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

64 Salvatore Schiavo-Campo
transactions, the optimal policy response is to improve the budgetary
procedures, to set up specific procedures for those particular transactions,
or to do both, rather than placing the transactions themselves outside the
budget process. In practice, especially in developing countries, earmarking
arrangements, separate funds, or autonomous management may be desirable
to improve efficiency in public spending.
Nevertheless, EBFs are a common feature of budgetary systems almost
everywhere. In industrial countries, nonbudgetary functions account, on
average, for about one-third of total government expenditures (mostly for
pensions, which account for about 90 percent of nonbudgetary expenditures).
In African developing countries, the importance of pension EBFs is
much lower, but other extrabudgetary expenditures are much higher, and
EBFs account for between one-fifth and two-fifths of total spending (the
variation between countries is much greater than in industrial countries). 2
Thus, an alternative to avoiding EBFs is to distinguish between different
types of EBFs and make provisions to manage them and reduce their attendant
risks. This pragmatic and sensible approach is taken in a recent study
by Richard Allen and Dimitar Radev (forthcoming).
The bottom line is that budgetary management authority must not be
allowed to lead to loss of expenditure control or erosion of financial
integrity. Thus, the standards of scrutiny and accountability for expenditures
financed from funds, autonomous agencies, or special accounts should be
no lower than those applied to other expenditures. To verify that EBFs meet
these standards, their gross financial transactions must be regularly included
in the budget documentation even if no legislative approval is sought.
Types of Special Arrangements
EBFs come in many forms, the main types of which are discussed in turn
below, beginning with the most frequent, social security funds.
Social security funds
Social security covers a variety of services classified into three broad categories:
1. Social insurance, which is generally financed with contributions from
employers and employees and yields benefits linked to the contributions
2. Direct provision of a service or cash payment to a defined group of beneficiaries,
such as family allowances, pensions, and maternity grants
3. Social assistance—that is, payments or services contingent on investigation
of the needs and financial status of the beneficiary (assistance to the
elderly, handicapped, jobless, and so on).