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Chapter 9: Cash Management And Debt Management: Two Sides Of The Same Coin? This uniquely interdisciplinary combination of economics, political science, public administration, and accounting has seen an influx of innovative ideas and reforms that have sought to address some of the perennial challenges of managing public finances. To constrain the likely temptation to increase expenditure and spend, rather than save, in times of plenty, countries have introduced fiscal rules and fiscal responsibility laws. To understand and plan for the impact of today’s policy choices on finances in the years ahead, governments have adopted medium-term budget frameworks. While the field of PFM has changed dramatically over the last two decades, very little has been written about this revolution, with the exception of a few specialized articles.
The book poses critical questions about these reforms and evaluates what they have accomplished and the issues and challenges they have encountered, including with the global financial and economic crisis. The IMF remains committed to working with all its member countries to provide advice and assistance on public financial management, drawing on its deep experience of working on these issues all over the world. Although the book was conceived and written in the midst of a grave financial crisis, it is not about the crisis. Nor is it a PFM handbook or manual, which would merely describe PFM practices. Having in place inappropriate budgetary processes and rules can cause unsustainable increases in expenditure and unbudgeted liabilities. The key objectives of public financial management—maintaining a sustainable fiscal position, the effective allocation of resources, and the efficient delivery of public goods and services—have long been established in the literature. The emphasis of this book is on the set of systems, processes, and rules that can counter the well-documented deficit bias inherent in the political process.
As the book argues, information on past, current, and future fiscal developments is of paramount importance in this regard—without sustainable public finances, effectiveness and efficiency run the risk of becoming secondary objectives. In this respect, PFM has certainly evolved from its traditional focus on financial compliance and control to become a key foundation for macrofiscal analysis and policy-making. It is important to dispel a potential misunderstanding of the meaning of the first PFM key objective, maintaining a sustainable fiscal position. This objective should not be seen as, and certainly does not imply, a bias toward fiscal tightening. The PFM literature has grown rapidly in this period, but it is fairly specialized and addresses a specific audience. Very few attempts have been made to take stock of how PFM has evolved over the last two decades. What are the key PFM innovations discussed in this book?
How have these reforms emerged over the past two decades? The number of countries with fiscal rules rose from 5 in 1990 to 76 in 2012. The number of countries with MTBFs increased from fewer than 20 in 1990 to more than 130 in 2008. The number of countries with fiscal councils grew from about 6 in 1990 to about 25 in 2013. A sharp increase has occurred recently, with ten or more such councils having been created since 2008.
With the emergence of new fiscal reporting standards, the number of countries reporting at least a financial balance sheet to the IMF increased from 21 in 2004 to 41 in 2011. 2011 nearly 70 percent had a standard performance budgeting framework. 94 countries, and by the end of 2012, 285 PEFA assessments had been undertaken, covering 135 countries. The word architecture is used in the title of this book to convey how PFM elements are interconnected and mutually dependent and how they can be melded into a comprehensive structure.
Looking at PFM as an integrated framework or system can illuminate important issues. For instance, when reforms are launched in isolation from one another, interested governments may not be aware of their interdependence. Viewed in isolation, each innovation has its own constituency, terminology, information requirements, and procedures that may get in the way of others. This is when government expectations for improvement are frustrated, leading to administrative overload and reform fatigue. Properly designed, an integrated PFM agenda can highlight interdependencies among elements and enable government to select the course that fits its needs and capacity. Finally, advanced economies have been fertile breeding grounds for PFM innovations, but low-income countries have been the main venues for comprehensive reform efforts.