Budget Formulation: good practices

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Budget Formulation good practices

• Rob Taliercio, World Bank
• With material from Bill Dorotinsky, IMF
• Washington, DC
• April 24, 2007

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Outline

• Three PEM System Objectives
• Process Issues
• Quality Issues Classification, MTEFs, etc.
• Capital Budgeting
• Budget office roles
• References

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Three Objectives of Public Expenditure Management
Systems

• Macrofiscal discipline and stability
• Avoid public finance crises
• Support economic growth and stability
• Strategic allocation of resources
• Match government policy with programs, objectives
• Technical efficiency
• Getting the most from each dollar spent

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Expenditure Management Cycle
Source Adapted from Integrated Financial
Management. Michael Parry, International
Management Consultants Limited. Training Workshop
on Government Budgeting in Developing Countries.
THE UNITED NATIONS. December 1997.
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Process Issues

• Due process
• Fair hearing for proposals, requests within
  government
• Coherence
• Budget process is planning process
• Planning within resource constraints
• Indicative ceilings for budget offered early in
  the process
• hard budget constraint
• Changing incentives (special rights)
• Comprehensiveness
• Capital, all revenues and expenses
• Civil society participation (transparency)
• decentralized impact analysis
• Legislative stage
• In executive via white papers

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Process (continued)

• Proper decision sequence for coherent process
• Macrofiscal, revenues, expenditures
• Sectoral
• Administrative/program/project
• Accountability Link resources with management
  responsibility
• Schedule
• Budget calendar issued
• Sufficient time for sound proposals
• Ministries
• Budget office analysis
• Legislative review

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Classification 1

• Functionpurpose of spending (general public
  services, social, economic, etc.)
• Classification of the Functions of Govt (COFOG)
• Economicgoods and services, subsidies, interest,
  capital, etc.
• Government Finance Statistics (GFS)

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Classification 2

• Object/line itemdisaggregated categories for
  control and monitoring (travel, utilities, etc.)
• Appropriate usage for management
• Compatible with GFS
• Administrativehierarchical by governmental unit
  (ministry, department, province, district, etc.)
• Programdisaggregated by function
• Disconnect with administrative structure?

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Medium Term Perspective

• Medium Term Expenditure Framework (MTEF)
• The MTEF provides the linking framework that
  allows expenditures to be driven by policy
  priorities and disciplined by budget realities.
• Gives a medium-term perspective to budgeting. The
  heart of the MT perspective is constraining
  choices to support LT development.

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MTEF Concept 1

• An MTEF rests on three pillars
• the top-down multi-year projections of resource
  envelope targets (what is affordable)
• the bottom-up multi-year cost estimates of sector
  programs (what has to be financed, with a focus
  on performance)
• the institutional (politico-administrative)
  decision-making process to integrate the above
  two pillars (making the necessary trade-offs)

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MTEF Concept 2
STAGE CHARACTERISTICS
Development of Macroeconomic Framework Macroeconomic model that projects revenues and expenditure in medium term
Development of Sectoral Programs Agreement on sector objectives, outputs, and activities Review and development of programs and sub-programs Program cost estimation
Development of Strategic Expenditure Framework Analysis of inter- and intra-sectoral trade-offs Consensus-building on strategic resource allocation
Definition of Sector Resource Allocations Setting medium term sector budget ceilings
Preparation of Sectoral Budgets Medium term sectoral programs based on budget ceilings
Political Approval Presentation of budget estimates to cabinet and parliament for approval
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Some Technical Issues
DESIGN FEATURE KEY ELEMENTS
Macro/Fiscal Framework (MFF) -Basis for framework (type of quantitative model) -Content of framework (projections, targets, aggregate and sectoral ceilings, etc.)
Sector Expenditure Framework (SEF) -Inclusion of policy framework and strategy -Type of costings of existing and proposed programs (level of detail)
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Some Organizational Issues
DESIGN FEATURE KEY ELEMENTS
Status in Budget Process -Fit in budget process (form and date of inclusion in annual process) -Approval/authorization process
Management Structure -Central and sectoral agencies roles -Organizational locale of MTEF management -Civil society input into process
Dissemination -Method and form of dissemination internally and externally (formality)
Oversight and Support -Oversight of sectors by central ministries -Oversight of central ministries by sectors -Training support
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Some Lessons from Experience

• MTEF should be a complement tonot a substitute
  forbasic PE management reform (esp. execution)
• Sequencing and phasing of the MTEF reform itself.
  In practice, most MTEFs have been implemented in
  a phased and piloted manner
• Phased vertically (macro, sector, service
  delivery)
• Piloted horizontally (across sectors)
• Tailor to capacity and time with respect to
  overall PEM reform (e.g., in a country with weak
  PEM focus on MFF first, then phase-in the SEFs,
  starting with sectoral strategies, objectives,
  and performance indicators before moving to
  costed programs)
• MTEFs should be part of the annual budget process

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Quality 1

• Budget ownership
• Early, frequent engagement of policy officials on
  structured decisions
• Fiscal policy paper to kick-off process
• Communication (transparency)
• Clear signals of direction, markets and agencies
• Prepare public for change sustainable
  adjustment

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Quality 2

• Budget Information
• Prior year actual, current year estimate, budget
  year 2, Staffing, Outputs
• Classification economic, administrative,
  functional, program
• Requests distinguish between on-going, new
  spending mandatory, discretionary
• Decision papers
• Basis for Minister of Finance, Govt decision
• Pulls together academic, audit, performance,
  evaluation of prior years financial performance,
  other information

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Information to Factor in to Budget Papers

• Prior Year Spending
• Did the agency stay within its budget? Why/why
  not?
• Did the agency spend all of its funds?
• Was there one-time funding included in last
  years budget that should not be included again
  this year?
• Current Year Spending
• Is the agency staying within its allotments?
• Is the agency spending at a rate which will lead
  to over-spending, and what measures must be taken
  now to correct?
• Policy Performance
• Did the agency fulfill the policy directives for
  the prior year? Are they doing so for the current
  year?
• Audit Results
• Were there internal or external audits of the
  agency or its programs and activities last year
  or this year? What are the implications for
  funding? Did the agency make any corrections
  recommended in the audits?

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Information (continued)

• Program Evaluations
• Were there any program evaluations of the agency
  or ministry completed since the last budget
  cycle? What were the results, and what are the
  implications for funding?
• Other studies
• Were there any academic or private researcher
  papers or NGO studies published that have
  implications for funding, program structure,
  etc.?
• Performance Assessment
• Did productivity (cost-effectiveness, e.g.)
  increase or decrease from the last budget cycle?
• Did the activity or program attain planned
  outputs for the prior year?
• Did average costs per output increase or
  decrease?
• What did the agency accomplish over the past
  year? Is it achieving its objectives or
  fulfilling its mission? What is the outcome of
  the activity?

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Capital budgeting good practice

• Investment office
• Central appraisal, process management
• Cost-Benefit Analysis (CBA) financial, economic,
  and risk
• Clear assumptions (e.g. life-span and
  maintenance)
• Avoid dual budgeting problems
• Recurrent costs captured in budget
• Quality control, managed database of approved
  projects
• Monitoring physical, financial progress
• Ex post evaluation of actual costs
• Line ministry
• Project proposal preparation
• Supporting sector strategy
• Identify project manager
• Project preparation, management training

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Budget office roles

• Budget offices (center, ministry)
• Manage process vertical and horizontal
• Vet assumptions in requests
• Probe for efficiencies, alternative means
• Independent source of advice on sector
  strategies, policy (advanced)

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Handbooks

• Public Expenditure Handbook, World Bank, 1998
• Managing Government Expenditure, S. Schiavo-Campo
  and D. Tommasi, Asian Development Bank , 1999
  (on-line)