July 2014|Rebecca Simson and Bryn Welham|Working papers,

In many countries, particularly low-income and fragile states, national budgets are often poor predictors of revenue and expenditure. This paper draws on rational choice theory to set out a framework for explaining what drives budget non-credibility.

Three drivers of budget non-credibility are identified –inevitable lack of knowledge as to how the future will unfold (uncertainty); the inability of the head of the executive to fully control his subordinates (unruly agents); and the desire for the head of the executive to gain the support of external stakeholders by publishing a budget that he does not truly intend to undertake (signalling). The latter two drivers represent different variants of the ‘principal-agent’ problem. This framework is applied to a stylised budget execution chain and examples of non-credibility are illustrated with real-world cases from the budgets of Uganda, Tanzania and Liberia. The paper discusses the challenges of using the PEFA framework to consider budget credibility issues and reviews some of the common responses that aim to reduce budget non-credibility. The challenges of appropriately diagnosing budget non-credibility problems and of accessing accurate budget data for further analysis are noted.

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