A description of major expenditure and revenue measures and their contribution to policy objectives should be provided. Estimates should also be provided of their

current and future budgetary impact and their broader economic implications.

Costing of new revenue and spending programs

129. Budget discipline requires clear descriptions and careful costing of both continuing government programs and new policy proposals. As part of the budget documentation, countries should always include a statement describing any important fiscal policy changes

and their expected effects.⁶³ These should incorporate estimates of the separate impact of each new program on revenue and expenditure for the current year (which sometimes may be particularly dependent on the timing of the policy change or announcement). This will allow a clear picture of the factors that may cause budget outcomes to diverge from planned spending and thus improve accountability for fiscal policy implementation. Estimates should also be included of the current and future magnitude and impact of tax expenditures and of the future impact of new initiatives, which may increase once they come fully into play.

There may also be issues related to sustainability over the medium term and beyond.

130. It is also important that any discussion of new measures take into account the

implications for subnational governments in terms of resource requirements and expenditure responsibilities. Best practice is that the estimated fiscal effects of all proposed central government legislation, including the cost implications for subnational levels of government, be made publicly available.⁶⁴

131. For new revenue measures, it is important that forecasts be consistent with recent trends and realistic assumptions. Moreover, existing policies regarding tax expenditures need to be clearly understood. Several approaches to revenue forecasting are outlined in Box 7.

With regard to expenditure measures, rigorous costing is required to distinguish the separate effects of policy changes.

Broader economic implications

132. New policies, or new measures to promote existing policies, may have varying degrees of effectiveness and may have an impact spreading beyond the particular purpose to which they are directed or the individuals or group to which they are targeted. Reforms aimed at reducing fiscal deficits and improving macro stability, or at enhancing efficiency, may affect different income and social groups differently, and may hurt or benefit vulnerable and low-income groups more than others. It is important for transparency that some

assessment of these impacts be included in the budget documentation.

63 A good example of this is the reporting of budget measures in the United Kingdom, where a summary table of new budget measures and their estimated fiscal effects is provided in the budget document, and an annex expands upon each new measure in more detail. In France, existing policy expenditure (“appropriations for current services”) is clearly distinguished from “items of expenditure reflecting new policies.” This distinction is required by the organic budget law and, under that law, current services appropriations are subject to only one vote in parliament, whereas new policy items are subject to detailed voting processes (see France, Fiscal ROSC, 2000, paragraph 13). In the Netherlands, the fiscal costs of new policy initiatives are separately identified in the budget process and budget documents (see Netherlands, Fiscal ROSC, 2006, paragraph 34).

64 In the United States, the Congressional Budget Office (CBO) is required by law to advise the legislature of the estimated costs (and the basis of the estimate) that proposed federal legislation would impose on state and local governments (and on the private sector). See http://www.cbo.gov

133. Poverty and Social Impact Analysis (PSIA) refers to the analysis of the distributional impact of policies and policy reforms on the welfare of different groups, with a specific emphasis on the poor and vulnerable. Similar analysis can be applied to other effects (such as the environment) and target other parts of the population. Various approaches are available, from the most simple to more complex econometric techniques (Box 10). Good practice would require that budget documentation include at least a simple analysis of the differential impact of new policies and measures.

Box 10. Poverty and Social Impact Analysis

Understanding the impact of policy interventions on different groups is critical to designing effective policy strategies. Poverty and Social Impact Analysis (PSIA) refers to the analysis of the distributional impact of policy reforms on the welfare of different groups, with an emphasis on the vulnerable and the poor. PSIA helps to

• Analyze links between policy reforms and their impact on poverty or particular social groups;

• Explicitly consider trade-offs among reforms on the basis of their distributional impacts;

• Enhance the positive impacts of reforms, while minimizing negative impacts;

• Identify mitigating measures and risk management systems; and

• Assess policy reform risks.

Although there is no single methodological template for analyzing the poverty and social impacts of a policy, it is possible to identify key elements important for a good-practice PSIA. Key issues include the identification of

• Groups likely to be affected in a positive or negative manner;

• Implementation mechanisms for carrying out the reform;

• Key transmission channels (employment, prices, access to goods and services, assets, transfers, and taxes);

• Assumptions permitting the estimation of the expected magnitude and direction of the impact on key groups; and

• Critical risks that could change the expected impact of the reform.

Several definitions of PSIA prevail. The most basic refers simply to instances in which the social consequences of programs are considered, even if only on a qualitative basis. In many cases,

however, the term PSIA refers to cases in which analysis is supported by rigorous analytical studies.

These can include incidence analysis, which generally focuses on the impact of changes in tax and public spending policy on household income or welfare, often using econometric techniques.

Computable general equilibrium models are sometimes employed to incorporate fundamental links among production structures, incomes of various groups, and the patterns of demand. Social

accounting matrix multiplier models provide a comprehensive, flexible, and consistent system for organizing social and national accounts of a nation over a period of time.

Fiscal sustainability and fiscal risks