REFORM OF PUBLIC ADMINISTRATION FINANCES

6. REFORM OF PUBLIC ADMINISTRATION FINANCES

6.1 Context and Principles

The reform of the financial system occupies a fundamental position in public administration reform. The following relationships and principles should be mentioned:

all reform considerations in public administration impact on public budgets, public budgetary systems and relationships within these budgets and institutions,
as public finances form a sort of "grid" of links and relationships, connecting all economic subjects in respect of both public revenue (particularly taxes) and public expenditure (subsidies, transfers, etc.), it is important to see that any change in this field will influence the whole economic system and all economic subjects, including the citizens,
the institutions and bodies of the public budgetary system itself form part of public administration and their activities must be optimized in the framework of public administration reform,
the mechanism of financing public administration institutions and authorities, including its instruments and ways of control, rank among the principal tools of improving the efficiency of all public administration activities.

In addition, public finances experience structural and methodological problems and development tendencies of their own, reflecting manifestly the requirements of changes and further recommendations connected with the preparation for EU membership. In the course of public administration reform it will be necessary to attain the standard of public finance management, public administration financing, budgeting and financial control corresponding with EU standards.

6.2 Impact of Decentralization and Territorial Administration Reform on Public Finances

Decentralization and the establishment of another regional tier of public administration (self-government, state administration or both) will make a distinct impact on public finances. This planned step will necessitate changes (1) in the institutional structure of the public budgetary system, (2) in the taxation system and tax allocation, and (3) in redistribution among the individual public administration tiers in respect of public expenditure and subsidy policy of the Government.

To optimize relationships within public finances in connection with decentralization, competences will have to be divided among state administration (at central level), the regional tier of public administration and local self-government, not only with reference to the exercise of state administration or self-government, but also:

to production and distribution of public goods and services (in education, public health, culture, transport, etc.),
to redistribution (e.g. social transfers),
to stabilization (unemployment, economic development, etc.).

It will be necessary to optimize the scope of self-sufficiency of the lower (i.e. regional and local) tiers of the public budgetary system with reference to the present allocation of taxes and subsidy mechanism. The delegation of competences from the central level to lower levels must be accompanied by the generation of sufficient income sources enabling effective activities of not only public administration authorities and institutions, but also of public sector organizations which are or will be established by the regional or local administration itself.

Decentralization assumes appropriate changes in budgetary rules and the tax system, in the financing of central authorities, ministries and their organizations, in economic management rules applied to fully or partially budget-financed organizations including their transformation, in the rules of state property management, in public-budget sector accounting, etc. A number of these changes have been initiated, others are in the process of negotiations and first drafts are available, yet others will have to be drafted and prepared.

The decision on the amount of funds for public administration will continue to be based on the public choice principle (reflecting the democratic political system and the principles of political bargaining). The object of public administration finances will continue to consist in the formal bodies and institutions vested with the exercise of public administration. Their size in terms of property, budgetary funds and staff will be subjected to long-term verification. This does not exclude the implementation of target-oriented projects (programmes) with budgets of their own to be implemented in state administration like in other fields of public services. The financing of the public administration reform itself can serve as a good example.

State administration will be financed from the state budget. All expenditure will form part of the budget and all income, it any, will be returned to the budget. In the case of self-government bodies it will be necessary to decide about the quota of their finances provided, apart form the state budget, by the revenue from the property managed by these authorities, and possibly from other sources. Linking self-government authorities with the economy of the territory they administer can be a positive factor stimulating economic development of the territory; however, it may have negative consequences, some of which are well known e.g. from the economic management of communes.

At regional and local levels, self-government finances should be governed by the following principles:

(a) in the distribution of tax revenue it will be necessary:

to stabilize the shares of the state budget and the budgets of communes and regions in the total tax revenue in the course of time,
to divide the revenue from state taxes (shared taxes) among communes and regions equitably and not on territorial principle, i.e. according to the amounts levied in the respective territories,
to apply the principle of merit to the taxes in the levy of which the commune or region wield a certain power (e.g. the determination of tax rate, tax relief, etc.); this applies in particular to the real-estate tax and communal taxes (in the meaning of the prepared law),
to assure these objectives by (a) dividing the existing taxes into four groups according to whether their yield belongs totally to the state budget, totally to communal budgets, totally to regional budgets and those shared by all tiers, (b) determining the shares of the individual tiers in shared taxes, and (c) dividing their shares among communes and regions with reference to their populations using a system of ratios taking into account the fact that large communities provide certain public goods also for small communities;

(b) in policies governing subsidies:

to allocate subsidies from the state budget to communal and regional budgets exclusively on the basis of a Government-approved programme,
to apply to every programmes rules that are accurately defined, known in advance and maximally stable,
to periodically publish information on the distribution of subsidies among communes and regions.

6.3 Changes in Principles and Methodology of Public Budgets

A basic reform of the tax system has been carried out in the Czech Republic previously, as a result of which a part of public revenue has acquired a new form. The expenditure side of the budget, however, has remained almost intact - a fact testified to also by the basic legal norm (budgetary rules), in force since 1990 with minimum amendments. The problem consists in the very principle of financing in the budgetary area, the methods of preparing budget proposals, approving the budgets and implementing them. This is connected also with the budgeting method in the whole budgetary public systems (including the fully and partially budget-financed organizations).

A more objective assessment of annual budgets will be enabled by continuous medium-term (3-4 years) budgeting introduced recently in EU member states. The strategy of the reform of public administration finances (including public sector institutions) will also have to solve some more or less technical financial issues including:

selection between institutional or functional public administration and public sector financing, and application of results-oriented budgeting criteria and principles emphasizing the links between public expenditure and the quality of results achieved by public institutions,
preference of certain forms and types of relationships between various elements of the public budgetary system (such as target-oriented or general subsidies),
choice between input or output (products, results) financing within the public sector.

6.4 Financial Control

The issue of improvement of control mechanisms in the field of public finances (whether implicit or explicit) is highly topical in the Czech Republic not only in respect to public revenue, but primarily in respect to public expenditure. A simple comparison with EU member states reveals that the Czech Republic has no such institution as the Treasury through which payments from public budgets would be both processed and systematically controlled. Although there is an independent control body, The Supreme Audit Office, there is no professional control at Government level to control public finances including state administration. The existing control departments in the ministries, reporting to the ministers, cannot replace this function. The absence of these institutions represents a serious handicap for the integration into the EU. The functions of a democratic state must also include public control of state administration and self-government finances. Accordingly, the principle of publishing the financial statements, a public review of budgets and their use, etc. should be stipulated in relevant legislation concerning budgeting rules.

An essential step towards the improvement of efficiency, transparency and control of public administration finances will be made by consistently separating, both in the budget and in accounts, the exercise of public administration and self-government from other expenditure intended for public goods and services. The amount of funds required for public administration may be justified more objectively by various ancillary indicators, such as the ratio of the state administration expenditure and the GDP, or the per capita public administration expenditure in a region. The transparency and public control of expenditure required by particular public administration authorities will also be enhanced by using normative methods based on the measurability of some factors characteristic of their performance (e.g. the ratio of administrative costs of tax collection and the amount of taxes collected - an indicator stimulating the simplification of the tax system and greater use of information technology which, however, may also lead to higher fines or increase of taxes).

6.5 Harmonizing Public Administration Financing with EU Requirements

The harmonization of particular areas of fiscal policy with EU requirements includes legislative and institutional steps which will be reflected in public administration financing. It will be necessary to master the practical approach of EU member states to applying EU requirements to legislation and to concrete mechanisms and procedures in financial administration.

It will be necessary to clarify the cash flows from and to the EU budget (unification of rates, harmonization of the methods of funds collection, accounting and transfers to the EU budget, control, document filing, etc.).

In the methodology of compiling and using public budgets it will be appropriate to apply the principle of budgeting for several years, thus creating the prerequisites for joint participation of national funds in the financing of certain operations extending over several years. This is also connected with the aforementioned programme budgeting and continuous monitoring of long-term budgetary impacts of particular programmes and their socio-economic evaluation with reference to budget priorities. Perspectives reaching beyond one year are required in such instances.

Furthermore, an institutional base for administering structural funds (establishment of management units in particular ministries concerned with the use of these funds, etc.) will be built up gradually, though as a matter of priority. It is expected that PHARE will be helping in this endeavour.

Public administration finances will also be affected by decisions concerning the budgetary aspects of the handling of common funds. Czech legislation must apply the principles based on the Financial Provisions of the Community, provided by Arts. 199 through 209 of the Treaty, and related implementation provisions.

Entirely new issues concerning the circulation of resources will be faced by customs administration and other services protecting EU borders on the territory of the Czech Republic.

EU membership imposes specific requirements (at least with reference to previous development in the Czech Republic) on financial control. The changes in this field will have to be made concurrently with the changes in the budgeting process. These measures obviously will require a higher number of civil servants and a corresponding increase of the wage bill.

All these measures will create entirely or partially new systems of financial controls in state administration. They will be based on EU legislation at present in force, but above all will be guided by newly adopted legislation related to SEM 2000 (Sound and Efficient Management Programme). Foreseen measures include:

greater emphasis on continuous and preliminary financial control at each level of state administration with particular reference to the final user,
establishment of an independent financial inspector in every organization,
respecting the uniform rules for financial control of structural funds (Directives of the Council Nos. 2052/88, 4523/88, 4258/88 and others), for financial control in agricultural policy (such as Directives Nos. 729/70, 4045/89, 386/90, 307/91, 3508/92, 1553/95, 515/97), etc.

The establishment of internal control units necessitates also the establishment of a central state administration agency as an umbrella organization and methodological guidance centre for the total system of internal controls (see also Chapter 10).