Transcript Preparing for Fiscal Decentralization

Extending Budgeting to
the Medium Term:
From Fiscal Forecasts to Programmatic MTEFs
International Monetary Fund
Fiscal Affairs Department
Holger van Eden
ASIAN REGIONAL SEMINAR: PROMOTING
FISCAL SUSTAINABILITY
Kuala Lumpur, February 28 - March 2,
2011
Outline
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Why Medium-Term Budgeting?
The typical development path
When is a framework really a framework?
The constituent parts of an MTEF
Have MTEFs delivered on their promise?
Why is Medium-Term Budgeting so hard?
Prerequisites for introducing MTEFs
How to make MTEFs work – For Discussion!
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The promise of medium-term budgeting
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Improved aggregate fiscal discipline through estimation of
realistic medium-term resource envelopes and setting of
aggregate and sectoral ceilings
More effective fiscal policy; improved planning and execution
of stimulus and exit strategies by identifying fiscal space and
possible/required policy measures over medium-term
Linkage of budget to long-term fiscal targets
Enhanced strategic prioritization by linking budget to
strategic planning and sectoral priorities, and building in decisionphase on new expenditure priorities in budget cycle
Increased planning certainty for budget managers
Increased fiscal policy transparency and accountability
If linked with development of program budgeting – programmatic
MTEF - >>> linkage to expenditure outputs and outcomes,
improved policy impact of the budget, shift from administrative to
managerial culture, improved expenditure efficiency
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What is a medium-term [fiscal/
budget/ expenditure] framework?
A medium-term framework is a technical
and institutional mechanism for setting multiyear objectives for [fiscal aggregates/budget
expenditure/programs and outcomes] and
ensuring that they are respected in budget
formulation, approval and execution
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Usual development path for mediumterm budgeting (Phase I)
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Fiscal outlook: macroeconomic forecast +top-down
estimates of fiscal aggregates; debt sustainability analysis
Multi-year budget estimates: bottom-up estimates of
budget items (often using very simple parameters)
Medium term fiscal framework (MTFF): involves
cabinet decision on fiscal aggregates over the mediumterm; agreement on major policy direction; uses highlevel economic presentation
>>> sometimes MTFF is achieved, sometimes
immediate jump to step 4
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Usual development path for mediumterm budgeting (Phase 2)
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Forward estimates: incorporation in budget estimates of
existing and agreed policies. Implies development of
baseline methodology + multi-year baseline estimates.
Starts top-down with economic classification, can
gradually incorporate bottom-up estimates aligned with
budget classification.
Medium term budgetary framework (MTBF/or
partial MTEF): cabinet decision-making on aggregate and
line ministry spending ceiling over the medium term,
reconciliation with forward estimates; decision-making
over medium-term cutbacks, new initiatives, fiscal space
>>> sometimes MTBF is achieved, sometimes
immediate jump to step 6
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Usual development path for mediumterm frameworks (Phase 3)
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Linking policy to medium term budget: Development
of programmatic budget classification, linkage of sectoral
strategies and policy initiatives to medium term
budgeting. Not constrained yet by expenditure ceilings.
Full MTEF or Programmatic MTEF: Involves cabinet
decisions on sectoral expenditure ceilings, fiscal space,
policy priorities and expenditure programs (and their
outputs and outcomes) over the medium term.
>>> Without cabinet decision making, medium term
budgeting remains a technical exercise with limited
impact on the budget
>>> mostly countries do not progress to multi-year
appropriations
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When is a medium-term framework
really a framework?
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Decision on multi-year fiscal targets/expenditure ceilings
by Cabinet (and possibly by legislature)
Targets/ceilings are enforced in budget preparation
(linkage to the budget)
Out-years of the MTFF/MTEF are rolled over; starting point
for next MTFF/MTEF
Framework presents main allocative decisions that need to
be made to reconcile baseline with ceilings (reconciliation
for MTFF much less detailed then for MTBF and MTEF)
>>Many countries have fiscal or budgetary outlooks
rather than frameworks
>>Fiscal and budgetary outlooks are useful by themselves to
inform on (required) direction of government spending
>>> a framework obviously has much greater benefits!
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Key Design Elements of MTEFs
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Linkage to fiscal objectives/targets/rules
Comprehensiveness
Unit of planning and control (Aggregate, Ministry, Economic/Line
item, Program)
Time horizon: budget year + 2,3 or 4 years
Forecasts/Baselines vs. Ceilings
Introduction of strategic decision-making phase in budget
process
Clear identification of fiscal space and new policy initiatives (and
their costs over the medium term);
Rolling vs. Fixed (in any case one should not every year start
from scratch)
Real vs. Nominal Baselines/Ceilings
Planning and/or contingency reserve
Performance orientation
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Different countries have different
models
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Strategic Phase in MTEF should
involve Cabinet and Legislature
Cabinet
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Does Cabinet endorse fiscal targets, and aggregate and line
ministry expenditures ceilings for the medium term?
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Are main cutbacks and new policies identified, costed and agreed
upon?
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Is an MTFF or MTEF document agreed upon
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Do expenditure ceilings survive in the later budget process
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Is the MTEF rolled-over in the next year, starting from last year’s
decision-making
Parliament
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Does parliament debate the MTFF or MTEF document
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Does parliament approve aggregate and sectoral ceilings
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Does parliament vote on budget in two steps (aggregate
envelope and then detailed expenditure plans)
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Do budget amendments respect MTEF ceilings?
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WB Interim assessment of MTEFs
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Evidence from PEFA
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Medium term focus is now prevalent in
many countries
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Annual budget credibility is increasing
Lack of reconciliation in rolling over budgets
Poor integration of capital and recurrent
But…
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Classification (still dominated by economic)
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Excessive detail in outer years
Comprehensiveness lacking
Execution often does not follow budget
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Why MTEF is difficult to implement (1)
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Political environment not ready to deal with budgetary
decisions over the medium term – political time horizon
often even shorter than one year
Institutional separation between MTFF/MTEF preparation
and budget process
Lack of capacity in fiscal and macro forecasting;
Inappropriate design:
 (1) no two-step budget process;
 (2) no reconciliation in top-down/bottom-up;
 (3) no recalibration of MTFF/MTEF at budget time;
 (4) no roll-over of out-year figures /yearly restart of
MTEF
Countries jump to MTEF while MTFF not functioning
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Why MTEF is difficult to implement (2)
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Coverage of MTFF/MTEF (and budget) is not
comprehensive >>> EBFs, quasi-fiscal activities are
excluded >>>aggregate control not realized
Expenditure ceilings set in strategic phase are
systematically not enforced
Expenditure commitments are not controlled
Budget execution does not follow original budget given
cash constraints/in-year changes to budget
>>> these issues relate not only to MTEF but also to annual
budget process
>>>without a sound, credible annual budget process, an
MTEF will not fulfill a useful role
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Prerequisites for introducing MTEF
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Reasonable level of macroeconomic stability
Adequate macro, fiscal and debt data, and projection
skills/capacity to create realistic macrofiscal framework
Basic PFM process are functioning:
 Credible budget preparation
 Adequate fiscal reporting
 Competent cash planning
 Reliable budget implementation
Core strategic planning, fiscal and budgetary policy capacity in
finance ministry/central agencies
Commitment from Cabinet and Parliament
Capacity to enforce hard budget constraint at sector/ministry
level (systems capacity and political will)
Executive commitment to a more transparent budget process
Capacity in sector policy analysis and expenditure planning
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Some suggestion to strengthen the
use of MTEFs - I
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Diagnose existing budget processes >>>PEFA, ROSC,
PE(I)R, CFAA to identify weaknesses
Ensure PFM basics are in place
Develop MTFF first, ensure forecasting and policy making
capacity of MF unit
Integrate MTEF unit into DG Budget; stand-alone units
(even if positioned next to Minister) can be ignored
Ensure political and managerial support for multi-year
perspective and decision making
Limit the time horizon; for emerging market and
developing countries a 4-5 year horizon is much too long
Keep program budgeting component simple
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Some suggestion to strengthen the
use of MTEFs - II
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Produce a MTEF decision-document, separate from
budget, and split budget preparation process in two
phases
Have Cabinet vote on the fiscal targets, expenditure
ceilings, and main policy measures >>> send to
Parliament for information or approval to enhance
accountability
Reconcile MTEF with previous year’s out-years, i.e. ensure
roll-over
Enhance fiscal reporting/transparency to increase political
accountability for MTEF
Consider fiscal rule(s) as potential anchor of MTFF/MTEF
to ensure fiscal sustainability and stability
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Thank You!