Budget preparation in Denmark

The Budget Preparation process in Denmark generally follows the same pattern every year.

 

1. The Budget cycle
2. Institutions in the Budget process
3. Establishing Budget preconditions
4. Setting up overall Budget targets
5. Follow-up

1. The Budget cycle

The Budget Preparation process in Denmark generally follows the same pattern every year. The timestable is desribed in the constitution, where the law prescribes that the general government draft Budget bill should be introduced before the end of August, and the Parliament should pass the approved Budget bill or pass a provisional appropriation before the finansical year begins.

From the first preparations of the Budget proposal it takes about 1 year before the Parliament decides on the Budget and about 2½ years before the fiscal accounts can be presented to Parliament.

The overall schedule are illustrated in the following table:

Time	Process
January	Ministry of Finance examines budget preconditions and proposes overall Budget targets
Early February	Break down of overall budget targets to ceilings for consumption, income transfers, and investments for each ministry
May	Line ministries give their draft Budget proposals to The Ministry of Finance
May - June	Ministry of Finance performs technical scrutiny of the Budget proposal and holds discussions with line ministries on the financing of new initiatives etc.
August	Last minute estimates of the economic situation and the influence on the Budget proposal
End of August	Presentation of the Budget proposal
Early September	First Parliamentary discussion on the Budget proposal
Early November	End to political negotiations on the Budget proposal
Mid November	Minister of Finance proposes the Governments amendments and changes to the Budget proposal (including the result of the political negotiations)
End of November	Minister of Finance presents amendments due to a final estimate of the economic situation and the influence on the Budget Proposal

Mid December

Third and final Parliamentary discussion on the Budget Proposal

2. Institutions in the Budget process

The Preparation of the central Government Budget in Denmark is done in co-operation between several levels of Government. The different authorities play their own special role - not only in the preparation of the Budget Proposal, but also in implementing the Budget, and controlling the outcome.

The authorities and the functions they perform can be found in every country. A closer study will however show differences with regard to:

· Procedures used in the Budget preparation and appropriation process, and during Budget implementation, follow-up and control.

· Actual influence, that the different authorities have at different occasions during the process.

This presentation will give an introduction to the authorities and their role in the Danish Budget and appropriation system.

Parliament
The Parliament is the central appropriation authority. According to the Danish constitution no expenditure may be paid without a prior appropriation from the Parliament, and no tax may be collected if it is not decided in a law.

As for the Budget procedures the Danish constitution states that the Budget Proposal must be presented to Parliament at the latest four month prior to the beginning of the fiscal year.

The Parliament can not make its own Budget Proposal, but it is entitled to decide changes to the Governments Budget Proposal before finally adopting the Budget.

The Parliaments Finance Committee functions as the appropriation authority during the fiscal year. It is also in the Finance Committee discussions on the detailed contents of the Governments Budget Proposal are taken. Usually the Parliamentary debate on the Budget Proposal follows a broader perspective on the economic policy.

When the Budget Proposal has been adopted by Parliament and the fiscal year has begun, changes to the appropriations in the Budget can be implemented through applications to the Parliaments Finance Committee. Such applications must contain a full explanation to why a change is necessary, how it will be financed e.g. through cuts in other appropriations or reserves. Furthermore an application must bee approved by the Ministry of Finance before it can be sent to the Finance Committee.

This procedure makes the Danish appropriation system very flexible because most applications to the Finance Committee are passed within 1-2 weeks. As a special Danish practice all applications passed by the Finance Committee during the fiscal year are combined in one supplementary appropriation-act by the end of the fiscal year.

Government
At Cabinet-level only a few general economic discussions are taken during the year. Generally most economic discussions in the Government including Finance Policy and Economic Programmes are taken in the Cabinets Economic Committee (a group of four ministers where the Minister for Finance presides). In specific matters this Committee can call on other ministers.

In January the Cabinets Economic Committee decides on ceilings for the coming year (i.e. spending limits for each ministry). This discussion also includes a broader economic discussion on the global economic targets.

In June the Cabinet discusses the result of the Budget Preparation process and decides on the Budget Proposal for presentation to Parliament.

Ministry of Finance
The Ministry of Finance coordinate the Budget process. It is the Minister of Finance who presents the Budget Proposal to Parliament on behalf of all cabinet ministers.

Under the Danish system no cabinet minister can contact the Parliament or its Budget committee in appropriation issues without a prior acceptance from the Minister of Finance.

The functions of the Ministry of Finance in the Budget process can be divided into four major tasks:

· To make Guidelines and Directions to bee used by the spending ministries when drafting the Budget.

· To collect draft Budget Proposals from the ministries and combine these to the final Government Budget Proposal.

· To follow-up on Government revenue and spending and make economic forecasts and calculations as preparation for Government decisions on economic policy.

· Through the Agency for Economic Management to ensure the accounting in the agencies and to present the fiscal accounts after the end of the fiscal year.

The first three functions are necessary to ensure that the Minister of Finance has the background to present a coherent economic policy based on actual projections of the Fiscal Balance for the Central Government.

Due to practical considerations the functions of accounting are placed with the Agency for Economic Management. This is to ensure the best possible use of computer technology, but also due to financing considerations. In Denmark the Ministry of Finance does not make money transfers to spending agencies. The agencies have access to draw directly on the Central Bank. The accounting and payment systems gives the agencies regularly updated reports on how much have been spent of the appropriation. These reports are also sent to the relevant ministry.

Spending ministries
All Government administration in Denmark is based on the law of responsibility of each cabinet minister. The law determines that the minister are politically responsible for all decisions taken within his area, but does not prohibit a delegation of decision-power to lower levels within the ministry.

This implies that all appropriations decided by Parliament are given to a minister. From this also follows that every spending decision in the agencies are taken on the Ministers responsibility.

The spending ministries therefore have two major functions in the Budget process:

· They have to present a draft Budget Proposal for the ministry and all its agencies to the Ministry of Finance.

· They have to follow-up on the actual Budget and take action if an agency have difficulties to keep the given appropriations.

If a spending ministry during the Budget follow-up finds it necessary to apply for a change to an appropriation, the application and the financing must be approved by the Ministry of Finance before it can be submitted to Parliament.

Spending agencies
The spending agencies are where the actual spending of the appropriations decided by Parliament are done. In the Danish Budget system they are involved in several parts of the Budget process.

As mentioned above they operate on behalf of the relevant minister and on his responsibility. The amount of decision-power delegated from the minister to the agencies can differ from ministry to ministry. This also applies to spending decisions.

In most cases the Budget process within a ministry starts with the minister asking the different agencies for draft Proposals to the Budget for their operations. Later in the Budget process agencies usually are asked to help in the process of giving priority to marginal spending reductions or expansions.

3. Establishing Budget preconditions

As mentioned in the first section the Budget process begins approximately one year prior to the beginning of the fiscal year.

Before the actual drafting of the Budget Proposal can be set in work, several preconditions have to be determined. These preconditions are all based on an economic analysis of the Danish economy.

This analysis is first of all used to see what will happen if no policy-actions are taken. In other words the analysis determines the statistical basis for the Budget preparation.

As an appendix to the Budget for the current year, multi-year Budget estimates are presented to Parliament.

In the multi-year Budget estimates activity-based factors have already been implemented. Among these are factors are demographic developments such as the number of old-age pensioners and the number of students at higher education’s, but also other factors e.g. results of political agreements on the number of police officers and the level of expenditure to foreign aid programmes are implemented.

Furthermore the results of the latest economic analysis regarding cyclical expenditure i.e. unemployment benefits and some social welfare programmes also are included in the multi-year Budget estimates.

What the new economic analysis provides are new estimates with regard to cyclical expenditure and forecasts of the inflation.

As the multi-year Budget estimates are provided in the same price-level as the Budget for the current fiscal year. It is important to have an estimate of the inflation to determine the price-level for the coming fiscal year. Furthermore it is important that the same forecast of the inflation is used in all ministries and agencies during the Budget preparation to ensure the consistency of the Budget Proposal.

The economic analysis is the basis for forecasts of the inflation on:

· Salaries and wages

· Working expenses

· Construction expenditure

· Entitlement expenditures (income transfers)

· Tax basis (for collecting income-tax, VAT etc.)

· Revenues (other than taxes)

The Ministry of Finance distributes these forecasts to all Government agencies from the beginning of the Budget process. Later on these Budget preconditions are only changed if an economic analysis shows large and important deviations.

4. Setting up overall Budget targets

The general framework of the Budget process is the setting of ceilings for each spending ministry, within which they have to present their Budget Proposal to the Ministry of Finance.

The system of ceilings consists of three spending limits: Comsumption, income transfers, and investments. Beneath the spending limit for consumption there is a special limit for salaries, and beneath the limit for income transfers is a sub-limit for discretionary expenditure programmes.

An important part of the system with ceilings is that the allocation of the spending limit lies with the spending ministries. The Ministry of Finance controls the overall spending limits and whether the spending ministries keep their ceilings.

The Budget process starts in the beginning of January with an evaluation of the Danish economy with the purpose of establishing an acceptable overall expenditure level.

In the beginning of February the ceilings for the individual spending ministries are decided by the Cabinets Economic Committee.

During the 1980s the main fiscal objective were to reduce and eliminate the deficit and at the same time hold the non-cyclical expenditure at the same level in real terms. Due to demographic changes this implied a strong fiscal policy. Since 1993 the fiscal objective have been re-evalu­ated. Growth in non-cyclical expenditures must be beneath the growth in the economy and priority has been given to deficit reduction and in the latest years with surplus to debt reduction.

It is to ensure that these fiscal objectives are in line with the proposed overall spending limit, that the economic analysis are evaluated by the Ministry of Finance before the ceilings are prepared and proposed to cabinet.

But apart from the economic analysis of the economy the Ministry of Finance also evaluates the Budget for the current year with respect to technical aspects as:

· Expected change in expenditure due to demographic conditions

· Actual spending in the preceding year

· New estimates for income transfers

In this evaluation process the Ministry of Finance also takes into account the expected expenditure development in the different spending programmes as presented in the multi-year Budget estimates.

Furthermore the Budget for the spending ministries is evaluated aiming at finding spending programmes, where cuts can be proposed. Targeted cuts proposed by the Ministry of Finance will however only become effective if the relevant spending ministry adopts them.

However the Ministry of Finance does incorporate the Proposals in the ceilings presented to the Cabinets Economic Committee. This commits the spending ministries to incorporate the cuts, come up with other Proposals or negotiate a raise to their ceilings.

Finally an important part of the evaluation process is to find the level of total expenditure that can be accepted with the overall target of a growth in Government expenditure that is below the growths in the economy in mind.

Based on the above-mentioned considerations and evaluations The Ministry of Finance prepares a decision paper for the discussion in the Cabinets Economic Committee with Proposals of ceilings for the different spending ministries.

A part of this decision paper is the allocation of possible targeted spending reductions or proposed analysis of spending programmes.

The Cabinets Economic Committee decides to the decision paper in the beginning of February. After deciding on the ceilings the spending ministries are given approximately three month to prepare their draft Budget Proposal within the decided ceilings.

Upon receiving the draft Budget Proposals from the ministries the Ministry of Finance will make analysis and technical scrutiny of the requests. A part of this process is to make sure that Budgets are kept within the ceilings.

5. Follow-up

During the fiscal year the spending agencies have to control spending and follow-up on the allocated appropriations. If this follow-up shows that the given appropriations are about to be exceeded, the agency must either take actions to reduce spending or apply for a raise of the appropriation. Such an application cannot be sent directly to the Parliament Finance Committee, but must go through the relevant minister and approved by the Ministry of Finance.

Two times a year in May and September all ministeries have to repport a balance sheet and the expected economic development to the Ministry of Finance. Afterwards the Ministery of Finance presentes the informations from the ministeries to the Parliament in the publication Budget Outlook (Link til Budget Outlook).