Chapter 3. Auditing for more strategic and sustainable budgeting in Brazil

Guided by OECD’s Recommendation of the Council on Budgetary Governance, this chapter promotes action that Brazil’s supreme audit institution, the Tribunal de Contas da União (TCU), can take to encourage more sustainable and strategic budgeting over the long-term. In particular, this chapter looks at Brazil’s budgetary structure with respect to four key trends that have emerged amongst OECD member countries in the last decade, including: (i) integration of medium-term perspectives in the budget, (ii) the integration of performance information into, evaluation and value-for-money into the budget, (iii) strengthening of fiscal discipline and (iv) long-term fiscal sustainability. Recommendations are made to TCU as to how to support improvements in each area through its audit and advisory work.

  

3.1. Introduction

The budget is the single most important policy document of governments. The budget clearly outlines which policy objectives have been prioritised. If those priorities are to be met, the budget should be both strategic and sustainable (OECD, 2002). Brazil’s budgetary process has been evolving through incremental change. Since the introduction of the Fiscal Responsibility Law (LRF) in 2000, budgetary reforms in Brazil have tended towards budgetary equilibrium and fiscal responsibility (IDB, 2010). The trend continues, with current efforts to stimulate growth focused on placing limits on spending and establishing controls in high-risk areas.

Fiscal sustainability and responsibility require short-term action with a view towards developing more sustainable outcomes over the medium and long-term. Short-term decisions should not come unequivocally at the expense of medium-term perspectives and planning that is meant to adequately guide annual allocations in the Budgetary Guidelines Law (Lei de Diretrizes Orçamentárias or LDO) and the Annual Budget Law (Lei Orçamentária Annual or LOA), which are in turn meant to provide realistic fiscal frameworks through which entities can plan.

Cutting expenditures in the short-term may often shift perspectives away from medium-term efforts towards efficiency and effectiveness of such expenditure or towards “good budgetary governance.”1 In efforts to balance both, the OECD’s Network of Senior Budget Officials used lessons learned from the financial crisis to develop international budgetary principles that could equip budgetary systems with the tools to meet the complex challenges of the future (OECD, 2015a). The current environment provides a window of opportunity for Brazil to align with good international principles in budgetary governance. While reforms since 2010 have largely been incremental, focusing on fine-tuning existing initiatives and institutions, the current proposals would suggest opportunity to bring about more meaningful change. In driving improvements for a more strategic and sustainable budget, TCU is a source of valuable and objective oversight and insight.

Brazil’s supreme audit institution (SAI), the Tribunal de Contas da União (TCU), has been instrumental in improving fiscal responsibility in Brazil in accordance with its constitutional mandate to verify government accounts and audit the operations of the government. This role, and TCU’s audit of the year-end consolidated accounts of Government, was the focus of the OECD’s 2012 review “Brazil’s Supreme Audit Institution: The audit of the consolidated year-end government report.” TCU recently received much public interest for its opinion of the government’s 2014 accounts, which played a central role in recent political turmoil. In addition to checks of compliance with financial and accounting rules, TCU is increasingly active in assessing the adequacy of Brazil’s medium-term perspectives in the budget. For instance, TCU recently conducted an audit of the broader budgetary framework, using the principles of OECD’s Recommendation of the Council on Budgetary Governance. Such audits can be useful inputs for budgetary decision making and policy making, provided that they are provided in timely and efficient manner.

This chapter focuses on the activities of TCU that provide oversight, insight and foresight for more strategic and sustainable budgeting. TCU could complement work it already does in this area, taking inspiration from other SAIs that are also looking to improve multi-annual programmes that affect citizen’s well-being in the medium and long-term. The role of SAIs in this regard is not to second guess difficult policy decisions proposed by government and authorised by the Congress, but rather to aid in more effective, efficient and transparent spending.

3.2. Overview: budgeting at the federal level

The legal framework of the budgetary process in Brazil is primarily laid out in the 1988 Constitution, putting the main responsibilities of creating and executing the budget in the Executive. Article 165 of the Constitution establishes Brazil’s budgetary framework is comprised of three budgetary instruments, as established in article 165 of the Constitution – the Multi-annual plan (Plano Pluriannual or PPA), the LDO and the LOA. The process begins with the PPA, which the President must present to congress during the first year in office. PPAs are presented every four years, thus covering three years of the current presidential term and the first year of the following.

The drafting of the plan is done between line ministries, the Ministry of Planning, Development and Management (Ministério do Planejamento, Desenvolvimento e Gestão, or MP) and the President’s Office. The MP is responsible for ensuring consistency between programmes. The plan comprehensively covers all government expenditures in several hundred outcomes or output based programmes. Additionally, PPA highlights the political priorities of the government. Priority programmes are marked as mandatory, meaning they are protected from cuts in the presidential implementation decrees, and MP aids spending on these programmes rather than individual ministries (OECD, 2003).

The annual budget process then begins when the government presents the LDO to Congress by 15 April, which must then be approved by Congress by 30 June. According to the 2000 Law of Fiscal Responsibility (Lei de Responsabilidade Fiscal, LRF), LDO must include targets for the primary surplus for the next three years which Congress must approve (mandatory for the first year and indicative for the next 2 years – rolling process). In accordance with the constitution, LDO must also stipulate which expenditures and mandatory. The bill also contains information on lending policies of government financial institutions and a number of procedural issues (OECD, 2003).

The annual budget then begins with internal reviews of the Planning Secretariat and the Budget Secretariat of the MP. The Planning Secretariat reviews the results of the previous year’s activities through inputs and outcomes and proposes amendments to the priority programmes. This review is then taken into account in the review by the Budget Secretariat, however for the most part this lengthy review focuses more on the amount of resources needed to carry out each organisation’s activities, as well as analyses last year’s spending. The Budget Secretariat’s review will then determine the maximum amount of expenditure for each ministry, and this will also inform Congress’s deliberation on the LDO. Ministries then have three weeks to input their detailed allocations which cannot exceed the amount set by the CMO. They can also appeal their maximum allocations, however ultimately it is set by the CMO. The Budget Secretariat is then responsible for finishing the LOA and presenting it to Congress before 31 August. Approval by Congress happens before 22 December (OECD, 2003).

As the understanding of the budgeting process widens, and as governments review budgetary processes and tools, SAIs are also evolving their work beyond fulfilment of the traditional mandate of monitoring compliance with budgetary laws. For instance, SAIs are assessing the link between the accuracy of the budget and the preparedness of government to deliver on long and short-term plans, programmes and policies (OECD, 2016a).

TCU, like its peer SAIs, has been active in assessing the budget, pursuant to Constitutional articles 70, 71 and 74 of Brazil’s 1988 Constitution. Chief among TCU’s responsibilities to this end include accounts proceedings, including the year-end audit of the President’s accounts, and carrying out audits and supervisory proceedings of administrative units. Firstly, TCU is charged with examining the accounts rendered annually by the President of the Republic, and those of the administrators and other persons responsible for public monies, assets and values of the direct and indirect administration. TCU’s audit of the year-end President Report, which focuses on financial compliance but also efficiency and effectiveness of individual sectors, is TCU’s greatest means for assessing, in year Y, adherence to the LOA in year X-1. TCU has additional activities that contribute to strengthening the accuracy of the budget and medium-term planning individually (such as Executive planning or evaluation of fiscal forecasts), as well as the link between the two (evaluation of the PPA). The process and production of TCU’s year-end audit was covered extensively in an OECD review in 2012.2

Secondly, TCU is charged with carrying out inspection and audits of an accounting, financial, budgetary, operational or property nature in the administrative units of the Legislative, Executive and Judicial Powers. TCU enjoys discretion in its audit planning and flexibility in determining the scope of inspection and analysis. Knowing the importance of all elements of the budget, both on the quantitative and qualitative dimensions of public spending, TCU is tackling a range of budgetary weaknesses. Its recent comprehensive audit using OECD principles indicates follow-up audits that drill down onto other critical elements of good budgetary governance, such as: clarity and adequacy of fiscal projections, and the quality of performance-related information.

TCU can continue to support greater alignment with international practices of budgeting – taking into account Brazil’s challenges in good budgetary governance and particularly in linking strategy and budget, as well as the approaches already taken by TCU. Generally, TCU could systematise more concretely its targeting of other elements of the budget that support long-term sustainability, including assessing macroeconomic indicators, the effect of in-year adjustments to the budget, and the use of evidence in budgetary trade-offs and decisions, for instance and as discussed further below. The time is opportune, given the rapidly changing environment, demands for greater fiscal responsibility and the greater attention that TCU has drawn in its audits on the budgetary process. Specific recommendations are provided in Table 3.1.

Table 3.1. Recommendations: Auditing for more strategic and sustainable budgeting in Brazil

TCU could encourage more meaningful medium-term perspectives in the budget by (a) auditing overall performance of multi-year sectoral plans, and (b) highlighting key findings on the alignment of annual budgetary allocations with multi-annual priorities, emphasising implications for entity-level planning.

  • TCU could assess overall performance of medium and long-term sectoral plans, focusing on 1) adequacy and execution of annual allocations for achieving goals, 2) the impact of thematic programme goals set out in the multi-annual plan, and 3) the implications of performance for achieving the sustainable development goals.

  • TCU could continue to assess and communicate key findings on the alignment of multi-annual priorities with annual budgetary allocations, emphasising the importance of entity-level planning with a longer time horizon.

TCU could help to improve the reliability of evidence and information for making performance-based budgetary decisions through assessments of key areas, such as expenditure programmes funded by earmarks and the effectiveness of operational cost measurement.

TCU could enhance its contributions to the dialogue on fiscal discipline by periodically assessing in-year progress reports to discern how adjustments to fiscal targets and plans affect the achievement of goals.

TCU could further assess whether adequate institutional procedures and safeguards are in place to ensure the quality, reliability and sustainability of budget forecasts and medium-term projections.

The recommendations to TCU (Table 3.1) are not meant to suggest a role in long-term projections or conducting fiscal forecasting, but instead how it can support their quality and use them for pointing to the sustainability of the programmes being funded. The proposals advance objectives 6 and 8 of TCU’s strategic plan. Objective 6 is to improve the availability and reliability of information of the public administration particularly of financial and performance related information (objective 6.2) and objective 8 is to encourage the monitoring an evaluation of performance of public administration, particularly to assess the effectiveness and sustainability of the financing of public policies (objective 8.4) (TCU, 2015a).

3.3. Encouraging more strategic and sustainable budgeting over the medium-term through audits of policy performance

TCU could encourage more meaningful medium-term perspectives in the budget by (a) auditing overall performance of multi-year sectoral plans, and (b) highlighting key findings on the alignment of annual budgetary allocations with multi-annual priorities, emphasising implications for entity-level planning.

Decades of OECD experience in working on good budgetary governance show a predominant trend in seeking a greater link between strategy and budget. Upstream allocation decisions of the budgeting process, including those decisions meant to be taken in the interests of citizens, determine which government priorities will or will not be funded. A mismatch between policy objectives and annual resource allocations can lead to unfulfilled strategic goals and objectives (OECD, 2014a; 2015b; 2016b).

Governments, particularly institutions within the Centre of Government (CoG) responsible for planning, often elaborate a vision or prioritisation that is relatively short-term. Medium- and long-term planning requires resources, capacity and skills that the CoG may not have. A long-term strategy has the benefit of setting priorities that span electoral cycles and thus that provide a general guideline against which governments should pursue, regardless of political platform. Brazil’s political actors have been able to achieve broad consensus on long-term policy objectives that has been useful in poverty reduction, growth stimulation and depolarization of policy conflicts that came about during prosperous economic times (Bertelsmann Stiftung, 2016). Yet, Brazil does not have a long-term plan at the federal level. Medium and long-term plans exist within select sectors, ministries and regions. Brazil’s commitment to the achievement of the Sustainable Development Goals for 2030 provides broad aims for the government over the long-term.

One of the major developments in budgetary governance since the turn of the century has been the increased focus on the multi-annual dimensions of budgeting. Medium-term perspectives in budgeting refers here specifically to the adoption of Medium-term Fiscal Frameworks (MTFFs) or Medium-term Expenditure Frameworks (MTEFs) that strengthen the ability of the government collectively, and the Ministry of Finance (Ministério da Fazenda, MF) in particular, to plan and enforce a sustainable fiscal path.3 MTFFs are increasingly relevant in a context where the multi-annual character of policies require an extended time horizon, such as large capital projects, new programmes, and organisational reform and restructuring (OECD, 2014a; 2015b, 2016b).

If properly designed, an MTEF should force stakeholders to deal with the medium-term perspective of budgeting and budgetary policies, typically covering a period of three to four years. It should also facilitate stakeholders in identifying the policy choices and trade-offs that will be necessary in light of the estimates of what would happen in the following three to five years based on unchanged policies. From the point of view of managers, in-line ministries and agencies, medium-term frameworks put them in a better position to plan their policies and operations, to the extent that they have some level of visibility regarding the likely level of funding beyond the next budget (OECD, 2014b).

Brazil’s PPA is not an MTEF4 , but shares characteristics with MTEFs of OECD member countries (OECD, 2014b). The aim of the PPA, like that of an MTEF, is to improve the quality and certainty of multi-annual fiscal planning (OECD, 2015a). The PPA includes a strategic dimension intended to guide the preparation of thematic programmes, which describe the government’s agenda in different areas, such as social security and public investment. In setting entity-level objectives, public managers are encouraged to link their entities’ goals to the main themes of the PPA. According to stakeholders within and outside of TCU, the PPA does not provide sufficient guidance or criteria for entities to plan.

The current PPA (2016-2019) seeks to enable the government to better demonstrate and facilitate an understanding of how the overall government strategy connects to objectives and goals at the entity level (MP, 2016a). The MP has played an important role, together with the Ministry of Finance, in trying to foster a link between planning and budget despite budget rigidity. However, in practice, there are misalignments that do not transfer the intended benefits of the PPA, as set out in the constitution, into reality. These limit the extent to which Brazil’s budgetary framework can allow for a medium- or long-term strategy and sustainability. Amongst other effects, the misalignment also makes it difficult for managers to know their programme targets and to accurately project performance and results (TCU, 2016a).

The PPA’s thematic programmes around important areas such as environment and regional development are meant to provide a framework for planning across sectors, such as in the National Education Plan (PNE). This reflects the strides made in recent years to adopt a more cross-cutting and forward looking view into its PPA – now structuring each 4-year PPA cycle around thematic outcomes. The Constitution spells out that the 3 budget laws – the PPA, the LDO and the LOA – should be aligned. In the absence of an explicit long-term plan at the federal level, long-term ambitions and indicators in Brazil are detailed through comprehensive sectoral plans, such as the National Education Plan (PNE). The PPA’s thematic programmes provide policy goals over the medium and long term. However, in practice, there are misalignments that do not transfer the intended benefits of the PPA, as set out in the constitution, into reality. These limit the extent to which Brazil’s budgetary framework can allow for a medium- or long-term strategy and sustainability. Amongst other effects, the misalignment also makes it difficult for managers to know their programme targets and to accurately project performance and results (TCU, 2016a).

Heavily funded programmes, which were incongruent with austerity measures, were evidence of a need to strengthen the link between planning and budget, even before the economic downturn (OECD, 2015c). The sustainability and strategic nature of Brazil’s budgetary framework is influenced by the rigidity and large proportion earmarked to particular expenditures. A 2009 assessment using the Framework for Public Expenditure and Financial Accountability (PEFA) found that during the execution of the budget, Brazil’s Executive restricts the release of funds for discretionary commitments and spending in a way that is often inconsistent with PPA. PEFA (2009) gave Brazil a grade C in ‘frequency and transparency of adjustments to budget allocations’. In-year adjustments, according to TCU, mean that the LOA ends up leading to adjustments in the PPA itself, instead of the other way around. Finally, TCU has detected a lack of synergy between individual sector-based plans and the PPA.

Medium-term budgetary planning yields a number of benefits for governments, ensuring that policies and programmes deliver results for citizens. For instance, one benefit of effective medium-term budgetary planning is that it should work to mitigate particular activities that may be considered as classic budgeting “games”, such as: i) capital projects being launched with changing operating costs; ii) programmes coming into effect late in the budget year, thus not exposing their full costs in the initial year; and iii) programmes’ spending implications not being fully reflected under the circumstances prevailing during the budget year, but will become so in out-years.

Another benefit of effective medium-term budgetary planning is in the flexibility it grants in spending, allowing governments to fund programmes that require multi-year funding in order to realise policy goals. Brazil’s budgetary framework allows for carryover of unused funds or appropriations from one year to another in order to facilitate multi-year budgeting for discretionary, operational and investment spending (OECD, 2014b). This flexibility in expenditure is important for multi-year programmes, when managed within reason, particularly in view of Brazil’s otherwise rigid budget. Brazil is the only country in OECD’s 2013 survey of select Latin American and Caribbean countries to allow line ministries to carry over unused funds without thresholds for both operational and investment expenditures (OECD, 2014). Of 32 OECD member countries, carry-over without threshold for operating expenditures is allowed in 34% of countries, and for investment expenditures in 43% of countries’ (OECD, 2014b).

TCU has been active in auditing budgetary planning, including the PPA, Budgetary Guidelines and law (LDO and LOA). As these budgetary instruments are created as laws, and not programmes, TCU’s corresponding work does not comment on the priorities chosen or merits within those laws, nor the recipients of the 35% ‘priority’ spending (OECD, 2003). Moreover, as an SAI, TCU does not audit the judgement behind the design of laws or policies. However, TCU can assess the reliability and achievement of objectives set within those laws. Many peer SAIs, like TCU, have been active in this space.

An OECD survey of 10 SAIs showed the extent to which they were active in assessing auditees against international budgetary standards. Nine of ten had assessed the adequacy of budgetary planning processes, including: to facilitate an alignment between budgeting and strategic objectives; to ensure reliability and quality of tools that underlie the budget; to manage public debt; to assess long-term sustainability; and to guide the multi-annual process of resource allocation. Ten out of ten SAIs surveyed had assessed the effectiveness of the procedures in place for managing, monitoring and overseeing financial allocations, including: the compliance and consistency of in-year budget reallocations; the adequacy of in-year budget execution reports (OECD, 2016a).

TCU recently released a comprehensive audit of Brazil’s budgetary system using OECD principles espoused in the Recommendation of the Council on Budgetary Governance (OECD, 2015a). One main component of the audit focused on principle 2 of the Recommendation, on the need to “Closely align budgets with the medium-term strategic priorities of government”. TCU found a weak alignment between the 3 budgetary documents (Box 3.1). The alignment, or misalignment, is found primarily in the lack of integration of the PPA’s thematic programmes in the LOA. The low degree of implementation calls into question the ability of the programme goals to be met in by the year end, and thus by the end of the current PPA. Other key findings of this recent TCU audit in this area are summarised in Box 3.1.

Box 3.1. TCU audit findings: misalignment between multi-annual priorities and annual budgets

TCU’s recent survey report provides a comparison of good practices in budgeting and established by the OECD and the International Monetary Fund (IMF). It outlines areas for improvement and good practices for Brazil’s public administration, providing recommendations to Brazil’s Ministry of Planning, Development and Management (Ministério do Planejamento, Desenvolvimento e Gestão, MP).

The key findings related to qualitative and quantitative elements of the budget were as follows:

  • “Brazil does not have a medium-term plan aligned with government priorities; in view of the discrepancies in the forecasts of macroeconomic parameters, and changes in primary and nominal result targets, in order to adjust them to government spending, it is not possible to say that, in Brazil, budgets are being managed with clear boundaries, credible and predictable in fiscal policy.” This element of analysis pertains to OECD recommendation 1: Manage budgets within clear, credible and predictable limits for fiscal policy.

  • “A lack of consistency between planning and budgeting, and the administration’s inability to achieve consistent and intact forecasts, results in the imposition of budgetary and financial constraints that are too high for sectoral bodies during the year. This failure has caused damage to the effective and efficient implementation of the actions of the LOA and the implementation of the PPA programs. TCU concluded that the Federal Public Administration is not adhering to the principles concerning the integrity of forecasts and budget execution”. This element of analysis pertains to OECD recommendation 10: Promote the integrity and quality of budgetary forecasts, fiscal plans and budgetary implementation through rigorous quality assurance including independent audit.

  • “In relation to the monitoring of budget implementation and evaluation of results, there is a lack of effectiveness indicators in the PPA; objectives of the plan have no indicators nor annual targets; there is no clear definition of those responsible for conducting the PPA objectives, especially those arising from cross agendas without national plans; the half-yearly monitoring proves to be inapposite to aid management; the current budget structure hinders the association between costs incurred and the results of policies; there is a lack of a co-ordination body responsible for oversight of budget execution and more effective accountability for results; and monitoring and evaluation processes are formal and not always feedback the planning system; We conclude from this that the Federal Public Administration is not adhering to the principles that address performance evaluation and cost-effective.” This element of analysis pertains to OECD recommendation 8: Ensure that performance, evaluation & value for money are integral to the budget process.

Source: Adapted from TCU (2016a), TCU Judgement 033.142/2015-7 Survey Report, http://bibspi.planejamento.gov.br/bitstream/handle/iditem/700/Acordao_TCU_948_2016.pdf?sequence=1)

To help the government address these challenges, TCU can develop its audit portfolio to improve budget processes and planning, and provide meaningful insights for budgetary decision making in the Congress. Given the governments focus on short-term priorities, as discussed, TCU’s audits and findings could continue to emphasise a perspective that looks beyond immediate objectives and challenges. This is particularly relevant in the coming years, as Brazil takes on the challenge of effectively designing and implementing policies to achieve the Sustainable Development Goals (SDGs). The SDGs, by their nature, have a medium to long-term horizon for the achievement of outcomes. In addition, the PPA is not as effective as intended in guiding annual allocations, making sectoral plans more critical for economic and social progress over the medium and long-term. Where sectoral plans exist, such as the National Education Plan (PNE) spanning from 2014 to 2024, they could feature more consistently as the focus of audits. As a result, TCU’s work on medium-tern budgeting would not solely be tied to the PPA.

Building on TCU’s existing work in this area, TCU could offer meaningful medium-term perspectives for improved budgetary planning in the following ways:

  • TCU could assess overall performance of medium and long-term sectoral plans, focusing on 1) adequacy and execution of annual allocations for their goal achievement, 2) the impact of any relevant thematic programme goals set out in the PPA, and 3) the implications of performance for achievement of related SDGs; and

  • TCU could continue to assess and communicate key findings on the alignment of multi-annual priorities with annual budgetary allocations, emphasising the importance of entity-level planning with a longer time horizon.

TCU could assess overall performance of medium and long-term sectoral plans, focusing on 1) adequacy and execution of annual allocations for achieving goals, 2) the impact of thematic programme goals set out in the multi-annual plan, and 3) the implications of performance for achieving the sustainable development goals.

Building on its current portfolio, as detailed below, TCU can induce help government to identify inconsistencies and gaps in formulation, implementation or evaluation of policies that may lead to falling short of sectoral or national goals. TCU’s audits have linked poor execution of thematic programmes with the inability of the PPA to allow for realistic annual allocations. For instance, TCU’s recent audit noted that the thematic programmes appearing in the PPA (2016-2019) such as Regional Development, Sustainable Land Management and Economics, Climate change and Urban Planning and Tourism, had executed less than 10% of the annual allocations in the first semester of 2016. Particular thematic programmes, such as Urban Planning, have executed less than 1% (TCU, 2016a). The low percentages of implementation are due to several factors, such as contingencies made by the Executive, lack of technical capacity of agencies to implement the policy, the occurrence of limiting factors unforeseen at the time was thought to politics, among others. TCU’s audit found it impossible to say, with few exceptions, that the LOA reflects the medium-term planning of government in view of the difficulties faced by agencies when executing policies.

TCU audit teams attempted to assess the values set out for in the PPA of 2012 to 2015 (Law 12,593 / 2012), with the values throughout the execution of the plan. TCU found that, in reality, PPA programme values were updated yearly in accordance with the annual appropriations in the PPA. In other words, instead of the PPA guiding the preparation of the LOA, the actual appropriations in the LOA fuel a review process of the PPA, removing the planning utility of the PPA, since the overall thematic programme values, which should guide the allocation of resources in the LOA are not used as a parameter to draw up the budget law (TCU, 2016a).

This inverse process, whereby the LOA inspires review and updating of the PPA, would suggest that ministry or sectoral plans end up having more impact on the achievement of policy goals in particular policy areas than the PPA does. This renders these sectoral plans critical for social and economic progress in Brazil. Accordingly, TCU has assessed Brazil’s national development policy from various angles, including its governance, indicators and alignment with the PPA (Box 3.2).

Box 3.2. The SAI of Brazil – audit for national development policy

Objective

A series of audits took place between 2009 and 2013 that focused on the national policy for regional development and aimed to understand and identify structural features that may be responsible for any successes and performance gaps. The dedication of effort and time in these audits was justified by the amount of public resources invested in the national policy for regional development (around BRL ten billion annually) and the importance of the issue to national development. This comprehensive work involved six audits and 214 business days at a cost of BRL 988 000 (approximately USD 325 000).

Scope and methodology

The scope included the whole governance structure for managing the national policy for regional development, including its formulation, rules, actors, monitoring and evaluations systems, transparency, plans and finance resources - as public funds dedicated to loans for entrepreneurships with favourable interest rates, tax expenditures and budget expenses.

To capture a systemic view of the policy, TCU included the following: Usage of many teams for auditing the various public agencies and finance tools, distributed by the Brazilian regions elected by the policy, co-ordinated by a common guidance and audit questions provided by the preliminary audit; assessment of compliance between the actions and the legal conception of the policy; usage of many performance audit tools (indicators analysis; problem tree method; mapping the logical model of the policy; stakeholder analysis; survey; consultation to experts); a study of international models, together with the executive bodies and agents responsible for the policy management; and a strong interaction and open debate with the executive bodies and agents responsible for the policy management

The main findings (and related recommendations) include:

  • The policy had not been assessed since it started.

  • The predicted monitoring and evaluation system had not been built.

  • There were no appropriate indicators of performance to guide the management and ensure transparency for the citizens.

  • The formulation of the policy did not consider mechanisms to fight the major causes of the problems.

  • There was no strong alignment between the diagnostic that guided the policy formulation and the regulation for using the majority of finance resources.

  • There was a lack of co-ordination between the federal agencies concerning the policy.

  • There was a lack of co-ordination between the federal, state and local level concerning the policy planning and implementation.

Many measures were adopted after the recommendations, these are listed below:

  • The responsible government body promoted an assessment of the policy that covers the time between its formalisation and the year after the first audit recommendations.

  • There was a stronger investment in developing the monitoring and evaluation system.

  • A new set of indicators is being used and others are being developed by the government agencies.

  • A new conception for the policy was formulated after intensive stakeholder participation across the country. This led to a new project of law and regulation for the policy that considers the need to improve the governance of the policy, especially regarding co-ordination issues.

Sources: TCU (2013a), Audit on the National Policy for Regional Development in the Multi-Annual Plan (PPA) and the Annual Budgets (TC 002 976 / 2013-7) http://www.tcu.gov.br/consultas/juris/docs/conses/tcu_ata_0_n_2013_38.pdf; TCU (2012a): Audit of the Accounts of the President of the Republic, (Contas do Presidente da República), 2012, http://portal2.tcu.gov.br/portal/page/portal/TCU/comunidades/contas/contas_governo/Contas2012/index.html; TCU (2012b), Monitoring of Recommendations of the Preliminary Audit (TC 015 133/2011-7) http://www.tcu.gov.br/Consultas/Juris/Docs/judoc/Acord/20120124/AC_0042_01_12_P.doc; TCU (2012c), Performance Audit on the Indicators of the National Policy for Regional Development (TC 037 079 / 2012-3) https://contas.tcu.gov.br/etcu/AcompanharProcesso?p1=37079&p2=2012&p3=3; TCU (2011a): Audit of the Accounts of the President of the Republic, (Contas do Presidente da República), 2011, http://portal.tcu.gov.br/tcu/paginas/contas_governo/contas_2011/index.html; TCU (2011b), Performance Audit on the Logic Model and Goals of the National Policy for Regional Development (TC 033.934.2011-8); http://www.tcu.gov.br/Consultas/Juris/Docs/judoc/Acord/20141211/AC_3564_49_14_P.doc; TCU (2009), Preliminary Audit on the National Policy for Regional Development (TC 013.705.2009-6); http://www.tcu.gov.br/Consultas/Juris/Docs/judoc%5CAcord%5C20091204%5C013-705-2009-6-MIN-JJ.rtf

In future audits, TCU could assess the interplay between sectoral goals, and overlap with related PPA thematic goals and the goals that Brazil has sought in signing for the SDGs. In support of such an approach, TCU could build on its experience in auditing sectoral plans in other areas, such as the National Education Plan (2014-2024), which spans beyond the PPA (2016-2019), but will end before the SDG goals are to be met (2030). In addition, SDGs is one element not considered in the series of audits of the national development policy.

In view of the aforementioned TCU findings, TCU could also assess adequacy of annual allocations for achieving government-wide goals. Where single sectoral plans exist, TCU can use this as a basis of analysis. TCU could ask whether the annual allocations reflect the government-wide priorities and thematic programmes set out in the PPA. TCU could also ask whether public managers have a sense of whether funding proposals and plans of particular sectors are linked to the PPA, or to one another, and are based on realistic funding projections. The 2009 PEFA report found a weak link between planning and budget, noting that sector strategies are not well costed and are not related to the aims set out in the PPA and LDO (PEFA, 2009).

Where no sectoral plan exists, TCU could assess a set of plans that cut across the sector or with other related sectors. For instance, this could include assessing objectives in health that touch upon education, or vice-versa. This would have the added benefit of allowing TCU to deepen its understanding on the policy interactions and policy effects within sectors and between sectors (see Chapter 2).

TCU could continue to assess and communicate key findings on the alignment of multi-annual priorities with annual budgetary allocations, emphasising the importance of entity-level planning with a longer time horizon.

Given the extensive activity that TCU has already undertaken to examine the alignment, or rather the misalignment, of the PPA, TCU could benefit from making clearer the importance of their findings for better budgetary governance. For instance, TCU could consider holding targeted seminars with the executive and legislative branches – particularly with Centre of Government entities with a responsibility for oversight of the government agenda.

In addition, TCU could amplify its focus during its audits with regards to the impacts the current PPA has on annual planning at the ministry level. A recent TCU audit demonstrated the extent to which sectoral bodies and the Federal Budget Secretariat (Secretaria de Orçamento Federal, SOF) discuss the policies of the PPA to be prioritized in the LOA of each year. Fifty-eight percent of sectoral bodies claimed that they always or almost always had this discussion, while 42% of agencies said that they sometimes, rarely or never had this discussion (TCU, 2016). These numbers suggest greater opportunities to improve such interactions. Further, as discussed below, the projections prepared for the LDO are often overestimated, and thus mean that entities plans are also overly ambitious and often need to be downsized. The questions in Box 3.3 below could help TCU to conduct audits that delve into the impact of the PPA, LDO and LOA on entity planning.

Box 3.3. Potential questions in assessing PPA, LDO and LOA’s impact on entity planning

The following questions can inform an assessment of how government-wide budgetary provisions enable annual planning at the ministry level, so that strategies and activities are goal-oriented, realistic and measurable.

  • Is the budget process used to align national priorities, reconcile sectoral objectives and foster policy integration?

  • What efforts are being made to re-structure the budgetary process to reflect the increasing cross-cutting nature of policy-making?

  • Why are the predetermined objectives and indicators important? How are indicators/targets used to manage service delivery?

  • In what ways are the policies and their associated resource allocations likely to reinforce each other for achieving sustainable development objectives?

  • Have ex ante evaluations of capital and current expenditure programmes been undertaken?

Source: OECD (2016a), Supreme Audit Institutions and Good Governance: Oversight, Insight and Foresight, OECD Public Governance Reviews, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264263871-en; OECD (2015d), OECD (2016b), Better Policies for Sustainable Development 2016: A New Framework for Policy Coherence, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264256996-en.

The example of the Auditor General of South Africa (AGSA) and its activities to fulfil its mandate to undertake an annual Budgetary and Strategic Review can also be instructive for TCU. Although this activity is formally considered as a financial and compliance audit, it also incorporates a broader assessment of pre-determined objectives laid out in the budget. Specifically, AGSA reviews the relevance and measurability of pre-determined objectives and the measurability of targets to help ministries understand shortcomings in their planning. The Auditor General presents findings to relevant parliamentary committees (case study Box 3.4).

Box 3.4. Audit of strategy and budget in South Africa

In South Africa the portfolio committees of parliament and provincial legislatures undertake reviews, recommendations and reports on budgets before they are submitted to parliament and the legislatures for approval. In this process, the Auditor General of South Africa plays an important role in the budgetary and strategic plan review that uses the insight gained from the previous year’s financial and compliance audits. The review considers each department’s financial accountability records, assessments of internal controls and delivery on service objectives to assess the budgets audit preparations.

Specifically, procedures of the budget process are incorporated into the year-end compliance audits. AGSA reviews compliance with the Public Financial Management Act of South Africa in the areas of current annual budgets, virements, rollovers, adjustments and reporting. In addition, AGSA also performs procedures on predetermined objectives through interim auditing.

  • In assessing the measurability of objectives, AGSA asks: Does the indicator/measure have a clear unambiguous definition? Is the indicator/measure defined so that data will be collected consistently? Based on discussions held with senior management and relevant information inspected, is the indicator/measure well-defined? Is it possible to verify the processes and systems that produce the indicator? Based on discussions held with senior management and information inspected, is it possible to conclude whether the indicator/measure is verifiable?

  • In assessing the measurability of targets, AGSA asks: Is the planned target specific? Is the planned target measurable? Is the planned target time-bound?

  • In determining the relevance of objectives, AGSA interviews relevant senior managers/officials to determine how indicator/measurement relates logically and directly to an aspect of the institutions mandate, and the realisation of strategic goals and objectives. The following questions are used as the basis of the discussion: Why are the predetermined objective and indicators important? How are the indicators/targets used to manage service delivery? AGSA then provides a conclusion.

These procedures on the budget process are then incorporated into a presentation to parliament’s and provincial legislatures’ portfolio committees.

Source: OECD (2016a), Supreme Audit Institutions and Good Governance: Oversight, Insight and Foresight, OECD Public Governance Reviews, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264263871-en

3.4. Strengthening performance-based budgeting with evidence and findings from audits

TCU could help to improve the reliability of evidence and information for making performance-based budgetary decisions through assessments of key areas, such as expenditure programmes funded by earmarks and the effectiveness of operational cost measurement.

Difficult budgetary decisions require objective and factual information on what works well and what does not. In 2015, the OECD recommended that Brazil’s policy makers review the earmarking of public revenues and mandatory spending floors with a view towards making public spending more responsive and flexible to the policy priorities (OECD, 2015c). These proposals reflect international standards and good practices. For instance, OECD’s recommendation on good budgetary governance stipulates that performance, evaluation and value for money be integral to the budget process (OECD, 2015a), including:

  • evaluating and reviewing expenditure programmes – including associated staffing resources as well as tax expenditures – in a manner that is objective, routine and regular to inform resource allocation and re-prioritisation both within line ministries and across government as a whole (Principle 8d); and

  • taking stock, periodically, of overall expenditure (including tax expenditure) and reassessing its alignment with fiscal objectives and national priorities, taking account of the results of evaluations; noting that for such a comprehensive review to be effective, it must be responsive to the practical needs of government as a whole (principle 8g).

In recent years, OECD and other countries have increasingly sought to develop a focus on the results achieved with the appropriations allocated through various approaches under the heading of “performance budgeting.” Performance budgeting frameworks are widely found in OECD countries and are generally flexible in nature. In general, the different policy sectors aim to use performance information for setting allocations for programmes, line ministries and agencies, for strategic planning, for proposing new areas of spending, and for a reduction in spending.

In reality, there is currently no settled consensus on the optimal way of using performance information within the budgeting context. The issues arising range from the level of information being used, the problems inherent in measurement of public performance and concerns that performance budgeting would displace other mechanisms for accountability and monitoring of performance.

A 2013 OECD survey showed that, generally, when performance targets are not met, the consequences for managers of ministries can be limited. This suggested that performance information was not easily transformed into action, as was the case in Brazil (Table 3.2). More recently, case studies of 5 OECD member countries (Canada, Ireland, the Netherlands, the United Kingdom and the United States), demonstrated that the performance public managers are increasingly evaluated with use of performance information in mind (OECD, 2016b).

Table 3.2. Performance budgeting practices at the central level of government (2013)
Latin America and the Caribbean

Existence of standardised performance budgeting framework for central government

Consequences for poor performance

No consequences

Organisational or programme’s poor performance made public

More intense monitoring of organisation and/or programme

Budget decreases

Argentina

Yes

Barbados

Yes

Brazil

Yes

Chile

Yes

Colombia

No, Line Ministries/Agencies have their own

Costa Rica

Yes

Dominican Republic

No, Line Ministries/Agencies have their own

..

..

..

..

Ecuador

Yes

El Salvador

No, Line Ministries/Agencies have their own

..

..

..

..

Guatemala

Yes

Honduras

No, Line Ministries/Agencies have their own

Mexico

Yes

Panama

Yes

Paraguay

Yes

Peru

Yes

Total

● Always

3

3

2

0

⚪ Usually

2

1

5

0

☉ Occasionally

1

2

2

3

❍ Rarely

3

5

3

5

⦸ Never

4

2

1

5

x Not applicable (information not produced or negotiations do not take place)

2

2

2

2

.. Not available

2

2

2

2

Source: OECD (2014b) ‘Government at a Glance: Latin America and the Caribbean 2014,’ Country Fact Sheet, OECD Publishing, Paris, https://www.oecd.org/gov/brazil_en.pdf Accessed 30 Sep 2016.

Brazil uses elements of performance-based budgeting (OECD, 2014b; IBP, 2016; Bertelsmann, 2016). However, the quality of the information used as inputs into the budget (underlying assumptions) and the results reported against the budget are questionable, according to TCU. There is oversight from constitutionally appointed bodies, such as TCU and the Ministry of Transparency, Supervision and Control (Ministério da Transparência, Fiscalização e Controle, CGU), as well as mechanisms that legally guarantee citizen engagement and feedback on programmes and services. In addition, there is a law (Complementary law 101/2000) which establishes a council to assess the performance of agencies and actors in the formulation of the budget, and the Senate is obliged to conduct annual evaluations.

In practice however, there are concerns with the quality of information and its meaningful use in making budgetary decisions (IMF, 2014; TCU, 2016a). Moreover, Brazil’s LOA and LDO do not identify the budgetary impact of new policies, making it difficult to anticipate implications for the budget (IMF, 2014). When performance targets are not met, consequences for managers of ministries can be limited, as is the case in Brazil (OECD, 2014b). A recent OECD report on trends in performance-based budgeting found that general programme evaluations can be useful, but lack a budget focus. It suggests:

“Frequently, evaluation is designed and used to assist programme managers better understand the performance of their programme to comprehend how to do better given resource and policy constraints. These perspectives are legitimate frameworks for analysis, yet this process rarely generates the sort of evidence most useful to budget officials – data on the relevance of a programme, an understanding of the causal relationship between financial inputs and outputs/outcomes, and analysis of the efficiency and economy with which programmes deliver performance” (OECD, 2016b).

In decentralised systems, it is rare for a central budget authority to conduct evaluations themselves and instead rely on evaluation of ministries and programme managers. Thus, if evaluations are not producing results that are comparable, the evaluations become less useful from a budgetary perspective. To date, reviews that have a specific budget focus – such as spending reviews – tend to provide more focused evidence that can be input into the budgetary process (OECD, 2016b).

A further issue is that evaluations often lack commentary on efficiency or effectiveness, as well as the success or shortfalls in meeting programme expectations. Instead, evaluations are prone to equivocal explanations that, again, make it difficult for budget officials to take a horizontal, comparative view on performance implications for the budget (OECD, 2016b). Such expectations and pitfalls of performance-based budgeting frameworks will be useful for Brazil’s government to keep in mind in this first year of the “Committee on Monitoring and Evaluation of Federal Public Policies” (CMAP), established by the federal government in April 2016. Established as an inter-ministerial committee, CMAP seeks to improve actions, programs and public policies, as well as the application of resources and the quality of public spending (Internal ordinance Number 102) (MP, 2016b; 2016c; 2016d; 2016e). It aims to generate results from across the administration that can better inform performance, as well as to serve in the elaboration and execution of the budget. Learning from OECD member countries, the CMAP may benefit from integrating budgetary-focused reviews into its basket of evaluative tools.

SAIs have been attempting to link results of policies and programmes to the budgetary assumptions and decisions that underlie them in order to promote more informed and evidence-based decisions. In a survey of ten SAIs, eight had assessed whether there are adequate mechanisms to generate and capture quality performance information during the phase of budget execution (OECD, 2016a). TCU’s own work on governance reflects this approach. One example is TCU’s systemic report of the labour function (FISC-Trabalho) that looked at the allocation of resources to labour policies, the subsequent monitoring of indicators and progress, or lack of, with regards to previous audits. The audit pointed to sustainability issues with the Support Fund for Workers (Fundo de Amparo ao Trabalhador), and an imbalance between revenue and expenditure (TCU, 2015c).

TCU has also looked at elements of performance and value-for-money elements in budgeting through other activities. For instance, TCU undertook a monitoring report on the procedures for drawing up the PPA for (2008-2011), with emphasis on the analysis of performance indicators linked to the various programs that make up medium-term budget. The work aimed to map out a diagnosis of the main problems and challenges faced by the planning system involved in the PPA design task (TCU, 2009a).

Linking outcomes to budgetary decisions is a challenging pursuit, but doing so is critical for developing a clear picture of Brazil’s federal performance year-on-year (TCU, 2016a). More reliable and relevant performance information, demonstrating what is working and what is not, would further help Brazil to determine trade-offs based on reliable evidence. This also helps to protect the budgeting processes from special interests, thereby creating trust in government spending decisions. TCU’s audit reports can serve as critical inputs into the process. To effectively inform budget deliberations and resource allocations, TCU’s report should be published in a timely, relevant and objective manner, in accordance with international standards (INTOSAI, 2013). In addition, TCU could further help to improve the reliability of evidence and information for making performance-based budgetary decisions. Areas TCU could consider as a focus of future audit work to this end include the following:

  • The usefulness of budget reviews and evaluations for decision-making: TCU could look at existing reviews or evaluations for their link to the budget, as a separate endeavour to assessing evaluations for their reliability in general (discussed in Chapter 5). A 2014 IMF review of Brazil’s budgetary framework recommended the introduction spending reviews that would encompass mandatory expenditures (IMF, 2014). TCU could also assess the extent to which CMAP’s provisions for gathering budgetary related results will yield informative and reliable findings.

  • Reliability of information of policies related to earmarking of public revenues: The government has produced ad-hoc evaluations on tax expenditures, but the government does not provide systematic reviews or an overarching view of results obtained through these increased expenditures. In 2011, Brazil’s tax revenue was highest amongst Latin American and Caribbean countries, amounting to 35% of GDP (OECD, 2014b), but much of it earmarked and limits the flexibility of government to allocate spending between areas (OECD, 2015). These tax-related expenditures are approved by Law but by different legal instruments and at different times than the LOA. According to TCU officials, these are also not under same scrutiny by Congress. In 2015, the OECD recommended that Brazil’s policy makers review the earmarking of public revenues and mandatory spending floors with a view towards making public spending more responsive and flexible to the policy priorities (OECD, 2015c). As mentioned, the IMF recommended that Brazil introduce spending reviews that encompassed mandatory expenditures (IMF, 2014).

  • Reliability of measurement of operational costs: Another area for focus could be the periodic assessment of government’s evaluations of its operational costs. This requirement was foreseen in the fiscal responsibility law of 2000. The Ministry of Finance (MF) began developing a system for measuring costs of activities as was predicted approximately 4 years ago. While the implementation has been gradual, there may be an opportunity for TCU to assess the quality of any existing reports as well as of the underlying review process itself. This could act to accelerate the process, anticipated in 2000. This process will be an important means of supporting budgetary trade-offs made to operational expenditure. TCU may be inspired by the Netherlands Court of Audit for instance (Box 3.5), which found that a merger, intended to produce savings for the government by cutting operational costs, would fail to materialise because of faulty projections on which the decision for the merger was based. This is a good example of SAIs using foresight to highlight the need for quality, objective evidence for more sustainable decisions.

Box 3.5. The SAI of the Netherlands – linking evidence-based decisions with efficiency gains

Audit Objectives

The Netherlands Food and Consumer Product Safety Authority (NVWA) was created on 1 January 2012 through the merger of three inspectorates: the General Inspectorate (AID), the Netherlands Plant Health Authority (PD) and the original Food and Product Safety Authority (VWA). The government had foreseen two opportunities to make savings with the new supervision methods of the NVWA:

  1. The three merger partners’ development and the introduction of new supervision methods was looked upon as a potential source of cost savings. By using risk-based working methods and giving more responsibility to the private sector, the NVWA would need fewer people.

  2. As inspections, knowledge development, personnel and premises/operational management could be combined following the merger, economies of scale were anticipated.

The Court of Audit assessed whether the merger between the VWA, the AID and PD was evidence based, and whether it produced the desired efficiency gains by looking at 1) the cost savings ex post; and 2) the underlying premises of the merger. The audit took 650 working days.

Audit Outcomes

The audit determined that the government had failed to make a thorough analysis of the pros and cons of the merger before it decided to merge the inspectorates in 2007. The government had based its decision on general considerations and assumptions about potential efficiency gains. The conditions under which new supervision methods could cut expenditure, how much money would be saved and over what time period, had not been studied in advance. The inability to apply the new methods of supervision across the board meant that foreseen major savings were not realised in recent years. The new supervision methods are also unlikely to produce significant savings in the next four years because they will first require the investment of time and money. The expected economies of scale from the merger also proved too optimistic. Foreseeable risks, for example in the field of IT, were not taken fully into account. Furthermore, the overlap between the three organisations was never quantified, but was estimated to never be greater than 13%.

The considerable savings expected of the merger have so far failed to materialise, resulting in inevitable consequences for the feasibility of the planned savings. The intended structural saving of €50 million as from 2012 has not been achieved. The target of a further saving of €31.6 million as from 2018 was lowered by €11.8 million in 2013. The Court deemed it unlikely, however, that even this lower savings target will be achieved.

Following the audit, the State Secretary for Economic Affairs began implementing the NCA’s recommendation to consider social risks and human resources before taking any decision on further changes to the NVWA’s tasks and budget. The SAI received no response on its recommendation to monitor the achievement of savings, and has since encouraged the ministry to provide a clear overview of the initial budget, the savings targets and the price level in the annual budget and accounts.

Good pracices used

This was an innovative performance audit for the NCA as it not only evaluated the results of the decision (in this case, the savings) but also looked at the assumptions for the decision (the merger). Auditing if the assumptions of a decision were plausible helps to determine the causes of unsatisfactory results. Analysing the wording of relevant documents, figures, and interviews with those directly involved, broke down general concepts (such as “synergies”) on which the decision was based into more operational concepts. The audit included a quantification of the overlaps – or lack of synergies – that existed between the merged entities.

At a very basic level, the Court found it useful to study the figures of the intended budget cuts. There appeared to be considerable uncertainty within the Ministry of Economic Affairs about the reference level from which the cuts had to be realised. Moreover, the effect of inflation is important in such long-term policy intentions and was not made explicit. Determining the causes helped to strengthen the Court’s recommendations.

Lessons learned

In this study the Court tried to uncover whether the new organisation (NVWA) had enough resources for their tasks and, to this end, conducted many structured interviews with staff. At the end of the study, the Court considered much of the interview information as unreliable. The Court now views the reliability of information from interviews as a methodological problem to be solved by further integrating other scientific approaches with qualitative analysis.

Sources: Adapted from OECD (2016a), Supreme Audit Institutions and Good Governance: Oversight, Insight and Foresight, OECD Public Governance Reviews, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264263871-en; NCA (2013), Supervision of the Netherlands Food and Consumer Product Safety Authority Following the Merger, www.courtofaudit.nl/english/Publications/Audits/Introductions/2013/11/Supervision_of_the_Netherlands_food_and_consumer_product_safety_authority_following_the_merger.

More consistent evaluation by TCU in these areas would help to make off-budget expenditures or expenditures under different oversight processes, more transparent. Due consideration should be given in advance to the oversight procedures that have been established, and whether there is an opportunity for this to be strengthened before TCU engages.

TCU may be further inspired by the SAIs of Canada, Korea and the Netherlands in which the SAI assessed workforce sustainability of government plans to manage population ageing, which will also become an issue for Brazil (Box 3.6).

Box 3.6. The SAIs of Canada, Korea and the Netherlands – using foresight to assess workforce sustainability and population ageing

In 2012, the Netherlands Court of Audit undertook a review of Human Resource Management that focused on the strategy and planning for central government personnel. The audit analysed the preparedness of central government for increases in retirement and turnover in personnel predicted between 2012 and 2022. The Court of Audit concluded that the lack of a strategic personnel plan significantly undermined its ability to anticipate and oversee the consequences of personnel changes. Planned spending cuts to the civil service between 2012 and 2014 compounded the need for strategic planning to ensure that jobs necessary in the future were not cut. Lack of planning prevented central government from steering the development of staff and responding to evolving needs.

In 2012, the Korean Board of Audit and Inspection conducted an audit on the management practices of the Government Employee Pension Service (GEPS) and Teacher’s Pension (TP), with the goal of determining the stability of the systems and restoring public trust. As a result it found the deficiencies in asset management and operations of the GEPS and TP, including inaccurate measuring of the value of assets, overpayment for management services compared to other pension systems and overstated revenues. The audit also found that ineligible recipients indeed received pension and severance payments. BAI provided recommendations for the GEPS and TP to better manage its assets, and notified the relevant ministries of ineligible recipients of pension payments so they could begin actions to recollect the money.

It found issues with the status of the assets managed by these systems, including inaccurate measuring of the value of assets held, overpayment for management services compared to other pension systems, and overstated revenues. The audit also found that some persons who were not eligible for the pension were allowed to receive pension and severance payments. The Board of Audit and Inspection provided recommendations for the GEPS and TP systems to better manage its assets, and notified the relevant ministries of ineligible recipients of pension payments so that they could begin to recollect the improper disbursements.

The Auditor General of Canada delivered its Fall Report in 2012, which included a chapter on the long-term fiscal sustainability of Canada. It looked particularly at the growing proportion of elderly Canadians and the resulting pressure on the health care and pension systems. The Auditor General focused on whether Finance Canada had analysed and publicised these long-term sustainability issues, as well as made decision makers aware of their findings. The Auditor General concluded that Finance Canada had made long-term sustainability analyses where appropriate, but made recommendations regarding the need to: 1) perform analyses of the overall long-term fiscal implications for the federal government of budget proposals, 2) inform the Minister of Finance before budget measures are decided and approved, and 3) publish overall long-term fiscal sustainability analyses for the federal government, as well as periodically publish an analysis for all governments combined (i.e. federal, provincial, territorial and municipal) to give a comprehensive perspective of Canada.

Sources: Adapted from OECD (2016a), Supreme Audit Institutions and Good Governance: Oversight, Insight and Foresight, OECD Public Governance Reviews, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264263871-en; NCA (2012), Central Government personnel: strategy and planning, Netherlands Court of Audit, the Hague, www.courtofaudit.nl/english/Publications/Audits/Introductions/2012/05/Central_government_personnel_strategy_and_planning; OAG (2012), 2012 Fall Report of the Auditor General of Canada, Office of the Auditor General of Canada, Ottawa, www.oag-bvg.gc.ca/internet/English/parl_oag_201210_07_e_37351.html#hd5a.

3.5. Assessing in-year progress reports to support the dialogue on fiscal discipline

TCU could enhance its contributions to the dialogue on fiscal discipline by periodically assessing in-year progress reports to discern how adjustments to fiscal targets and plans affect the achievement of goals.

With the introduction of the Fiscal Responsibility Law (Lei de Responsabilidade Fiscal, LRF) in 2000, Brazil moved towards a more established pattern of mid-term fiscal management that would provide more stability.5 Further specifications on fiscal rules and responsibility were made in the supplementary Law 229, originating in 2009 and being updated in 2015, which outlines norms on planning, budget control and public accounting for public sector management (Brazil Senate, 2015). The requirements outlined in the LRF essentially act as fiscal rules, which are concrete indicators of fiscal management.6

Fiscal rules can play an important role in credibility of national budgeting by constraining politically-motivated spending to improve macroeconomic stability in the short-term, while contributing to long-term fiscal sustainability. Further, fiscal rules should make it easier to understand and to anticipate the government’s fiscal policy course throughout the economic cycle (OECD, 2015d). Brazil’s expenditure commitments, budget allocations, and revenue projections tend to be adjusted fluidly in year, weakening the institutional link between planning and budgeting in practice that is set out in the Constitution (IMF, 2014; PEFA, 2009; TCU, 2016a). The International Monetary Fund (IMF) found “the Constitutional powers of Congress to increase revenue estimates and the President’s powers based on the LRF to issue decrees to reduce expenditures regularly lead to an inefficient and time-consuming budget process” (IMF, 2014).

Periodic in-year reporting on budget execution and revision of budget estimates has helped OECD member countries to detect and manage the impact of economic developments and other factors on the budget in a timely manner. Such reports identify any changes to the assumptions underlying the budget, as well as other relevant events that have transpired during the fiscal year. Thus, quality in-year reporting becomes important to ensure that entities can manage in accordance with fiscal adjustments, and continue to work towards the achievement of goals and objectives. In Brazil, executive entities provide reports on fiscal targets and compliance with fiscal rules bimonthly and every quarter, marking points of control, or “pontas de controle” (MP, 2016b). The LRF requires the Executive to report to the CMO every 4 months to explain the evolution of fiscal objectives. They are sent to CGU for review. The LRF also mandates that Brazil’s TCU (and TCEs) audit the enforcement of the law’s procedural rules.

There are fewer TCU examples targeted to this area of budgetary governance when compared to the other areas explored in this chapter. TCU touches on fiscal discipline as part of its accounts examinations process. It also featured tangentially in the review of budgetary governance, explored at length in recommendation 3.1.

Given the importance of in-year reporting and the potential of in-year adjustments to affect strategic goals, TCU could audit in-year progress reports to understand how adjustments to fiscal assumptions are affecting entity and programme outcomes at the end of the year. Specifically, such audits could help TCU and audited entities to understand how the quality and decision making related to in-year reporting and adjustments to fiscal targets affect the annual or multi-annual goal attainment of the specific entity or programme. This work would allow for real-time feedback on a key governance mechanism, so that additional adjustments could be made, as needed, to ensure the success of policies and programmes.

TCU would be well placed to contribute further to the discussion on fiscal discipline and responsibility. It can do so with both Congress and the Executive. Indeed, part of TCU’s impact in strengthening more sustainable budgeting rests on improving communication particularly with the CMO. Further, TCU could consider more frequent communication of key findings with central entities involved in budget and planning (MP and MF).

3.6. Improving audits to support long-term fiscal sustainability

TCU could further assess whether adequate institutional procedures and safeguards are in place to ensure the quality, reliability and sustainability of budget forecasts and medium-term projections.

Public fiscal sustainability is the ability of public governments to maintain public finances at a credible and serviceable position over the long run, in light of the prevailing mix of spending and revenue policies. Prudent macroeconomic assumptions, sensitivity and risk analyses, as well as appropriate fiscal rules, are factors that can help to orient spending and revenue policies within sustainable levels in the short and medium term.

Long-term fiscal projections can play a useful role in identifying the expected future costs and associated debt of current policies in light of forecasted demographic and economic developments. In most OECD countries, the Central Budget Authority (CBA) is responsible for long-term fiscal projections. In some countries this responsibility is located in other departments of the Ministry of Finance other than the CBA or in other core ministries. Some OECD governments also present long-term fiscal challenges in a cross-generational perspective, in order to distribute benefits and cost in a reasonable way over generations.

In Brazil, projections are prepared jointly by the MP and the MF. Any ex-ante comparison of the government’s macroeconomic and fiscal forecasts with those of other institutions goes unpublished (IMF, 2014). Past assessments of Brazil’s preparation of multiyear fiscal forecasts and functional allocations have identified room for improvement (PEFA, 2009). Despite the strong institutional framework for creating projections, adjustments are made to the revenue projections and discretionary spending during the Congressional approval process (Hallerberg et al., 2009; PEFA, 2009; IMF, 2014; TCU, 2016a). The IMF has recently suggested that Congress should be required to use forecasts prepared by independent parties, which are perceived to be more objective in the event the Congress rejects the estimates of the MP and MF. This could also help to ensure that increases in revenue estimates by Congress, in exercise within its constitutional powers, are measured and evidence-based.

In Brazil, bodies of expertise that could provide insight on fiscal sustainability, apart from the MF, have come and gone. Establishment of an Independent Fiscal Institution (IFI) is one way in which OECD countries are trying to improve the credibility of budgetary forecasts and enhance independent oversight with regard to fiscal performance. A proposal to establish an IFI in the Brazilian Senate is currently incorporated into draft law number 65.7 The creation of IFIs reflects a trend of invest in resources and institutions that facilitate Parliamentary engagement in the budget process. TCU, and other bodies in Brazil, can look to OECD’s Recommendation of the Council on Principles for Independent Fiscal Institutions (OECD, 2014c), for both guidance in its establishment or criteria against which an eventual IFI could be evaluated.

An SAI is another institutional mechanism for supporting adequate institutional procedures and safeguards for quality economic and budgetary forecasts. OECD’s “Supreme Audit Institutions and Good Governance: Oversight, Insight and Foresight” (2016a) demonstrates how SAIs are contributing to budget sustainability. They are active in using foresight to assess the reliability of fiscal projections in order to ensure that underlying assumptions of the budget are sound. Nine of 10 SAIs, including TCU, are looking to the reliability and quality of tools that underlie the budget. Eight of 10 had assessed the adequacy of other mechanisms for determining the quality and reliability of budgetary forecasts and fiscal plans, and managing accordingly (OECD, 2016a).

TCU is responsible for assessing compliance of entities with the Fiscal Responsibility Law, and its more traditional role has been to monitor fiscal targets. TCU’s recent work in assessing the budgetary framework against OECD’s Recommendation of the Council on Budgetary Governance looked at the ability of public administration to achieve consistent and intact budgetary forecasts. Select examples of TCU’s work in this area include:

  • Evaluation of the revenue forecast of the year 2013: Seeks to verify the adherence of the statements presented to the constitutional and legal requirements, particularly the Fiscal Responsibility Law (TCU, 2013b).

  • Audit of financial position of government: Follow up report to check that the financial statements of Ministry of Finance reflect, in all material respects, the financial position at the end of year (TCU, 2015d).

  • Audit on the reliability of the budgetary forecasts and fiscal plans like revenues, expenditures, fiscal targets, national economic forecasts and central government primary balance (TCU, 2015e).

  • Survey report to identify the criteria used to forecast macroeconomic indicators that are used for preparing the Annual Budget Law, to compare the predicted values with the realized and to check for possible discrepancies and effects on the budget execution and government finances (TCU, 2014a).

  • Evaluation of the revenue forecast of the year 2014: Seeks to verify the adherence of the statements presented to the constitutional and legal requirements, particularly the Fiscal Responsibility Law (TCU, 2014b).

  • Compliance and monitoring report, Follow-up: Revenue forecast evaluation of the federal budget bill 2015, to assess the estimates of revenue contained in the Budget Bill of the Union for 2015. This report showed that projected revenue estimates did not match the market expectations (TCU, 2014c).

The recommendations are not meant to suggest a role for TCU in long-term projections or conducting fiscal forecasting, but instead how it can support their quality and use them for pointing to the sustainability of the programmes being funded. In fact, TCU’s future audits could delve further into the subject, to assess whether Congress specifically is equipped with the institutional capacity, including independent professional advice and critique, to meet OECD principle 10 to “promote the integrity and quality of budgetary forecasts, fiscal plans and budgetary implementation through rigorous quality assurance including independent audit” (OECD, 2015a).

In addition, future TCU audits could use fiscal projections to ascertain progress or advancements in the quality of forecasts over time, and to more systematically assess sustainability of programmes, as has been done by the SAI of Mexico (Auditoría Superior de la Federación), which assessed the assumptions on which decisions related to the deficit were made. As a starting point, ahead of the establishment of the IFI, TCU could analyse and collect key findings from audits already conducted in order to identify the processes and conditions that produce quality fiscal targets. In addition, according to external stakeholders, TCU could integrate these conditions as criteria into its audits. Other approaches include those of the SAIs of Canada, the United Kingdom and the United States (Box 3.7).

Box 3.7. SAI approaches to assessing fiscal sustainability

Canada’s Office of the Auditor General (OAG): Auditing long-term sustainability

Canada’s OAG in past years has used audit as a tool to assess to what extent long-term sustainability is factored into budgeting and policy. For example, in 2012 the OAG examined how well the Department of Finance accounts for the impact of spending and taxing on long term fiscal sustainability before recommending policy. This audit also examined how long-term fiscal sustainability analyses are prepared and reported.

The audit found that the Department of Finance prepares long term fiscal analyses when they deem it relevant. As such, they will only make projections for the impact of fiscal measures past five years if they believe the impact of those taxes and spending measures is going to be significantly changed relative to the size of the economy. When the Department does deem it relevant to perform analyses, they assess the long-term impact of individual measures on revenues or expenditures but it does not always consider the effect on budgetary balance and public debt or overall fiscal sustainability.

Additionally the audit found that although the Department of Finance does provide results of fiscal sustainability analyses that project budgetary balance and debt in the long term, they do not provide it to Parliament with enough time before the budget is tabled to inform decisions. In fact, for a budget, the Minister is not informed of the overall long term fiscal impact until months after the budget measures have been adopted. Further, although fiscal sustainability assessments have been prepared since 2010, the Department does not make them public.

The United Kingdom National Audit Office (UK NAO): Audit of Forecasts

In 2014, the UK NAO conducted cross government reviews to assess how departments produce and use forecasts for effective public financial management. While the focus of the review was mostly forecasting that informs expenditure, the findings prove applicable to forecasting more generally, such as benefits from new investments.

The review found poor forecasting is an entrenched problem across the government. For example, forecasts often lacked ranges and sensitivity analysis, which detracts from the effectiveness of risk management. The audit found often decision makers need to introduce new measures quickly and do not fully manage the risks for the forecasts. Additionally, ‘optimism bias’ has a tendency to skew risk management by making forecasts which are more supportive for policy initiatives rather than realistic. The audit also found that the centre needs to do more in order to incentivise better forecasting as there are few examples of sanctions or rewards for quality forecasting. Additionally, because there is no consistent approach or framework for forecasting across government it is difficult to compare the quality of forecasts.

The United States Government Accountability Office (GAO): Long Term Fiscal Simulations

Since 1992, the GAO has published long term fiscal simulations showing the deficits and debts under different policy assumptions. Rather than precise forecasts or predictions of what will happen in the future, however, these are general illustrations of the outcomes of different sets of policy assumptions in order to provide a context for future policy options.

For the projections the GAO uses two types of simulations. The Baseline Extended follows the current year’s baseline projections of the Congressional Budget Office, creating a simulation reflecting the current law taking into account caps and automatic enforcement procedures and inflation for the next ten years. Additionally, for the alternative simulation, federal debt as a share of GDP grows throughout the period and can be expanded for a number of decades.

Through these simulations, in 2004, the GAO demonstrated that without large scale entitlement reform and/or dramatic changes in tax and spending policies, the country will face persistent and escalating deficits.

Source: OECD (2016); http://www.oag-bvg.gc.ca/internet/English/parl_oag_201210_07_e_37351.html; http://www.gao.gov/products/GAO-04-585T and https://www.nao.org.uk/wp-content/uploads/2015/01/Forecasting-in-government-to-achieve-value-for-money-summary.pdf

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Notes

← 1. “Budgetary governance” refers to the processes, laws, structures and institutions in place for ensuring that the budgeting system meets its objectives in an effective, sustainable and enduring manner (OECD, 2015a).

← 2. OECD’s review “Brazil’s Supreme Audit Institution: The audit of the consolidated year-end government report” focused extensively on this particular activity of TCU, this report does not seek to duplicate and focuses thus on the other operational audits of TCU (OECD, 2012).

← 3. The level of detail of such frameworks varies from country to country. The World Bank (2013) proposes some useful distinctions among MTEFs, in ascending order of sophistication and detail: medium-term fiscal frameworks (MTFFs, which focus upon fixed fiscal limits for budget-setting), medium-term budget frameworks (MTBFs, which aim to incorporate national and sectoral strategies within the MTFF) and medium-term performance frameworks (MTPFs, which include systematic use of performance information within funding envelopes).

← 4. As designated by Senior Budget Officials in Brazil, which reported to the OECD Budget Survey in 2013 to not have an MTEF at the federal level.

← 5. The LRF included: restraints for certain expenditures, such as personnel; clear debt ceilings; setting restrictions for public spending near election time in all levels of government; imposing clear responsibilities for budget managers; ceilings on personnel expenditure (including pensions); and binding the use of public resources to government programs defined in the budget.

← 6. A fiscal rule is seen as a fiscal policy expressed in terms of a summary indicator of fiscal performance has two fundamental characteristics. First, it presents a constraint that binds political decisions made by the Legislature and by the Executive. Second, it serves as a concrete indicator of the Executive’s fiscal management (Kopits and Symansky, 1998).

← 7. As of September 2016, referring to draft law 65 that had been approved in Congress in March 2016.