At the end of September at the latest, a draft budget for 2013 will be submitted to the Sejm. Due to the economic slowdown, it may be difficult to implement it, but this does not have to be so. The budget has many safes with funds. We have asked Elżbieta Suchocka-Roguska and Halina Wasilewska–Trenkner, authors of many budget drafts, whether it is possible to reach for such funds.
Obserwator Finansowy: Commentators who write about the Budget Act often suspect that the Minister of Finance deliberately hides reserves to facilitate budget implementation. For example, the NBP profit is not included in the revenue, although it usually represents a considerable amount.
Elżbieta Suchocka: The budget for 2013 will include the NBP profit.
In what amount?
ES: PLN 400 million.
But the actual profit will probably be higher. The amount assigned to this year’s budget from the NBP was PLN 8.2 billion.
ES: We have seen various situations. Please remember that according to EU statistics, the NBP profit is not shown as revenue, and, therefore there is no cover for expenses financed from these funds which contributes to deficit increase. Revenue set forth in the Budget Act is a forecast and expenditure represents non-extendable limit. Even if the actual budget revenue is higher than the revenue set forth in the Act, it will only reduce the deficit and limit borrowing needs, but will not provide grounds for increasing expenditure. In the process of budget preparation, there are always opinions that the revenue may be higher, which would allow to increase expenditure. Based on my experience as a person who has worked on budget acts, the revenues are often overestimated.
ES: No, actually they are not. The problem is that it is usually easier to implement a budget act than to prepare it. When a budget draft is being prepared, there is pressure to include many items that, as a matter of fact, have no chance of being implemented.
Why is that so?
ES: There are various reasons— political, propaganda related and sometimes even prosaic ones. When an item is entered in the budget, a call for tenders may be issued. However, the period between a tender call and the moment when money is actually spent is often longer than a year. Everyone knows that the money assigned to a project will not be spent, but without entering it in the budget, the investment would not be initiated at all. Several years ago, the Minister of Finance introduced a procedure based on a promise of financing, which was mainly, related to EU funds spending. This made it possible to initiate work on projects without the necessity to enter the expenses in the budget act. However, what happened with last year’s budget is worth noting. PLN 10 billion of the expenditure could be saved. This shows that the planned expenses were overestimated already in the first phase. By the way, there was no mention of any unexpected liabilities suddenly beginning to appear or entities not receiving funds from the budget.
Is there any idea how to change this situation to make the act more accurate in terms of forecasting expenditure and revenues?
ES: Finding a solution to this problem is not within the competence of the Minister of Finance, but of other members of the government. As far as investments are concerned, particularly long-term ones, there is a phenomenon that in the times of the Polish People’s Republic was called “take hold of the plan”. First enter a project in the budget and worry how and at what expense to carry it out later.
Halina Wasilewska-Trenkner: Let us be honest – this is a way of thinking represented not only by ministers, but most of all by MPs. The Parliament cannot increase revenue, but it can move different expense items. Moving funds to a local project can unite all MPs from a given region regardless of their party affiliation. This is why the budget often includes expenses on a road, for example, that has not even been designed yet. As we have seen many times, funds were allocated in the budget to the dam near Włocławek or the Silesian Center for Heart Diseases in Zabrze.
Will these items be entered in the next year’s budget?
ES: No, we have finally managed to correct it. I remember another example. One of the MPs insisted that PLN 20 million be allocated for the completion of an investment in his constituency. I called the province governor and he said that a construction permit had not been obtained yet.
The budget often includes projects supposed to last for a number of years.
ES: Interestingly, they are never completed. Once a project is entered, it is very difficult to withdraw it and save money.
HW-T: I can remember two such cases. The Minister of the Environment had completed the construction of measurement stations, and decided that he could end the task and return PLN 6 million. Another time, when the Minister of Internal Affairs confirmed that the construction of the national fire fighting system had been completed and the funds could be allocated for another project. However, the MPs had managed to pick out the money from different budget items and add it to the budget of the Ministry of Internal Affairs, although it was not justified at that time.
ES: For many years, the budget included a reserve for the rehabilitation of areas where Soviet troops had previously been stationed. Local governments used this money to build pavements and repair streets and roads. Hence, the money was not spent on land rehabilitation. The project was completed, but MPs still wanted to enter these funds in the act. After a long battle, this practice was finally stopped. The conclusion is that entering a new project in the budget is risky. Moreover, the money is usually spent on ongoing programmes and there are not enough funds for more important purposes. The same items appear in specific reserves whose amount is often unjustified — e.g. a few hundred million zloty to combat livestock diseases. Such a large reserve is not managed in a rational way since funds are provided too late.
Would it not be advisable to change the budget preparation procedures to eliminate politicians’ pseudo creativity?
ES: Similar things happen around the world. The budget act enjoys a specific status also in our Constitution and there is no way to prevent the MPs from trying to include funds in the budget to be able to boast about it to their voters. However, budget preparation procedures are improving. The number of independent centres that are capable of forecasting budget revenues has been increasing; hence, work on the budget has become more transparent. Obviously, the Minister of Finance must have some room for manoeuvre, since he may be brought before the State Tribunal for exceeding the deficit.
HW-T: The budget is not just tables. These are funds of the whole State, which must be available 24 hours a day and there have to be resources for sudden needs. Imagine a situation where we have no funds for payments from the Social Security Fund (FUS) — PLN 2,5–3,0 billion a month, or for wages for the general government sector. In both cases funds have to be available on a specific day. This is why the budget cannot be treated in a static way. The minister must have sufficient liquidity reserve to avoid a disaster.
This year’s budget revenue will be much lower, especially from VAT. Doesn’t it imply a risk of exceeding the deficit?
ES: The shortage of revenue from VAT will be covered to a great extent with a higher NBP profit, but, as I said, from the point of view of ESA 95 statistics, this will increase the deficit of the public finance sector.
Why has the Minister overestimated this year’s VAT revenue to such an extent? He forecasted the growth in VAT revenue at the level above the GDP + inflation. Yet, the revenue will remain on the previous year’s level, which means it will be lower than justified by economic growth.
ES: Today, we know more. However, the act was prepared in July last year when the Minister assumed that the VAT revenue in 2011 would be higher. The basis he used in the forecast was considerably higher than it actually turned out to be. This could be handled and adjusted later, in the course of parliamentary work. Can you imagine a terrible row that would start if the Minister said that the revenue would be a few billion lower and we had to cut expenses proportionally?
HW-T: The most effective source of VAT revenue is imported goods. In 2012, the import growth rate has been falling, which is why this source is drying up. On the other hand, exports are growing, which is good for the economy but not for the budget, since exporters get a VAT refund. VAT revenue is easy to estimate when the structure of the economy is constant. In times of a crisis, the structure is changing. This was the cause of erroneous estimations for the current year.
Is it possible to save budget funds without carrying out huge reforms?
ES: There are few projects that can be cancelled immediately. On the other hand, it would be possible to reduce certain social expenses without incurring significant social costs. For example, attendance allowances are paid from the Social Security Fund to every pensioner aged 75 plus regardless of his/her health and physical condition and whether he/she is still employed or not. Each person receives PLN 180 and the total sum amounts to billions. I have tried to change these regulations several times to make the allowances be paid only to those who need care. Each time the answer was: who would verify this? Persons aged 75 plus, including those receiving PLN 5,000 or more per month, are also exempt from the radio and television subscription fee and can use public transport free of charge.
HW-T: A typical example of unjustified expenses is subsidies provided to so called “milk bars” (bars selling cheap meals). There have been two attempts to eliminate subsidies, but each time there was a row. In Warsaw, several “milk bars” are located in the city centre, where the rent is high. The rent is subsidised from the budget and we go on thinking we are helping the poor who supposedly eat there.
ES: Certain savings could be made by integrating institutions that deal with the same tasks at different levels: in districts, provinces and central agencies. If the management, e.g. of road construction and administration, was better, we would need fewer officials and the equipment would be used more efficiently. Tasks delegated by central bodies to local governments are financed from the state budget. They can then be controlled centrally, but as a result local governments are not interested in managing these funds more efficiently. A typical example is the financing of social assistance, for which local governments receive funds from the budget. If local governments had to participate in the expenses, they would try to minimise costs. Perhaps it would be worthwhile to employ the unemployed to do some work for the community. However, if the local government used this opportunity, it would lose the money it receives from the central budget.
Are local governments’ funds better spent than central budget’s money?
ES: There is no rule, but local governments are usually subject to stronger social control. People elect their representatives and more and more often control how they spend public funds. That is why I support the idea of delegating the performance of tasks to communities, that will be using their own revenues instead of receiving subsidies. Representatives of local governments should make their own decisions as to what they want done in their area.
A few years ago, the Ministry of Finance initiated work on the preparation of what was called performance budget, in which tasks of government bodies were set and funds allocated for their performance. Has the work been continued and will a performance-based budget be a remedy for various shortages of the existing budget procedures?
ES: Performance budget is being prepared along with the draft budget act. What is the problem is the criteria — how to measure the performance of tasks specified in the act. Criteria are not precise and the information on task performance from the Central Statistical Office is provided with delay. The conversion of the budget in its present form into a performance budget is a difficult task, but it is feasible. Yet, what purpose would the performance budget serve?
HW-T: Performance-based budgeting is rigid. Appropriations for a given project cannot be moved to a different item. At the time of considerable instability of revenues, setting such an inflexible expenditure plan would require an increase in reserves and their proportional allocation to all the projects. Some of these provisions would not be used, but the Minister would have to create them and, as a result, borrow and freeze funds. This is hard to imagine.
What are the greatest risks in the 2013 budget?
HW-T: As usual, debt servicing costs are a big unknown, while PLN 43 million is allocated for this purpose. This item is influenced by each change of interest and exchange rates. The exchange rate has also an impact on other budget expenses, such as EU contribution — approx. PLN 17 billion, the activities of the diplomacy and contributions to international organisations — PLN 3‑4 billion. Obviously, the exchange rate also determines the amount of EU subsidies under structural funds and direct aid to agriculture. Exports and imports growth rate is also unknown. If exports collapse, it will have a negative effect on the economy, although, paradoxically, it will be positive for the budget. And the other way round — if exports grow faster than imports, the VAT revenues will decrease.
And what if the GDP growth rate falls to zero?
HW-T: This would lead to a considerable increase in unemployment and expenses on allowances and social aid. The negative effect would be observed not only in 2013. Many companies would incur losses that would be carried forward for several years, which would result in low revenues from corporate income taxes. Additional borrowing would be necessary, which would strain the budget for many years. The scenario does not look pleasant.
By Witold Gadomski
Halina Wasilewska-Trenkner — from 1995 to 2004, she was the Under-Secretary and then the Secretary of State at the Ministry of Finance. In 2001, she held the position of Minister of Finance for two months. In the years 2004-2010, she was a member of the Monetary Policy Council. Currently, she is an adviser to the President of the NBP.
Elżbieta Suchocka-Roguska — from 2004 to 2010, she held the position of the Secretary of State at the Ministry of Finance. Currently, she is an adviser to the President of the NBP.