Crises place extraordinary stress on countries’ PFM systems.

With high uncertainty and changing circumstances, budgeting becomes a continuous reactive process that strains existing procedures, assumptions, and timelines.  

Impact of Crisis on 
Expenditure Outturn

Key Insights

Significant overspending occurs at the aggregate level when there is a crisis (e.g., the Global Financial Crisis in 2008 and the onset of the COVID-19 pandemic in 2020).  

Fewer countries were able to maintain credible budgets in 2020 when compared to 2019. Of the 77 countries that provided data for FY2020, about 57 (or 71.25%) reported budget deviations larger than +/- 5%. This implies that the COVID-19 pandemic significantly altered priorities. Approximately 47.5% (or 38 countries) overspent their budgets while the remaining 42 countries underspent.

When a crisis strikes, it affects everyone, including important government institutions who are under significant pressure to make quick decisions to safeguard lives and livelihoods. The urgency to act can change existing roles and responsibilities, and challenges a range of stakeholders to devise and implement the crisis response.

The PFM system becomes most stressed during the crisis response stage due to the urgent need to act, reprioritize, and quickly channel resources to priority spending units. Delays can be catastrophic. Consequently, the pressure to respond can supersede established rules and procedures of PFM systems, which is defined as crisis budgeting.

What is Crisis Budgeting?

Definition: A situation in which “budgeting is fundamentally altered, if only temporarily, by pressures that overwhelm established policies and practices”

-Schick, 2009

According to Schick, crisis budgeting is a temporary alteration of conventional budgeting due to pressures that overwhelm established policies and practices. It is characterized by special procedures, improvisations that redistribute budgetary power, and significant changes in revenue or spending outcomes. Crisis budgeting is a recognition that the PFM policies and practices established for ‘normal times’ may be too rigid and impractical during a crisis. Instead, greater flexibility and adaptability are required, both on the revenue and expenditure sides.

Urgent revenue mobilization is often needed to finance the crisis response. There are two main sources of crisis revenue:

As governments take on this additional revenue, it is likely to influence their debt management strategy. During a crisis, expenditures typically rise while revenue typically falls, leading to larger fiscal deficits than anticipated. Therefore, additional revenue is often needed to help finance the crisis response, which may also include tax relief actions and other economic and social measures. Debt service payments, however, should be safeguarded to avoid a potential default, which would further exacerbate the crisis. It may thus be necessary to make suitable adjustments to the annual borrowing program and issuance calendar and/or to take other measures to ensure debt management is aligned with the government’s policy objectives.

Most of these crisis budgeting tools are discouraged during normal budgeting times.

Many budgeting processes have evolved to discourage flexibility and adjustments, which can lead to higher risks of fraud and misappropriation. During a crisis, however, the rigidity of established rules and procedures can inhibit the government’s ability to respond. With the added flexibility of crisis budgeting tools, priority spending can be accelerated to ensure government action benefits those in need.

A crisis, however, creates new opportunities for integrity violations. As controls are relaxed to urgently spend funds, there are increased risks for fraud and corruption in public procurement and stimulus packages and within public organizations. For example, during the COVID-19 crisis, there were cases of contracts being awarded to dubious companies, price gouging on key equipment and supplies, and many other instances of fraud (see, for example, OECD 2020).

“Achieving the appropriate balance between flexibility and accountability is more important than ever.”

As funds are rapidly disbursed to the front lines, governments need to ensure that their PFM systems can effectively track and guarantee the efficient use of resources. The following additional PFM measures are critical to effective crisis governance.

“Once the crisis ends, it is essential that budgeting reverts to pre-set routines, stable roles, and predictable outcomes. An important consideration is deciding what the “new normal” will be in the post-crisis phase. Ideally, lessons from the crisis should motivate reforms that strengthen the resilience of PFM in preparation for the next crisis. Typically, the crisis and its aftermath will spur governments to pay greater attention to fiscal sustainability, the means to assess fiscal risk, and reforms that integrate risk estimates into the budget and other financial statements”.

-Schick, 2009

Supplementary budgets were a commonly used tool to respond to the crisis. According to the public finance survey of African countries carried out by the Collaborative Africa Budget Reform Initiative, 36 out of 49 countries used a supplementary budget tool to respond to COVID-19. The overall budget envelope increased in 25 cases and decreased in 11.