Budget Formulation: good practices

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Budget Formulation good practices

• Bill Dorotinsky
• PREM
• PREM-FM Budget Execution and Financial
  Accountability Course
• January 2005

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Outline

• Why formulation in an execution course?
• Three PEM System Objectives
• Process Issues
• Quality Issues
• Budget office roles
• New Resources
• References

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Why budget formulation in a budget execution
course?

• Other half of an integrated system
• Problems emerging in execution may have origin in
  formulation
• You cannot implement well a badly formulated
  budget
• Some execution and formulation processes and
  reforms interdependent
• Cannot formulate well without actual expenditure
  data as starting point
• To properly diagnose and reform execution
  requires some understanding of formulation

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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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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
• Comprehensiveness
• Capital, all revenues and expenses
• Civil society participation
• 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
• Two stage process

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Quality Issues (improving process outcome)

• Multi-year perspective
• Setting multi-year policy objectives
• Conservative economic, revenue forecast
• Likely versus hoped for
• Benchmarked against non-governmental forecasts
• Realistic expenditure forecast
• Provision for recurring unanticipated events
• Contingency reserves with clear rules for use
• Indicative ceilings linked to second-year of
  prior budget forecast (policy)
• Requests reconciled to prior year actuals,
  current year estimates
• Two aggregate forecasts (advanced)
• Proposed policy
• Current services/policy
• Capital and recurrent

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Quality (continued)

• Budget ownership
• Early, frequent engagement of policy officials on
  structured decisions
• Fiscal policy paper to kick-off process
• Distinguish policy from recurrent revenue
• Proposed revenue sources versus historical trends
• No spending allowed against proposed unless they
  materialize (grants, tax revenue)
• Communication
• Clear signals of direction, markets and agencies
• Prepare public for change sustainable
  adjustment

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Quality (continued)

• 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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Budget office roles

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

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New Resources

• World Bank IMF Budget Law Database
• http//www1.worldbank.org/publicsector/pe/countryb
  udgetlaws.cfm
• Currently
• 41 country budget laws, 3 draft budget laws,
• 10 fiscal responsibility laws, and
• 15 other public finance laws on-line
• Users can and should contribute

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New Resources (2)

• World Bank OECD Budget Practices and Procedures
  database
• http//ocde.dyndns.org/
• 44 developed and developing countries
• Covers formulation, execution, basic structure,
  budget documents, performance management,
  intergovernmental fiscal relations, special
  issues (e.g. HR)

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Example
Source World Bank OECD budget procedures
database at http//ocde/dyndns.org/
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Selected References

• Public Expenditure Handbook, World Bank, 1998.
• Managing Government Expenditure, S. Schiavo-Campo
  and D. Tommasi, Asian Development Bank , 1999.
  (on-line)
• Managing Public Expenditures A Reference Book
  for Transition Countries. Richard Allen and D.
  Tommasi, editors. Organization for Economic
  Cooperation and Development (2001)