Économie et Finance

‘Spending more effectively’ to improve the Budget’s impact on the economy

le 14 juin 2018

The major budgetary reform undertaken by the central government in 2015 wasn’t simply a matter of cutting back on expenditure or streamlining revenue as a means of sustainability. Rather, it was about reforming the Budget Act, introducing budgetary governance and digitising processes to boost profitability over time and increase transparency.

The impact from public budget utilisation on economic growth and, inversely, revenue and expenditure elasticity as a function of the growth rate, will depend on whether each aspect of this reform process is successful.

Mention was made of this area of macro-economic analysis, highly important to a country such as Morocco which is rapidly modernising, by the Kingdom’s Treasurer General at a recent international symposium organised by Casablanca’s Hassan II University. Mr Noureddine Bensouda explained that “The essential functions of central government are resource allocation (central government intervenes directly in the process of producing public goods and services), redistribution (central government combats inequality) and stabilisation (central government deals with the effects of economic crises)”.

The benefits of good governance

Government intervention in the economy is carried out by various means.

First, central government and local government budgets have a direct impact, of course, on the economy’s functioning by impacting businesses and households.

Similarly, public spending contributes to corporate activity through public procurement and direct or indirect subsidies to different economic agents.

And even public debt generates revenue for creditors of the State (banks, insurance companies, investment firms).

That is why good governance of central government and local government budgets would improve the impact that they make on the economy.

For this to happen, budgetary governance has been at the forefront of budgetary reform in recent years. And, in particular, the reform of the Constitutional Bylaw governing the Budget Act (LOLF), which has made public policy transparent and understandable.

Indeed, the focus on governance is clearly defined by Article 39 of the LOLF. In particular, it specifies that the LOLF must consist of a programme that is based on a consistent set of projects or initiatives derived from the same ministerial department or institution.

This must be underpinned by well-defined goals on the basis of socially beneficial outcomes and, above all, on quantifiable indicators that make it possible to measure the anticipated results as effectively and efficiently as possibility and the quality of what has been achieved.

The LOLF makes it possible to “identify public policies and translate them into programmes”.

The central government budget is now structured into programmes that are linked to a strategy and goals which are monitored against appropriate indicators.

It’s simple: prior to this reform, the budget was structured by type of expenditure rather than by purpose as a means of costing public policy.

Public procurement has also greatly benefited from the introduction of budgetary governance, ensuring that public sector goods and services are produced, thereby generating growth. This is one of the main goals of the LOLF.

LOLF, performance remains an ongoing priority

The Constitutional Bylaw governing the Budget Act (LOLF), which is the veritable financial constitution of the State, primarily aims to improve State intervention by ensuring that public spending is effective, while performance remains an ongoing priority as well as service quality.

A culture of means in which budgets were routinely distributed between ministerial departments has now been replaced by a results-driven and performance-based approach.

This new approach can be seen in reforms made to budget classification, by which central government expenditure is now presented in terms of programmes, projects and initiatives.

The LOLF in Morocco has introduced an arsenal of mechanisms aimed at rationalising and optimising public spending.

Lastly, so as to remedy the issue of the low implementation rate for capital expenditure and its corollary, appropriations carry-over, the LOLF has restricted carryovers to 30% of payment appropriations for the annual Budget Act in question in respect of each ministerial department or institution’s investment budget.

Even before it was introduced 1 January 2018, this measure had the effect of substantially increasing capital expenditure under the central government’s budget, which reached MAD 67 billion in 2017 versus MAD 61.7 billion in 2016. It is therefore clear that the LOLF is organising “spending more effectively”.

As far as local and regional authorities are concerned, it is worth underlining that the new constitutional bylaws relating to the way in which they are organised financially reflect a similar goal, which is to speed up the pace of local budget implementation as well as reducing administrative supervision of project design processes, budget planning and implementation.

Budgetary governance may also be enhanced through the following reforms:

– Payment deadlines which introduce a time factor into managing budgets;

– Establishing integrated information and management systems which provide information on budget efficiency and transparency. These are also fundamental to accountability.

Public procurement, a critical role

Improved budgetary governance overall goes hand in hand with reforming public procurement.

Public procurement, in particular, the awarding of public contracts, is attracting interest from the corporate sector because of the high financial and economic stakes on offer.

Through public procurement, the central government’s primary aim is to produce quality goods and services, support growth by stimulating demand in favour of businesses and steer investment at the regional level.

In this respect, it is worth highlighting that “central government, as an economic agent, through public procurement, generates opportunities for wealth creation by businesses”.

In doing so, it must guarantee equal opportunities between them by ensuring that regulations meet international standards as well as being adapted to the Moroccan context.

This is precisely the aim underlying the reform of regulations regarding the awarding of public contracts, which came into effect 1 January 2014.

The new Public Contracts Decree has introduced a number of major innovations relating to the preparation, awarding and management of public contracts, including:

– Simplifying and clarifying procedures, in particular, by harmonising the legal framework for the awarding of contracts by public entities, which lies at the very core of the new regulatory system. The decree of 20 March 2013 shall now apply to contracts awarded by central government bodies, local authorities and public institutions as well as architectural services.

– Enhancing transparency, competition and equal treatment between candidates.

Public investment and growth, ‘could do better’

Public spending is one of the key components of demand and has a multiplier effect on economic growth, together with private investment and exports.

However, in Morocco’s case, according to an empirical study, the impact from public spending is ‘average’.

Indeed, it is worth noting that “economic growth in Morocco is positively correlated to public spending […]. Despite the positive impact from public spending on Morocco’s economic growth rate, the effect from this type of spending is average (0.37).

For every 1 percentage point increase in public spending, economic growth increases by 0.37 points.”

Factors explaining why public spending’s contribution to economic growth is only average include “the propensity to save, the propensity to import, the level of social security transfers and budgetary pressure”.

In addition, the above empirical study shows that the cause of the twin deficits lies in the fact that the effectiveness of capital spending is average and that the contribution from the economy’s degree of openness to growth is poor.

“The reasons for this are first, fiscal and second, trade-related.  Rather than stimulating economic activity, government spending simply exacerbates the trade and fiscal deficits.”

In addition, as far as the contribution from investment to economic growth is concerned, Bank Al-Maghrib and the Economic, Social and Environmental Council specify that “Morocco’s Incremental Capital Output Ratio (ICOR)” is not only very high but is still actually on the rise, reaching a level of 7 in 2014, while the global average is slightly above 3.

This would imply that investment generates less and less economic growth and, therefore, the resulting impact on the domestic economy is less and less effective”.

The Treasury’s assessment

Central government support for businesses, particularly SMEs, does not generate all the anticipated effects, largely due to the negative consequences resulting from payment delays regarding public contracts.

Despite the significant levels of central government injections into the economy in the production of goods and services, payment delays have snowballed. This is because payment delays are passed on from companies awarded a public contract to their suppliers…

By way of example, according to data published by the General Treasury of the Kingdom on government contracts, average payment periods over the period 2012-15 far exceed the regulatory requirement, varying between 138 days in 2012 and 2013, 156 days in 2014 and 146 days in 2015, while payment periods exceed 200 days for some ministerial departments.

One year on since this reform was adopted, the overall average payment period for central government has come down from 146 days prior to January 2016, the date that this reform became effective, to 55 days in 2017.

The same applies to local authorities, which has seen the average payment period fall from 142 days to 55 days. This substantial reduction in the overall average payment period is mainly due to the decrease in average payment periods at payment mandate issuers which have dropped from 140 days in 2016 to 51 days in 2017.

As far as public accountants are concerned, their performance in terms of approvals and payments has improved from 6 days in 2016 to 4 days in 2017.

The Integrated Expense Management (GID) system is one of the most important. It is a standardised joint budget and accounting information system that is used by everyone involved with expenditure.

The GID system aims to speed up processing for all types of public expenditure in compliance with current legislation, simplify and streamline the circuits and procedures for implementing it, reconcile the public accounts of the various stakeholders and develop the necessary reporting schedules so as to enhance decision-making.

In fine

Improved budgetary governance, which has a positive impact on the economy and raises citizens’ living standards, will require simultaneous action in the following areas:

– Expenditure by central government and local authorities needs to be improved if the multiplier effect on economic growth is to become more effective

– So too, their resources, which should have an elasticity greater than one.

In conclusion, it is important to emphasise that by ‘spending more effectively’, the financial resources of central government and local authorities will be put to better effect.

Afifa Dassouli

Original articlehttps://lnt.ma/depenser-mieux-ameliorer-limpact-budget-leconomie/