Public Sector Governance and Accountability Series: Budgeting and ...

The Budget and Its Coverage 81
example, a differentiated income tax rate according to family status), the existence
of a tax expenditure may be debated. There is also debate about the
methodology for assessing the impact of tax expenditures, because some tax
expenditures may have an impact different from that of direct spending if
changes in the behavior of taxpayers are taken into account.
Tax expenditures are granted through tax laws. In several countries, these
expenditures are presented together with the expenditure budget but are not
submitted to the same system of internal control and legislative authorization
as other expenditures. Therefore, tax expenditures are often an easy and
less transparent way of granting special benefits to specific groups. In certain
cases, the beneficiaries are less clearly identified than are those who would
benefit from direct spending. As a result, tax offsets can often produce results
that are completely different from the stated objectives. For example, highincome
households can benefit more than needier households from tax credits
than they can from family allowances targeted to low-income groups. Moreover,
tax offsets (particularly on goods and services) create loopholes within
the tax system itself.
Tax expenditures should be subject to an explicit tradeoff against new
spending initiatives and should be as transparent as possible. Ideally, as for
government lending, the direct impact of tax expenditures should be budgeted
in gross terms. This procedure is possible for tax expenditures that are
easy to measure and monitor (such as tax refunds or tax offsets granted
according to the provisions of a contract). However, because measuring most
tax expenditures is difficult, this approach cannot be generalized.
Even though explicit budgeting of tax expenditures can be considered
only in specific cases, an assessment should be included in the regular process
of budget decision making. For this purpose, a statement of tax expenditures
should be produced regularly, to allow a review of tax expenditure policy during
budget preparation and to make tradeoffs between tax expenditures and
direct spending. Some industrial countries (for example, Belgium, France,
and the United States) append such a statement to the budget document. This
approach enhances legislative scrutiny of government policy.
An illustration of good reporting of tax expenditures in a developing
country is provided in box 2.5.
Basic Budget Legislation
Because the budget is a fundamental legal instrument, the budgetary principles
and rules must be codified in a form appropriate to the legal and
administrative culture of the country concerned.