has commonly been viewed as a concept with many facets. An EPC note (2007) defined QPF as “a
broad concept which refers to the conduct and organisation of budgetary policy and its potential
impact on long-term growth of the economy.” As summarised in the EPC notes from 2006 and 2007
and the paper by Afonso et al. (2005), presented in Section I, empirical evidence suggests that public
finances can contribute to this objective by well-targeted expenditure and more efficient use of scarce
public resource which also allows lowering the overall size of governments and the tax burden. Sound
budget positions are key for these objectives and can be helped by fiscal rules and institutions.
Since meaningful and comparable data are key for the cross-country analysis of quality of public
finances, the Working Group paid much attention to identifying and filling data gaps, in particular on
public spending. The paper by the EPC from 2004 describes that the Classification of Functions of
Government (COFOG) was agreed to be the most useful starting point in this respect as it allowed
splitting up government expenditure by functions rather than by economic classification. The former
lends itself better for studying the productivity and efficiency of expenditure. By now, these data are
available for all EU Member Sates through the Commission services' AMECO database. However,
since the aggregation level was still too high to assess, for example, the role of R&D spending for
growth, the work was advanced on providing second-level data (COFOG-II). This work is ongoing
and data are envisaged to be made publicly available soon.
Fiscal governance: Fiscal governance cuts through all dimensions of quality of public finances, but
particularly helps ensure sound budgets and sustainability. A paper by the European Commission
(2006) provides a comprehensive overview of the numerical fiscal rules in the European Union and
documents their rising importance. Moreover, it finds empirical evidence that strong fiscal rules with a
wide coverage of budgetary items are linked to better budgetary outcomes. A paper by Anderson and
Minarik (2006) compares deficit and expenditure rules and clearly recommends the latter in terms of
best accomplishing the multiple objectives of the budget. Another institutional option to lower the
deficit bias are fiscal institutions (also called fiscal agencies) which provide independent analysis,
forecasts or judgements as shown in the paper by Debrun, Hauner and Kumar (2007). The work by
Curristine, Lonit and Joumard (2006) focuses on the role of budgetary procedures, in particular
performance-based budgeting, in improving public efficiency. Country experiences in this area and
modernising public administrations more generally are surveyed in the European Commission note
(2007). Instructive are the country examples of fiscal governance frameworks. The paper by Hansson-
Brusewitz and Lindh (2005) details the Swedish experience with medium-term expenditure rules,
while the paper by Bobay (2005) describes the French budget reform from 2001 that introduced a new
budget structure along with goals and performance indicators.
Composition and efficiency of expenditure: Initially the Working Group paid much attention on
reviewing the composition of public expenditure given the links between some spending components
and growth (see for example an overview of the literature in the 2004 Public Finance Report). Two
country cases, Austria and the Netherlands, are presented in this section, describing the experiences
with shifting expenditure in support of growth (more country examples can be found in Section V).
The particular role that public expenditure can play in boosting innovation is assessed in the paper by
Lilienthal (2004).
Given the pressures to reduce public spending, another focus has been on how to assess and improve
the efficiency of public expenditure. The main challenges for such analysis, such as the measurement
of inputs, outputs and outcomes to obtain efficiency indicators, and the main reform avenues, such as
structural and institutional reforms, are summarised in a joint EPC/European Commission note (2007).
Comparative estimates of efficiency of public expenditure and overall public sector performance for
new Member States are provided in the paper by Afonso, Schuknecht and Tanzi (2005). This study
builds on their earlier paper on efficiency, covering the old Member States. While the paper stirred
some critical discussions on the methods used, it opened the door for further efficiency studies, which
explicitly take into account the determinants of efficiency such as the one by Afonso and St. Aubyn
(2006) on health provision.