Do governments adhere to their approved budgets? Insights from PEFA assessments

Why budget reliability matters

Accurate revenue and expenditure forecasting is crucial for effective budgeting to ensure that governments can adequately plan for public services, infrastructure projects, and social programs without unexpected shortfalls. When forecasting is not accurate, governments may not be able to achieve fiscal stability and deliver on policy priorities.

In this blog, we try to address whether governments adhere to approved budgets in terms of expenditures and revenue collections, and whether they tend to overbudget or underbudget.

We analyzed 307 pairs of Revenue Outturns (RO) and Aggregate Expenditure Outturns (EO), from publicly available assessment reports conducted with the PEFA framework across 85 countries and territories between 2012 and 2024. The PEFA (Public Expenditure and Financial Accountability) assessments use a framework which utilizes seven pillars covering different phases of the budget cycle. The first pillar, Budget Reliability, results from the other pillars and includes Aggregate Expenditure and Revenue Outturns.  

The PEFA framework scores deviations based on ranges and annual limits. For our purposes, we focused on the data in Dimensions 1.1 (Expenditure Outturn) and 3.1 (Revenue Outturn) of the PEFA assessments. Four distinct scenarios emerged from this analysis (see Figure 1):

1. Over-collected, Overspent – 18% of instances (Top-right in Figure 1, RO>100%, EO>100%)
2. Over-collected, Underspent – 19% of instances (Bottom-right, RO>100%, EO<100%)
3. Under-collected, Overspent – 14% of instances (Top-left, RO<100%, EO>100%)
4. Under-collected, Underspent – 49% of instances (Bottom-left, RO<100%, EO<100%)

We noticed that scenario 4 is the most common one, accounting for nearly half of the instances, where, in a given year, the government collected less revenue than budgeted and also spent less than budgeted.

_{Figure 1: Revenue Outturn % vs Expenditure Outturn % in the same year for countries — distribution of Over- and under- Revenue and Expenditure combinations (n=307) Data source: PEFA National Assessment Reports on http://www.pefa.org}

When Revenue and Expenditure Outturns are plotted along X and Y axis respectively (see figure 1), there is a positive correlation: 38.2% of the Expenditure variance is explained by Revenue. Additionally, the linear regression suggests that each percentage revenue change predicts a 0.59% expenditure change. To simplify, an additional 1% in revenue leads to 0.59% more spending on public services like schools, clinics, and roads. What this tells us is that if governments improve revenue management, they would be able to deliver better services to their people.

Based on our findings we observed two key points:

• Governments often overestimate revenue (63% of cases) and fail to meet their expenditure targets (68% of cases).
• Government underspending is probably due to lower-than-expected revenue collection.

What does this tell us? A revenue shortfall will likely result in spending below approved budgets leading to underperformance such as cancelling government programs or lowering quality of services. So, it is very important to have realistic revenue forecasting and effective tax administration to avoid underspending.

Source : World Bank