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Off-Budget Expenditures

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Practice Advice on Budgeting and Financial Management

Off-Budget Expenditures (OECD)

Summary Advice: The OECD advises that governments need to identify best practices to ensure that off-budget expenditures do not impair the proper functioning of a budget.

Main Points: The OECD notes that off-budget expenditures result in inconsistencies which may impair the four main functions of the budget, namely: the authorization function, the allocative/distributive function, the macro-economic function and the administrative function. Although most OECD countries strive to ensure that all expenditures and revenues are included in the budget, there still remain some forms of “back door” and “off-budget” expenditure that may hinder the proper functioning of the budget.

Many OECD countries have introduced substantial credit reforms concerning off-budget funds, direct loans, credit budgeting and credit subsidy budgeting.

Off-Budget Funds are special funds owned by the government which are not part of the budget but receive revenues from levies and other sources such as fees and contributions from general tax funds. The main forms of Off-Budget Expenditures which may impede one or more functions of the budget are off budget funds, direct loans, guarantees and Public Private Partnerships (PPP). Off Budget Expenditures are often present in the budgets of European OECD countries, in the areas of social security, health care, transport and pensions and funds to facilitate the privatization process. The OECD recommends:

  • Avoid off-budget funds or only allow them under strict conditions, i.e. making them exclusively or largely financed by earmarked levies and subject expenditures and revenues of the funds to regular budgetary control.
  • All expenditures and revenues of off-budget funds should be integrated in the budget documentation that is submitted to the budgetary authorities. Regular expenditures and Off-Budget expenditures should be shown in all documentation side-by-side. 

Direct Loans, as a form of public lending, are financed through taxes or levies, and are generally offered on conditions which are more favourable to the borrower than those offered by bank loans in the private sector. Sometimes, direct loans are provided because it is impossible to obtain loans for high risk projects from the private sector banks. Direct loans may also include a subsidy element in the form of below-market interest rates or favorable repayment conditions, or special risk fees (as found in study loans). The OECD recommends:

  • Include the estimated subsidy costs of direct loans in the budget at the time the loans are made, and not at the time the cash flows occur.
  • Estimate the costs of credit programs based on rules which are easily comprehensible for politicians and citizens.
  • Direct loans should be authorized by law and the supporting budget documentation should provide information about the among of direct loans outstanding for each program at the beginning and the end of each budget period.

Credit Budgeting describes the inclusion of certain credit programs, such as disbursement of loans and repayments, in separate sections of the budget. Given that such credit programs are sometimes excluded from the fiscal rule, yet remain subject to budgetary control, credit budgeting allows monitoring the different macro-economic effects and eliminates improper elements from the public deficit.

Credit Subsidy Budgeting describes the discounting of expected incoming and outgoing cash glows during the lifetime of loans and the subsequent authorization of the remaining balance as a subsidy cost as the time the loans were made. This implies that program funds require authorization for new loans made each year, and also allows conducting a cost-benefit-analysis of the credit programs in the course of the annual budget process. Credit Subsidy Budgeting is not easy to execute because: 1) The cost estimates do not include administrative costs, complicating the cost-benefit-analysis; 2) The proper public discount rate (risk margin) and the default risks are difficult to estimate, requiring complex statistical models for each type of loans; and 3) It requires regular re-estimation in order to incorporate subsidy cost increases, leading to additional administrative costs.

Guarantees are loan guarantees made by government to non-governmental lenders in case of debtor default. Loan guarantees usually include public insurance of loans. Similar to Direct Loans (see above), the OECD suggests

  • Guarantees should use correct estimates, based on information available the day the guarantees were made.

 Back-Door Expenditures are entitlements (financial obligations created by substantive law) and tax expenditures (tax reliefs created by tax laws). Tax expenditures require separate attention, as they may impede the proper functioning of a budget by hampering the macro-economic and allocative/distributive functions of the budget by escaping the control of the prevailing fiscal rules, and by impeding the tradeoff required by the allocative/distributive function and the control of cost-efficiency required by the administrative function.

Source: OECD (2004). "Best Practice Guidelines - Off Budget and Tax Expenditures" 25th Annual Meeting of Senior Budget Officials, at: (accessed 2 January, 2013).

Page Created By: Khilola B. Zakhidova on 2 January 2013. Updated by Ian Clark on 17 January 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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