Government budget credibility and the impact of COVID-19

The annual budget is the key policy tool used by governments to implement strategies, policies, and programs. Adherence to planned budgets is an important indicator of the overall capacity of the government to deliver on the programs to which they have committed. SDG indicator 16.6.1 (WDI indicator "Primary government expenditures as a proportion of original approved budget") seeks to measure the dependability and efficiency of government budget execution: do governments spend what they plan / want to spend and collect what they intend to collect? The indicator measures whether government budgets are realistic and implemented as intended.

The SDG Initiative and PEFA Involvement

The information for monitoring SDG indicator 16.6.1 comes from the Public Expenditure and Financial Accountability (PEFA) Framework, which is a tool for assessing the status of the Public Financial Management (PFM) of a country and for reporting on its strengths and weaknesses. PEFA is considered a gold standard for assessment of PFM systems and is widely used around the world. PEFA assessments provide a thorough, consistent, and evidence-based analysis of PFM performance at a specific point in time and can be reapplied in successive assessments to track changes over time. The tool focuses on key outcomes of PFM: fiscal discipline, strategic allocation of resources, and efficient service delivery. At present approximately 750 PEFA assessments have been conducted.

The information for monitoring SDG indicator 16.6.1 corresponds broadly to Performance Indicator PI-1 in the PEFA Framework which compares the aggregate expenditure outturn (or the budget that was spent) in recent years with the government’s budget approved by the legislature. Sources of information include published PEFA reports supplemented by data on World Bank member countries collected by World Bank experts. The indicator covers 152 countries over an average period of 10 years.

The country coverage is presented in the map below, color coded according to the availability of data for a specified number of years. The full set of data can be accessed on the World Bank Data Portal and on the UN website: SDG Indicators Database.

What does the indicator tell us about budget execution over the period 2010 - 2021?

This indicator measures performance according to the percent deviation from the planned budget. Countries where the aggregate expenditure outturn is within 5 percent of the approved budgeted expenditure (between 95% and 105%) are considered to have better performance; countries with deviations beyond 15 percent are considered to be poor performers.

Looking at the 152 countries with available data for 2010-2021, just over half show less than a 5% deviation in budget execution, a third deviate within a range of 5-10%, and the remaining one-fifth show deviations beyond 10%.

Regionally, Sub-Saharan Africa has highest scope for improvement amongst regions, as 11 of the 44 countries assessed show a budget deviation greater than 10%. Europe and Central Asia is the best performing region with 26 out of 35 countries (75 percent) showing a deviation of less than 5%, based on available data from countries.

Looking at countries by income levels, two-fifths of the assessed low-income countries have deviations in budget execution rates of more than 10%. Performance improves markedly in middle- and high-income economies.

Subnational Data

At the subnational level, governments have found it even more challenging to implement their budgets in line with originally approved allocations. The PEFA framework1 has been applied to a wide range of subnational governments (SNGs), representing different tiers/layers of government, municipalities, regions, districts, and overseas territories. The number of subnational assessments has been increasing: 2016-2021, 73 SNG were carried out in 22 countries.)

The budgets of over half of the assessed SNGs deviated by more than 15 percentage points. In only around one-third of SNGs were average deviations less than 5% (e.g., Belgium, Ethiopia, Georgia, Germany, Indonesia, and the Kyrgyz Republic).

The link between national and subnational performance is not systematic; for example, countries may perform well at the national level but may not do as well at the sub-national level, or the opposite. Ethiopia and Georgia are good examples of countries where most subnational and national budgets were very close to the ones approved by the legislature.

How did the COVID-19 pandemic affect budget execution globally?

Many countries were not prepared for the shock of the COVID-19 pandemic, budgets were disrupted, and it was necessary to draw on a wide range of resources to finance emergency spending and additional investments through the budget or through special funding arrangements in order to address the impact of the pandemic.

In several regions, the average deviations between actual and planned budgets during 2020 and 2021 were higher than in the previous years, suggesting that the pandemic impacted aggregate spending. The East Asia & Pacific region shows overall underspending, in same cases of more than 10% during 2020-2021, whereas in Europe & Central Asia most of the analyzed countries (5 out of 8) overspent by more than 15% (although a few countries (3) underspent). The Latin America & Caribbean region shows mainly underspending (6 out of 10). Countries in South Asia on average underspent by a wide margin in 2020 of up to 20-30%. Many economies in Sub-Saharan Africa also underspent their budgets in 2020 and 2021 (6 out of 6).

Some governments took action to mitigate the economic and financial effects of the pandemic on their budget expenditures, such as measures in health, education, public services and in improving tax compliance (based on reporting to PEFA in 2022). Examples include development of construction projects for medical posts and hospitals (Bolivia) and projects related to renewable energy to provide permanent electricity for hospitals (West Bank and Gaza). Other examples are measures to support employment and small and medium-sized businesses (Chile and Turks and Caicos Islands), and assistance provided for youth employment opportunities (Samoa). Funds were established for reimbursement of the medications for COVID treatments, covering the cost of vaccines and critical care supplies (Belize and Albania), financial resources were redirected for ventilators, scanners, fever clinics and raising health awareness (Fiji). Reinforcement of human and physical resources and social programs were initiated (Jamaica and Mexico). Expenditures were planned for support of vulnerable groups (Suriname) and for recovery of tourism, wholesale, and retail sectors (Cambodia).

All these examples show that countries managed the disruption that COVID-19 caused by injecting more funds to accommodate the COVID related expenditure. Some governments increased the social welfare budget by 100 percent under the stimulus package. However, increasing expenditure in certain areas, with the aim of responding to the COVID-19 pandemic, has in some cases hindered the implementation of new projects, especially those related to renewable energy.

Although globally more than half of the analyzed countries for the period 2010 – 2021 are performing well, with less than 5% budget deviations between executed and approved budgets, others are trying to overcome the impact of COVID-19 on budget credibility.

Monitoring the efficiency of budget execution - whether governments spend what they plan to spend - is a critical measure of a country’s financial credibility. It is important to note that, like any one indicator, it should be evaluated in context and along with other measures of an economy’s fiscal performance. Long-term trends need to be considered. Crises like the COVID-19 pandemic can make occasional unplanned spending a necessity, where the benefits far outweigh the costs of budget disruptions. The PEFA framework helps countries develop effective, accountable, and transparent processes for budget monitoring which are critical to long term financial sustainability.

1To make better use of the PEFA framework for different categories of SNG, and to make it more agile, flexible and simple, the PEFA Secretariat developed, Adjusted Methodology for Subnational Governments, adding also an optional module on service delivery.