A Political Economy Analysis of the Budget Process in Colombia

1. A Political Economy Analysis of the Budget Process in Colombia Mauricio C�rdenas Carolina Mej�a Mauricio Olivera Fedesarrollo August 31, 2006

2. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

3. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

4. Motivation Fiscal outcomes have been disappointing Political institutions are an important part of the explanation of the changes in fiscal performance Role of the budget process has received little attention Here we focus on the budget process from a political economy viewpoint

5. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

6. SustainabilityCentral Government�s deficit: Opposite trends relative to the region Puede ser interesante mirar proyecciones del MFMPPuede ser interesante mirar proyecciones del MFMP

7. AdaptabilityOutput gap vs. fiscal thrust (change in the cyclical component of the primary surplus)

8. EfficiencyExcessive expenditures relative to outcomesPrimary education

9. Likewise for health outcomes

10. Representativeness The 1991 increased the number of players that participate in the budget process. Congress and the Constitutional Court play a much larger role. In addition, the pluralistic Consejo Nacional de Planeaci�n must approve each administration's development plan before it submitted to Congress.

11. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

12. Budget inflexibilities This is the focus of most of the recent literature dealing with Colombia�s fiscal problems. According to the IMF (2004), Colombia is the country with the largest share of earmarked expenditures. Most of the rigidities are embedded in the Constitution, rulings of the Constitutional Court, or laws approved after the 1991 Constitution. In an environment characterized by many players, short horizons, lack of enforcement devices, rigid rules emerge as a natural outcome of the policymaking process.

14. Inflexibilities originated after 1991Earmarked revenues according to year of creation (% of total 2003 budget)

15. Inflexibilities: Constitutional Examples According to Art. 350, public social expenditure has priority over any other type of expenditure and may not be reduced (as percentage of the total budget) from one year to another. Similarly, the Constitution increased territorial transfers substantially (Art. 356) and allowed earmarking of revenues for social expenditure. Main problem: definition of public social expenditure is too broad.

16. Total vigencias futuras approved per year

17. Inflexibilities: the role of the executive (vigencias futuras % of each year's investment budget)

18. �Vigencias Futuras� by sector

19. Is the Budget Process Relevant? Many of these rigidities precede and constrain the budget process. But there is still a significant portion of resources to be allocated. More importantly, according to the Organic Budget Law, the Annual Budget Law may overrule expenditure mandated by other laws.

20. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

21. Budget Process: Formal rules of the formulation, discussion, and execution of the budget Law 38 of 1989: More flexibility to the line ministries to program their own expenditures Created the Consejo Nacional de Pol�tica Fiscal (CONFIS) and the Banco de Proyectos de Inversi�n (BPIN) to implement ex-ante cost-benefit analysis of investment projects. The 1991 Constitution More rigidities More representativeness Development Plan Law (Ley 152 de 1994) Organic Budget Law - EOP (Decreto 111 de 1996) Compilation of previous legislation Fiscal Responsibility Law (Ley 819 de 2003) and Decree 4730 of 2005.

22. Planning stage

23. How relevant is the planning stage? Development Plan vs. Final Execution (% GDP)

24. Preparation, discussion, and approval

25. Execution and control, monitoring and evaluation

26. Comparative evidence

27. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

28. Who are the key players? President Although extremely powerful, the 1991 Constitution limited legislative powers (e.g., state of emergency and capacity to veto legislation). Cabinet Extremely high turnover. Expenditure ministers tend to follow political careers.

29. Who are the key players? Congress Bicameral. Each chamber is organized in seven committees, according to policy areas. The economic committees (3rd and 4th), together with the constitutional committee (1st), are highly valuated by legislators. However, it is very difficult to become a member. Legislators in these committees (specially in Senate) show high incumbency rates and are very specialized. Another powerful committee is the Comisi�n de Cr�dito P�blico, in charge of approving all public debt operations.

30. Senate: 3rd committee composition 1991-2006

31. Sponsors secure the passage of the Budget Bill through Congress

32. Negotiating with Congress The executive�s main instrument to secure coalitions in Congress is the inclusion of investment projects (mostly regional and local) promoted by the legislators. The shape of these mechanism has changed throughout the years Pre-1991: the infamous auxilios parlamentarios (prohibited by the 1991 Constitution) 1991-onwards: specific investment projects and global line-items included in the Budget Law. Most of the negotiation takes place during the debates in the economic committees rather than during the plenary sessions.

33. Examples of vehicles used(as a % of total budget)

34. Who are the key players? Constitutional Court Created in the 1991, the Constitutional Court is a very influential actor in the CBP, through the revision of bills, statues, treaties and rulings of tutelas. The fiscal implications of some of its latest rulings are noteworthy: Public sector wages Displaced population Pension reforms in the last 15 years In practice, even if the executives secures an agreement with Congress, the Constitutional Court is a de-facto veto player.

35. Rulings of the Constitutional Court with budget implications: An example Four rulings on public sector wages Constitutional revision of the 2000 budget law All of them refer to Art. 53 of the Constitution (Estatuto de los trabajadores) which establishes the �minimum fundamental principles� Remuneraci�n m�nima vital y m�vil, estabilidad en el empleo, irrenunciabilidad a los beneficios m�nimos establecidos, facultades para transigir y conciliar sobre derechos inciertos y discutibles, garant�a a la seguridad social. Periodic readjustment of legal pensions

36. Specific rulings on public wages

37. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

38. Changes in the budget�s amount and composition Stage I: from the Projecto de Ley (Budget Bill) to Ley de Presupuesto (Budget Law). These changes reflect the cost of approving the budget bill in Congress. Stage II: from the Ley de Presupuesto (Budget Law) to Final Appropriation (include all modifications during the fiscal year). Stage III: from Final Appropriation to Final Execution. Measure of efficiency of execution agencies.

39. Measuring amount changes in stage IBudget proposal vs. budget bill

40. Measuring amount changes in stage IIBudget bill vs. final appropriation

41. Example: the 2001 supplementary budget NOTA: IPSE (Instituto de Planificaci�n de Soluciones Energ�ticas) EN FUNCIONAMIENTO EL INCREMENTO FUE DE 11.24% RESPECTO AL PPUESTO INICIALNOTA: IPSE (Instituto de Planificaci�n de Soluciones Energ�ticas) EN FUNCIONAMIENTO EL INCREMENTO FUE DE 11.24% RESPECTO AL PPUESTO INICIAL

42. Measuring amount changes in stage IIIFinal appropriation vs. Execution

43. Construction of indexes: changes in composition 1). Stage I: for each year. 2). Stage II: for each year. � 3). Stage III: for each year. Where Pi = component i as a % of total budget in Projecto de Ley (Budget Bill) Li = component i as a % of total budget in Ley de Presupuesto (Budget Law) Ai =component i as a % of total budget in Final Apropriation Ci =component i as a % of total budget in Final Execution N= number of components (three in this case)

44. Changes in budget composition

45. Determinants of modifications in Stage II

46. Outline Motivation Key budgetary outcomes Budget inflexibilities Formal rules Key players and the budget process in practice Empirical evidence Conclusions

47. Conclusions Poor outcomes in terms of sustainability, adaptability and efficiency. Part of the problem are the large inflexibilities that result from a more contested political scenario (cooperation is harder to attain in the budget process and rigidities secure coalitions). However, formal rules and real practices are also important elements of the explanation. The mayor modifications to the budget don�t take place in the passage of the Budget Bill through Congress. Moreover, additional resources in this stage were moderate (on average, 0.41% of GDP).

48. Conclusions Changes take place in the second stage: The executive negotiates support for other legislative initiatives through regional investment projects, and Congress takes advantage of the supplementary budget petitions of the executive. Nevertheless, since 1991, there have been less changes during this stage. In short, Congress has more relative power than the formal rules predict. The same occurs with the Constitutional Court: the fiscal implications of it�s rulings and revisions are considerable.

49. Policy Recommendations Reduce the use of inflexibilities in the budget Narrow down the definition of public social expenditure Limit the use of Vigencias Futuras to investment projects included in the administration�s Plan de Desarrollo and for a maximum of eight years (also helps to enhance the connection between planning and execution). Abolish the Comisi�n Interparlamentaria de Cr�dito P�blico. Establish that all investment projects included in the Budget Law should have an ex ante technical approval of the DNP. Require a technical report for all Constitutional Court rulings with a significant fiscal impact. Avoid the presentation of supplementary budgets in Congress, which implies a more careful programming of revenues and expenditures.

50. A Political Economy Analysis of the Budget Process in Colombia Mauricio C�rdenas Carolina Mej�a Mauricio Olivera Fedesarrollo August 31, 2006