17th December 2022 Skopje – Weathering this perfect storm and undoing the recent reversals in development require new macro- and micro-economic pathways in both advanced and developing countries, World Bank President David Malpass said in his address at Stanford University in September this year. It is clear that lessons are to be learnt from each crisis and ways are to be sought to overcome the systemic gaps. This is the very topic the column is dedicated to – how to make the system better, where we are and which is the way forward.
This passing year has posed major economic challenges worldwide. From an economic perspective, the world will certainly remember 2022 for the highest inflation increase since many decades back. Energy crisis and price pressures at the end of last year continued this year as well, intensifying with the onset of the war in Ukraine. Since the outset of the pandemic onwards, the global economy is constantly exposed to shocks. As soon as one challenge was overcome, another followed, with the policy makers constantly, for three years in a row, resolving crises. As most of the Governments worldwide, our Government focused its capacities on managing and cushioning the risks posed by the global crisis, maintaining macroeconomic and social stability by supporting both the citizens and the businesses (7 sets of anti-crisis measures since the outset of the pandemic).
Anyhow, we have not put the public finances reforms on the back burner. On the contrary, we have simultaneously continued working on the reforms, in support of strengthening the system and setting sound basis for economic growth acceleration. Several major public finances reforms were completed in 2022. Organic Budget Law was adopted, first medium-term budget was prepared and framework for a Fiscal Council and fiscal rules was established. Tax system reform, in line with Tax System Reform Strategy, was commenced, based on the concept of broadening the tax base by revising the tax expenditures and reducing the informal economy. We remain committed to gradual fiscal consolidation with the 2023 Draft Budget. Fiscal Sustainability Plan, envisaging measures for streamlining the expenditures, is therefore adopted. Legal amendments envisaging strengthening of fiscal decentralization are adopted, with the municipalities being made available more funds, greater financial autonomy, but also higher accountability and transparency. New laws on strengthening the institutional capacities of the institutions relevant in the field of public finances and state audit, i.e. Law on Public Revenue Office and Law on State Audit, undergo final preparations, and are aimed at strengthening their independence. Accordingly, we can say that public finances reforms defined 2022.
Pursuing the Reform Agenda despite the Ongoing Crisis
Public finances reform is aimed at longer-term and better planning of budget programs and budgets, sustainability and continuity in implementing the policies, more just model from the point of view of revenues, expenditures and the manner of financing (how the funds are collected in the Budget and how citizens’ money is spent), as well as monitoring and measuring the performance. Among the main pillars of public finances reform are transparency, accountability, allocating public funds where greater benefits are generated when prioritizing the optimal policies in support of both the citizens and the businesses, “value for money” concept and introducing so-called key performance indicators.
Public finances reforms are essential for faster recovery from the crisis and accelerated economic growth. This is also what the international financial institutions recommend. Sustainable results in any sphere can be achieved only if a system is put in place. We are already in an advanced phase of establishing the “smart” finances system, which is based on clear strategy, maintainability, accountability, reforms and transparency. Such system can help us bring new investments, provide new jobs and better living standards for the citizens through a smart, sustainable and inclusive growth.
It is favourable for the reform agenda to be implemented amid crisis, since it best shows the required changes to the system. The word “crisis” in the Chinese language is composed of two characters – one representing danger, the other, opportunity, meaning that we should be aware of the threats, but also be able to recognize the chance how to improve.
Reform Package – Eight Pillars for Public Finances Strengthening
New strategic budgeting is a crucial reform step. It is also part of a broader set of reforms aimed at creating a new and improved public finances system. In line with the Public Financial Management Reform Program, the reforms are based on eight pillars. The first pillar pertains to strengthening the economic analysis capacities, the second one refers to revenue mobilization via tax and customs policy, the third one involves budget planning, the fourth concerns public procurement, the fifth refers to integrated public finances, the sixth pertains to public internal financial control, with the seventh and the eighth covering external control and parliamentary oversight and PFM at local level respectively.
Strengthening the Analytical Capacities for Better Public Finances Performance
Improved forecasting, planning, performance and measuring require, above all, improved economic analysis capacities. Quality data and proper identifying of the developments are based on adopting the right decisions. Strengthened analytical capacity in forecasting the revenues and creating tax policies, as well as monitoring by the tax administration to the end of improving the revenue collection efficiency, are of crucial importance.
Moreover, introduction of comprehensive fiscal risk assessment is part of the priorities, all to the end of providing information on potential threats to the country’s fiscal position and ensuring integrated approach to managing these risks. Fiscal risk analysis will contribute to a better understanding of the public finances position, thus providing support for prudent fiscal policies, as well as strengthening risk management accountability, including our commitment to establishing a Fiscal Council, as per the Organic Budget Law. By establishing a Fiscal Council, sustainability of public finances will be enhanced through an independent assessment of the fiscal policy, the economic strategies and their implementation, as well as assessment of the baseline and macroeconomic and budget projections used when preparing strategic documents related to public finances. Introduction of fiscal rules, as carefully selected and set targets for debt indicators, will provide for fiscal policy sustainability.
Improved Revenue Mobilization
Second pillar pertains to revenue mobilization, which will provide for the indispensable fiscal space for maneuvering and increased consumption, all to the end of boosting growth in the medium term, covering also the infrastructure, the health and the educational sectors. The priorities are geared towards increasing the stability, the efficiency and the quality of the overall revenue system in the country, being aimed at ensuring sustainable and sound public finance management, professional services to taxpayers, tax compliance and support of legal trade by strengthening the control mechanisms.
Tax Reform Strategy is also focused thereon, pertaining to introduction of fair, efficient and effective tax system, which will be the basis for accelerating the economic growth and accomplishing certain goals in a developed and modern society. Strategy rests upon five priorities, such as greater fairness of taxation, in order to ensure that everyone meets its social obligation and pays its fair share of tax. The second priority includes more efficient and more productive tax system, in support of improved revenue collection. Third priority covers increased tax transparency, all to the end of strengthening the legal framework for transparency and exchange of information, cooperation between financial institutions and tax administration, greater encouragement of taxpayers to report all relevant information. The fourth priority includes better-quality services, i.e. simplifying and speeding up the procedures and reducing the administrative burden, while the last one pertains to introducing environmental (“green”) taxation aimed at stimulating taxpayers to reduce the activities that cause pollution, while being aspired to use renewable energy sources, protect the natural resources and boost sustainable economic development, as well as improve the quality of life.
Under the tax reform, the Government adopted legal amendments to the Profit Tax Law, the Personal Income Tax Law and the VAT Law, with the aim of expanding the tax base and attaining greater fairness. Model for taxing family income will be further considered as a fair taxation model. Moreover, consultations have been commenced, pertaining to the potential introduction of extra profit tax, following the example of many economies having recognized it as a “fair” way of providing the necessary additional funds.
Budgeting and Public Procurement
Third pillar covers planning and the Budget, reforms being mostly included in the new Organic Budget Law. A lot has been written about the reforms in the Budget over the past period, thus, now, I will just mention that it provides for substantial improvement of the public finance management, above all through medium-term budget planning as one of the major priorities of the Government in the EU accession process.
In our country, public procurement value reached 8% of GDP and 23% of the State Budget in 2020. Hence, improvement of the public procurement system will contribute to more sound public finance management, legal certainty for all participants in the public procurement system, encouragement of the competition and sustainable economic growth. Exploiting the full potential of the e-procurement platform should be the main focus of the efforts we put in increasing the transparency and boosting the confidence in the public procurement system. In addition, it is necessary to strengthen the institutional capacity and improve the statistical data, coupled by open data analysis. Under the 2022-2026 Strategy for Development of the Public Procurement System in the Republic of North Macedonia, measures for further enhancement of the public procurement system are defined.
Centralized Single Web-Platform for Integrated and Efficient Public Finance
Fifth pillar as regards the public finance reform is also part of the new Organic Budget Law, pertaining to the Integrated Financial Management Information System – IFMIS. This system should contribute to increased efficiency and transparency of public finance management operations by transiting the existing defragmented and disconnected systems to a single centralized web-based platform. IFMIS is expected to support the amended legal and institutional budget framework, thus responding to the existing challenges by expanding the scope as regards monitoring the budget execution and the fiscal reporting, covering all expenditure cycle phases (from procurement until payment), as well as getting a picture of consolidated public expenditures in a timely manner. IFMIS will provide for, among other things, establishing a multi-year budget framework, introducing 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. Furthermore, its 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.
Under this pillar, strengthened accounting of budget users by applying new accounting practices, i.e. introducing modified cash accounting, is foreseen. These activities will be aimed at improving the financial reporting and realistic presentation of the arrears. Establishing the Public Finance Academy, under which trainings and exams will be held for certified public sector accountants, is also aimed at strengthening the respective capacities. One of the challenges in the upcoming three years will be training and certifying all public sector accountants.
However, the role the Public Finance Academy will play will be much more extensive than just accounting-related trainings and certification. In fact, continuous education of the public administration in the field of public finance management and creating a modern and competent administration for rendering quality and rapid services to citizens and businesses, will be provided via the Academy. In addition, certification and licensing for internal auditors and financial inspectors so far, have been conducted partially and without any continuity. Academy will provide for continuity of these processes and their implementation thereby.
Strengthening Public Internal Financial Control
Sixth pillar under the Public Financial Management Reform Program, pertains to the public internal financial control. Public internal financial control system effectiveness will be strengthened by increasing the effectiveness of internal controls, enhancing the effectiveness of the internal audit in the public sector and strengthening the financial inspection function. Planned measures and activities will provide for improving the legislation and the bylaws, by introducing models for monitoring the efficiency and the performance of financial inspectors and their remuneration, as well as measuring the value added of the financial inspection function.
External Control and Oversight
Seventh pillar pertains to external control and parliamentary oversight Our priorities, as a Government, are aimed at strengthening the independence and the efficiency of the state audit, all to the end of attaining improved public finance management and greater transparency and accountability as regards the use of public funds by strengthening the external audit legal framework by achieving constitutional independence of the State Audit Office and strengthening the financial and operational independence in accordance with the respective principles. By putting an effective mechanism in place, aimed at reviewing the audit reports in the Parliament, the effects of the audit, the accountability and the transparency in using the public funds, will be strengthened.
Commitment to decentralizing local governments, strengthening their capacity and increasing transparency and accountability is also one of the priorities as regards the public finance reforms, i.e. the eighth and the last pillar upon which the reforms rest. As of recently, amendments to the Law on Local Financing were adopted, thus carrying out crucial reforms for the purpose of providing more funds for the local authorities by increasing the municipal revenues from the share of the unpaid taxes by the central government, as well as to the end of increasing both the accountability and the transparency. The municipalities are responsible for many important areas directly related to the citizens’ life, such as education, social protection, environment, utility services, therefore having stable finances is crucial. Hence, this reform significantly strengthens their fiscal capacity, at the same time obliging them to greater fiscal discipline, accountable and transparent operations.
Strengthened financial discipline of municipalities may be attained by realistic projecting of revenues and expenditures, rationalizing the operations and reducing the unnecessary expenditures, regular servicing of arrears, strengthened financial discipline, procedures on declaring financial instability and analysis of the existing arrears of both the municipalities and the public enterprises. Strengthened control mechanisms will be ensured through the supervision carried out by the financial inspection with respect to the compliance with the provisions referred to in the Law on Reporting and Recording of Liabilities, the Law on Financing Local Government Units and the Law on Financial Discipline, and the increased transparency of municipalities through the publication of financial statements in a transparent and comprehensible manner.
Human Resource Investments – Crucial for Reform Implementation
As for each of the pillars, the strengthening of human capacities is of particular importance in order to be able to implement the reforms. For instance, team of the Ministry of Finance, as the institution in charge of the public finance reform process, has been, since the onset of the crisis, simultaneously working on the regular activities, as well as designing separate measures for coping with the crisis, providing funds amidst specific circumstances, but also on the reform agenda focused on public finance system improvement. Hence, although it is obvious from the overall context thereof, I will stress once again – human resource investment will be of crucial significance in implementing the ambitious agenda. When the foundations are laid and when managing to build a sound public finance system from the ground up, the economy to be built thereupon, will be more resilient, more sustainable and fast-growing. The ultimate goal remains the same – accelerated economic growth and better living standard for the citizens of our country.