Budget's more like a Super Sixes game here

MUMBAI: President George Bush’s budget, unveiled earlier this month, might be 25 times the size of the budget that Jaswant Singh will present on February 28, but he received nowhere close to the attention and hype that Mr Singh would enjoy on Budget day.
In fact, President Bush’s budget this year was somewhat atypical because it received an unusual amount of attention, at least by American standards, because of its radical tax cutting agenda, in particular the proposal to stop taxing dividends in the hands of the investor.
In general, however, US presidents don’t dominate airwaves in the manner Indian finance ministers do when presenting the budget. The difference probably lies in the fact that Indian budget is more like the Super Sixes cricket game — a lot of action concentrated into a two-hour event marked with uncertainties.
By contrast, in most developed countries, the budget process is like the traditional form of cricket — the action is spread over a longer period and is far more predictable.
So, unlike in India, budget is not something that the markets dance to in the western economies. “The budget event has almost no impact on markets and, in the medium term, a virtually negligible impact on ECB policy,� says Norbert Walter, chief economist of Deutsche Bank group. “If EMU member states are running excessive deficits, the ECB may be forced to raise interest rates.�
“But there is absolutely no immediate effect on the markets while the budget is presented,� he said.
In recent years, many governments have taken initiatives towards becoming more transparent, more predictable and more long-term in their perspective. The organisational efforts in this direction are led by the Directorate for Public Governance and Territorial Development in the OECD (Organisation for Economic Cooperation and Development). OECD has also put in place a framework for the best budget processes that member countries should strive to follow (see table).
Budget cycle: In many countries, the budget cycle begins a year or more before the fiscal year starts. In Japan, for instance, the Cabinet approves the macroeconomic guidelines for the budget in summer, which are based on the work of a specialised body called the Council on Economic and Fiscal Policy (CEFP).
Within the broad framework of these guidelines, each ministry submits its requests. These are incorporated in a draft budget that the Cabinet approves in December. The legislature examines the draft budget from January onwards so that it is finalised before the fiscal year starts in April.
In Canada too, the process is largely similar and the Treasury Board Secretariat (TBS) negotiates with each department their spending requirements within a framework laid out by the Cabinet.
At the time of these negotiations, each department is also required to prepare a three-year business plan. This ensures that the department’s programmes are managed from a long-term perspective rather than through ad-hoc annual demands.
In effect, there are two budget days in most western economies. The first is when the broad thrust areas, the policy stance of the government and aggregate allocations are announced.
The second stage is when the details are set out — in terms of which programmes get how much. Usually, in terms of public discussions on the budget, the first event overshadows the second one.
Since the tax regimes in these countries are far more stable than in India, the public discussions often focus more on aggregate numbers like the deficit and borrowing numbers, and allocations to major sectors like defence, health, education.
Legislature and budgets: In India, the budget that the government presents on the last day of February is taken to be more or less the final one.
The legislature does not have much role to play in deciding the final budget. So, when Yashwant Sinha changed some of his proposals after the budget discussions in the Parliament, he was termed the ‘rollback FM’.
But the legislature is not necessarily such a rubber-stamp in many other economies. Typically, the legislature is far less influential in the Westminster systems like the UK and Canada as compared to the US, where the legislature can make significant changes to the budget proposals.
In Japan also, the legislature usually approves the budget without any changes, while the legislature effects minor changes in France, Germany, Korea and Mexico.
In some of the countries like the US, Sweden, Canada and Mexico, the legislature first votes on the total revenue and expenditure, before it votes on specific appropriations. Thus, within the general spending limit sanctioned by the legislature, the government can play around with the allocations to specific programmes.
Another benefit of this top-bottom practice is that the departments’ demands do not outweigh the general policy on fiscal discipline. If one programme is given extra funds, some other programme has to suffer a cutback.
Sweden, which introduced several budget process reforms during the 1990s to bring its fiscal position back on track, has an interesting concept of the ‘budget margin’. The Swedish parliament approves the maximum level of total expenditure for the government and the indicative level of funding for each of the broad expenditure areas. The total of the indicative expenditure is intentionally left lower than the total expenditure. This margin is meant to be a buffer against any forecasting errors so that the maximum level is not breached.
In most economies, legislatures are also equipped with professional staff that analyses the budget. In the US, the Congressional Budget Office (CBO) has been acting since 1975 with the mission to provide the Congress with an objective, non-partisan analysis. It even prepares revenue implication estimates for the bills, or modifications to the budget that individual members plan to introduce.
Disclosure in budget documents: Another focus area of budget reforms in developed countries has been on improving the quality of information made available to the legislators, non-government organisations and the citizens. More than a dozen OECD governments, including Canada, the UK and the US, include non-financial performance data for most government programmes in their budget documents.
Many countries also follow a multi-year framework of budgeting — declaring the likely budget numbers that one should expect in the following two years (five in case of the US). Budget documents mention very clearly the economic assumptions on GDP growth, inflation, interest rates, which underlie the budget process.
Thus, for example, the recent US budget documents tell us that the budget estimates have assumed a 2.9% growth in the US economy in ‘03, a 2.2% inflation and an interest rate of 4.2% (on a 10-year treasury note). The documents even disclose the government’s expectation of corporate profits and salaries. Plus, the budget contains a simulation analysis of what would happen to the budget numbers in case of a variation in key economic assumptions.
There has been also an effort in recent years to demystify the budget and move away from the ‘legal document feel’ to a ‘corporate annual report feel’. Almost every major OECD economy — including the US, the UK, Sweden, Korea, Japan, Germany and Canada — regularly publishes a citizen’s guide to the budget. “This year, we also have a separate microsite for the summary leaflet, which highlights the key points of how the budget will affect you,� declares the website of the UK treasury in a friendly tone.
The comparison of budget processes in different countries makes it clear that a part of the charm of India’s budget stems from the fact that we still have a long way to go to make our processes consultative and participatory.
If India follows the western budget models, it would gradually take away much of the hype. A small beginning has perhaps been made through the mid-year review released last year and the public discussion on tax reforms. The next logical step could be to issue a draft budget well in advance.
The Andhra Pradesh government has already taken a lead in this regard. Chandrababu Naidu’s government announced an annual fiscal framework a month before the budget, which was nothing but a simple and demystified draft budget.
Traditions associated with the UK budget
* The word budget comes from the French word ‘bougette’, which means a little leather bag.
* The same box was in use in the UK from 1860s till 1997, when Gordon Brown decided to use a new one.
* Normally, alcohol is not permitted in the House of Commons, but the Chancellor is allowed a drink on the budget day.