Public financial management is a topic that has only quite recently attracted the attention it deserves. For a long time, fiscal policy (and, more broadly, public finance) focused on how the levels of taxation and government expenditure affected the macroeconomic stability of countries and how the design of tax systems and the structure of spending programs influenced microeconomic efficiency and possibly economic growth. The practicalities of collecting revenue and allocating spending were considered separate topics that, at least among macroeconomists, were regarded as being of lesser importance. For a long time more attention was generally paid to economic aspects of taxation. The budget has always mattered, because it is the instrument used by governments to present their fiscal, tax and expenditure policy choices and because it is a statement of intentions for which the governments will be held accountable by voters. Yet the processes of budgeting attracted little attention over the years and remained an area too complex for the average voter to pay much attention to.
Macroeconomic distress and resource misallocations often reflect poor budgetary decisions. However, they may also be a consequence of shortcomings in the procedures and in the rules that govern the design and the implementation of national budgets. These can create “principal–agent problems” and can occasionally lead to corruption, with the consequence that public resources may end up in part being used in ways different from those intended in the budget. Just as it is now widely recognized that the effectiveness of a tax system depends on both its statutory design and its ability to provide needed public revenues in a fair and efficient way, so the effectiveness and efficiency of government expenditure depend on the capacity to reflect the spending decisions that have been made by policymakers in a realistic and credible budget. This would be a budget that is properly funded and that can be faithfully and successfully executed. Unfortunately, in addition to being complex, modern budgets are often more and more influenced in their formulation by decisions made by past governments – decisions that to some extent have tied, legally and politically, the hands of the current governments – and by problems that may develop between a budget’s formulation and its implementation.