30th July 2022, Skopje – There is a saying, which goes like: working hard is good, but working smart is even better. Wherever there is a sound system in place, the results are greater and easier to achieve. Since the beginning of my term of office as Minister of Finance, I strived for putting a SMART public finance system, in place. This system is based upon a clear strategy, sustainability and accountability, being reform-oriented and transparent, as the acronym itself actually says (S-strategical, M-maintainable, A-accountable, R-reform-oriented, T-transparent).
What is going to be achieved with the SMART finance concept? – Process of planning and making projections will be longer-term and with better quality, i.e. strategical, thus improving the performance, enhancing the investment strategy and implementing the fiscal consolidation, as well as increasing both the transparency and the accountability.
To my great pleasure, one of the reform laws under the SMART system was adopted by the Parliament this week. It is a matter of the Law on Financing Local Government Units, thus making a significant step forward as regards the fiscal decentralization. Moreover, the New Organic Budget Law was, upon the second reading, adopted by the Parliament, being actually the leading law as regards the smart finance system, i.e. the profoundest fiscal reform over the last two decades. Under this Law, the traditional incremental budgeting will be turned into a performance-oriented budgeting. Setting fiscal rules and establishing a Fiscal Council is foreseen under the new Organic Budget Law.
Both laws were developed in a visionary way, thoroughly, inclusively, via wide consultation process with all stakeholders – as the case should be with such reforms. They were supported by all MPs, including the opposition MPs as well. What is extremely important is the existence of a consensus on certain economic policies – such as the so-far consensus on the monetary policy independence. Hence, the Organic Budget Law provides for a consensus on the fiscal rules, i.e. the fiscal sustainability. I expect, as earlier as possible, for the Parliament to be reconvened, to consider this Law at a plenary session, given its significance and the radical changes it will incorporate in the public finance system.
In order to get the full picture about the major public finance reform over the last decades in our country, I will focus on the essence of these two laws and the changes they bring. New Organic Budget Law is the cornerstone of the SMART public finance system. Therefore, I will start elaborating thereon.
Medium-term budget and performance-based budget
Budget is one of the most significant instruments of economic policy for any Government, and accordingly, the significance of the regulations defining the Budget preparation and adoption procedures, is apparent. Existing Budget Law was adopted 17 years ago. Additional amendments and clarifications were put in place over the last years, however, the new trends, the recommendations of the international institutions and the EU Directives require new solutions for public finance management. Hence, the need to create a new law arose, which fits within the SMART finance concept.
New Organic Budget Law was prepared and submitted to the Government at the end of December 2022, being adopted by the Government on 19th January 2021 and submitted to the Parliament, for adoption. In the meantime, Ministry of Finance started preparing the relevant legislation for the purpose of its implementation, with the Twining Project support via IPA.
Law itself is quite complex by its nature, however, in summary, the main reforms pertain to the medium-term projecting and budgeting, the Integrated Financial Management Information System (IFMIS), as well as the introduction of the Fiscal Council and the fiscal rules and principles. New and strong mechanisms for planning and projecting, implementation and supervision, are put in place.
As regards medium-term projecting and budgeting, medium-term 5-year fiscal strategy based on sectoral approach, is envisaged under the Law. Performance-based budgeting has also been introduced by putting key performance indicators in place, for the purpose of improving the public expenditure efficiency and effectiveness by connecting the costs in the public sector with the respective performance. Performance-based budgeting aims to ensure that the key decision and policy makers will systematically take into account the results to be achieved by executing the expenditures. This will also provide for attaining the goal related to defining the priorities and the policies as regards the Budget as per the value for money concept, meaning that the budget funds will be allocated where greater benefits are generated, thus providing for higher living standard and better-quality of life of the citizens.
New Organic Budget Law also incorporates mechanisms for better planning and projecting, as well as implementing capital projects, stipulating the adoption of a methodology for defining, preparing, considering, appraising and prioritizing new infrastructure projects. Budget users, as part of the budget preparation process, will have to submit a pre-feasibility or feasibility study to the Ministry of Finance for all new proposals about major investments, where organizational Public Investment Management Assessment Unit will be established. General methodology will be developed aimed at preparing and assessing projects and calculating shadow prices, necessary for applying the capital investment project methodology. In addition, a single list of estimated capital projects will also be prepared, thus creating a project database with all sectors and all sources of financing. In light of the Growth Acceleration Financing Plan, these mechanisms will contribute to better planning and projecting, as well as realization of major infrastructure investments, given their effects on the overall economy. Moreover, all public-private partnership projects will, in an integrated manner, be monitored via the Single Registry of the PPP. The Government will also, in an integrated fashion, monitor the overall state aid provided to the business sector.
Organic Budget Law also provides for making the fiscal consolidation easier, i.e. gradual and sustainable budget deficit reduction.
Fiscal Council and fiscal rules
New Organic Budget Law also introduces fiscal rules and principles, as well as the establishment of the Fiscal Council. Fiscal Council aims to independently evaluate the fiscal policy, the strategies and their implementation, as well as macroeconomic and budget projections. Fiscal Council will be composed of 3 members – experts in the field of public finance, macroeconomics or economics, proposed by the Macedonian Academy of Sciences and Arts, the State Audit Office and the National Bank, who are to be elected by the Parliament.
Organic Budget Law stipulated the fiscal rules as regards the budget deficit and the public debt, to the end of ensuring fiscal sustainability. In fact, budget deficit is projected to be up to 3% of Gross Domestic Product, with public debt being projected at up to 60% of GDP, which, as per the new methodology, is actually considered as a general government debt (the Government and the municipalities), whereas the guaranteed debt of public enterprises and other public sector institutions, not being budget users, is limited to 15% of GDP. In case of any deviation from these rules, the Government is obliged, together with the draft Budget, to explain to the Parliament, the reasons, as well as to propose measures with quantified fiscal impact aimed at overcoming the occurred situation and getting back to the respective rules.
Another significant fiscal sustainability mechanism in the medium-term is the fiscal policy statement, which the Government submits to the Parliament within 100 days since its election, being published on the website of the Government and the Ministry of Finance. Statement contains the fiscal policy guidelines throughout the Government’s term of office, the budget balance and the public debt projections, as well as the projections on the GDP, the foreign trade and the labor market. This provides for additional increase of the Government’s responsibility as regards the economic growth and the fiscal policy sustainability.
New Organic Budget Law is planned to come into force as of the beginning of 2023, except for certain provisions pertaining to the Fiscal Council, the strategic planning, the macroeconomic projections, the Fiscal Strategy, the internal financial control and IFMIS, the Organizational Unit for the Organic Budget Law Reform, which are to be applied upon the entry into force of the Law.
Digitalization and new technologies in support of public finance
One of the most important reforms introduced under the new Organic Budget Law is the contemporary Integrated Financial Management Information System (IFMIS). Main goal of IFMIS is improving the efficiency and transparency of the operations by connecting the existing fragmented systems to a centralized web-based platform, via the benefits of the state-of-the-art digital technologies. IFMIS will provide for integrated monitoring of the revenues and expenditures from their projecting through their performance and execution, which will have effects on improvement of the budgeting and the budget execution. The system will provide for establishing a multi-year budget framework, introducing of a public investment management function related to the future public-private investment system, an automated system for monitoring the liabilities, including multi-year commitments and centralized data on the assumed liabilities, management of fixed assets and debt management. New integration will ensure comprehensive and timely availability to the data on public finance, thus contributing to increased efficiency in projecting the liquidity and managing the financial flows as regards the budget, also including the climate and gender aspects.
Increased revenues and enhanced fiscal discipline for the municipalities
Law on Financing Local Government Units is the second reform law, adopted by the Parliament last week. Given the connection of this Law with the Organic Budget Law, as well as the detected room for improvement, over the years, the modifications and amendments thereto were necessary.
Carried out research of the collected municipal revenues demonstrate low share of the own revenues in the total owns, accounting for approximately 20% thereof. Modifications and amendments to the Law on Financing Local Government Units stipulate increased funds, transferred from the Central Budget to the municipalities. As of 1st January 2024, percentage of collected PIT revenues transferred to the municipalities, will increase from 3% to 6%. Until then, during the transitional period, the percentage is foreseen to be increased to 4% in 2022 and 5% in 2023. Municipalities are allocated the revenues on the basis of PIT collected from individuals with permanent or temporary place of residence in the respective municipality. Gradual increase of VAT grant rate from 4.5% to 6% in 2024 is also foreseen. Thereby, the provided funds will be allocated in three portions – basic portion accounting for 4.5% of the VAT collected in the previous fiscal year, with the rest being divided in two equal portions pertaining to performance and equalization. During the transitional period, the grant rate will increase from 5% in 2022 to 5.5% in 2023.
Two Funds are envisaged to be established – Performance Fund and Equalization Fund. Municipalities showing positive results and higher own revenue collection will be awarded funds from the Performance Fund, while municipalities with lower revenues, but also showing fiscal effort and good results in collecting their own revenues, will be awarded funds from the Equalization Fund.
Amendments to the Law also provides for enhancing the fiscal discipline of municipalities by introducing fiscal rule for projecting the own revenues up to 10% in relation to the average of the previous revenues, collected in the last three years. In case the core budget own revenue collection accounts for more than 75% as of the third quarter inclusive, the municipality is provided with the opportunity to increase the projected revenues up to 20% at the most. Provisions will start to apply as of 1st January 2025, with a transitional period, being foreseen thereuntil. In fact, in 2023, core budget own revenues of municipalities can be projected to increase by 20% with a margin of plus 10%, in case the revenue collection accounts for 75% of the projections in the third quarter. In 2024, they can be projected to increase by 15% with 15% margin.
Law also includes a solution for transition towards enhanced financial discipline system. In fact, in order to overcome the arrears-related issues, the municipalities will be able to reschedule the arrears via a 10-year structural bond. Municipalities having declared financial instability could have at their disposal a stand-by credit from the Ministry of Finance and can issue a municipal bond with the Ministry of Finance as purchaser.
Law also additionally regulates the procedure and the conditions for declaring financial instability, also introducing plenty of mechanisms aimed at increasing both the transparency and the accountability.
Consensus on key economic policies
Before I conclude this article, I would like to once again stress the significance of the consensus on the significant economic policies in the country, which was extremely important to achieve as regards the public finance reforms. This is a long and painstaking process, which requires patience, openness to different views, but which is unquestionably a process that is worthwhile, generating better-quality solutions. Under this broad and inclusive process, significant role was played by all stakeholders in the society, the European Commission, the international institutions, as well as the entire political spectrum in the country, including the opposition, with their amendment interventions and the full support expressed in the Parliament.
I would like to hereby emphasize that the consensus on fiscal rules and the public finance sustainability is equally important as the consensus on the monetary policy independence. However, in order for this reform to endure, it must be institutional and governed by law. As a matter of fact, as Jean Monnet said: “Nothing is possible without people, but nothing lasts without institutions”.
Despite the ongoing crisis, the reforms must continue
These legal solutions, by being implemented, will contribute to creating a better and more just public finance model, which will, in the best possible way, destine the citizens’ money towards the citizens themselves. SMART finance will be the foundation upon which we will implement the Growth Acceleration Financing Plan, which should, in the medium term, produce the desired higher economic growth rates.
Despite the global economic crisis and the challenges it brings, we must pursue the reform path. The ongoing anti-crisis activities should be accompanied by a long-term way of thinking as well. That is the right answer and the right way of acting towards building a strong and prosperous economy, as well as providing better living conditions for our citizens.
Fatmir Besimi, Minister of Finance