Proposals to reform the government budgetary framework

By Andreas Charalambous and Omiros Pissarides

Cyprus’ performance in public finances is considered satisfactory, as reflected, among others, in the favourable evaluations of international organizations and rating agencies. As a general rule, government budgets are in surplus, leading to a downward trajectory of public debt, thereby enhancing its long-term sustainability.

However, from a long-term perspective, the current framework needs to be radically reformed, mainly focusing on the quality of public spending.

A key parameter of such a reform should be the enhancement of the three-year horizon of the budgets, mainly by incorporating binding detailed quantitative expenditure targets for the ministries, in contrast to the current practice of imposing general expenditure ceilings per ministry. The proposed strengthening of the three-year framework would reinforce its strategic character, while contributing to a higher degree of accountability of the government towards both the parliament and the citizens.

Another important parameter is the gradual adoption of performance-based budgeting. Admittedly, such an undertaking is ambitious and would require fundamental changes and sufficient time to materialise.

Under such a modernised framework, development budgets would only incorporate mature investment projects. These should be assessed holistically and throughout their entire implementation period, rather than in a piecemeal manner every year in line with prevailing practice. This proposal would also limit the currently observed phenomenon of a low level of implementation of development budgets.

Furthermore, a comprehensive social budget could be incorporated, which would focus on the most vulnerable groups, with specific targets regarding employment, income support, housing, access to education, health and other basic services.

Similarly, a comprehensive budget for the transition to climate neutrality could be incorporated, with binding targets and provisions in relation to pricing policy, public investment in infrastructure projects, incentives for private investment, social compensation schemes, etc.

Such a radical reform presupposes a degree of simplification, with a corresponding vertical reduction of the number of articles of each ministry which undergo a voting procedure. It presupposes, at the same time, the decentralization of decision-making in favour of the ministries/organizations. The role of the finance ministry would be confined on the evaluation of outcomes taking into account the predetermined targets, instead of the current, inefficient and time-consuming practice of a detailed approval of individual ministries’ expenditures.

Other key elements of the proposed reform may include special provisions for the utilization of state assets, with the aim of strengthening public revenues and state guarantees, as well as quantifying the cost-benefit of the development incentives provided.

The above proposals would help Cyprus confront the challenges relating to the implementation of the recently revised EU Stability and Growth Pact. The Pact emphasises the need to improve the quality and the control of expenditures, thus ensuring the achievement of fiscal deficit targets, in a growth friendly and socially balanced manner. The transformation of the proposed reforms into practice requires political will, active involvement of the scientific community and experts, as well as ongoing consultation and dialogue with citizens. It also requires reinforcement of the role of the independent fiscal council.

Andreas Charalambous and Omiros Pissarides are economists.