Public Financial Management and Nation-First Governance

This paper analyses the two concepts of Public Financial Management (PFM) and nation-first governance and explores how their combination helps in achieving multiple objectives. The paper adopts a comparative study approach by taking into account the top-performing OECD countries (USA, UK, Switzerland, and Canada) by using OECD indicators as benchmarks. It explores how fiscal transparency and citizen participation lead to a responsible government. Further, it brings out lessons for India.

Introduction

In the present time, the government plays multiple roles to achieve multiple objectives. Allocative efficiency, equitable distribution, stabilisation, and economic development are the prominent goals of a modern welfare government. Therefore, the government must collect revenue efficiently and direct its expenditure to meet priorities. To carry out its functions smoothly, the government needs to raise revenue from diverse sources and expend money on a variety of needs. A significant challenge before any government is the prudent management of public finance and its utilisation in a way that aims at the maximisation of welfare and economic development. Public Finance Management (PFM) is based on a set of rules, systems and procedures to provide a functional framework to the government to plan, execute and monitor public finances. Thus, PFM is a vital element of good governance in the present time (Allen et al., 2013).

In recent years, the concept of nation-first governance has emerged as a guiding philosophy for the government. The philosophy emphasises the need for holistic development of a nation in a way that is sustainable in the long term. It places the nation above everything else. An essential need to adopt this philosophy is a sound management of public finances, which can be achieved with the help of PFM. Thus, PFM turns out to be an indispensable requirement to practise this philosophy.

Conceptual Framework of PFM

It is hard to define the concept of PFM precisely. PFM deals with the laws, organisations, systems, and procedures available to a government to ensure efficiency, effectiveness, and transparency. PFM emphasises the “how to do” type of questions, focusing on budgetary systems, procedures, and institutional arrangements that ensure public policies are implemented effectively (Allen et al., 2013). Although PFM covers various tax and non-tax sources of public revenue, public borrowing, and public debt management, its central focus area is the management of public expenditure. Thus, PFM covers different aspects of government finance, like budgeting, revenue mobilisation, accounting, and auditing.

The PFM has been developed by incorporating concepts and approaches from different academic disciplines, like economics, political science, law, and management. The theoretical and conceptual framework for designing fiscal policy, maintaining macroeconomic stability and ensuring efficient resource allocation comes from two branches of economics i.e., microeconomics and macroeconomics. Political science and public policy provide PFM with the knowledge of how power and political decision-making processes influence fiscal policy and the management of public finances. In PFM, concepts like fiscal responsibility, budgeting, procurement, and auditing substantially depend on the discipline of law for their legal frameworks. Frameworks such as the International Public Sector Accounting Standards (IPSAS) and the International Financial Reporting Standards (IFRS) from accounting and financial management provide standards for fiscal reporting, transparency, and accountability.

An effective PFM aims to achieve the following three objectives:

1. Fiscal Discipline,
2. Efficiency in Resource Allocation, and
3. Efficiency in Financial Operations.

Conceptual Framework of Nation-First Governance

The philosophy of nation-first governance transcends the role of the government from a mere budget maximiser to a custodian of public wealth. The government must act for the maximisation of national welfare rather than for mere political gains.

The philosophy of nation-first governance transcends the role of the government from a mere budget maximiser to a custodian of public wealth. The government must act for the maximisation of national welfare rather than for mere political gains. Principles of integrity, transparency, accountability, equity, and sustainability play a guiding role for the government in designing policies and the utilisation of resources. The philosophy of nation-first governance conforms with the good governance framework of the OECD and Sustainable Development Goal number 16 of the United Nations, which emphasises on effective, inclusive and accountable nature of public institutions. It requires the budgets to be realistically prepared to pursue evidence-based policies, and public spending must be justifiable to the citizens. Thus, public participation also becomes an integral part of such governance.

Ideally, a benevolent and foresighted government works in the best interest of the society. Apart from short-term needs, it works for long-term objectives such as public investment in health, education, and infrastructure that create benefits in the future. To be realistic, only a benevolent, omnipotent, omnipresent, and omniscient government can function in an ideal manner in the best interest of the nation. However, a government is often constrained by a lack of information and scarcity of resources in designing policies. In the absence of perfect information, policies can never be designed perfectly, and the scarcity of resources hampers their proper and timely implementation. Therefore, the philosophy of nation-first governance definitely needs to be inseparably clubbed with the principles of PFM to achieve optimum results under constraints.

Evolution of PFM in India

The evolution of PFM in India has a long history of about two centuries. It has passed through the colonial system of command and control to the modern, sophisticated and technology-driven system. The PFM process has become more and more focused on accountability and transparency over the years. With the establishment of the Indian Audit and Accounts Department in the year 1860, the foundations of PFM were laid down in India. Another milestone in this direction was reached with the establishment of the Office of the Accountant General (AG) and Comptroller and Auditor General (CAG) during the British administration to achieve effective fiscal control and better compliance. Later, the Constitution of India built parliamentary control over public spending. Articles 112 and 117 provide for the process of the annual financial statement, that is the Union Budget, and special provisions for Finance Bills, respectively. Further, Article 148 constitutionalised the office of the Comptroller and Auditor General (CAG) of India, which is envisaged to be free from any fear or favour for audit independence. Three parliamentary committees — the Public Accounts Committee, the Estimates Committee and the Committee on Public Undertaking — also exercise their fiscal control.

Despite these changes, public participation, accountability, and performance orientation of the budgetary and fiscal processes remained very low. As a consequence, the fiscal health deteriorated sharply. By the late 1980s, fiscal deficit and public debt rose sharply to very high levels. Traditional fiscal management proved to be ineffective.

Economic reforms of the 1990s introduced programme-based budgeting and expenditure rationalisation. In this direction, the Expenditure Reforms Commission was also constituted in the year 1994, and concerted efforts were initiated to link public expenditure with measurable outcomes and performance. Despite these efforts, by the year 2000, the combined Centre-State fiscal deficit rose to 10 per cent of the GDP and consolidated public debt reached to an unsustainable level of more than 80 per cent of the GDP. This led to the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. It mandated international standards of fiscal prudence in India (RBI, 2021). The rule-based system constrained the fiscal capacity of the Centre and States in legal terms, as it laid down targets for fiscal deficit and public debt. Further, it mandated transparency and provided for medium-term fiscal policies. The Act proved to be a turning point in the Indian history of public finance management as it significantly reduced debt and deficit levels.

In the last twenty years, India has witnessed a paradigm shift in its PFM. Digital tools have been incorporated into the PFM. The Public Financial Management System (PFMS) was launched in the year 2009 to track, in real time, the ultimate reach of the funds to the last beneficiary. This system has significantly reduced leakages and enhanced transparency (NITI Aayog, 2023). Further, the DBT scheme, which was launched in 2013, enabled direct transfer of subsidies to the accounts of the beneficiaries by integrating PFMS, Aadhar, and the banking system. Introduction of the Government e-Marketplace (GeM) has digitalised government procurement through e-bidding. At the state level, the introduction of treasury computerisation, Integrated Financial Management Information Systems (IFMIS), and outcome budgets has helped in improving transparency and accountability.

The upheaval of COVID-19 reminded the significance of fiscal resilience, and therefore the Government in India has adopted reforms in cash management, public asset monetisation, and performance-linked budgeting. Like the UK’s Office of Business Responsibility, both the 15th Finance Commission and the RBI have recommended an independent Fiscal Council.

Traces of Nation-First Reforms in India

India has witnessed a paradigm shift in governance over the last ten years, wherein sincere efforts have been made towards the objective of nation-first governance in the country. In this phase, Public Financial Management in India has been increasingly targeted towards the broader objective of nation-first governance. The focus has been on reducing waste, preventing corruption, and ensuring that maximum number of citizens obtain benefits from public resources.

The three interrelated domains of nation-first governance

The phrase nation-first governance got prominence in public discourse during the 2010s. The idea emphasises that the government must prioritise stability, transparency, and inclusiveness. Further, fiscal accountability and welfare maximisation must be ensured by the government. The concept of nation-first governance has three interrelated domains:

• Welfare Maximisation: This objective refers to the attainment of maximum social welfare from the available resources. The government must ensure that the benefits of social security schemes and other welfare measures reach the targeted beneficiary without leakage of resources. Thus, corruption and other malpractices must be curbed.
• Fiscal Responsibility: The government has to entrust itself with fiscal responsibility in carrying out its expenditure towards various objectives in the best interest of the nation. Revenue deficit has to be contained within the maximum permissible limit to ensure that fiscal deficit remains within an affordable limit and public debt remains within a sustainable limit.
• Ethical Governance: The government has to promote honesty, transparency, and the spirit of public service in financial disbursements. A value-based system of rules and procedures must be developed to ensure that public organisations make honest, fair, and prudent decisions.

Economic Aspects of Nation-First Governance and PFM

Nation-first governance envisages a framework of fiscal and economic policies that augments economic stability, economic growth, and equitable development in an intergenerational context.

Nation-first governance envisages a framework of fiscal and economic policies that augments economic stability, economic growth, and equitable development in an intergenerational context. It requires a wise and prudent utilisation of the nation’s financial resources so that maximum welfare gains are obtained for people. Further, it requires an efficient utilisation of resources that prevents or minimises wasteful utilisation and ensures the highest socio-economic gains. Expenditure has to be enhanced on social overhead capital, such as physical infrastructure, power, schools, and hospitals etc., which are fundamental for the long-term development of a country.

The government should refrain from short-term populist schemes generating immediate socio-political gains to avoid unnecessary pressure on the government treasury. This may trap future generations in a debt burden contrary to the objective of the nation-first governance, which envisages a balanced and prudent spending to prevent an unsustainable debt burden on future generations. Borrowing today may be incurred, provided it creates future income-bearing assets.

A trustworthy fiscal framework needs to be practised to improve public trust in the government, which in turn will enhance taxpayers’ compliance. People are likely to contribute more to the treasury if they believe that their money is being utilised in the best possible manner.

PFM strengthens the relationship between macroeconomic policy and fiscal risk management. It helps in improving the delivery of public services through performance budgeting and decentralisation. It helps in enhancing accountability through greater public participation and overseeing institutions like fiscal councils and audit authorities, and transparency by adopting digitalisation and international accounting standards.

Global Frameworks

Global frameworks provide benchmark standards for countries to adopt for fiscal governance and contribute to the evolution of public financial management.

The United Nations (UN), in its Sustainable Development Agenda, emphasises sound fiscal governance. Under its Sustainable Development Goal (SDG) 16, the UN promotes the adoption of effective, transparent and inclusive institutions. The UN Development Programme (UNDP) promotes open budgeting and participatory planning.

Member nations of the Organisation for Economic Co-operation and Development (OECD), on average, have high fiscal transparency and accountability. The Budgeting and Public Expenditure framework of the OECD promotes the adoption of medium-term budgeting, independent fiscal councils and public participation. It also encourages member nations to adopt transparent and rule-based fiscal systems.

The Transparency Code of the IMF and the Public Expenditure and Financial Accountability (PEFA) programme of the World Bank provide benchmarks and systems for evaluating fiscal arrangements, in particular, to assess the credibility of budgets, predictability of revenue, expenditure control, and external audit mechanisms.

PFM in Selected Top-Performing Nations

The United States, the United Kingdom, Switzerland, and Canada are considered top performers in PFM practices and fiscal governance. We can have several insights from their functioning.

United States

In the US, the Government Accountability Office (GAO) and the Congressional Budget Office (CBO) play an instrumental role in maintaining the most transparent fiscal system in the country. These institutions function autonomously and provide their independent assessment of fiscal governance. The Government Performance and Results Act of 1993 has been very effective in performance measurement across federal agencies. The US has developed the usaspending.gov portal, where government expenditures can be tracked by anyone. Thus, the US PFM system, with its openness, public scrutiny, and institutional checks, is well synchronised with the objective of nation-first governance.

United Kingdom

In the UK, the Office of Budget Responsibility (OBR) maintains transparency and accountability in fiscal governance through independent economic forecasts and an assessment of the alignment of fiscal policy with fiscal targets. Apart from that, fiscal prudence is further ensured by the Charter for Budget Responsibility, which limits borrowing and mandates balanced budgets across economic cycles. Thus, the PFM system in the UK effectively ensures that fiscal stability is maintained to boost confidence in the government.

Switzerland

In Switzerland, the PFM system has a unique approach in the form of a ‘Debt Brake Rule’. It ensures that the Swiss public debt does not grow. It restricts public expenditure to levels consistent with cyclically adjusted revenues. In case of overspending in a year, expenditure compression has to compensate for it in subsequent years. The country has sustained one of the lowest debt ratios among developed economies. Its citizens also participate directly in fiscal decision-making.

Canada

In Canada, the Parliamentary Budget Officer (PBO) carries out an extensive analysis of the government budget and provides independent fiscal analysis to Parliament for transparency and accountability. Open data initiatives and outcome-based budgeting are other instruments to enhance inclusivity and national solidarity, fostering nation-first governance in the country.

Thus, we see, in these countries, that independent fiscal institutions, legal fiscal rules, and public participation build public trust, stability, and credibility. India has made significant progress in strengthening its PFM systems, yet insights from best international practices can further improve this system.

Way Forward for India

India’s Public Financial Management (PFM) system, particularly, FRBM Act, 2003, PFMS, DBT, and GeM, has enhanced discipline, transparency, and efficiency in public funds utilisation. Still, some challenges remain in this system. While the Union government has adopted a standard PFM system and consistently performed well on fiscal discipline in the last two decades, state governments have shown different levels of fiscal discipline. Further, in India, audits are delayed, public participation in budgeting remains low, and detailed fund utilisation statistics are not readily available. In spite of the Finance Commission’s recommendations, India does not yet have an Independent Fiscal Council, which can greatly help in developing a stronger and trust-based fiscal governance system.

India needs to speed up its auditing system, for which the CAG needs to be equipped with modern digital tools. There is a need for a portal for an integrated fiscal database that connects central and state ministries for real-time monitoring. Populist measures before elections that enhance public expenditure disturb fiscal discipline. Such expenses need to be curbed. There is a need for better coordination between the Centre and the States. Training and upgradation of administrative skills, along with ethical standards, can take India closer to the international standards of PFM and nation-first governance.

Conclusion

Public Financial Management (PFM) helps the government in maintaining fiscal discipline. It helps in achieving operational and allocative efficiency in public finances. The philosophy of nation-first governance places the national interests above everything else.

Prudent management of public finances is an essential part of the efficient functioning of the government. Public Financial Management (PFM) helps the government in maintaining fiscal discipline. It helps in achieving operational and allocative efficiency in public finances. The philosophy of nation-first governance places the national interests above everything else. It emphasises unity, integrity, welfare, and national progress of the nation as the most important goals. Public Financial Management reflects governance values, while nation-first governance is about the national character of public policies. The ultimate goal of nation-first governance is to build a nation that citizens can trust. PFM creates the foundation for the same. A sound system of PFM together with the philosophy of nation-first governance can achieve greater accountability, transparency, integrity, and development. For India, the way forward involves strengthening and creating institutions, inculcating ethical standards, and expanding citizen participation. Public money should be spent for collective purposes and with responsibility.

References