Public finance and macroeconomy

Public finance and macroeconomy

Public finance and macroeconomy

The stability of the economy and the performance of countries' public financial management systems are two significant factors affecting the outcome of growth and development policies: these have a far better chance of success if they are implemented in a propitious environment. Progress in this respect also enhances domestic accountability towards citizens and predictability for private investors. The European Commission supports partner countries to improve their macro-economic framework and upgrade their public finance management systems with a variety of instruments.

/europeaid/file/seventh-african-fiscal-forum_enSeventh African Fiscal Forum

Inclusive and sustainable growth requires a stable economic framework and sound management of public finances. Both are also critical for the optimal use of development assistance, notably in the context of budget support contracts. The European Commission supports assessments and reforms of both macroeconomic and public finance management in partner countries.

Securing a stable economic framework

Promoting macroeconomic stability requires creating or maintaining the conditions for governments, enterprises and individuals to plan, to invest, and to anticipate changing circumstances. More specifically, it involves avoiding unsustainable external and internal deficits, swings in economic activity, high and/or volatile inflation and excessive volatility in exchange rates and financial markets, which often result in loss of jobs and reduced prosperity.

Macroeconomic stability is therefore central to inclusive and sustainable growth. It also contributes to more effective and efficient budget management. In the absence of a stable macroeconomic framework, budget outcomes are more likely to diverge significantly from forecasts, undermining the programmes that budget support is meant to advance.

The European Commission, in close cooperation with the governments of partner countries and international financial organisations, uses in-depth macroeconomic analyses in order to pinpoint aspects that might jeopardise the country's economic stability.

Macroeconomic analysis also informs the European Commission's policy dialogue with all partner countries, as well as the formulation of appropriate responses to external shocks and global economic developments. It is performed in close coordination with the assessment of public finance management systems as the two aspects are intertwined (e.g. tax policy and tax administration or debt management and debt sustainability).

Macroeconomic assessments are carried out to:

  • analyse the main macroeconomic aggregates and identify potential sources of instability that would endanger the strength and the persistence of growth, or the return to a stable macroeconomic framework and to a manageable level of debt;
  • assess the macroeconomic and fiscal policies in place and their contribution to stabilising the macroeconomic framework over the short and medium term;
  • evaluate efforts to strengthen domestic revenue mobilisation;
  • determine vulnerability to external shocks and strengthen macroeconomic resilience;
  • anticipate the impact of macroeconomic measures on public policies, and notably their financing, or on overall development objectives (e.g. poverty and inequality reduction).

These assessments are of particularly importance in the context of budget support contracts since a stability-oriented macroeconomic policy is an eligibility criterion to the instrument.

The European Commission works closely with the International Monetary Fund in this area.

 

Fostering sound management of public funds

A national budget is an instrument to implement public policies and a statement of the political intentions of a government. A sound system of public finance management (PFM) is essential for the implementation of this budget and these policies, for the delivery of public services and for the achievement of development objectives. It involves collecting resources from the economy, integrating them into the budget, allocating them and using them in an efficient, effective, economic, equitable and accountable manner. A sound PFM system should allow for fiscal discipline, in the first place, which otherwise could undermine macroeconomic stability.

The PFM system of a country comprises the full budget cycle including revenue administration, budget preparation, budget execution with cash management, procurement systems, internal controls and internal audit, accounting and reporting, external audit and scrutiny.

The European Commission carries out assessments of PFM systems in partner countries when it prepares its country strategy papers and programmes. Such analyses are performed regularly and are notably used within budget support contracts, for which improvement of public finance management is an eligibility criterion.

PFM assessments explore two key aspects:

  • the quality of countries' systems, which is analysed mostly through the ‘Public Financial Management – Performance Measurement Framework’ developed by the Public Expenditure and Financial Accountability Initiative (PEFA) and may be complemented by other dedicated tools for tax administration (TADAT), public investment management (PIMA), public procurement (MAPS) or debt management (DEMPA);
  • the PFM reform process and governments' efforts to improve its public finance management, the relevance and level of implementation of a country’s reform strategies, and the contribution of cooperation partners' support to PFM reforms.

The European Commission works closely with the International Monetary Fund, the World Bank and the OECD in this area, as well with regional organisations or financial institutions. In this context, a specific attention is paid to gender-responsive budgeting and to domestic revenue mobilisation, in general terms or in relation to natural resources and extractive industries more particularly.

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