Euro Update (8): The state of the Portuguese Budget

I took a break from my Christmas break to report on the scary state of affairs at the budget office of the Portuguese Finance Ministry. However, I only got around publishing it online now. This is obviously not the result of my own journalistic effort, but rather the result of being able to read Portuguese news. Despite of the respite imposed by the holidays, I felt it was appropriate to share what insights this less-than-exceptional skill endowed me with with non-Portuguese speakers, given that they are the ones who will have to foot the bill.
In an article by João Ramos de Almeida, the Portuguese daily newspaper “Público” reports on December 19, 2010 that the Portuguese Finance Ministry particularly its Budget Office, known as the Directorate General for the Budget ( Direção Geral do Orcamento), is in complete disarray. The article was motivated by two facts. Firstly, the belief that the previous director General for the Budget resigned due to disagreements with the government and secondly, by a recent demand of the central Government, that expenditure targets be imposed and reviews be undertaken on a quarterly basis.

The first belief is held despite public denials by the said Director General for the Budget, and are backed by nnamed sources. The second fact was problematic because the imposition implied it did not exist until then, which was seen as a gross failure of the Budget Office. As the article argues, “The ability of Budget Office to control the budget has been deteriorating over the years. In 2009, the closing of the general account of the state was particularly difficult because of gaps in accounting. And in 2010 the situation as not improved. According to various sources this degradation reflects the fragile accounting control of public expenditure, the inconsistency between the instructions given to services and, since 2007, the absence of Budget Office audit to verify the numbers reported. The result we should point out is the experience of artificial bumps to expenditure and revenue, which have deteriorating effects on the control of public spending by officials from the Ministry of
Finance”.

This chaotic situation is illustrated by three exemplary failures: firstly, the Budget office suffered a technical computer problem on December 9, 2010 which caused unexplained problems to the public finances. Secondly, the managerial chaos it finds itself in has caused it to delay the implementation of the Official Public Accounting Plan, targeted at allowing it to keep track of budget developments in real time by 2012. Finally the same article reports that all of this is happening with only one civil servant responsible for balancing the accounting books of the Portuguese state.
Another article from the same daily newspaper, the reference of which I can’t find right now, also reports on criticisms by the Court of Accounts (the only state budget and accounting monitor) that the government is delegating accounting responsibility for certain forms of expenditures to agencies for which it is ultimately responsible. I checked the web site of the court of Accounts and this criticism refers to the accounting year of 2009, the latest for which the court has published any such report (official summary report here).

If I’m not mistaken, this is what is called Off-Balance-Sheet Accounting. What off-balance sheet accounting does is that it creates a third party that is able to contract debt in its own name and to which some responsibility is delegated. It borrows today to pay for the costs of those delegated tasks, the payment of interests and debt to maturity of which will be up to the principal (the central government), when they are due, given that the agency lacks independent resources. However, these debts only show up on the agencies’ books, not the government budget. This practice of off-balance sheeting expenditure implies higher costs to the state in the future than the ones it is accounting for now and is the reason why the Court of Accounts criticized the government, I think.

On top of this, he Portuguese daily, Diario de Noticias claims that there are at least 13740 public organisations through which the state performs off balance sheet operations, of which only 1724 have public accounts, of which the Court of Accounts is only able to audit 418 (Download the data on Organisations that use state resources, DN Jan 2011, List of Portuguese Public Trusts, DN Jan 2011 and List of Portuguese Public Institutes, DN Jan 2011. Alternatively consult the newspaper’s original websites here, here and here). If this is true, then the Court of Accounts only fulfills a little over 3% of its responsibilities.

All this sounds pretty alarming and makes me fear that through incompetence, smart arsery and lack of resources the Portuguese state has exposed itself to corruption of the sort that has brought Greece to its knees. Hopefully 2011 will prove the article wrong and consequently post-pone my fears…

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