This blog was originally posted on the IMF’s Public Financial Management Blog.
Large discrepancies between what a government budgets for and what it actually spends, and between the revenue it forecasts and the revenue it ultimately collects, can be unsettling and potentially dangerous – especially during a global crisis. Clues on how to address this widespread phenomenon were presented in our recent study, “Exploring the determinants of budget credibility.” This report examined national government budget data in 94 countries from detailed reports issued by the Public Expenditure and Financial Accountability (PEFA) program.
- When revenue collections are lower than projected, governments tend to ‘underspend’ – or spend less than the allocations in the approved budget. While this result might be expected and obvious, the underspending is typically unevenly distributed among different sectors and can have harsh consequences on people’s lives, especially for those who rely on public services.
- Governments that are more transparent have higher levels of budget credibility. Our study points to the primacy of transparency for improving budget credibility. It also identifies other important factors—such as clear rules for amending budgets, strong procurement systems, and good accounting practices—that enable more real-time control over how public resources are being expended.
Underspending in government budgets was a problem even before COVID-19
In an earlier multi-country study of budget credibility conducted prior to the pandemic, we found that levels of annual underspending in government budgets averaged nearly 10% across 35 countries. For perspective, this proportion of the budget amounts to more than the health and education budgets in many countries. And in low-income countries, nearly one out of every seven budgeted dollars was left unspent.
A more detailed report on immunization programs across 22 countries revealed a shocking 30% underspend of budgets for the purchase of vaccines over several years even as governments declared vaccine shortages on 96 occasions.
On the flip side, and not surprisingly, we also found ‘overspending’ to be an issue on some items and in some countries. Recently, we published a blog article that describes how police budgets across 19 countries were overspent, and by large margins in countries such as Uganda and Mexico.
What does this mean for budgeting during COVID-19?
Many governments have responded to the COVID-19 pandemic by committing to do whatever it takes to support their people and economies. But as they rush to commit large sums toward relief and recovery, the pressure for unrealistic revenue forecasts has increased—setting up a scenario in which governments are likely to overpromise and then underperform.
Understandably, the pandemic makes it very challenging for governments to accurately forecast economic growth, which impedes their ability to establish reliable revenue targets. In January 2020 (before COVID-19 became a household name), the IMF projected a global growth rate for 2020 of more than 3%. By April, the IMF was projecting a decline of 3%. And, last month, the IMF revised down its projection again to a decline of 5%. In many countries, growth projections have fluctuated even more drastically.
It could be catastrophic if governments continue the behavior identified in our new report and reduce their spending as they lower their revenue projections – especially for essential services, such as health, education, and social safety nets. At a time when the public is more reliant than ever on the provision of essential services, we think governments should make every effort to fully spend their budgets for these services.
Key takeaways for governments and civil society organizations
Governments: At this time, citizens need to be reassured that the policies announced to alleviate the pandemic’s suffering will, in fact, be implemented. It is expected that governments will have to revise their revenue projections and may even have to modify spending targets, but now more than ever, transparency is essential. Accordingly, governments could consider giving priority to the following steps:
- Disclose all changes to budgets in response to the pandemic, including how COVID-19-related policies will be translated into budget allocations, assumptions for revenue projections, and sources of financing.
- Release regular updates on the implementation of COVID-related measures in the budget, changes in the forecasts of revenue and spending, a comparison of spending projections and outcomes, and the reasons for any deviations.
- Commit for audit all spending incurred during the pandemic, ideally more than once during the fiscal year, so that auditors can closely examine budget credibility issues and report publicly with their findings.
Civil society organizations (CSOs): CSOs should not assume that large budget allocations for essential services represent “victories.” They should follow the budget cycle and track government spending patterns during the year—particularly in 2020, when governments are confronting unprecedented challenges. And they should be vigilant when governments cut spending below the levels planned in the budget, raising the alarm when such cuts are unjustified.