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called up. In contrast, since the adoption of the Federal Credit Reform Act in 1990 in the United States, the cost of a loan guarantee – defined as the net present value of cash flows to cover claims by the lender for defaults and other costs – is included in the federal budget. No other OECD country has adopted such a specialised law to cover this important budgetary issue.

4.2.10. Supplementary budgets

General provisions relating to supplementary budgets are laid out in the Constitutions of several countries (e.g. Denmark, Finland, Korea, Spain, Sweden) or in a budget system law (e.g. France, Germany, Japan, New Zealand, United States). The reasons for supplementary budgets are stated in some countries’ laws. For example, in Japan, the Public Finance Act permits Cabinet to submit a draft supplementary budget to the Diet for: 1) supplementing funds necessary to meet statutory contractual government obligations unforeseen in the initial budget; and 2) modifying the budget to meet additional spending needs arising after the budget is approved by the Diet. Supplementary expenditure needs generally include natural disasters, ad hoc emergencies, new policy initiatives, or transfers of budget authority.

The law seldom restricts the number or timing of supplementary budgets. In Germany, for example, the federal budget code allows supplementary budget requests to be submitted to the legislature at any time provided they are before the end of the fiscal year. In no OECD country does the law restrict the size of budget revisions. This is generally upward (although not always) for most expenditure items, but by less than 10% on average when it does occur. In many countries, two to three supplementary budgets are adopted by the legislature at regular times during the annual budget cycle. In some countries, the executive is required by law to present a mid-year review of budgetary developments, which may be used to present a supplementary budget request to the legislature.

4.3. Budget execution

Many countries do delegate authority to the executive to issue decrees or regulations for the budget execution processes. This is a sign that the legislature trusts the central budget authority to implement the approved budget and the audit body to provide reports to the legislature on budget execution. In Finland, for example, the State Budget Act contains a specific article to this effect. There are, however, some areas, where Parliament may be involved during the course of budget implementation. These include the extent to which the executive has authority to cancel or transfer budget appropriations which have been approved by the legislature and, in special circumstances (e.g. emergencies, from contingency funds), to make expenditures prior to ex post approval by the legislature. The United States is an example of a country that has adopted

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detailed laws in these and other areas of budget execution so that the legislature can closely monitor and control in-year budget developments. This section examines country practice in selected areas of budget execution.

4.3.1. Apportionment of expenditure authority

After the legislature has approved budget authorisations for a 12-month period, many countries trust the executive with all in-year allocations – or apportionments – of budget authority. In such countries (e.g. Canada, France, Germany, New Zealand, Spain, United Kingdom), a law may provide general authority for apportionment, but not elaborate on details. For example, in Germany, the Law on Budgetary Principles merely requires that “appropriated funds be administered in such a way that they suffice to cover all expenditures falling due under the various purposes indicated”. In France, in-year appropriations are made available to ministries by government decree. In Westminster countries, the Crown authorises the Treasury to issue funds to departments for meeting expenditures; procedures for allocating authority for particular time periods are contained in regulations, not law.

In contrast, in the United States the law sets out the apportionment process in considerable detail. Title 31 (ss. 1501 to 1558) of the US Code requires appropriations to be apportioned by the Office of Management and Budget for periods within the fiscal year or among functions, activities, projects and objects. The code specifies precise dates by which apportionments should be notified in writing to departments and agencies (e.g. 15 days after enactment of the appropriation acts), the legislature and the judiciary. The apportioned amounts cannot be exceeded, without administrative sanction, by those executing the budget. The law also allows apportionments to be subdivided administratively within the limits of the total apportionment. The relevant laws in Japan and Korea also have elaborated apportionment procedures, with perhaps a little less detail than in the US Code.

4.3.2. Cancellation or postponement of budget authority

In implementing the legislature’s approved budget, OECD the executive may cancel or postpone approved appropriations, under conditions stated in the law in about half of OECD countries (OECD, 2003, Q.3.1.c). For example, in Germany, the law authorises the Minister of Finance to make commitments or cash expenditures subject to his approval should developments in revenues or expenditures so require. In other countries, quantitative and other restrictions may be imposed. For example, the Organic Budget Law authorises the executive in France to cancel appropriations by government decree, up to a maximum of 1.5%. The law requires that parliamentary committees be informed, prior to the issuance of the decree. Extensive legally binding restrictions on the executive were incorporated in the United States Impoundment Control Act 1974, which

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distinguishes cancellations (“rescissions”) from postponements (“deferrals”); the former require congressional approval in all instances (see the United States country case study for details).

For spending that is mandatory – because it is required by a law separate from the annual budget law spending – the executive in nearly all OECD countries is not authorised to cancel or limit such spending. For discretionary expenditure, two-thirds of OECD countries do not allow the executive to withhold funds for approved spending (OECD, 2003, Q.3.1.d). In such countries, executives are generally free to propose cancellations via a supplementary budget.

4.3.3. Emergency spending and contingency funds

The constitutions of four OECD countries (Austria, Finland, Germany and Japan) and the budget system laws of most other countries contain provisions relating to the authority of the executive to spend public money in excess of the approved budget, when there are specified contingencies. In order to avoid undermining the legislature’s budgetary authority, restrictions necessarily apply.

In Germany, the Constitution authorises the Minister of Finance to consent to excess spending only in the case of an unforeseen and compelling necessity. For the federal budget, the Federal Budget Code elaborates: the need shall not be deemed compelling if a supplementary budget can be adopted in time or if the expenditure can be postponed until the following year. In France, in particularly urgent situations, where the national interest is at stake, the Organic Budget Law allows the executive to increase Parliament’s appropriations by decree even if it means that the budget deficit target would deteriorate. However, should the Council of Ministers issue such a decree, it must be ratified by Parliament as soon as possible. Besides emergency situations, the executive in France may increase budget appropriations in the event of excess tax revenues, up to a limit of 1%, provided the budget balance is unaffected and after notifying parliamentary budget committees.

In some continental European and Nordic countries, certain appropriations are labelled as “estimated”. Budget system laws may allow “estimated” expenditures to be exceeded without parliamentary approval. There are two types of expenditures that may be categorised as “estimated”. First, expenditures required to be made by law or legally binding contractual arrangements. A major example is debt servicing payments, which must be made in a timely way irrespective of the approved amount in the budget. Second, some expenditure items, by their very nature, are difficult to estimate. When identified as such in the annual budget, spending on them, in excess of budgeted amounts, is allowed. Ex post reporting to Parliament on “estimated” expenditure is generally a legal requirement.

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In Japan, the Constitution allows a contingency fund to be authorised by the Diet and to be spent on unforeseen omissions from the initial budget, with Cabinet taking responsibility for such expenditure. The purposes and procedures for which contingency funds may be used are spelt out in the law in many countries. In Japan, the Public Finance Act focuses mainly on the procedures for using the contingency fund, which is managed by the Ministry of Finance. In requesting use of the funds’ resources, line ministries must specify the reasons for its use, the amount, and the basis for calculating that amount. The request must then be submitted to the Ministry of Finance which may adjust the request before Cabinet approval. After using the contingency fund, the Public Finance Act requires line ministries to prepare and submit a report to the Ministry of Finance on how the money was used; the Ministry prepares a comprehensive report for the Diet’s approval.

Whereas in Japan (and some other countries) the amount in the contingency fund is not specified in the law (the executive determines its size), in other countries the size of contingency funds or reserves is so specified. For example, the United Kingdom’s Contingency Fund Act 1974, which authorises the making of urgent expenditures not yet voted by Parliament, is capped at 2% of the previous year’s expenditures.

Budget flexibility by the executive is strongly restricted in the United States and a few other countries. Any reserves operated by departments or agencies are limited. On the other hand, the United States legislature reserves flexibility for itself. For example, when the federal government budget turned into a surplus towards the end of the 1990s, Congress knowingly loosely interpreted “emergency” spending allowable under the Budget Enforcement Act, 1990, the aim of which was to provide a framework for budget discipline and control of expenditures.

4.3.4. Transfers and virement of appropriations within the year

Irrespective of whether a country has adopted an output-based appropriation structure – or maintained an input-based appropriation structure – the rules for transfers between appropriations need to be established in a law. The need for complex rules – including regulations within the executive to supplement any laws – increases in line with the extent of the detail of the appropriations structure and the extent to which the legislature chooses to retain transfer authority rather than delegate it to the executive. The main choices made in the law concern the extent of delegated transfer authority between broad categories, such as salaries, other operating expenses, transfers, and investment spending. A variety of legal arrangements exists in OECD countries.

For countries that have adopted a broad-based appropriations structure, the executive is restricted from making transfers of appropriations between

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programmes – the executive already has considerable discretion to decide between inputs. Transfers between capital and operating expenditures are prohibited in many countries (e.g. Australia, Denmark, Finland, Norway). Legislative authority is usually needed for transfers between programmes (for example, Sweden, United Kingdom).23 However, a law may provide the executive with interim authority to transfer between appropriations. For example, in New Zealand, output expenses may be transferred by government order, up to a maximum of 5%.

In countries that have maintained a detailed line-item appropriation structure, a law restricts transfer authority. In Germany, virement rules for administrative expenditures were eased somewhat when a new law was adopted in 1997. However, this affected less than 10% of total federal expenditures – major spending programmes were unaffected by the new legislation. In the United States, the executive has very little discretion to make changes in the 1 000 or so accounts that require congressional approval. Exceptions for the Department of Defense have been granted by Congress. Transfers within programmes – known as “re-programming” – is not governed by a general law. However, Congress generally writes reprogramming restrictions into individual appropriation acts. Japan and Korea also have quite strong restrictions on the ability of spending ministries to make virements without either central ministry or parliamentary approval.

4.3.5. Government banking arrangements and cash planning

Budget system laws may establish the concept of a unified revenue account into which all public money is paid and out of which specific expenditures are made. The precise banking arrangements associated with this concept are often not specified in law – certainly not in detail. In France, the Organic Budget Law simply states that there is to be a single account for total revenues and expenditures of the general budget. In the law relating to the Bank of France, the central bank is to provide banking or other services that the State may ask of it, provided that these are specified in protocols and that the services are remunerated to cover costs. This example illustrates that the legal basis for government banking arrangements may be established in a central bank law, with details left to protocols between the Treasury and the central and/or commercial banks.

Surprisingly, the Westminster countries’ budget-related laws contain some details on government banking arrangements. Part of this is due to the inheritance of the 1866 Exchequer and Audit Act in the United Kingdom, which specifies that the Treasury issues public funds to departments out of a consolidated Exchequer account held at the Bank of England. The New Zealand legislation goes further in specifying the authority of the Minister of Finance over government banking arrangements. In particular, in accordance with the

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provisions of the Public Finance Act, the Treasury (“Ministry of Finance”) may open, maintain, and operate the Crown Bank Account at a bank or banks that the Minister of Finance may direct. Departmental bank accounts may be opened, maintained, and operated by a department at bank(s) as the Minister of Finance may direct. The Minister of Finance may give directions as to any terms and conditions under which any departmental bank account may operate and at any time close and suspend the operation of an account (for further details, see the New Zealand country case study).

The short-term forward planning of cash inflows, outflows and financing needs, and arrangements for managing short-term developments in the government’s balance sheet (if there is one) is a matter of concern to the executive – not the legislature. Accordingly, in many countries, government regulations provide guidelines for these aspects of budget execution. Nonetheless, in some countries, a law contains a few principles relating to cash management, such as “revenues shall be collected punctually and in full” and “money may only be spent as and when necessary” (Germany, 1969 Law on Budgetary Principles). The principle that gross revenues be paid into a single treasury account is important; such a provision is captured in the United Kingdom’s 1866 Exchequer and Audit Departments Act (“public moneys must be paid into the ‘Exchequer account’”), which the law specifies be held at the central bank. Although OECD countries have not adopted treasury laws, Lithuania is one country that has adopted such a dedicated law.

4.3.6. Internal control and audit

A mixture of law and regulation is usually used for specifying internal audit arrangements. However, in a few countries (including Denmark, New Zealand, and the United Kingdom) neither law nor regulations define coherent principles, systems and functioning of internal controls and audit (OECD, 2003, Q.4.1.a). In these countries, internal control and audit within spending ministries is seen as one of the management functions performed by those responsible for “efficient, effective and economic management of the activities of the department” (see the New Zealand State Sector Act 1988).

In countries with decentralised internal control and audit, budget system laws only provide a few general guidelines for internal control and audit. For example, the State Budget Acts of Sweden and Finland merely specify a need to “follow up” budget execution. Regulations on internal control and audit in such countries are issued usually by the central Finance Ministry or a dedicated agency. The Nordic countries are unique in that organisationally, internal audit entities usually exist at the programme level, not at the level of a ministry (although this is possible). In most countries, since internal control and audit is at the ministry level, internal audit procedures and the preparation of reports for managers (including ministers) are specified in regulations.