[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
           INTERNATIONAL PERSPECTIVES ON COMMON FISCAL ISSUES
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, JUNE 5, 2002
                               __________

                           Serial No. 107-31
                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html




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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
GARY G. MILLER, California           BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania             JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma                DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington             TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California        CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio                    DENNIS MOORE, Kansas
RAY LaHOOD, Illinois                 MICHAEL E. CAPUANO, Massachusetts
KAY GRANGER, Texas                   MICHAEL M. HONDA, California
EDWARD SCHROCK, Virginia             JOSEPH M. HOEFFEL III, 
JOHN CULBERSON, Texas                    Pennsylvania
HENRY E. BROWN, Jr., South Carolina  RUSH D. HOLT, New Jersey
ANDER CRENSHAW, Florida              JIM MATHESON, Utah
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[vacancy]

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel












                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, June 5, 2002.....................     1
Statement of:
    Phil Bowen, General Manager, Budget Group, Department of 
      Finance and Administration, Australia......................     3
    Peter Saurers, Deputy Director, Administration of Federal 
      Finances, Switzerland......................................     5
    Mats Odell, Vice Chairman, Finance Committee, Swedish 
      Parliament.................................................     7
Prepared statement of:
    Hon. Adam Putnam, a Representative in Congress from the State 
      of Florida.................................................     3
    Mr. Odell....................................................     9











           INTERNATIONAL PERSPECTIVES ON COMMON FISCAL ISSUES

                              ----------                              


                        WEDNESDAY, JUNE 5, 2002

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:45 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, 
Watkins, Culberson, Brown, Putnam, Kirk, Spratt, McDermott, and 
Moore.
    Chairman Nussle. Good morning.
    Today we are holding a hearing entitled, ``International 
Perspectives on Common Fiscal Issues'' to discuss how different 
countries conduct the budget process and their approaches to 
solving some of the budgetary issues that, as countries, we all 
face.
    We are looking forward to today's testimony to find 
different ways to address a number of issues. We will be 
looking at budgeting for emergencies, an issue that in fact 
just hit me as the chairman. Just yesterday, my district 
experienced, in some parts as many as 10 inches of rain and, as 
a result, quite a bit of local flooding which obviously, in 
some instances, requires the Federal government to be involved. 
How do we budget for these kinds of emergencies that come up 
from time to time?
    Entitlement reform, as you may have--as our witnesses, you 
may have watched with some interest our battles that go on with 
regard to providing health care for seniors, as well as 
retirement security for seniors in what we call Social Security 
and Medicare as examples.
    Performance budgeting, which I know a number of our 
witnesses have some experience with, and have some expertise to 
share with us--and for that matter, accrual accounting--issues 
that may be mundane and seemingly what we might call a budget 
wonk over here in the United States; these are issues that are 
important as we look at many different outcomes.
    It is important for the United States to look at how other 
countries conduct their budget process so we may learn some 
ways to strengthen and improve our own budget. I have taken a 
personal interest in these particular budget issues that we are 
talking about today. I look forward to gaining personally some 
new insight on how to approach them from an international 
perspective.
    This hearing is part of a larger effort this week to do 
just that. Tomorrow, I am honored to be co-hosting an 
international conference of budget chairpersons from around the 
world organized by the Organization for Economic Cooperation 
and Development, commonly referred to as the OECD. We will 
cover some of the topics that we have talked about here today 
in more detail, and we will be discussing them with 
chairpersons of the parliamentary budget committees from around 
the world.
    In addition, earlier this week, the Director of the Office 
of Management and Budget, Mitch Daniels, hosted a similar 
conference for his international counterparts, also organized 
by the OECD.
    Today's hearing is intended to give you a preview of 
discussions we will be having at the conference. We are 
extremely pleased to have several of those international budget 
officials with us today to testify and give us their 
perspectives on these common fiscal issues.
    Today, with us we have--and in advance I apologize for any 
mispronunciations:
    Mr. Phil Bowen from Australia. Welcome. He is the General 
Manager, Budget Group, Department of Finance and Administration 
in Australia;
    Mr. Peter Saurers, I believe from Switzerland, who is the 
Deputy Director, Administration of Federal Finances; and Mr. 
Mats Odell. Did I get that right?
    Mr. Odell. That is right.
    Chairman Nussle. Who is the vice chairman of the Finance 
Committee of the Swedish Parliament.
    I know that Ranking Member Spratt and the other members of 
the committee join me in welcoming you not only to our 
committee, but to the United States. We are very honored to 
have you and we look forward to a very informative discussion.
    Mr. Spratt.
    Mr. Spratt. Quickly, let me echo what the chairman just 
said and extend to all of you a warm welcome.
    We have some common problems, procedural and substantive, 
whether it is budget process, how to do it or whether it is 
entitlements, a problem that concerns us all. There is a lot 
that we can learn from your experience and, frankly, I think we 
should acknowledge we don't do enough in the way of comparative 
government in our government. We have such a big government 
that we are sort of satisfied that the whole universe is right 
here in our laps when in truth, you probably invented and 
devised some solutions that we would be well advised to take a 
look at.
    So we are glad to have the opportunity to look at your 
lessons learned, to hear the problems that you are still coping 
with. We appreciate the fact that you are here and willing to 
testify.
    Thank you very much for coming. We look forward for the 
next couple of days together.
    Chairman Nussle. Just for the members present, we have a 
number of conference agenda items over the next 2 days, 
sponsored by the OECD and the Budget Committee. Members of 
Congress are welcome to attend any or all of these sessions and 
participate, and so we would welcome you to the committee for 
that purpose.
    [The prepared statement of Mr. Putnam follows:]

 Prepared Statement of Adam Putnam, a Representative in Congress From 
                          the State of Florida

    Thank you Mr. Chairman for convening this hearing. I would also 
like to thank our distinguished guests that have come from across the 
globe to be with us today to examine common fiscal issues.
    My main objective here today is to understand how other governments 
conduct their budget processes. I believe that this conference provides 
a valuable platform for the Budget Committee in the U.S. and its 
equivalent counterpart abroad, to scrutinize one anothers efforts and 
achievements, as well as less successful initiatives. This conference 
affords us the opportunity to learn from one another, to gain the 
knowledge of experience by sharing practices, procedures and examining 
case studies.
    There are three issues on the agenda that are of particular 
interest to me: budgeting for emergencies, entitlement reform, and 
accrual accounting. However, I would like to address only one of these 
issues at this juncture: accrual accounting.
    Accrual budgeting is a method of financial planning that realizes 
expected long-term costs at the time that the assurances to incur those 
costs are made. There are three recognized benefits from the 
implementation of such an accrual accounting method. First, it 
encourages more efficient and effective resources management by 
recognizing costs. Second, it supports more decentralized and 
performance-focused management systems. Lastly, it provides better 
budgetary recognition of assets and liabilities.
    Accrual budgeting, when used by other countries, has usually been 
adopted as part of broader reform efforts. The general consensus is 
that these reforms have been very positive. About half of the OECD 
countries use accruals in one form or another, usually to aid in 
financial management. However, under current U.S. law, most Federal 
programs use cash-based budgeting, leaving room for greater reform in 
the years ahead. Reform efforts in the U.S. could benefit a great deal 
from instituting accrual accounting standardization for some of our 
entitlement programs, such as Social Security and Medicare.
    Spending on entitlement programs accounts for nearly two-thirds of 
the total Federal budget in the United States yearly. These 
expenditures are largely exempt from annual budget controls. They are 
effectively on cruise control. Long-term Social Security and Medicare 
reforms must be considered to ensure that Social Security will be 
solvent and relevant to current retirees as well as future generations 
of Americans. The objective must make Social Security sound for the 
next 50 years, not just the next fiscal year. These entitlement 
programs should start to use accrual budgeting to more accurately 
reflect their cost to taxpayers.
    I want to especially thank our three witnesses: Mr. Bowen from 
Australia; Mr. Saurers from Switzerland; and Mr. Odell from Sweden. 
Thank you for your insights and participation. I believe that today we 
have an opportunity to examine this issue in further detail and perhaps 
learn about other examples in which accrual accounting has brought 
about real reform and positive change.

    Let's begin today with Mr. Phil Bowen from Australia, 
General Manager of the Budget Group, Department of Finance and 
Administration.
    Welcome. We are pleased to accept your testimony.

    STATEMENT OF PHIL BOWEN, GENERAL MANAGER, BUDGET GROUP, 
      DEPARTMENT OF FINANCE AND ADMINISTRATION, AUSTRALIA

    Mr. Bowen. Thank you, Mr. Chairman. Thank you for the 
opportunity to share with you the experience of the Australian 
Government over recent years in the development of its 
budgeting and reporting frameworks. My remarks relate to the 
implementation of the framework at the Federal government 
level.
    Is that better?
    Chairman Nussle. That is better.
    Mr. Bowen. OK. Sorry.
    There are three key features of the Australian Government's 
budgeting and reporting framework, all of which are 
interrelated. These are budgeting on an accrual basis, 
budgeting and reporting on outcomes and outputs, and devolution 
of management responsibility. Australia has been operating 
under this new budgeting framework since 1999.
    The first element, budgeting on an accrual basis:
    Prior to 1999 the Australian Government's budget was 
prepared on a cash basis only. Annual accrual reporting had 
been required for government agencies for a number of years, so 
the concept of annual accounting within government was not of 
itself new. However, preparation of budget estimates on an 
accrual basis required a new approach and made changes to the 
financial management systems of central and line agencies.
    The induction of accrual information has added a new 
dimension to budget estimates. In addition to the important 
role that cash information provides, accrual information 
enables the full cast of government programs to be identified, 
along with the recognition of the impact that current decisions 
have on future budgets.
    For the Australian Government, this is of particular 
importance in areas such as longer-term government employee 
entitlements, including employee pensions. Under cash 
budgeting, only the emerging cash impact of these entitlements 
was budgeted for. There was no recognition of the full cost of 
meeting the accruing liability for future employee pension 
payments, which is currently substantially greater than the 
annual cash outlay required to meet present employee pension 
payments.
    These full costs are now recognized and budgeted for, along 
with the emerging cash requirements.
    The move to accruals has not made cash measures irrelevant, 
and this is an important point. Cash and accrual measures 
complement each other in the information they provide. Cash 
information is important for measuring liquidity and the impact 
of government activity on the economy; accrual information 
better measures the sustainability of the government's 
financial position, in particular by identifying its emerging 
liabilities. This focus on longer-term issues has been 
strengthened by the publication in our most recent budget of an 
intergenerational report. This report looks at the impact of 
demographic factors on the Federal budget over the next 40 
years.
    The Australian Government is bound by legislation to 
prepare its budget in accordance with external standards. 
Accordingly, the Australian Government prepares the budget 
under the Australian accounting standards and also in 
conformity with the International Monetary Fund's Government 
Finance Statistics Convention.
    The extent of financial information available under the new 
framework is greater than under the old and, thus, the level of 
transparency in budgeting and reporting has increased. The 
increasing harmonization of generally accepted accounting 
practices with the Government Finance Statistics Convention 
should help to lead to more simplified financial information in 
the future being presented for users.
    The second feature of the Australian framework is that 
budgeting and reporting is conducted under an outcomes/outputs 
model. The resources made available to the government by the 
Parliament are appropriated to fund specific outcomes. 
Ministers have considerable flexibility in the deployment of 
these resources. Outcomes may encompass a number of government 
programs that, taken together, are expected to have a 
particular impact on the Australian community.
    Each portfolio minister is required to specify the outputs 
that will contribute to the outcomes of the portfolio. 
Portfolio ministers are also required to assign indicators of 
efficiency and effectiveness to their outcomes and outputs. 
These performance measures are reported publicly in the 
portfolio budget statements and annual reports of government 
agencies.
    This model has been adopted to strengthen transparency in 
the reporting of government activities and to ensure that there 
is an accountability regime that focuses on results. The 
intention is that the Parliament and the community can assess 
what it is that the government and its agencies are achieving, 
the price at which the government's outputs are delivered, and 
the effectiveness with which these outputs are contributing to 
outcomes for the community. The auditor general and 
parliamentary committees play an important role in assessing 
the performance of agencies in the delivery of government 
programs.
    However, the move to outcome/output budgeting and reporting 
has, in practice, also resulted in budgetary information being 
provided on a higher, more summarized level than previously 
when funds were appropriated at a lower program level. This has 
meant that some of the more detailed financial information 
associated with programs is no longer available to users of 
budget information. This is an area of the framework that is 
currently under review with the objective of restoring some of 
this information without increasing the complexity of the 
current budgeting and reporting arrangements.
    The final future of the Australian budgeting and reporting 
framework is the increased level of management responsibility 
that has been devolved to chief executives of government 
agencies. Chief executives are responsible and are delegated 
authority from the minister for finance administration for the 
efficient, effective and ethical use of resources within their 
agencies. A number of powers previously held centrally have 
been devolved to agency chief executives. These include powers 
in relation to the remuneration of staff, the management of 
cash, and the preparation of budget estimates and financial 
statements.
    Agencies have full responsibility for their own banking 
arrangements and earn interest on their cash holdings. These 
moneys are held within the official public account with the 
Reserve Bank of Australia and are monitored by the Department 
of Finance on a daily basis. Agencies provide the Department of 
Finance with summary financial data on a monthly basis. This 
enables the government to publish monthly financial statements 
and the Department of Finance to monitor agencies' financial 
performance.
    The ability of the Department of Finance to have more 
timely access to agencies' financial performance information is 
currently subject to review with the objective of improving the 
quality and timeliness of advice to the government on budget 
estimates and program performance.
    Performance reporting under the outcomes/outputs framework 
is an important accountability tool for agency chief 
executives, particularly in the highly devolved environment of 
the Australian system.
    In conclusion, Mr. Chairman, at a time when there is 
increasing pressure for government agencies to perform and for 
the public sector to justify its share of the nation's 
resources, better measures of resource usage and performance 
have been welcomed by our government and the Parliament. 
Nonetheless, it will be important that the framework continue 
to evolve to provide a more robust budgeting and performance 
reporting system that supports sound resource allocation 
decisions and promotes transparency and accountability for 
achieving results.
    Thank you.
    Chairman Nussle. Thank you for your testimony.
    Next we will hear from Mr. Peter Saurers from Switzerland, 
the Deputy Director of the Administration of Federal Finances.
    Welcome. And we are pleased to accept your testimony.

STATEMENT OF PETER SAURERS, DEPUTY DIRECTOR, ADMINISTRATION OF 
                 FEDERAL FINANCES, SWITZERLAND

    Mr. Saurers. Well, thank you, Mr. Chairman. And I would 
like to start by saying how pleased I am and honored to appear 
before your distinguished committee.
    The next remark would refer to the introductory remarks by 
Mr. Spratt when he said what can we learn from each other. One 
of the facts, that is, one of the main interests when I go to 
OECD, and the main results, is to take back information how 
other countries monitor and manage their affairs. When I give 
my testimony, I don't do it in a sense of, ``look how you 
should do it,'' but rather just offering some information. And 
you will see to what extent you will derive something which is 
of value for you.
    We talked about yesterday the political economy from 
reforms. When you talk about political economy, you already 
know what you ought to do, but you don't know how to implement 
it; and that is where I may give some contribution from our own 
country's experiences.
    As you might know, we are a country with a long history of 
direct democracy. Direct democracy means you do more than just 
elect the Parliament. You can vote on issues; and the people, 
by and large, have two instruments at their hands.
    First of all, 100,000 people can initiate a discussion, a 
vote, and a change in the constitution. And 50,000 people can 
at any time challenge a new law that has been adopted by 
Parliament. Those are the two main instruments.
    And to what extent do they influence fiscal policy and to 
what extent, for instance, do we see some conclusions and draw 
some conclusions, how they affect political economy of 
implementing changes? In fiscal policy, our system foresees the 
tax rates are laid down in the constitution. The Parliament may 
not increase tax rates; they have to be approved by the people, 
and as a consequence, the budget basically at the Federal level 
is a discussion on the expenditure side.
    Hardly ever do we vote on general tax increases. I believe 
the chances would be very small. They are bigger if they are 
earmarked like, for instance, in the old age security fund.
    A couple of years ago we obtained a majority by the people 
to increase VAT to finance higher existing entitlements. So 
there is a great acceptance by the people to vote for higher 
taxes if they can see what use is made of them.
    When we look at the issue now of reforms, of entitlement 
reforms--and let me say in our country right at the moment it 
goes far beyond simple Social Security and health insurance; we 
are a federalist state--we have a tight web between transfers 
between the Federal and state level, and they are as much of 
concern as Social Security.
    In this context of direct democracy and entitlement 
reforms, I believe there are two things to be distinguished. 
First of all, does this direct democracy lead to better 
decisions? Second, will direct democracy react faster than 
another system of Parliament?
    Regarding the first question: Is the outcome different than 
in a normal parliamentary agreement setting? I don't think it 
is very much different. People, by and large, vote along the 
same lines as Parliament. First of all, we elect members of 
Parliament and they should represent them; by and large, they 
should decide what we want them to decide. So I don't think 
that there is a big difference in outcome by the end of the 
day.
    But on the other hand, I do believe that the system of 
democracy increases a faster awareness of problems. And if I 
recall, Mitch Daniels in his opening remarks at the OECD 
conference, he applauded in the way that, by and large, the 
general public does not care that much and how can we pass the 
message on to them.
    I do believe the system of initiative, 100,000 people, 
100,000 signatures, that is quite easy to come by in the first 
place, although we are a much smaller country. But it is easy 
to come by; and therefore, you get it on the floor of 
Parliament, and government is obliged to address the issue. 
They can't postpone it and put it in a drawer. They have to 
discuss it and to submit it for a vote of the people. And in 
the forefront of these votes there is a debate, particularly on 
TV, as well.
    I do believe the awareness is created through that system. 
There I think you get a faster response by the general public, 
and maybe it will also influence afterwards the results.
    The sign just lit on saying ``stop.'' I don't know if you 
want me to carry on. I would just use another 2 minutes on 
emergencies.
    How do we deal with emergencies? We decide on a budget and 
we have got mechanisms which allow either the government or a 
selected number of members of Parliament to decide on 
additional expenditures throughout the year. By and large, 
government never makes use of this right because government is 
aware of the fact that the budget, as such, is a matter of the 
Parliament. But however it can occur, it hardly ever does.
    And the next step is that 6 out of 246 members of 
Parliament--we have got a coalition government--may make 
decisions. We had such a case last year in the context of the 
rescue of Swiss Airlines where an injection of about 1 billion 
Swiss francs had to be approved. And these six members, they 
decided and Parliament afterward approved their decision, 
acknowledged their decision.
    They didn't really decide to sign off on it. But in the 
matter of that decision, we had the argument, is it correct 
that six members of Parliament may take such decisions of a 
far-reaching consequence, 1 billion Swiss francs. That, out of 
a budget of 50 billion, is quite a huge amount of money.
    We had a discussion going on, not yet decided, but I 
believe by the end of the day we shall leave that system as it 
is. That means we don't put emergency money in the budget as 
items, but rather have mechanisms where either government or a 
selected number of members of Parliament may decide on 
additional expenditures.
    Thank you.
    Chairman Nussle. Thank you for your testimony.
    Our final speaker on this panel is Mr. Mats Odell from 
Sweden, vice chairman of the Finance Committee for the Swedish 
Parliament.
    You are welcome. We are pleased to receive your testimony.

  STATEMENT OF MATS ODELL, VICE CHAIRMAN, FINANCE COMMITTEE, 
                       SWEDISH PARLIAMENT

    Mr. Odell. Thank you, Mr. Chairman. Well, first of all, I 
am also very grateful to have had opportunity to take part in 
this meeting.
    I would like to focus on two things: first of all, the big 
Swedish budget reform after the disastrous beginning of the 
1990s, where we created very, very big deficits in our budget. 
Secondly, I would like to focus on our experiences in 
performance budgeting, especially in evaluation and follow up 
of goals and results in the budget process.
    But I must say that the Swiss system is as far as you can 
come from the Swedish system. We have a tax rate of 54 percent 
of GDP, and I don't know what the people would have voted if 
they had the possibility to take steps by step. Perhaps we 
would have been where we are, but I am not quite sure.
    And this high exposure to the budget cycle is, of course, 
one of our big problems. During the 1990s, Sweden experienced a 
spectacular deterioration and then recovery of its budget 
balance. From substantial surpluses in the late 1980s, the 
budget went into a deficit that reached more than 10 percent of 
GDP. And the budget for 1993 had a deficit of almost 14 percent 
of GDP.
    Well, when we looked upon this status, it indicated that 
one of the structure reasons for the crisis was what you would 
call lax budget process. It was noted that in the 1970s, the 
preparation phases, as well as in the processing of the budget 
bill by the Riksdag, the Parliament, were skewed toward adding 
expenditure.
    I think you are well aware of this tendency in the United 
States. Most of that growth was in social welfare, transfer 
programs sensitive to general developments in the economy, of 
course, which increased the volatility of the budget.
    Well, then we decided to make reform and to bring the 
Swedish budget back into balance in the short term and to end 
this structure tendency toward expenditure growth. A system of 
top-down associating of budget constraints was introduced in 
1996. And overall ceiling on total centrally financed 
expenditure is now set for 3 coming fiscal years. The 3 coming 
fiscal years are set in advance, and the ceiling is broken down 
into ceilings for 27 expenditure areas. The latter ceilings 
form the framework of the preparation of the actual budget bill 
tabled in September.
    When the Riksdag processes the budget bill, voting is done 
in two stages, first on the expenditure area envelope and only 
subsequently on the appropriations. The consequence is that a 
motion or an amendment to increase a particular appropriation 
must be accompanied by a proposal for how to increase it to be 
financed; that is, what other appropriation or appropriations 
within the expenditure area should be reduced. And this is, of 
course, a big problem.
    Secondly, I can tell you there is no longer a possibility 
to pick the most interesting things for the opposition; the 
entire opposition must have a complete alternative to the 
government's budget bill if they want to. Or if we want--since 
I belong to the opposition, if we want to change any detail, we 
have to present a total covering to the government's budget 
from the Left Party to the Conservative Party; and you can 
imagine that is not very likely to happen.
    So our system is also prepared for minority government's 
possibility to survive and to present responsible budgets.
    The second thing I would like to say is about this Swedish 
Parliament how we try to integrate evaluation and follow-up of 
goals result in the budget process. Well, evaluation and 
scrutiny are important tools in any budget system, but with 
performance budgeting it is indeed necessary that the 
Parliament receives good information by the government. The 
Swedish budget act states in general terms that the government 
should provide the Parliament with information about targets, 
outcomes and performance.
    The government provides much of its information in the 
budget bill, but there are also other channels as well. The 
Swedish budget is as I mentioned, divided in 27 expenditure 
areas. The government has asked to submit reports focusing more 
exclusively on performance information for all expenditure 
areas from next year, year 2003; and these reports are not 
supposed to cover everything within the expenditure area, but 
rather focus on some activities.
    Well, the government submitted two reports with performance 
information only a week ago and we read them with great 
interest. One report is about the goal for culture policy. This 
goal concerns equality.
    I don't know if you have goals like that in your budget 
process--equality, in the sense that all citizens should have 
the access and make use of various culture activities such as 
theaters, libraries and art exhibitions. According to the 
report, the efforts made by the state have contributed to 
equality in this sense, while we would have been surprised if 
it hadn't. That is fine.
    But the conclusion in the report indicates the problem with 
governing by objectives and results; the conclusion is that in 
order to keep the high levels of culture activity and to 
improve culture activity further, the state's effort should 
continue to improve. While who can say anything against that, I 
can assure you that the political opposition will not say that 
the state efforts will not improve. We may disagree with the 
government on the level of expenditure for public culture, for 
instance, but the efforts can always be improved.
    The other report submitted to the government concerns 
matters that are politically contested, more contested. And 
this report gives an account for Sweden's implementation of the 
European Union's employment strategy. I will not go into any 
detail, but the European Union, as well as the OECD, has stated 
several times over the years that Sweden should lower its taxes 
on labor and deregulate its labor markets. As I indicated 
above, these matters are central to the political debate, and 
performance information may indeed create interest among the 
parliamentarians.
    Well, Mr. Chairman, I could give you briefly or so what we 
have said in the finance committee, and also the Parliament has 
decided that we ask the government to be more precise about the 
goals. The goals and the objectives should be formulated in a 
way that makes it possible to follow up, for example.
    The performance information must be relevant in relation to 
the objectives. Results should, to a larger extent, be given in 
quantitative terms, and the information should make it possible 
for the Parliament to assess the fulfillment of the goals. That 
is not always the case. The information should, to a larger 
extent, focus on outcome and performance and less on specific 
measures and so on. And we have listed what we want and what we 
expect from the government.
    Well, Mr. Chairman, these are some of our experiences, and 
thank you for your attention.
    Chairman Nussle. Thank you.
    [The prepared statement of Mats Odell follows:]

Prepared Statement of Mats Odell, Deputy Chair, Committee on Finance of 
                          the Swedish Riksdag

    Mr. Chairman, dear participants, in the annotated agenda for the 
OECD Symposium for Chairpersons of Parliamentary Budget Committees, it 
was suggested that parliamentarians do not really use the result 
information that is submitted to them. This implies that valid 
information is not taken into account when decisions are made. It is 
also a waste of resources to produce information that is not used. This 
is probably a fairly common problem.
    I will make a few remarks on this problem, relating from my 
experience in the Swedish Parliament. I have to admit that we also 
suffer from this problem, but sometimes the political interest for 
goals and results is high.
    Let me start with the goals themselves. One reason for the apparent 
lack of interest may be that the goals and targets often are fairly 
technical. If the goals are more political, the parliamentarians will 
also be more interested.
    But how should we know if the goals are politically interesting? 
One test can be to ask whether the different political parties can 
agree on the goals. If both the government and the opposition think 
that the goals are fine, there is actually a risk that nobody cares 
about the goals. It is hard to disagree on goals such as ``the 
financial system should be stable and in order''. Most goals are 
probably not very contested. For instance, most parliamentarians want 
sustainable economic development or, at another level, safe roads.
    But it is possible to set up goals that encourage political debate.
    I belong to the Christian Democrats, one of the opposition parties 
in the Swedish Parliament. We, the opposition parties, have set up a 
goal that Sweden should achieve 3 percent growth in the Gross National 
Product (GNP) every year. Our policies in various areas have to 
contribute to this goal. For instance, the labor market must function 
well if this goal should be achieved. There must also be more and freer 
competition in some areas where the public sector now is the only 
employer or at least a very dominant employer.
    My point here is that goals and objectives may indeed be relevant 
for the political debate and may show the differences between the 
various political alternatives.
    We have also had a political debate about another goal. The social 
democratic government set up a goal a few years ago that the open 
unemployment should decrease by half, from 8 percent to 4 percent. We, 
in the opposition, have been critical because we think that this goal 
has led to a focus on wrong matters. Simply put, it has been more 
important for the government to put people in labor market measures 
than to create conditions in order to get what you may call real jobs.
    These two examples show that goals--and results--may indeed cause 
political interest. These goals show the differences in the political 
debate.
    I would now like to say a few words about another aspect. In the 
Swedish Parliament, we try to integrate evaluation and follow-up of 
goals and results in the budget process. Evaluation and scrutiny are 
important tools in any budget system, but with performance budgeting it 
is indeed necessary that the Parliament receive good information ex 
post by the government.
    The Swedish budget act states, in general terms that the government 
should provide the Parliament with information about target, outcomes, 
and performance. The government provides much of this information in 
the budget bill but there are other channels as well.
    The Swedish budget is divided into 27 expenditure areas. The 
government has been asked to submit reports focussing more exclusively 
on performance information for all expenditure areas from the year 
2003. The reports are not supposed to cover everything within each 
expenditure area, but rather to focus on some activities.
    The government submitted two reports with performance information 
only a week ago. One report is about a goal for culture policy. This 
goals concerns equality, in the sense that all citizens should have 
access and make use of various culture activities, such as theaters, 
libraries, and art exhibitions. According to the report, the efforts 
made by the state have contributed to more equality, in this sense.
    That's fine, but the conclusion in the report indicates a problem 
with governing by objectives and results. The conclusion is that in 
order to keep the high levels of cultural activity and to improve 
cultural equality further, the state efforts should continue to 
improve.
    Who can say against that? I can assure you that the political 
opposition will not say that the state efforts should not improve. We 
may disagree with the government on the level of expenditure for public 
culture policy, for instance, but the efforts can always be improved.
    The other report submitted by the government concerns matters that 
are politically more contested. This report gives an account for 
Sweden's implementation of the European Union's employment strategy. I 
will not go in to any detail, but the European Union, as well as the 
OECD, has stated several times over the years that Sweden should lower 
its taxes on labor and deregulate its labor market. As I have indicated 
above, these matters are central to the political debate and 
performance information may indeed create interest among 
parliamentarians.
    Finally, I would like to mention that the Swedish Finance Committee 
has demanded certain kinds of performance information and also put more 
general demands on the government:
    1. The goals and objectives should be formulated in a way that 
makes them possible to follow up.
    2. The performance information must be relevant in relation to the 
objectives. Results should to a larger extent be given in quantitative 
terms.
    3. The information should make it possible for the Parliament to 
assess the fulfillment of the goals.
    4. The information should to a larger extent focus on outcome and 
performance, and less on specific measures.
    5. The information should focus more on cross-sector activities and 
less on specific authorities.
    6. The relation between performance and the new appropriation 
should be improved. The calculation of the appropriation should be made 
clearer.
    7. The analysis of the performance should be based on facts. A 
clear distinction should be made between performance information and 
analysis on one hand, and the government's assessment on the other 
hand.
    8. The motives for the government's assessment and the government's 
conclusions should be clear in order to improve the connection between 
performance and draft budget.
    9. The volume of information should be better adjusted to the size 
of public spending and to the political relevance of the policy areas. 
The volume of the budget bill may therefore increase; and
    10. The dialogue between Parliament and government on performance 
information should continue. It should be a common ambition for 
Parliament and government to further develop performance budgeting.
    These demands also put demands on the Parliament itself to make use 
of the hopefully improved performance information. If the information 
is politically relevant, I do think that Parliament will make use of 
the information in the general public debate.
    Thank you for your attention.

    Chairman Nussle. And we could--well, I will speak for 
myself. I think could listen to all of you all day describe 
your process, because it is very interesting, what we have 
heard so far, just in comparison to our own system. In some 
ways, it is very similar in the challenges, and in other ways, 
you have blazed new trails. You have gone in different 
directions than even we have.
    Let me begin with the question on accrual accounting for 
Mr. Bowen.
    In particular, what was the reason that Australia went to 
an accrual accounting system from a cash accounting system, No. 
1; and No. 2, how difficult was that transition? How difficult? 
Because obviously, from a budgetary standpoint, there is a huge 
difference in the ramifications, particularly in the years to 
come as you make that transition.
    So why did you make the change and how difficult was the 
transition?
    Mr. Bowen. Mr. Chairman, one reason for the change: 
essentially it was to provide a full perspective on the 
government's financial position.
    It is very difficult to gain a full perspective by simply 
looking at cash flows. Cash flows do not tell you about the 
accruing liabilities for the future. They do not tell you where 
you stand in terms of your total assets/liability position, the 
level of debt, et cetera, that you need to fund.
    The intention was also to provide a better basis for the 
managers within agencies to manage their full resources, rather 
than simply focus on the amount of cash that pass through their 
hands.
    Allied with the introduction of accruals, I mean, the 
bottom line, I suppose you might say, is, we were looking to be 
able to identify for managers the total cost of--the full cost 
of their activities, including the costs of what previously had 
been hidden expenses, such as employee entitlements, the costs 
using capital, et cetera.
    Having said that, I wouldn't want to oversell the concept 
of accruals in budgeting. We think it is important, but we 
equally think that maintaining good cash information is just as 
important. So it is not accruals replacing cash; it is accruals 
complementing cash to give a balanced perspective on the 
totality of not only the impact of the government activity on 
the economy, which cash gives you, but the financial position 
of the government as an entity, which accruals help you see 
better.
    There is no perfect tool from our experience. And I don't 
say or sit here today, Mr. Chairman, and suggest that this is 
the answer to our prayers, let alone yours. But we believe that 
it has helped and, hopefully, will help us in the future.
    On the issue of how difficult was it, with hindsight, it 
could perhaps have been implemented in a somewhat more measured 
manner. In Australia, it was done--as I say, we had been 
reporting on an accrual basis for a number of years in our 
annual financial statements.
    Chairman Nussle. When you say ``a number,'' 5 years or how 
long were you reporting?
    Mr. Bowen. Well, I think it would have been somewhere 
closer to six. Yes. I think we have been doing that now for 
about 10 years, and we have been budgeting for 4. We have just 
had our fourth accrual budget. So I think within the civil 
service that there was a reasonable understanding of accruals.
    I am not so sure that there was at the political level. And 
we have not done enough to sell it effectively at the political 
level today. But it is increasingly gaining acceptance, I guess 
is what I can say.
    It was somewhat difficult to implement because we tried to 
do it so quickly, and we tried to ally the induction of 
accruals with other reforms, such as a focus on outcomes and 
outputs, rather than the inputs that go to make up those 
products. So I guess one of our learnings certainly has been 
that it might be better to do an initiative--to undertake an 
initiative of that nature in a slightly slower, more measured 
way.
    Chairman Nussle. Thank you.
    Mr. Odell, on the issue of setting ceilings, we have what 
we call ``caps,'' a similar type of concept it sounds like. And 
have you a 3-year cap, or 3-year ceiling, as you indicated; is 
that how you do it?
    Mr. Odell. That is right.
    Chairman Nussle. How closely do you adhere to that for 1 
year? Throughout the 3 years, for that matter, how closely do 
you hit those ceilings?
    Mr. Odell. The government is extremely clever in hitting 
them exactly, I can tell you. And----
    Chairman Nussle. We hit them, but we run right past them 
sometimes.
    Mr. Odell [continuing]. Our budget act states that if and 
when the government gets indications that it will be--the 
budget--the expenditure will go through the ceilings, they are 
entitled to come up with measures to stop that. So far and, I 
must say, with some creative measures, they have managed, even 
though I think last year there were tendencies to exceed the 
ceilings by 10 billion Swedish kroner; that is about $1 
billion. But they managed by postponing some expenditures, et 
cetera--but also not very much real cutting in expenditure, I 
must say, but they managed to keep them.
    Chairman Nussle. You have 27, you said, different ceilings?
    Mr. Odell. Twenty-seven, like one for defense, one for 
health care, et cetera.
    Chairman Nussle. And you also indicated, I believe, about 
emergencies. What happens if there is a legitimate emergency in 
Sweden when it comes to those caps? Is there a separate fund 
for emergencies, or how do you deal with that?
    Mr. Odell. Yes, there is a separate fund, but that is 
really a midget. It is only less than $1 million in this fund.
    You can imagine, we have very few, so far, emergencies in 
our country. We had some heavy rain last summer that caused 
some damage that was paid by the state. But we have--for real 
emergencies, the Parliament gives the government the right to 
use nearly 4 billion U.S. dollars in case of war, danger of 
war, or other exceptional circumstances. And this is given by a 
yearly base.
    But we try to solve our emergencies in other ways. One 
emergency is, of course, the experience from the early 1990s 
when we had these huge deficits. I think we have tried to find 
our process with these expenditure ceilings. But the kind of 
emergency that you experienced and that you have tried to find 
ways to solve is not--we have not experienced anything like 
that.
    Chairman Nussle. We have three--as I look around, three 
hurricane experts on this committee alone here today. So we 
would love to get your advice on how to deal with those 
disasters.
    I have a number of other questions, but I will share the 
time with other members who I know are interested as well.
    Mr. Spratt, one of our hurricane experts, by the way, too.
    Mr. Spratt. It is a little island, but nevertheless a 
hurricane would wipe out an emergency fund of a million dollars 
in about 1 minute.
    I ask each of you: Your countries have some kind of a 
balanced budget requirement?
    Mr. Odell. Yes.
    Mr. Saurers. Yes.
    Mr. Bowen. Yes.
    Mr. Spratt. Is this a cash budget or accrual budget that 
has to be balanced?
    Mr. Bowen. We have managed to achieve that.
    Chairman Nussle. Could you turn your microphone on, please.
    Mr. Spratt. So one of the first steps in the budget process 
is to determine what the economic cycle is likely to be. And 
over that cycle you have to balance the budget.
    Mr. Bowen. That is the commitment that our government has 
had. And, yes, as I say, they have maintained that.
    Mr. Spratt. Is there standing statutory law that requires 
to you balance the budget?
    Mr. Bowen. No, there isn't, Mr. Spratt.
    Mr. Spratt. And Switzerland?
    Mr. Saurers. Sixty percent of Parliament approved an 
expenditure rule and 80 percent of the people approved the 
amendment of the constitution. So there was, you may take it, a 
sense of more rationality by the people.
    Our expenditure rule, which will be in place there next 
year onward, is based on a structurally balanced approach, and 
hence, we do have the problem of the cycle as well, yet we 
believe that empirically, that problem is not as big as the 
problem that we had when expenditures were exceeding revenues 
during the past years. So the error there might be marginal 
there, compared to problems we had in the past.
    We deal with emergencies within that concept to the extent 
that whenever there is an emergency--and that is specified by 
law, that needs a qualified approval by Parliament--that these 
expenditures can be spent outside of the normal expenditure 
rule, and hence, will lead to an increase in indebtedness. We 
do not create the fund, but rather just to allow for additional 
expenditure.
    Mr. Spratt. Mr. Odell, over this 3-year period, does Sweden 
have the requirement that the budget be balanced, that the 
expenditures equal revenues?
    Mr. Odell. Yes, and even more.
    We have a target of 2 percent surplus in the total national 
economic sector, which includes not only the state but also the 
common sector and the pension system. This should be 2 percent 
on average over the cycle. And we have managed to have more, 
over 4 percent last year. This year, which is a weak year, and 
next year seems also to be a weak year.
    Mr. Spratt. Four percent of the budget, 2 percent of the 
budget?
    Mr. Odell. Two percent of the entire budget for the whole 
public sector. And this means this year will be 1.8 percent 
surplus and next year also a surplus of 1.8 percent.
    But then the big surplus is in the pension system; and the 
state budget is--more or less--next year, will be a minus. But 
the target--and this is, I think, for the OECD countries and 
European Union countries should also include the system.
    Mr. Spratt. So you can use the surpluses in your pension 
system to consolidate with the operating budget and create a 2 
percent or 4 percent surplus overall?
    Mr. Odell. I think it is the consensus method of measuring 
the national budgets.
    I wonder whether someone from the OECD could--yeah, so I 
think this is not especially for Sweden. This was mainly, I 
think, created because many countries had state budgets that 
seemed to be rather sound, but they had pension systems that 
were absolutely black holes. And you had to take everything 
into consideration.
    And we have, which we will talk about tomorrow; we have 
reformed also our pension system to a totally autonomous system 
with big buffer funds.
    Mr. Spratt. It is totally autonomous now? But nevertheless 
the two are consolidated, so you get the economic effect of 
government?
    Mr. Odell. Yes, but you cannot take money from the pension 
funds for the state. That is not possible.
    Mr. Spratt. What are the assets of the pension fund 
invested in then?
    Mr. Odell. The pension funds got new rules for organization 
and investments a few years ago, and they invest in shares and 
in bonds. Also internationally.
    Mr. Spratt. But not Swedish government bonds.
    Mr. Odell. Naturally, of course, they do.
    Mr. Spratt. They do?
    Mr. Odell. They do, yes.
    Mr. Spratt. In effect, we have this problem here, when the 
Social Security trustees buy government bonds, they are, in 
effect, funding government spending.
    Mr. Odell. If I am--if I remember right now, we have a 
system where people can choose how to invest their pension 
money when the money comes in. But those who don't choose 
anything, their moneys going into the so-called ``seventh 
fund.'' This seventh fund, that is for people that should not 
be speculating and so on. They have 95 percent in shares. They 
have 4 percent of this 95 percent--65 percent are foreign 
shares, and 30 percent Swedish shares, and 4 percent in what we 
call Swedish state bonds, and 1 percent is cash. So it is not a 
big amount of Swedish state bonds in this portfolio.
    Mr. Spratt. Let me ask you a question about something you 
described as a parliamentary procedure in considering the 
budget on the floor of the Parliament, so I understand.
    I understood that you said, in order for someone to add an 
expenditure, his motion had to include a provision for paying 
for that additional expenditure. We call that, around here, the 
pay-as-you-go rule. We have that rule.
    Is it strictly enforced in Sweden? Is there any way around 
it?
    Mr. Odell. It is absolutely strictly enforced. On top of 
that, you have not to--I mean, you have to convince the rest of 
the opposition to find exactly the same, both appropriations 
but also the financing. And that will never happen. So there 
will be very, very few changes in the budget bills proposed by 
the government when the decision comes in Parliament.
    Mr. Spratt. Does the same rule apply to tax cuts, tax 
reduction?
    Mr. Odell. The income of the budget is not treated in the 
same way as the expenditures. So the income has--this makes 
also an opportunity, of course, for the government to convert 
new expenditure to less taxes. So this is one of the ways you 
can--because the expenditure, if you don't increase the 
expenditures, you can cut the taxes and reach exactly the same 
purpose.
    Mr. Spratt. In balancing the budget?
    Mr. Odell. And still balancing the budget.
    Mr. Spratt. Let me ask you, in each of your governments if 
the budget is defeated, is this still a cause for dissolution 
of the Parliament?
    Mr. Bowen. It can be in extreme circumstances. In the 
Australian system, the government would normally have a 
majority in the lower house; in the upper house, for many years 
that has rarely been the case.
    But the Australian budget is passed in two different types 
of appropriation bills, one of which is for ordinary annual 
services of government and that is very--usually passed without 
major amendment. It can be rejected and sent back for 
reconsideration. The other one is for new items, capital 
expenditure, et cetera; but again, there is rarely a situation 
where there would be a total rejection of that bill.
    Mr. Spratt. Mr. Saurers.
    Mr. Saurers. We have a coalition government, and our 
procedures exclude that the budget could be defeated. And let 
me explain:
    Parliament approves credit lines for different items, and 
of course, at the end, the total amount of expenditures. Now if 
there are differences between the houses, they are not on the 
budget as a whole, but maybe on a few items. Our procedures are 
three times, to and fro, between the houses. If there isn't an 
agreement by the end of the day, the lower amount will be 
inscribed in the budget, and as such, we always have a budget 
by the end of the year.
    Mr. Odell. We don't have that system, but we have a 
minority government which has two supporting parties, the Left 
Party and the Green Party. And they have a negotiation and they 
negotiate a budget. And in the extreme case of the budget would 
be defeated, there is one possibility, of course, and that is 
that the government itself calls for new elections. That could 
be a threat, of course, if the opposition is weak, if they have 
a strong opinion behind them.
    But we don't have the possibility to just dissolve the 
Parliament, no.
    Mr. Spratt. Thank you all very much. We will talk further, 
but I want to give others an opportunity to ask questions as 
well.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman. On behalf of all 
the members of the committee we want to thank all of you for 
coming. This has been very interesting.
    First of all, we have heard from Sweden on the idea of 
privatized and/or personalized retirement programs. I am 
wondering if your two colleagues from Australia and Switzerland 
would share what kind of retirement program you have, what we 
describe as Social Security. Has it become more privatized or 
personalized than we have in the United States?
    Mr. Saurers. We have what we call three-pillar approach. A 
first pillar is compulsory unfunded system--compulsory system, 
unfunded system, state pension; we have what we call a finance, 
basically by payroll taxes of employers and employees.
    Mr. Gutknecht. So if I can be clear, you require that a 
certain percentage be taken out of people's paychecks and then 
is deposited in a private retirement account?
    Mr. Saurers. No, that is public. The first is public. The 
second pillar is a funded system with--we have got private 
funds; and again, it is compulsory to the extent that the 
employer and the employee have to contribute and money is 
invested in these funds.
    Mr. Gutknecht. But that money is then invested in shares?
    Mr. Saurers. Shares and funds. Equities, yes; and real 
assets as well.
    And the third pillar, that is what we call ``private,'' to 
the extent that you as an individual can put money in a blocked 
account, and you receive some tax benefits while do you it.
    Mr. Gutknecht. What we would describe as an IRA in the 
United States.
    Mr. Bowen.
    Mr. Bowen. In Australia, the government has traditionally 
funded old age pensions. Those pensions are not subject to any 
individual contribution; they are funded on a pay-as-you-go 
basis by the government. And the pensions are means tested and 
indexed by movements in average wages. But the pension is at a 
fairly low level. It is not a high level.
    In addition to that, for some years, employers have been 
required to contribute to employee super annuated schemes. I 
think from the first of July this year, that contribution of 
the minimum guaranteed payment that will be 9 percent of an 
employee's salary. That money is required to be invested and 
approved, what we call super annuated funds, managed funds.
    Mr. Gutknecht. What we would describe as mutual funds.
    Mr. Bowen. Mutual funds managed by the private sector, not 
part of the government sector at all. The impact of that is 
certainly starting to bear fruit, and in our long-term 
projections in our recent intergenerational report, it does 
suggest that this will have a major impact on holding down the 
government's future requirement to pay tax funded pensions.
    Mr. Gutknecht. Mr. Odell, is there something else you 
wanted to add?
    Mr. Odell. The Swedish system is not purely a privatized 
system. It is not privatized at all, I must tell you. But it is 
like that. 18 percent of your salary----
    Mr. Gutknecht. I know the terms are different, but here in 
the United States there is--at least we are having some 
discussion about having a system under the umbrella of Social 
Security in which employees could contribute a certain 
percentage of the taxes that go to Social Security into 
privatized accounts. It would still be under the umbrella of 
Social Security, but the money would not simply be an 
intergovernmental borrowing where it would ultimately into 
government bonds in the United States.
    The average rate of return, for example, for a younger 
worker in America in the money they put in is something like 1 
percent. And more and more younger workers are saying we can do 
much better putting money into banks.
    Mr. Odell. Our system is like the employer pays 18 percent 
of your salary to your pension. Two-and-a-half percent goes to 
a system where the individual can choose between, I think 4- or 
500 different alternatives. And this is a state agency that is 
managing the whole system. The rest, 15.5 percent of your 
pension's money goes into a traditional pay-as-you-go system, 
which has five buffer funds to smooth the differences in the 
business cycle and also in the demography and so on.
    I must tell you that we are very proud of our pension 
system. But one important element is that we manage to be--have 
a very big and broad consensus in Parliament. We have seven 
partisan in Parliament and five of this party's--the five 
biggest are totally behind. And doesn't matter if it is a 
socialist or a non-socialist government. We have like a 
coalition government around our pension reform. We have a 
governing group of people from five parties and irrespective of 
what kind of majority, these five parties stick to this pension 
reform and they are really taking care of the reform and it has 
been very successful so far.
    Mr. Gutknecht. Can I switch direction just slightly on 
this? Maybe perhaps quickly, you can tell us what is roughly 
the economic growth rate currently in each of your countries 
and what is your unemployment rates? Australia?
    Mr. Bowen. Our economic growth is currently around 3\3/4\ 
percent per annum and projected to go forward at least at that 
rate. Unemployment is running at around 6 percent.
    Mr. Saurers. Our real GDP growth rate is 1 percent. Our 
potential is below 2 percent by past experiences. And 
unemployment at the moment is slightly above 2 percent.
    Mr. Odell. Well, the Swedish present rate of growth is 
around 1.8 percent and that is unfortunately also the average 
of--from the year around 1970 to 2001. This is absolutely too 
low and the opposition has the target to reach potential of 3 
percent. That calls for a lot of structural reforms. Our 
unemployment rate is what we call the open unemployment is 
around 4 percent. But if you take into account all people in 
different kind of labor market activities and so on, we have 
more than 13 percent, perhaps 14 percent.
    Mr. Gutknecht. One of the issues we wrestle with here in 
the United States is what percentage of our budget we should 
spend on important issues like defense and health care. Can you 
give us--and I don't know if you brought these numbers with 
you--but roughly what percentage of your budget do you spend on 
defense and approximately what percentage do you spend on 
health care?
    Mr. Saurers. On defense it is below 10 percent. I am a 
representative for the Federal government, and particularly 
when it gets to health, it is blurred because states are 
spending much less on health as well. At the Federal level, we 
spend maybe about 2 billion. About 4 percent, Federal level 
only on health care.
    Mr. Gutknecht. I know it is a tough question.
    Mr. Odell. Defense, around 5 percent, and that is rather 
much for a Scandinavian country. Health care is more difficult 
because most of the responsibility for the health care is on 
the communes, but I say around 25 percent.
    Mr. Bowen. I haven't got accurate figures here with me, but 
I think defense is around 8 percent and health would be around 
15. Health in Australia--the health costs in Australia are 
growing at a very rapid rate, and that is one area of major 
concern for us over the next decade.
    Mr. Gutknecht. The reason I raise the issue, particularly 
of defense, and it is a bit of a sore spot with us, when you 
compare us to the European Union, and we just recently passed 
another emergency supplemental which increased defense 
spending, we will spend about double what the European Union 
does, almost any way you measure it. And one of the things we 
are hoping is you take the message back to your colleagues in 
the European Union is that we in the Budget Committee would 
like the European Union to pick up a little more expenses in 
defending the planet.
    It is becoming incredibly difficult for us to keep up with 
the requests from our own Pentagon. Right now we are in a 
circumstance--and the other issue that I am not sure the 
Europeans--my time is about up--is that we do regard ourselves 
at war right now. And as a result, we have been very generous 
with our defense expenditures. But long-term, we can't get up 
there around 20 percent of our total expenditures. With that, I 
yield back the balance of my time, Mr. Chairman.
    Chairman Nussle. Mr. Watkins.
    Mr. Watkins. You are very generous, Mr. Chairman. Thank you 
for this opportunity, because I think it offers some very good 
insight. You were asking some of the same things in the budget. 
One of the things we have sometimes in our Ways and Means, 
which is taxation phases, is that we have to come up with 
offsets and talk about some gnashing of teeth when you are 
trying to find offsets.
    I notice, Mr. Odell, it seems like you have less 
flexibility or elasticity to try to deal with certain things as 
you try to work through some of the budgets and all. But I will 
follow up with what my colleague from Minnesota asked about a 
couple of things. I would like to ask, all of you, in dealing 
with your budgets, what is the--and I guess you have debt--what 
is the percentage of your debt of your GDP?
    Mr. Odell. I think our debt is now around 40 percent of 
GDP. But then we also have assets. So if you take our net debt, 
I don't think we have a net debt.
    Mr. Watkins. Right. If you are allowed to put the assets--
--
    Mr. Odell. Forty percent of GDP. But if you have a balance 
sheet, we also have assets and we think in the opposition that 
we should sell more of state-owned companies and bring down our 
gross debt, of course.
    Mr. Watkins. Your overall costs are running around--
budget--what percentage of GDP.
    Mr. Odell. The cost of running the budget?
    Mr. Watkins. How much is the overall--budget. The budget 
itself compared to the GDP. What percentage of the GDP?
    Mr. Saurers. I give you the figures for the Federal level, 
the debt of the percentage of GDP is now at 25 percent and it 
doubled over the last 10 years which explains that we have big 
problems. Our expenditures as a percentage of GDP are 
approximately 12 percent at the Federal level as well. And if 
you take that to the overall government debt, would be about 50 
percent and expenditure as a percentage of GDP would be about 
40 percent.
    Mr. Watkins. About 40 percent of the expenditures. What 
about Australia?
    Mr. Bowen. In Australia, the net debt is roughly a half of 
a percent of GDP. It is very low. And it is expected to fall to 
zero in the next 3 years. The budget, as a percentage of GDP, 
is roughly 25 percent.
    Mr. Odell. On the Swedish budget as percentage of GDP, is 
roughly 35 percent, 800 billion out of 2,000.
    Mr. Watkins. Any particular trends there that you see? Do 
you see any sizable trends? Overall, our expenditures are up, 
but as a percentage of GDP, we have----
    Mr. Odell. Our expenditure as percentage of GDP has been 
smaller over the time. But this year, it starts to grow again.
    Mr. Watkins. Mr. Chairman, I have one other question that I 
thought would be very, very important for all of us to find out 
what the meaning here is of this. There is a statement in here 
about in Australia, you have got something called a Charter of 
Budget Honesty Act. Tell me what that is. We might need that 
around here.
    Mr. Bowen. Broadly, Mr. Watkins, it is an act that 
specifies the requirements on government for the budget 
reporting. It requires the government to report or present its 
budget in accordance with external accounting standards. It 
requires the government to produce financial reports at certain 
times in the year and it requires the government to produce 
certain reports at certain times in the electoral cycle. In 
particular, when an election is called, the government is 
required and the heads of our treasury and finance departments 
are required, to sign off on the budgetary position under the 
terms of the Charter of Budget Honesty. There is an obvious 
reason for that, to ensure that there is a public statement of 
the budget position to inform the electorate prior to the 
polls.
    Mr. Watkins. It doesn't have anything to do with Arthur 
Andersen doing the accounting?
    Mr. Bowen. Very little to do with Arthur Andersen. This was 
introduced prior to the Enron issue.
    Chairman Nussle. Mr. Kirk.
    Mr. Kirk. Mr. Bowen, I am wondering, I reviewed your 
testimony very carefully and would just offer you a chance to 
immigrate to the United States and run our OMB. It is a 
considerable jump in the political process to move to accrual 
accounting. It requires political will to recognize that 
enormous debt and put it on the books. Can you describe the 
process by which that decision was made 5 or 6 years ago for a 
government to recognize that liability?
    Mr. Bowen. Mr. Kirk, I think the advantage that we had at 
the time was that on an annual basis in the accounts of the 
government, all of those accrual measures were recognized. That 
was purely on a ex post reporting basis. So it was publicly 
available information at a point in time looking backwards. 
The--and to be fair, the majority of the liabilities facing the 
government had previously been in clearly on budget paper but 
perhaps not in a systematic way or as systematic a way as you 
achieve under an accrual based budgeting regime.
    So I think in the Australian experience, that by 
undertaking accrual reporting for a number of years, that did 
help to phase in a better understanding, but I would hasten to 
add that we still have a way to go for--before I think we 
present our budget in a very effective simple straightforward 
accrual way and a way in which all users of that information 
can understand it. One of our areas of concern is the fact that 
under our Charter of Budget Honesty, we report against external 
standards.
    There happen to be two that apply. So within our budget 
papers, we do present the budget on two different bases. Now 
there are a lot of commonalities in those two approaches, but 
there are some differences. And that does mean that in our 
parliamentary committee hearings at budget time, there are some 
interesting questions that have to be answered.
    Mr. Kirk. Imagine if we moved to accrual accounting; we 
would have mass unemployment on K Street because we would 
recognize such an enormous liability of the Federal government 
that the decision to create any new Federal program would be 
immediately laughed out of the halls of Congress. But you 
talked about external standards. The administration has moved 
to create a preponderance of private sector accounting entities 
to review the Federal accounting standards but has done so by 
executive order. I would hope we would do so by legislation. 
Regarding your independent standards for government accounting, 
how different are they than private accounting standards used 
to assess the value of a publicly traded company in Australia?
    Mr. Bowen. As I say, we have two sets of standards that we 
adhere to. One is the Australian accounting standards, but 
standards which are specifically written for the public sector. 
However, they are not substantively different to the standards 
that a public company would have to adhere to. And 
increasingly, they have become closer and closer. The 
accounting standards board that develops and sets the standards 
is a board established on the legislation, and it establishes 
the standards for the public and private sectors. The other 
standard that we adhere to is the International Monetary Funds' 
government finance statistic standard. As I say, that has some 
different elements to it.
    Mr. Kirk. If the Prime Minister is upset with the standard 
that is getting in the way of a policy direction, can he or his 
representatives on the board fudge the standard?
    Mr. Bowen. Well, it is far more likely that if the 
government feels that a presentation strictly in accordance 
with the standard would not reflect the government's policy 
intention, that they would change the presentation but make it 
explicit in the notes to that presentation that they have 
deviated from the standard. In fact, that happens.
    Mr. Kirk. And they hope no one reads the footnote.
    Mr. Bowen. They may hope that, but in fact, people do and 
people on committees such as yours increasingly are looking at 
those footnotes, and people in my position have to answer those 
types of questions.
    Mr. Kirk. When you moved to outcomes, and I looked at this 
particularly with our foreign assistance program, instead of 
measuring how much gas we allow to the foreign assistance 
agency or how many hours employees work, we just look at 
whether we increased female literacy in this region and measure 
it that way. But the question is who measures. Under the 
current--our Current Results Act, the agency running the 
program also measures the results. You can see the inherent 
conflict of interest. In Australia, who measures the outcome?
    Mr. Bowen. Look, we have a similar situation in that the 
primary center of the targets or proposer of the targets, the 
primary measurer is the agency concerned. However, that is done 
in the context of budget proposals and there is oversight by my 
department to a degree.
    Also, I mentioned briefly that our auditor general and the 
parliamentary committees have the opportunity to scrutinize. I 
wouldn't like to suggest that this is done always or always in 
great detail, but the opportunity is there for parliamentary 
committees to scrutinize those targets and the results and to 
ask questions about them. The auditor general has a mandate to 
conduct what we call performance audits. And those audits can 
be quite broad in scope, looking at the actual performance and 
the effectiveness of program delivery.
    Mr. Kirk. Thank you. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Brown.
    Mr. Brown. Thank you Mr. Chairman. Mr. Bowen, I certainly 
appreciate you all coming and being a part of this discussion, 
and I am sorry I wasn't here for the presentation. Maybe I 
might be repeating what you have already discussed, but in 
relationship with the interest, the private interest earned, is 
that taxable in Australia?
    Mr. Bowen. Can I just get some clarification on your 
question, Mr. Brown?
    Mr. Brown. If you have a CD, a bank deposit or something 
that draws interest, does the government tax the proceeds?
    Mr. Bowen. If a private individual or a company has an 
interest earning deposit, yes, certainly, that is part of 
taxable income.
    Mr. Brown. And if you have a mortgage that you pay 
interest, is that tax deductible?
    Mr. Bowen. No, not if that mortgage is for private 
purposes. If the mortgage is associated with a business 
purpose, then yes, it would be.
    Mr. Brown. So a home mortgage is not deductible?
    Mr. Bowen. No.
    Mr. Brown. How does that work in Switzerland.
    Mr. Saurers. Interest income is taxable, and at the moment 
we have got a system where an imputed rent is taxed and 
mortgages are deductible, and there are discussions going on of 
change of the system.
    Mr. Brown. Mr. Odell.
    Mr. Odell. Well, the tax on this kind of income is 30 
percent, and you can also deduct 30 percent, the entire--if you 
have borrowed, but not the mortgage is not at all deductible.
    Mr. Brown. But the interest on the mortgage is.
    Mr. Odell. The interest is deductible from your income, 
yes.
    Mr. Brown. In light of 9/11, the homeland security costs in 
America have been--you know, has gone up exponentially, and I 
am just wondering if that impacted your countries at all and if 
it did, to what degree?
    Mr. Bowen. In Australia, it certainly has impacted in this 
last budget. I don't have the figures with me, but it was a 
major factor in the increase in outlays, not only for our 
Defense Department, but also for our protective security 
agencies domestically.
    Mr. Saurers. It changed our efforts as well and has impacts 
in the government sector as well, but I couldn't give you the 
figures. But again, I would assume they are there, but they are 
not major concern.
    Mr. Odell. It had a very big political impact of course. 
Also, our government, prime minister and social democratic 
government skeptics of the United States have been 100 percent, 
and still 100 percent behind United States of America and its 
President in the war against terrorism. The budgetary 
consequences, I cannot tell you anything about it, but we have, 
of course, enhanced our security levels in several areas a lot.
    Mr. Brown. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Culberson.
    Mr. Culberson. Thank you, Mr. Chairman, for organizing this 
hearing. It is really interesting and informative and we are 
very grateful for you coming to join us today, and I simply 
wanted to ask about your tax systems and how the governments 
generate revenue. Do you have an income tax, and if so, what is 
the top rate of that income tax and do you tax capital gains 
and if so, at what rate? Australia, please, Mr. Bowen.
    Mr. Bowen. We have an income tax. We also have a goods and 
services tax and we do tax capital gains. The top income tax 
rate is around 48 cents on the dollar. The rate on goods and 
services is 10 percent. And we tax capital gains--we have taxed 
them at the marginal tax rate for individuals, but I think we 
have recently introduced some concessions there. We also have a 
company tax structure and the company tax rate I think now is 
down around 30 percent.
    Mr. Culberson. Thirty percent on a company tax rate. How do 
you determine that? Is that a----
    Mr. Bowen. That is a flat rate based on net taxable income 
for a company.
    Mr. Culberson. And you are not sure that the capital gains 
tax rate you say--the marginal rate is about----
    Mr. Bowen. Has been at the marginal tax rate--taxpayers--my 
tax expert has----
    Mr. Culberson. Where would we be without them?
    Mr. Bowen. I am advised now and I recall that if you hold 
your assets now for in excess of 12 months, as an individual, 
your capital gains tax is half--is taxed half your marginal tax 
rate.
    Mr. Culberson. So 24 percent?
    Mr. Bowen. If you are at the maximum rate.
    Mr. Culberson. Thank you.
    Mr. Saurers.
    Mr. Saurers. Again, we are a Federal state. We have income 
tax at three levels: Federal level, state level and the local 
level, which is just a percentage of the state level. Now I am 
talking about Federal level because I have got no expert behind 
me and I only have figures in my head. But those I have got at 
least. The flat rate at the Federal level for companies is 8.5 
percent and the maximum rate for income tax, personal income 
taxes is about 13 percent. But don't let yourself impress by 
these low figures, because they come on top of the figures on 
of the state level.
    Mr. Culberson. Thirteen or 30?
    Mr. Saurers. Thirteen. Last year in our system, we voted on 
an introduction of a capital gains tax at the Federal level. 
That initiative was declined by about 55 percent of the people. 
That does not mean that they are no capital gains taxed at all. 
First of all, on real property at the state level, there is a 
capital gains tax in the difference of value if you buy and 
sell your estate. And second, most state tax cost you a fortune 
at the flat rate. So you can consider that as a substitute of 
the capital gains tax that you pay irrespective if you make any 
gains or losses.
    Mr. Culberson. That is your principal source of government 
revenue?
    Mr. Saurers. No. Again at the Federal level, the VAT brings 
in about 25 to 30 percent of revenue. And income tax at the 
Federal level, that is about 20 percent.
    Mr. Culberson. And you also have a death tax. You have a 
death tax, when people die?
    Mr. Saurers. It is a bit complicated. At the state level, 
not at the Federal level. And quite a number of states are 
reducing one after the other, reducing their tax on what we 
call inheritage.
    Mr. Culberson. Thank you. Mr. Odell.
    Mr. Odell. I think we are the world champions in taxing our 
citizens. We start by 25 percent VAT. There are some deductions 
for food, for example, 12 percent. Then we have 30 percent 
income tax. That is for the commoner level. Everybody has to 
pay 30 percent. And then for little bit higher incomes, 20 
percent state. We are not a Federal state, so the state means 
the national level, at 20 percent. And for some higher incomes, 
even 25 percent.
    Mr. Culberson. On top of the 30.
    Mr. Odell. On top of the 30. So this means the average 
income tax is around, I think, 40 percent. But some people pay 
55 percent. Then comes the capital gains tax that is 30 percent 
on interest, or on what you get from your shares--what is the 
name of that--equity--that's right. Then we have a company tax 
and that is 28 percent. That is the lowest in European Union. 
Also Finland has 28 percent.
    I would also like to mention our property tax, which is 1.5 
percent on your taxed property, and that is all property more 
than--around $150,000. You can imagine in a globalized economy, 
when our citizens have to pay 1.5 percent in property tax and 
you can move your capital freely to other countries how this is 
hurting our economy. This is what we are trying to convince our 
socialist government about, because they think this is some 
kind of equality-making tax, but we think it is making us more 
poor instead. So this is about the Swedish tax structure.
    Mr. Culberson. Mr. Chairman, may I ask one follow up to Mr. 
Bowen? On the goods and services tax, you mentioned Australia 
has 10 percent, is that a value added tax or a point of sale 
retail sales tax, consumption tax? What do you mean by goods 
and services tax of 10 percent?
    Mr. Bowen. It is effectively a consumption tax. I should 
add that the revenue raised from that tax is passed directly to 
our state government.
    Mr. Culberson. And then finally to Switzerland, the capital 
gains tax was rejected by the voters. Under your system--the 
voters have a right to approve taxes?
    Mr. Saurers. There was an initiative of 100,000 or more 
people who submitted a proposal for the introduction of a 
capital gains tax. Parliament had to deal with it. Government 
had to produce a proposal and the people voted on that 
initiative last year and in the vote, itself, it was declined. 
So we won't have a capital gains tax.
    Mr. Culberson. Fifty-five percent said no.
    Mr. Saurers. Forty-five yes, and 55, no.
    Mr. Culberson. Zero capital gains tax in Switzerland?
    Mr. Saurers. Yes.
    Chairman Nussle. I wasn't going to get into this line of 
questioning. We had some earlier good conversation about your 
budget procedures, but now my curiosity is peaked. Do all of 
your citizens pay taxes or do you exclude particular citizens 
from taxation? There were a couple of you that mentioned that 
everyone, I believe--Sweden, everyone pays 30 percent on their 
income.
    Mr. Odell. Even on Social Security. We pay--people who live 
on Social Security have to pay taxes on that.
    Chairman Nussle. Is that true for the other countries 
involved?
    Mr. Saurers. At the Federal level, income tax, there is 
quite a large proportion of the population which will not pay 
any income tax at all. We are, at the moment, introducing a 
reform that will even increase that proportion. But this 
development has to be seen in the overall picture of taxation 
where Federal government historically had no income tax at all, 
and therefore, should be sort of reluctant of imposing its own 
income tax on top of the income taxes of the states. So the 
reform goes in a way of the direction of further exempting part 
of the poor population from income taxation.
    Mr. Bowen. Mr. Chairman, in Australia, we have the 
progressive income tax scale. So there are people on very low 
incomes who would not be subject to tax, income tax or who 
would be subject to a very low rate of tax. However, there are, 
to my knowledge, no exemptions from consumers paying the goods 
and services tax.
    Chairman Nussle. Are there any other questions that members 
have for this panel? If not, I would like to thank you for your 
testimony today and for being willing to answer a number of 
questions, even beyond what we asked you to come and talk 
about. We are very curious about how a number of different 
facets of your country operate, and I think you saw that with 
the questions today. Just for the information of the members 
and the audience that are here, tomorrow and Friday, we will 
continue with OECD conference on economic--excuse me, on 
budgeting. And tomorrow we will be considering fiscal rules and 
fiscal risks in the morning session as well as budgeting for 
emergencies and then in the afternoon entitlement spending will 
be considered.
    Then on Friday, we will take on performance budgeting and 
accrual accounting. And members--all members are invited to 
participate in this conference. It will be here in this room 
and we will be happy to share with you a schedule about that. 
This is about the OECD conference for chairpersons and 
parliamentary budget committees and all members are invited to 
attend.
    Mr. Culberson. If I could have one quick follow up. Can 
taxes be raised in your countries by simple majority votes of 
your legislatures or your Parliaments or does it require a 
super majority?
    Mr. Bowen. Simple majority.
    Mr. Saurers. Maximum rates are in the constitution for VAT 
and income tax and the people have to decide if the rates are 
increased.
    Mr. Odell. In Sweden, it is sufficient with a simple 
majority to increase taxes.
    Mr. Culberson. I prefer learning more about how Switzerland 
handles its tax system.
    Mr. Brown. Mr. Saurers, have you--have the citizens had an 
opportunity to increase those limits? Have they taken a vote to 
address it and if they did, was it a positive vote?
    Mr. Saurers. When we changed to the system from a 
consumption tax to a VAT tax, we, at the same time, increased 
the tax rate and maybe that was a political move. Part of that 
increase was earmarked for old age pension. And at that time, 
that increase of tax rates was approved. And I recall a little 
more back, we increased a petrol tax in a vote as well, 
earmarked for the construction of motor ways and that was 
increased as well. Our taxes are--not only do we have the 
maximum rates in the constitution, but the right to raise taxes 
is limited in time and requires prolongation of about every 12 
years.
    And on these occasions, always the issue comes up, do we 
eliminate maximum tax rate from the constitution in order that 
Parliament could fix them? Do we eliminate limitation and time? 
In past experiences when government tried to do both in 
Parliament, the result was always negative. And what we do 
again right now, we try to keep the maximum rates, but we flood 
with the idea do we eliminate the necessity to have a vote 
every 12 years to prolong taxation of the income and VAT, but 
we shall see if that will pass.
    Mr. Brown. Every 12 years you actually go back to the 
voters to approve the tax code?
    Chairman Nussle. Not the tax code.
    Mr. Saurers. Not necessarily the code in details, which is 
afterwards decided by the Parliament with the possibility of a 
referendum, of course, since it is a law. But at that time you 
fix what taxes, Federal government is allowed to introduce. You 
fix on the maximum rates. Yes, that we do.
    Mr. Brown. What happens if they don't approve it?
    Mr. Saurers. We got wise in the past. The existing tax 
system lasts until the year 2006, and we intend to have the 
first vote in 2004 in order for us to have a second attempt.
    Chairman Nussle. We really do appreciate your testimony 
today and for taking extra time to talk to us about a number of 
topics, and we look forward to your participation in the 
conference to come. Thank you very much. Committee is 
adjourned.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]

                                
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