This article covers the issues related to the limits of the legal framework of public finance, the legal acts it covers and the scope of the relationships it regulates. At the same time, the article will compare financial law and public financial management legal framework and cover some issues in the legal framework of public financial management.

First of all, it should be noted that law is a system consisting of a set of branches that regulate various relations. These relations cover various aspects of social life. This includes relations from civil circulation, family, land, ecology, labour, public security, administrative management, finance, taxation and other fields.

If we consider the law as a set of norms regulating social relations of various natures, (it is possible to take a broader approach) the set of norms regulating financial relations can also be considered as financial law. Law is mainly divided into branches based on two criteria: First, which relations to regulate, and second, which method to regulate. It should be noted that, although this approach is more traditional for Soviet legal doctrine, it theoretically helps to understand the concept of the legal field. Thus, based on the above, we can say that we can accept financial law as a field of law that regulates financial relations. However, unlike a number of legal fields, it is not easy to correctly define the scope of "financial relations". It is no coincidence that the approach to this legal field by post-Soviet countries and the Western practice is basically different. However, in other areas, the approach is almost the same, despite the fact that the legal systems are different.

Based on the above, if we pay attention to the definition of financial law in domestic legal literature, even here we can observe different approaches.

For example: financial law is considered a system of norms and principles that regulate social relations that arise in the process of creating, distributing and using funds for financial support for the activities of state and municipal bodies.¹

In another literature, financial law is defined as a set of legal norms that regulate social relations that arise in the process of financial activity to ensure the implementation of the duties and functions of the state in any period of social development.².

A common feature in both concepts is the formation and distribution of funds for the implementation of the duties and functions of the state.

In the domestic legal literature, it can be observed that relations related to insurance, banking, finance of enterprises, and currency relations are also covered within financial law. It should be noted that the activities of these entities assessed under the financial law are mainly activities performed by them as taxpayers. The participation of enterprises in state finances is expressed as a taxpayer, so we can say that this issue is regulated within tax law. In addition, there is no unambiguous and clear approach to the ratio of financial and tax law. Although some literature views tax law as a sub-field of financial law, some literature states that they should be treated as two independent branches.

To compare we should note that in Turkish literature, financial law is viewed in terms of public finance and financial law. The main goal in the concepts given above is limited by the framework of public financial relations. In this framework, subfields such as the Law of income (tax right), law of expenditure (directions of public expenditures, public debt) and budget law are conventionally covered. It is seen that entities of private law (bank, insurance, other enterprises) are not included in the financial law³.

It cannot be said with absolute certainty that financial law is considered a separate field in the Western approach. More precisely, it is stated that the relations covered by this field include financial transactions, banking, investment, insurance, property management, securities, bankruptcy, and also the issues arising from the protection of competition in the markets arising from these activities. Within this field, the financial relations of the public sector are not particularly emphasised.

Although the full reasons for the formation of such different approaches are not studied within the article, it can be seen in the Western literature that, it is derived from the characterization of the budget-tax and wider range of relations in which the state participates as public financial relations. In other words, despite the fact that the activities of the banking, insurance and financial markets are relations formed by the indirect intervention of the state (issuance of a license, prudential control, etc.), these relations are special financial relations and created with the participation of entities of private law. These relations are regulated by banking, insurance, and securities law which are branches or sub-branches of civil law and are private law. However, budget relations are completely regulated within public law.

In addition, despite the fact that they are subjects of private law, as well as their activities (the services they provide, relations with other market subjects, etc.), are regulated by civil law, financial accountability of the above-mentioned enterprises, their obligations arising from the being accounting subject, being subjects of mandatory audits and the regulations related to their obligations arising therefrom can be considered the subject of financial law.

However, it should be noted that the reason for sometimes confusing the circle of relations related to the activities of these enterprises is the fact that the state has significant control over financial market relations, activities of banks, investment funds, and insurers. However, this still does not focus on the "state finance" sector.

It should be noted that the boundaries of financial and tax law are not clearly defined. So, although the tax institute constitutes a significant part of budget relations, as a branch, it is where the relations between the tax collector (state or municipality) and the taxpayer (individuals, legal entities) are regulated. It is difficult to say that the issue is addressed unambiguously in the legal doctrine of the country. However, the recently formed approach is focused on the relations between the state and the taxpayer as mentioned above, rather than its place in the state finances as the main source of income of the budget, with researching and teaching tax law as a separate branch of law.

Above mentioned suggests that there is no unified and complete approach to the financial law framework. Shortage and lack of clear approach in the doctrine also affects the practical side. Based on the above, we can say that determining the boundaries of public finances is more optimal. Thus, it seems more possible to determine all the elements (regulated social relation, subjects involved in the relationship, the object to which the relationship is directed,etc.) necessary for the legal relations for this sector.

It is possible to determine the boundaries of these relations because the powers of state institutions related to financial activities have been regulated.

Summarising the above, within the article, it can be said that it is correct to analyse of “public financial management” part of financial law by accepting only its public side, that is, on the basis of the part of relations arising in the public sector. In this regard, a slightly different nuance will be observed in relation to state-owned enterprises (legal entities operating on the basis of commercial principles, whose founder or major shareholder is the state). In this regard, the studies of a number of international organisations regarding the management and organisation of activities of state-owned enterprises make an important impression.

Relation is formed in two directions in the activity of these enterprises: The participation of the state as an owner in relation to the share held by the state in the establishment of the enterprise, in this category of relations we can talk about the management of state property, and the other is the relations in which the enterprise itself carries out its activities, that is, it provides services, engages in production activities and other special (private) sector relations. It can be said that private and public law regulations should be reconciled in relation to public enterprises, and the correct ratio should be determined for the application of the principles of these directions. In this regard, the policy related to the management of these enterprises is determined (with a legal act status) in some countries. This policy defines the role of the state and the limits of its intervention in the organisation and management of the legal entity. Another interesting regulation is that in the legislation of some countries, it is required to maintain separate accounts of the state-owned legal entity providing public services in two sectors (EU Commission Directive 2006/111/EC).

Based on the above, the legal framework for public financial management can be grouped into two main areas—sources of law and the relationships they govern. In such a division, not the relation, but the boundaries expressed by the legal sources expressing the powers of the state are taken as the basis:

The main legal sources in public financial management

Source: Legislative acts regulating the constitutional and budgetary process

Legal relations: Division of power related to the adoption of regulatory decisions in the financial field. Division of power and mutual relations of state bodies on budget formulation, approval and control. Relations on budgeting system, budget calendar, documentation, accountability, expenditure framework or policy, budget execution, treasury system, etc.

Specific legal sources in public financial management

Source: Legislative acts defining fiscal responsibility, public debt, public financial control

Relations: Relations arising from the performance of the obligations of the entities involved in the budget implementation and the determination of responsibility. The relations are based on accountability. The relations arise from the implementation of control over individual elements of the entire management process. Public debt, debt creation, classification, and accountability.

Related legal sources of public financial management

Source: Legislative acts regulating public procurement, Central Bank activities, financial activities of local governments, public-private partnership relations

Relations: Relations arising from procedures for the use of budget funds, organisation of procurement. Relations arising from public-private partnerships. Relations arising from the performance of the role of the Central Bank in the financial system (assessed in this category due to the fact that it is an independent institution). Financial relations arising between the state and local self-government, including local self-government relationships arising from financial activity (the latter is derived from its local social importance, not the state)

It should be noted that in the legal relation, it is important to define the participants as well as the relation itself. In this regard, two directions can be defined in financial law. Relations whose parties are public and private law entities. An example can be given by accepting the relations on the above-mentioned financial markets, insurance, and securities markets as financial relations. Relations whose parties are subjects of public law. In private law, the main principles include equality, freedom, and flexibility, allowing for alternative behavior. In contrast, public law is based on subordination, predefined procedures, and mandatory regulations that leave no room for alternatives. It should be noted that one of the parties to the main relations regulated by public law is the state and the other is a private law subject. For example: tax relations, administrative law relations (obtaining an identity card, license, permission, prosecution for an administrative offence, etc.), and criminal law.

However, in the management of public finances, basically all participants are elements of the state mechanism and their activities should be regulated in order to ensure transparency and accountability. One of the main reasons for this is the possibility of eliminating gaps and deficiencies in the regulation of financial management of the state bodies involved in the management of public finances, in a mutual manner, during the implementation of relations.

The Constitutional Law "On Normative Legal Acts" highlights common factors leading to abuse, such as gaps in legal regulations, addressing issues meant for laws through other acts, and the absence of administrative procedures. While it cannot be stated without exception that this applies to all public sector relations, it is important to note that the need for regulation also applies to public financial management.

The constitution is the primary source for managing public finances. It not only regulates fundamental relations but also establishes the foundation for future regulations. If we consider the experience of a number of countries, we can see that the regulation of public financial relations is especially expressed in the constitution. In the constitutions of Poland, Moldova, Sweden, Germany, Finland, Spain, Belgium, and Switzerland, financial management is regulated by a separate section. The basis of relations related to the budgeting process with separate items, state property management, tax determination, and public debt is laid just here. The Constitution of the Republic of Azerbaijan should be evaluated as one of the best constitutions due to its systematicity and coverage of relations. Our Constitution does not directly regulate state financial management. Nevertheless, in separate articles, Article 15 (Economic development and the state), Article 59 (Right to free enterprise), Article 73 (Tax and other state duties), Article 3, Article 95, Article 109, and Article 119 regulate the powers of individual state bodies on the state budget and other issues.

Another important regulation is the laws regulating budget processes, which is the central legislative act in this area. It should be noted that in Uzbekistan, Georgia, Kazakhstan, Ukraine and other countries this law is called as the Budget Code, and in some countries it is known under different names, such as the Law on "Budget and Financial Management" in Latvia, Law on "Budget and Fiscal Responsibility" in Montenegro, Law on "On Budget System" in Serbia, "Fiscal Responsibility and Budget System Law" in other countries. In Azerbaijan, this law is called the Law "On the Budget System". In addition to the law, laws on the budgets of extra-budgetary funds, normative legal acts applied in the preparation and implementation of the budget, normative legal acts on accountability in this area, and financial strategies play an important role in the regulation of budget relations.

The second category of specific sources of public financial management includes legal acts related to the activities of the fiscal adviser in some countries, along with the legal acts on the relations mentioned above. It should be noted that this institution of financial control, which is traditional in most European countries, is new in nature. The Independent Authority for Spanish Fiscal Responsibility operates, the independence of which is guaranteed by legislation. Although the decisions taken by the institution opposing the state budget draft are not binding, it acts on the "comply or explain" principle in parliamentary debates. Thus, if a different decision is presented in the budget draft, the government must explain its non-acceptance of the said decision or make changes to the draft based on the proposal of the institution. Similar relations in Azerbaijan can be compared with the opinion given by the Chamber of Accounts on the draft law on the state budget (with the exception of the "comply or explain" principle).

One of the specific sources is the laws and other normative legal acts that regulate the relations on the public debt. It should be noted that although this concept seems clear from the point of view of public finance, the countries' approach to the legal framework of public debt is not the same. For example, there is a different approach to the scope of public debt, which is the main concept. In some countries, the public debt and the state debt are defined as a boundary that encloses each other. Public debt includes central government debt, state guarantees for borrowings and local government debt (Albania). In some countries, it can be seen that the public debt, which includes the debt of the Central bank, the debt of state-owned enterprises, and the debt of local institutions, is expressed as the debt of the public sector. In a narrower frame, it can be seen that (debt under contracts signed by the Ministry of Finance on behalf of the state) is considered as state debt. It should be noted that the concept of debt also affects accountability.

An analysis of Azerbaijan's legislation reveals a legal framework aligned with international practices regarding the hierarchy of normative legal acts. Public debt relations are regulated through both laws and lower-level acts. Regarding transparency, although our legislation declares that the information on the volume and composition of the public debt is open, it does not define a detailed requirement for the report. In this case, the country's legislation does not consider the debt of the Central Bank as a public debt, it also can be seen that the debts of state enterprises that do not receive a state guarantee are not public debt. However, it does not directly indicate in which category these debts are assessed.

One of the interesting nuances within financial management is the regulation of issues related to fiscal risk. Domestic legislation does not regulate at what stage of the budget process or how fiscal risks are to be carried out, and there is no attitude towards it at all. However, in practice, special attention is paid to this issue in the preparation of budget documents. Since the risk includes probability, there may be some difficulties in its legal regulation. Nevertheless, in the financial strategies of the countries, as well as in their legislation fiscal risk reporting and the compilation and monitoring of registers are defined in regulations called financial policy documents. We can say that internationally recognised methods and tools are used in this field as well.

In today's world, a new approach to the management of public finances is being formed, this approach expresses itself in the actualization of climate-responsive, gender-responsive financial management. The impact on the climate and environment is measured during the forecasting of budget expenditures using various assessment tools and methods. The process does not end there, the actual effects are expressed in the implementation report. In general, the process is first conditioned by the creation of a climate-responsive public financial management strategy. This can be explained by the complexity of the mentioned process. It is possible to come to this idea from the experience of a number of countries that have adopted this method. Also, not only the impact of the implementation of funds on the environment but also the determination of the limit of the budget allocated to the environment is important in this budgeting process. The conclusion is the evaluation of the result-based climate-responsible budget, the separate determination of environmental and climate impact reports at the implementation stage, and the conduct of audits in this direction at the end. It should be noted that climate impact assessment tools such as Q-Craft (Quantitative Climate Risk Assessment Fiscal Tool), and C-PIMA (Climate Public Investment Management Assessment) of the International Monetary Fund are widely used in this context.

New priorities require new approaches and the creation of arrangements. This, in turn, requires changes to the legal regulation of financial management and reforms in this field. For this very purpose, it is important to determine the legal framework.

Within the reforms on the legal framework, limits of carrying out reforms in legal acts are mainly focused on. It should be noted that we can talk about the experience of state finance reform boundaries covering 7 sections in the legal framework. Thus, it is desirable that the reforms carried out in different countries should include macro-fiscal policy, budget preparation and approval, budget implementation and treasury management, debt, liability and assets management, accountability, accounting and internal control, extra-budgetary state fund management (control), state enterprise activity and responsibility and sanctions. Although we see that there is regulation for all components, when we compare these components within the country, it can be seen that regulation for some sections is not direct, and there are problems with its quality and internal consistency. Notably, improvements are needed in fiscal strategy, liability and asset management, issues concerning extra-budgetary state funds, and internal control mechanisms.

Sources used:

• IMF 2022. How to Make the Management of Public Finances Climate Sensitive "Green PFM"
• OECD Guidelines on Corporate Governance of States-Owned Enterprises 2024
• https://www.constituteproject.org/
• https://infrastructuregovern.imf.org/
• https://www.imf.org/en/Topics/fiscal-policies/Fiscal-Risks