Budget reserves
Putting money to one side as a budgeting instrument
Ministers can put money to one side in a budget reserve. This is useful if it is not known how high certain expenditure will be or in which year it will be incurred. There has been an increase in the number and size of budget reserves in recent years. We asked why and what were the advantages and disadvantages of budget reserves.
Conclusions
The growth in the number of budget reserves (from 11 in 2009 to 23 in 2014) is chiefly the outcome of new budget rules introduced in 2012. Budgets must now include a reserve to cover government guarantees, loans and sureties. The increase in the value of the budget reserves (from €918 million in 2009 to €1.8 billion in 2014) is due chiefly to two reserves, those formed for sustainable energy and for asylum policy. The government has been forced to form reserves in these two policy fields on account of the extreme fluctuations in expenditure.
The transparency of budget reserves is suboptimal. Parliament does not receive all the information it should. Improvements are possible in the following three areas.
1. Disclosure of movements in reserves
Ministers disclose the balances of their budget reserves in their trial balances every year. A minister may sometimes include a note to explain movements between the opening balance and the closing balance of a reserve, but not always. If a minister does not provide this information, parliament does not have a full understanding of how a budget reserve develops over time.
2. Agreements on budget reserves are not public
Some line ministers have made agreements on their budget reserves with the Minister of Finance that are not made public. The Minister of Finance and the Minister of Economic Affairs, for example, agreed in 2013 that most of the budget reserve for renewable energy production would be ´cleared´ in the accounts when a new government took office. This information is relevant to parliament but was not shared with it. Non-public agreements have been made regarding 16 of the 23 budget reserves that had been formed in 2014.
3. Explanations of movements in and the size of reserves
The relationship between additions to and releases from a budget reserve and the expenditure necessary for a particular policy is not always clearly explained to parliament. Ministers also do not always explain why a budget reserve is as high or as low as it is. This make it difficult for parliament to decide whether the amount in the reserve is actually necessary to achieve the policy goals.
Recommendations
Include more detailed explanatory notes on budget reserves in the trial balance
The House of Representatives could better exercise its right to approve the budget if it received more information in the explanatory notes to the trial balance. We therefore recommend that the House require ministers to provide more detailed notes on budget reserves. We further recommend that ministers who hold one or more budget reserves include a table in the notes in the trial balance with brief information on the nature and purpose of each reserve and the additions to and releases from it.
Disclose legal obligations separately
Legal obligations may attach to parts of a reserve. The House is not free to make changes in those parts. If a distinction were made in a budget reserve between the part that is encumbered by a legal obligation and the part that is not, it would be easier for the House to see where it could exercise its right of amendment without causing problems.
Make all agreements on reserves public
We recommend that ministers who hold one or more budget reserves make public all agreements they make with the Minister of Finance regarding those reserves.
Keep accrual-based accounts as well as obligation-cash accounts
Our final recommendation to the Minister of Finance concerns the accounts kept by central government. Putting money to one side in anticipation of future expenditure is really an accounting trick arising from the basic rule of the obligation-cash accounting system used by central government. In this system planned cash expenditure must remain within the limits set for a budget year. The same is true of obligations entered into. The accrual accounting system used by the municipalities and provinces does not have such a restriction. Budgeted funds that are not utilised may be carried forward to the budget for the following year. In view of the growing importance of budget reserves we recommend that the Minister of Finance consider keeping accrual-based accounts as well as the strict obligation-cash accounts.
Response of the Minister of Finance
The Minister of Finance undertook to include more detailed explanatory notes on budget reserves in the trial balance. The requirement since 2014 to provide more information on the risk reserve will be tightened up in 2016. He will also act on our recommendation to make public all agreements on budget reserves made with the Minister of Finance.
The minister also agrees with our recommendation to make a distinction in the trial balance between that part of a reserve that is encumbered by an obligation and that part that is not. In his opinion, though, it should be recognised that the States General have already committed themselves to expenditure paid from a budget reserve if it is required by law.
In conclusion, the minister proposed that a working group should be set up with the Court of Audit to study the advantages and disadvantages of central government keeping accrual-based accounts. We wrote in our afterword that we welcomed his suggestion and looked forward to discussing it with him.