09.pdf

    We have a lot of work to do to make our way of governing ourselves fit for purpose!

  2. @Donal,

    Well done. You must be getting weary of doing it, but once again you’ve hit the nail on the head. We have the structure and the institutions; it’s simply a question of procedures, process, resources and the allocation of these resources.

    A tight focus on these has the potential to effect significant and beneficial change. But when the apparent widespread desire for political reform encompasses constitutional changes, new institutions, the abolition of some institutions, changes in the voting system, a raft of ‘good-to-have’ policy changes, etc., any momentum is sapped and lost.

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