A functioning public finance system is vital to allow the state to provide its citizens with public services. Citizens and companies profit from efficient, fair public revenue collection and the targeted, sustainable use of these funds.
External financial auditing by parliaments and supreme audit institutions enables abuses, improper and inappropriate conduct and cases of fraud to be identified, thus allowing governments to be called to account for the use of funds. This creates the basis for a viable relationship between citizens and the state.
In close collaboration with finance ministries, parliaments and supreme audit institutions, we assist our partner countries on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ) in reforming their state finances both at national and subnational level. In doing so, we take our lead from the principles of Good Financial Governance (GFG).
GFG means that state action in the field of public finances – both revenue collection and the use of funds – is transparent, legitimate and development oriented. This includes efficient, accountable state institutions and financial administrations acting within the rule of law, functioning supreme audit institutions and control mechanisms enshrined in policy and society.
More about public finances
Raising taxes and duties provides the foundation for funding any state. Without revenues of its own, a state is incapable of taking action and has no funds with which to implement its national priorities. Public revenues are therefore vital for poverty reduction, sustainable development and financial independence.
Partner countries often have limited options for generating income of their own. In many national economies, the level of income is low, and the local economy is characterised by an extensive informal sector. Tax fraud and tax evasion pose an enormous challenge. Moreover, customs revenues are declining in many partner countries due to increasing economic integration.
Nonetheless, the states concerned can increase the funding they generate themselves by implementing targeted fiscal policy measures, and strengthening the capacities of their tax and customs authorities.
GIZ supports reforms of public revenue systems that aim to achieve good financial governance. This means first of all basing tax policy on the principles of fairness, effectiveness and sustainability. Secondly, it means making tax administration processes transparent and efficient, and basing them on the rule of law – so as to make tax collection responsive to citizens’ needs.
Public revenue reforms thus play an important role in governance. When citizens pay taxes and duties, they become more interested in how their taxes are being used. Taxes and duties help build a relationship of accountability between the state and its citizens. In other words, they are the foundation for democratic development.
Public budgets and climate finance
The national budget is the central instrument for political steering. It reflects government priorities. Effective, fair and transparent budgeting systems are a cornerstone of good governance. In budgeting, good financial governance means that processes for preparing and implementing the national budget are designed to be effective, efficient and sustainable. It also means that they are subject to effective internal and external financial control, and that they involve appropriate participation on the part of parliament and civil society.
GIZ supports the reform of public budgeting systems, covering all aspects from budget preparation, to implementation, to control. Key partner institutions are the budgeting departments of ministries for financial affairs, line ministries and parliamentary budget committees.
Good financial governance in climate finance aims to establish effective, transparent and participatory structures for deploying funds to tackle climate change through the public financial management system. When establishing a national climate finance architecture, the financial institutions play a key role. The ministry for financial affairs is a key player in implementing the national strategy on climate change through the budget at the national and subnational levels.
Climate change measures are often financed through separate funds outside of the national budget. The long-term sustainability of their results will depend on how successfully these funds are integrated into the regular processes of public decision-making. Closer integration is the only way to guarantee policy coherence, legitimacy and accountability.
Public administrators are accountable to citizens for their actions and their use of public funds. This key element of good governance is ensured through the auditing and advisory activities involved in internal and external financial control. External financial control plays a salient role in public control due to its independence, which typically is enshrined in the constitution. It comes into play at the beginning and at the end of the budget cycle, and provides information on whether the government has used the funds duly, economically and in accordance with the designated purpose.
Through the parliamentary deliberations on the court of audit reports, and implementation of recommendations to improve the use of funds, financial control generates results that go far beyond merely verifying regularity and legality. It supports reforms to bring about management for development results, strengthens transparency, limits state power and thus contributes toward democracy and the rule of law.
GIZ has been advising on and supporting the establishment and professionalisation of financial control institutions around the world for many years. In so doing, GIZ has also been promoting regional and international cooperation in this area. In the context of external financial control, we cooperate closely with the International Organisation of Supreme Audit Institutions (INTOSAI).
A large proportion of public goods, services and investments are provided at the subnational level (i.e. in cities, municipalities and districts). In most partner countries, subnational public expenditure accounts for a growing share of the total public budget.
To enable the subnational authorities to act efficiently and ensure that they possess efficient structures, income and expenditure capacities must be distributed appropriately across the different levels of the state. The revenues of subnational units must, for instance, be sufficient to enable them to perform their allocated tasks. Moreover, these units must be authorised to decide how funds are to be spent with regard to their tasks.
Promoting financial relations within a state, fiscal decentralisation and local financial management is therefore of key importance. In close consultation with experts in the field of decentralisation and local self-government, GIZ supports its partner institutions in designing vertical and horizontal financial equalisation systems. These partner institutions are the ministries for financial affairs, ministries for local government, and regional and local administrations. We help develop their capacity to provide and responsibly use public funds for financing regional and local administrations and their services.