Budget Analysis for Expenditure Rationalization

1
Budget Analysis for Expenditure Rationalization

• Public Finance Analysis and Management Course
• World Bank, April 23-27, 2007
• Marijn Verhoeven
• Expenditure Policy Division
• Fiscal Affairs Department, IMF

2
Overview

• Why expenditure rationalization?
• The analytical tool box for expenditure
  rationalization
• A word about data
• Measuring efficiency
• We found the problemsnow what? (very briefly!)

3
Why expenditure rationalization?

• To achieve macroeconomic stability and fiscal
  sustainability
• To create fiscal space
• To increase allocative efficiency by cutting back
  or reforming government activities
• To enhance X-efficiency by achieving the same
  outputs with less inputs

4
Why expenditure rationalization? (contd)
5
A word about data

• Expenditure analysis is typically data driven
• But data are problematic
• There are several competing sources of spending
  data, each with their strengths and weaknesses
• Let us look at the example of data on wage
  spending

6
Facts and figuresmeasuring wage spending

• The wage bill is measured
• As a share of GDP and total spending to compare
  across countries
• As a share of domestic revenue to assess
  sustainability
• At the sectoral level, compare to nonwage
  spending to assess efficiency
• Source is IMF Government Finance Statistics or
  national data

7
(No Transcript)
8
Lies and statistics mismeasuring wage spending?

• Not all compensation may be captured in wages and
  salaries transfers (pension benefits and
  subventions for education), other goods and
  services (in-kind benefits and contractual
  workers), and capital spending (donor-financed
  projects) may hide substantial wage spending. In
  Nicaragua, out of actual wage spending of 8.6
  percent in 2005, less than 4 percent is recorded
  as wages and salaries.
• When government is decentralized, central
  government wage spending is biased downward. But
  reliable data for general government are rare for
  low-income countries.

9
Efficiency the issue
Source World Bank (2004) World Development
Report 2004. Spending refers to total annual
public spending per child of primary school age,
in 1995 US dollars.
10
How should we think about the efficiency of
public spending?

• What is the mix of public programs that best
  meets government objectives?
• Where to invest the marginal dollar across
  sectors
• For example, can education goals be reached by
  investing the marginal dollar in other sectors?
• Where to invest the marginal dollar within
  sectors
• Primary versus secondary education
• Primary health care versus secondary health care

11
How should we think about the efficiency of
public spending? (contd)

• Given allocative decisions, is output maximized
  with given inputs?
• Common problems
• Inappropriate student/teacher ratios
• Shortage of medicine or nurses relative to
  doctors
• Shortage of textbooks
• Waste, leakage of funds
• Labor and utility costs crowding out maintenance
  and capital spending

12
Assessing efficiency

• Many roads lead to Rome
• Basic benchmarking
• PETS
• Randomized evaluations
• Absenteeism studies
• Sectoral efficiency analysis
• Choice depends on data availability,
• objectives, and priors

13
Assessing efficiency always begins with...

• Review the basics of public spending
• Functional classification
• Primary, secondary, tertiary education
• Inputs, programs, types of intervention
• Education Teachers, textbooks
• Health Spraying, information and education
  campaign, etc.
• Economic classification
• Wage versus non-wage
• Recurrent versus capital (investment) spending
• Central and local government budgets, other
  Ministries
• Planned versus actual, nominal versus real
• Share of private, NGO, and donor spending

14
Basic benchmarking

• Selected useful descriptive statistics
• Budget data
• Unit costs
• Ratios of teachers, students, non-teaching staff
• Distribution of teachers among levels of
  qualifications percentage meeting basic
  government standards
• Actual maintenance budget versus engineering
  estimates for routine maintenance
• Enrollment rates, repetition rates, dropout rates
• Absenteeism, informal payments, etc.

15
Basic benchmarking (contd)

• Comparisons
• Sub-national units, clinics, schools
• Private versus public schools
• Private versus public health facilities
• Comparator countries
• Cross-country information on real resources and
  output
• UNESCO education indicators
• Program for International Student Assessment
  (PISA)
• WHO Indicators of Health System Attainment
• Trends in International Mathematics and Science
  Study (TIMSS)
• Progress in International Reading Literacy Study
  (PIRLS) and the International Survey of Adults
  (ISA)

16
Randomized evaluations

• Randomized evaluations of educational reform
• programs
• Random selection of schools for the reform
• Colombian voucher program, Angrist and others
  (2002)
• Randomized phase-in of programs
• Argentina Decentralization took place across all
  provinces, but at different periods and
  intensities, Galliani and Schargrodsky (2002)

17
Public expenditure tracking surveys

• Trace the flow of resources through the
• bureaucracy from the central government
• down to the service facility
• Comparing originally allocated funds with funds
  that actually arrive at the facility
• Amount of time required for fund to arrive
• Reinikka and Svensson (2001) Uganda in the
  1990s, significant leakage existed

18
Sectoral efficiency analysis basic concepts

• The measurement of efficiency generally requires
  the following
• (i) information on inputs and associated costs
• (ii) an estimation of output or benefit and
• (iii) a comparison of (i) and (ii)
• Key question
• Could the same level of output be achieved with
  less input?
• Equivalently, could more output be generated with
  the same level of input?

19
Sectoral efficiency analysis basic concepts
(contd)
20
Sectoral efficiency analysis Best-practice
frontier
21
Sectoral efficiency analysis measuring efficiency

• Basic idea measuring distance from the
  best-practice frontier
• Regression analysis
• Corrected ordinary least squares (COLS)
• Evans et al (2000), WHO (2000) Efficiency of
  national health systems
• Alternative Greene (2004) Stochastic frontier
  analysis
• Nonparametric analysis
• Free disposal hull analysis (FDH)
• Gupta and Verhoeven (2004) (Chapter 11)
  Efficiency of health and education spending in 85
  countries, 1984-95
• Data envelopment analysis (DEA)
• Herrera and Pang (2005) Efficiency of health and
  education spending in 140 countries, 1996-2002
• Affonso and St. Aubyn (2004) Efficiency of
  health and education spending in OECD countries

22
Sectoral efficiency analysis problems

• Lack of insight in nature of relationship between
  inputs and outputs
• How to measure inputs and outputs?
• Lags?
• Impact of environmental factors?
• Externalities across sectors?
• Parametric approaches are very data intensive and
  require more assumptions about the relationship
• Nonparametric approaches are less robust (e.g.,
  small sample bias) and sensitive to outliers
• The analysis is only as good as the dataand data
  are weak (e.g., on quality and policy objectives)

23
Examples of FAD sectoral efficiency analysis

• FAD research
• The efficiency of education, health, and social
  assistance spending in EU New Member States
• The efficiency of education and health spending
  in the G7
• The efficiency of government investment in Latin
  America
• Focus here on the efficiency of health spending
  in the Slovak Republic

24
(No Transcript)
25
(No Transcript)
26
SVK health efficiency sources of inefficiencies

• Low co-payments
• Unproductive spending on administration and
  collective care
• High spending on pharmaceuticals
• High doctors consultations, outpatient contacts,
  and inpatient hospital care
• Key challenge is changing the mix of
• real resources!

27
SVK health efficiencyrecommendations

• Restrain pharmaceutical spending
• introducing a national procurement system
• introducing incentives for generics
• improving the pharmaceutical pricing and
  reimbursement policy of the Ministry of Health
• Reduce the reliance on hospitals and contain the
  cost of hospital care
• Eliminate excess hospital beds
• Impose hard budget constraint on public hospitals
  
• Restart hospital privatization
• Reintroduce co-payments for doctors visits and
  hospital care

28
SVK health efficiencyrecommendations (contd)

• Enhance incentives for competition and more
  cost-effective administrative arrangements
• Introduce incentives for practitioners to be
  cost-effective
• Define a stricter basic health care package,
  thereby allowing some variations in basic
  insurance premiums
• Increase the power of the Antitrust authority and
  enhance the autonomy and independence of the
  Health Care Supervisory Board
• Refrain from introducing new limitations on
  profits of private insurance companies

29
Thank You!