Medium-Term Expenditure Framework: Lessons

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Medium-Term Expenditure Framework Lessons

• Bill Dorotinsky
• The World Bank
• Istanbul
• June 6, 2005

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Lessons in Implementation

• MTEF
• is designed to improve decision-making, and
  focuses on budget formulation ---- one process
  for allocating resources
• will not solve all PEM problems
• is not a standardized product, per se. The
  principles can be implemented in various ways
• needs to be customized to the country, including
  initial conditions in PEM, human and IT capacity
• should be viewed as a multi-year exercise, built
  and improved upon annually over years
• With MTEF, and PEM reform generally, doing too
  much at once can overload the Government capacity
  and prevent progress on all reforms

3
More lessons

• Not all aspects need to be undertaken at once
• Integration of capital and recurrent budgets need
  not be done immediately
• Performance information (outcomes, outputs) need
  not be incorporated immediately
• Budget comprehensiveness critical, but can be
  improved over time (start from where you are)
• Flexibility for spending ministries to allocate
  resources across programs, subprograms, and
  activities can be introduced gradually
• Many start with a medium-term fiscal framework
• Sound fiscal framework important to start
• Use as opportunity to educate policy-officials of
  constraints
• MTEFs should not be launched in selected sectors
  until there are medium-term ceilings in place

4
And more lessons

• Pressure on ministries to find resources within
  current expenditures may be more successful when
• accounting systems are in place to provide good
  information
• program and activity structure in place as focal
  point for discussion, costing
• Need not be contentious between line ministries
  and MoF/budget office (South Africa)
• Over-all, can be used to build consensus across
  government actors (US troika)
• Consider legislatures role early
• Educate them as appropriate
• Encourage good internal legislative decision
  process

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How to implement?

• Identify major limiting factor first
• Policy-level high-level decision process
• Adequate policy-level input, ownership of budget?
• Adequate trade-offs of major policy directions?
• Adequate policy-level incentives?
• Technical tools to support process
• Unbundling MTEF technical aspects
• Which aspect of the budget process needs to be
  improved?

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Unbundling MTEFs
Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires
Macroeconomic forecast Macrofiscal discipline Finance, Planning or Economy Ministry Provides strategic framework for setting fiscal and monetary policy, and allows proactive fiscal adjustment to changing economic trends. Forecasting model, capacity, multi-year macro variable time series, or access to multiple non-governmental forecasts
Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope Macrofiscal discipline Finance, Planning or Economy Ministry Sets upward bound for expenditures, limiting deficits, inflation, and currency depreciations supports sustainable fiscal policy, and realistic expenditure planning within the expenditure envelope supports focus on adequate revenue mobilization. Forecasting models. Stronger if relationships between macro growth, income distribution, and revenues understood and modeled. Debt sustainability analysis/model, or hard rule on debt/deficit limits.
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Unbundling MTEFs (2)
Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires
Multi-year forecast of spending under current policy or current level of services, by ministry or program Macrofiscal discipline, Allocational efficiency (sector) Finance, Planning or Economy Ministry, or in some cases spending ministries with clear guidance Broad indicator of future cost of current spending trends, identification of potential risk areas, and proactive, measured, more rational fiscal adjustment. Baseline for evaluating policy spending choices. MoF provided inflators for pay, non-pay, and clear guidance for projecting costs. Can be automated. Can be budget year only, but more effective over several years.
Multi-year ceilings for sector ministries Allocational efficiency (sector), Macrofiscal discipline, Operational efficiency Finance, Planning or Economy Ministry Enabling more realistic planning, appropriate policies incentive for reviewing existing programs for effectiveness, reallocations within sectors. At center, explicit trade-offs between sectors. More credible if reflecting policy choices, which requires some explicit policy directions on reallocation. More effective in changing behavior if approved by cabinet or parliament.
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Unbundling MTEFs (3)
Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires
Multi-year sector strategy Allocational efficiency (sector), Operational efficiency, Macrofiscal discipline Spending Ministry Sector strategic plan links outputs/outcomes with inputs in multi-year framework. Effective only if prepared within multi-year sectoral resource ceiling. Strategic planning capacity at sector ministry, information on outputs/outcomes of programs, and relationship to activities and inputs.
Multi-year estimates of cost of new policies or programs (recurrent), or expansion of existing programs, prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Spending Ministry Identifies multi-year implications of new initiatives relative to their objectives, and assessment of whether they can be financed from within existing sectoral ceilings or even within aggregate spending ceilings, and if they are financially sustainable over time. Requires guidance/training for spending ministry staff, and spending ministry staff capacity MoF provision of common inflators for use by ministries (pay rates, non-pay, capital costs).
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Unbundling MTEFs (4)
Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires
Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Spending Ministries Sensitizes sector ministry to cost drivers, affordability of existing policy or programs, attention to different means of attaining objectives, unit cost. Can begin at program, and later move to subprogram and activity costing. Requires trained staff at spending ministries, agencies MoF guidance and common inflators (pay rates, non-pay, capital costs).
Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Spending Ministries Many capital budget processes already include such estimates, including the recurrent cost implications of new capital projects. Trained staff at spending ministries, guidance on costing, understanding of project design and work flow.