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Bridging the Budget Divide: How PEFA Assessments and PFM Reforms Diagnose the Budget Reliability

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  • Nayak, Dinesh Kumar

    (National Institute of Public Finance and Policy)

  • Jena, Pratap Ranjan

    (National Institute of Public Finance and Policy)

Abstract

In this paper, we examine how Public Financial Management (PFM) systems affect budget reliability, focusing on interconnected PEFA pillars, indicators, and dimensions, across the globe, mainly in lower-middle-income countries (LMICs). Using the PEFA Public Database 2022 Global Report, we identify that there is a widespread challenge in maintaining reliable budgeting globally, more pronounced in lower-income group countries, and many Indian states exhibit growing discrepancies between planned and actual revenues and expenditures. We employ structural equation modeling (SEM) to analyze the effects of PFM system on budget reliability, and measurement models to construct latent variables from the observed indicators, such as PEFA pillars and dimensions. We find that a substantial and significant positive standardized effect of each unit increase in PFM system rises budget reliability by 0.625 (globally) and 0.629 (LMICs) units. Based on effect-size estimates of parameters, external scrutiny and audits are vital for enhancing budget reliability in PFM systems globally and in LMICs. Additionally, transparency in public finances is crucial globally, while predictability and control in budget execution are essential for LMICs. The findings offer policy relevance for developing and emerging nations, including India.

Suggested Citation

  • Nayak, Dinesh Kumar & Jena, Pratap Ranjan, 2025. "Bridging the Budget Divide: How PEFA Assessments and PFM Reforms Diagnose the Budget Reliability," Working Papers 25/435, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:25/435
    Note: Working Paper 435, 2025
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    References listed on IDEAS

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    1. Bernard Omollo, 2018. "Public financial management reforms and fiscal policy-a qualitative content analysis of the impact of PFM reforms on country budget income in Sub-Sahara Africa: A case for Kenya and Rwanda," OECD Journal on Budgeting, OECD Publishing, vol. 18(1), pages 167-201.
    2. Jena, Pratap Ranjan & Sikdar, Satadru, 2019. "Budget Credibility in India: Assessment through PEFA framework," Working Papers 19/284, National Institute of Public Finance and Policy.
    3. Jena, Pratap Ranjan, 2013. "Improving Public Financial Management in India: Opportunities to Move Forward," Working Papers 13/123, National Institute of Public Finance and Policy.
    4. Jena, Pratap Ranjan, 2010. "India Public Expenditure and Financial Accountability: Public Financial Management Performance Assessment Report," Working Papers 1/10, National Institute of Public Finance and Policy.
    5. Sri Hari Nayudu A. & Chakraborty, Lekha, 2025. "Fiscal Transparency and Budgetary Processes in India: Issues before the 16th Finance Commission," Working Papers 25/424, National Institute of Public Finance and Policy.
    6. Fritz, Verena & Sweet, Stephanie & Verhoeven, Marijn, 2014. "Strengthening public financial management : exploring drivers and effects," Policy Research Working Paper Series 7084, The World Bank.
    7. Lekha Chakraborty & Pinaki Chakraborty & Ruzel Shrestha, 2020. "Budget Credibility of Subnational Governments: Analyzing the Fiscal Forecasting Errors of 28 States in India," Economics Working Paper Archive wp_964, Levy Economics Institute.
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    Cited by:

    1. Mundle, Sudipto & Mehta, Madhur, 2025. "Monetary policy during Negative Output Gap periods in India in the First Quarter of the 21st Century," Working Papers 25/437, National Institute of Public Finance and Policy.

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    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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