analysisBy Yela Loanda
The off-budget measures announced in Article 11 of the State Budget Bill for 2013, which will allow the President an ample personal discretion to approve expenditures outside any budgetary provision, and which will also enable the establishment and management of special financial funds and secret funds "in the area of internal and external security "( i.e., espionage and political police) gives much food for thought.
In theory, the doctrine of public finance sets the grounds for the virtuous use of such funds. The formation of extra-budgetary funds makes sense in some cases.
The term extra-budgetary funds generally refers to public resources and government transactions that are not included in the annual budget or are not subject to the same general level of reporting, regulation, or audit as other public finance items. Extra-budgetary funds include a wide variety of arrangements, but traditionally they have included pension or social security funds, funds held by state-owned enterprises, and other discretionary or secret funds.
More recently they have also included arrangements for public resources from natural resource extraction, foreign aid, debt cancellation, proceeds from privatization operations, and Public-Private Partnerships.
However, in most cases, the underlying concern of the off-budget schemes and the creation of autonomous funds (known as in Portuguese as "sacos azuis" - blue bags - the local expression for slash funds) is the government's interest in sheltering certain budgetary areas from public scrutiny.
As distinctive features between virtuous use and criminal abuse of extra-budgetary funds, the science of public finance indicates the following: a) the validity of the budget justification to exclude a particular fund or operation, b) the adequacy and sufficiency of governance regimes established by the law authorizing the off- budget scheme to ensure that management of extra-budgetary funds is guided by criteria of rigor and public interest, and c) the extent to which the control mechanisms ensure transparency and the accountability of the managers of autonomous funds.
In the case of the proposed 2013 budget, the answer to these three questions is of a bleak simplicity:
- The justification is missing;
- The rules of governance are also missing, leaving its creation to the absolute discretion of the President;
- Also missing are any mechanisms for transparency and accountability; rather, what the law is concerned with is ensuring expressly the "secret or confidential nature" (Art. 11., No. 1) of this kind of expenditure.
These funds, when combined, can amount to a sizable share of government activities. On average, extra-budgetary funds account for nearly 40 percent of central government expenditure in transitional and developing countries. The majority of these funds are social security funds, which constitute an average of 26 percent of government expenditures in these countries (Allen and Radev 2006).
However, let us clarify right away that the off-budgeting in the 2013 State Bill, both because of the disproportionate amount of public funds diverted and because of the lurid circumstance - unprecedented in a Republic - of the Sovereign Wealth Fund being headed by a son of José Eduardo dos Santos, reveals a level of nepotism and appropriation of public resources hard to match anywhere else in the world. This exceptional case will be analyzed in further detail in follow up articles.
A distinction can be made between those extra-budgetary funds that are established by and operate within budgetary and other laws and regulations of a country, and off-budget transactions that are undertaken outside these laws and regulations and so should be considered irregular transactions.
For example, a Pension Fund Act may legally establish a fund with specific guidelines that do not require it to follow the government's general financial regulations but do require it to be publicly reported on, in the same way as other government expenditures, or to be subject to the same level of audit as other public funds. In contrast, a secret fund that is kept off budget, ignoring the government's financial regulations, as well as reporting and audit requirements, can give rise to illegal or irregular transactions.
Of course, nothing prevents public funds from being managed efficiently and effectively, through extra-budgetary funds, as it happens in various countries. Depending on the particular case, the off-budget operations are exempt from some or all of the following elements which provide appropriate control:
- Parliamentary approval of the budget;
- Obedience to the financial regulations in force;
- Accounting systems in accordance with the public accounting rules;
- Periodic external control or the end of the financial year, and
- Legal review by the supreme audit institution (in the case of Angola, the Court of Accounts).
The off-budget transactions are unlikely to be subject to the same kind of financial discipline as those inscribed in the budget (e.g., state-owned enterprises may have special financial rules and appoint their own auditors), partly because they are financially independent and partly because they are explicitly exempt from some rules governing other public spending.
This can result in an increased level of fraud and irregularities, or the use of these funds for unauthorized purposes. Furthermore, with the use of extra-budgetary resources, the reported level of government spending may be underestimated.
In this series of articles on the 2013 budget, we'll demonstrate how the proposed budget departs from these principles, incidentally violating the Financial Constitution of Angola, and discuss best practices (and also some bad) of African states in this regard.
In the meantime, for those of our readers more interested in these issues of public finances, here is some bibliography, accessible via internet:
Allen, Richard and Dimitar Radev. Managing and Controlling Extra-budgetary Funds. IMF Working Paper WP/06/286. Washington, D.C.: International Monetary Fund. 2006.
International Monetary Fund. Manual on Fiscal Transparency (esp. pp. 50-53). Washington, D.C.: International Monetary Fund. 2007.