A toolkit to strengthen government budget surveillance

Government accountability is an essential principle of democracy. Most developed countries do have in place a framework of political, legal, and administrative mechanisms designed to control government bodies and officials. Typically, these controls focus on the adherence of the designed policies to the extant legal framework, and are not designed to influence neither the ex-ante design of policies nor the ex-post responsibility of policy-makers as regards the performance of their actions. Nevertheless, planning errors can have enormous influence on the economy, in particular those related to budgetary policies.

In this paper, we illustrate these general points by focusing on the case of government budgetary matters in Spain. First, we review the current legal and administrative procedures. Second, we propose a broad set of tools suitable for real-time monitoring of fiscal plans, including the assessment of the probability of meeting fiscal targets, that allow for a quick and efficient processing of a vast amount of incoming monthly and quarterly  information pertaining to most revenue and expenditure categories, and for all sub-sectors of the General Government.

Given the different sampling frequencies of the time series included in our dataset, we estimate multivariate, mixed-frequencies models, of the unobserved components type. These type of models have been used with success in the field of fiscal forecasting (see e.g. Pedregal and Pérez, 2010). Their flexibility allows us to accommodate a number of policy-relevant exercises, most notably: (i) the production of unconditional forecasts that can be used to assess in real-time the probability of meeting the annual official fiscal targets; (ii) the distribution across quarters of annual official fiscal forecasts on the basis of the available short-term fiscal information, to assess consistency of fiscal plans with incoming data.

Our results show the usefulness of the tools for monitoring fiscal policies in Spain. They allow for an early, ex-ante detection of risks to official projections. Had these tools been used in real-time in the past few years, timely corrective measures could have been enacted. The latter would have reduced the reputational costs of ex-post budgetary deviations. On the basis of our results, we discuss how official monitoring bodies could expand, on the one hand, their toolkit to evaluate regular adherence to targets (moving beyond a legalistic approach) and, on the other, their communication policies as regards sources of risks of (ex-ante) compliance with budgetary targets as well as reasons for (ex-post) budgetary deviations had them occurred.