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

Dinesh Kumar Nayak and Pratap Ranjan Jena ()
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Pratap Ranjan Jena: National Institute of Public Finance and Policy

Working Papers from 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.

Keywords: Public Financial Management (PFM); Public Expenditure and Financial Accountability (PEFA) Framework; Budget Reliability; Fiscal Discipline (search for similar items in EconPapers)
JEL-codes: E62 H61 H70 H72 H83 M40 O22 (search for similar items in EconPapers)
Pages: 29
Date: 2025-08
Note: Working Paper 435, 2025
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