In planning the State budget, the best practice and the guidelines of the Organisation for Economic Co-operation and Development (OECD) must be used, long-term thinking must be promoted and the team work, where each responsible person is aware of their duties and undertakes responsibility for the quality of the work done, must be strengthened. Only then will the State budget become a tool for the development of the State and ensure the attainment of long-term goals and the improvement of public welfare. Following the review on the effectiveness of the State budget planning process, this conclusion was made by the State Audit Office, providing recommendations to the Ministry of Finance and proposals to the Cabinet of Ministers with regard to the improvement of the budget process.
After joining OECD in 2016, the public officials of Latvia highlighted the benefits provided by OECD membership, including the opportunity to receive advices from the most highly-qualified experts on the development of national economy and increasing the welfare level of inhabitants.
In OECD’s opinion, the State budget is an agreement between the State and its inhabitants on the way the State uses funds for the needs of inhabitants. Due to this reason exactly, the most prominent OECD experts have been working for more than ten years to assess international experience and provide clear guidelines to the governments of countries on planning the State budget, the application of which would have a positive impact on the welfare of inhabitants.
Is Latvia able and — most importantly — does Latvia want to make use of the benefits provided by OECD? In planning the State budget, do we think about the long-term development of the State and not just about living for the day and in debt? What prevents us from applying the OECD Principles of Budgetary Governance? Are those objective reasons or our unwillingness? The State Audit Office looked for answers to these questions by carrying out an extensive audit “Effectiveness of the Budgetary Governance System: Part 1 — Effectiveness Assessment of the Budget Planning Cycle”.
Within the framework of the audit, the State Audit Office assessed the compliance of budget planning and approval to eight OECD Principles of Budgetary Governance, including fiscal discipline, development planning, openness, democratic discussions and result assessment principles. This is the first assessment of its kind with regard to the planning of the State budget.
The State Audit Office admits that positive signs have been recently observed in the introduction of good budgetary governance. The Ministry of Finance has created a system for the supervision of fiscal discipline, simplified the preparation of budgetary requests, commenced the revision of funding historically allocated to budget units, and limited the practice of dividing deputy quotas. The work done is significant; however, there are no grounds for self-contentment. The internationally recognised good practice suggests that we have yet a long road ahead to be able to say that it is impossible to plan a budget more suitable for the interests of inhabitants.
The State Audit Office highlights that the still and ever growing national debt does not correspond to the interests of inhabitants or OECD principles. Due to the lack of fiscal discipline, the general government debt is refinanced instead of being reduced. At the end of 2016, it reached approximately 10 billion euro, which is almost 11,000 euro per employed inhabitant of Latvia. Moreover, over the last five years, the State has spent approximately 360 euro per employed person a year for debt interest payments to foreign and international financial institutions. The State Audit Office does not understand the unwillingness to fulfil recommendations provided by the Fiscal Discipline Council either: we have implemented, either fully or partially, just slightly more than a half of the provided recommendations. We would not like to think that the establishment of the council was a mere step to fulfil formally the requirements of some international organisation.
The State Audit Office also draws attention to shortcomings in the cooperation of State budget planning teams, i.e., ministries of sectors, the Ministry of Finance, the Cabinet of Ministers and the Saeima, which hinder formulating a high-quality State budget.
The State Audit Office has invited the Cabinet to motivate ministries of sectors to ensure the efficient use of budgetary funds according to stipulated goals instead of bringing pressure in order to maintain or increase the amount of expenditure. The Ministry of Finance, in turn, should carry out the assessment of the optimal level of national debt, stipulate a fiscal security reserve and calculate how much the State administration is allowed to spend. It is necessary to introduce the process of revising expenditure on the merits, analysing the use of the budget and looking for optimisation possibilities. The currently applicable regulatory framework must be put in order to ensure that it describes consequently and clearly budget planning processes. Documents to be submitted to the Saeima should show clearly the results achieved by means of budgetary funds of the previous year and the effects on the attainment of goals set by the State.
In assessing the responsibility of the Cabinet for the quality of the budget in general, the State Audit Office indicates the hurry, in which it is decided on revenue-increasing activities in the amount of 130–250 million euro every year. The influence of the coalition’s working group on the budget formulation process is considered to be an approach non-compliant with good practice. The group adopts crucial decisions on the distribution of additional funds, without observing the procedures set in the State and mainly focusing on proposals by political parties. Thus, activities for the total amount of at least 775 million euro were included in the State budget in the Framework Laws approved in 2014–2016.
The State Audit Office understands that the implementation of recommendations provided within the framework of the audit will result in any financial effects and, hence, supplements to the wallets of inhabitants in the medium or long term. The State Audit Office also expresses confidence that the reduction or elimination of identified problems, considering all the possibilities of applying the long-accumulated knowledge and experience of OECD already being a member country already, would enable Latvia to prove once again that we can be amongst leaders in OECD — the world’s most developed countries.