Transcript How FAD is implementing the MTS

Medium-term Expenditure Frameworks:
Why do they work in advanced countries?
(and why do they sometimes fail?)
Richard Hughes
Public Financial Management I
Fiscal Affairs Department
2 October 2008
OUTLINE
I.
Objectives of MTEFs
II.
Advanced country MTEF models
III. 5 keys to advanced country success with MTEFs
IV. Some thoughts on why MTEFs sometimes fail
V.
Implications for MTEF design in L/MICs
2
I.Objectives of MTEFs:
MTEFs are generally designed with three broad aims in mind:
1. Instill greater discipline over advance commitments of public
money by constraining budget appropriation and execution in future years
to levels consistent with the Government’s medium-term fiscal and
sectoral objectives. (Finance Ministries and IMF)
2. Facilitate a more strategic prioritization of expenditure by
abstracting from the immediate pressures and legal constraints that
impinge upon the annual budget process. (Planning Ministries, World
Bank and Donors)
3. Encourage more efficient inter-temporal planning of expenditure
by providing greater transparency to budget holders about their likely
future resources. (Sectoral Ministries and Donors)
But there is a fundamental tension between these three objectives
which is reflected in the range of advanced country models…
3
II. Advanced country MTEFs:
Models very based on coverage, detail, time horizon & discipline
COVERAGE
Soc
Sec
Finland
Some
Debt
Interest
No
Local
Govt
No
% of
public
spending
36%
LEVEL
OF
DETAIL*
Total
Spending
DISCIPLINE
TIME
HORIZON
Rolling or
Fixed
Frequency
of Revision
4
4 fixed
Every 4 years
4
4 fixed
Every 4 years
13 Ministries
4 Sectors
Netherlands
Yes
No
Some
80%
31 Subsectors
United
Kingdom
No
No
Some
59%
25 Depts
3
2 fixed + 1 rolling
Every 2 years
France
No
Yes
No
31%
35 Missions
3
2 fixed + 1 rolling
Every 2 years
3
2 fixed + 1 rolling
Every year
3
Rolling
Every year
3 to 5
Rolling
Every year
Sweden
Yes
No
Some
64%
Total
Spending
27 Areas
20 Depts
Australia
Yes
Yes
Yes
100%
267 Progs
16 Sectors
Uganda
Yes
Yes
Yes
100%
162 Progs
* Bold
= Fixed multi-year ceiling
Italics = Indicative multi-year projection
4
III. Key to Success # 1: Model Design
They don’t try to do everything
Time Horizon, Discipline, Coverage and Detail
of 5 Multi-Year Budgeting Models
5
Key to Success # 2: Historical Origins
Most MTEFs were forged in fiscal adversity…
General government balance
(1990 to 2008)
8%
6%
4%
2%
Netherlands
introduces
Expenditure Ceilings
UK introduces
Spending
Reviews
Finland introduces
Expenditure
Ceilings
% of GDP
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-2%
-4%
Sweden introduces
Expenditure Ceilings
-6%
-8%
-10%
-12%
Canada introduces
Expenditure
Management
System
Canada
Finland
France
Netherlands
Sweden
United Kingdom
France introduces
Multi-year Budget
…but were introduced to maintain discipline AFTER the
public finances had turned the corner.
6
Key to Success # 3 : Budgetary Foundations
They start with a credible annual budget
Expenditure Forecast Accuracy
UNITED KINGDOM
VS.
TANZANIA
UK’s 1 year-ahead forecasting error for public
expenditure is about 1%...
…which is 1/7th the 1 year-ahead forecasting
error for public expenditure in Tanzania.
UK’s 5 year-ahead forecasting error for public
expenditure is 5.2%...
…which is still lower than Tanzania’s average
1 year-ahead forecasting error of 6.7%
UK expenditure ceilings fixed for 3 years
because anything longer is deemed too risky
Tanzania’s annual forecast error = average
real expenditure growth
7
Key to Success # 4: Institutional Underpinnings
Capable MoFs with clear procedures for dealing with new pressures
Commitment
Controls
Flexibility
Adjustment
Mechanisms
•
•
•
•
Carry-over/use of windfalls
Virement rules
Access to reserves
Accounting adjustments
Responsibility
• Top: Political commitments
• Middle: Delegated limits
• Bottom: Legal commitments
Discipline
Arbitration
Mechanisms
CORE COMPETENCIES
Strong Exec. in
Parliament &
MoF in Cabinet
Forecasting
capacity in MoF
& line ministries
Timely &
reliable budget
execution data
Clear norms for
projecting
expenditure
Accountability
Arrangements
• Ministerial-based budgets
• Accounting Officers
• Public Accts Cttee
•
•
•
•
AUS: Exp Review Cttee
FIN/NL: Coal. Agreements
UK: Spending Reviews
France: RGPP
Legitimacy
8
Key to Success # 5: Fiscal Forecasting (I)
They make their own luck by building in pleasant surprises…
Location and Size of Contingency Margins in 6 Countries
Implicit Margins
Explicit Margins
Total
Contingency
GDP forecast
other economic
assumptions
within expenditure
estimate
within budget
balance
% of total
spending
Canada
MoF uses ave of
ind. forecast
MoF adds 0.5 to 1% to
interest rates and runs
through model
Contingency reserve of
1.5 to 2% of total
spending
MoF targets a surplus of
0.1% of GDP despite
balance rule
3.5 to 4%
United
Kingdom
MoF uses GDP
forecast 0.25%
below trend
7 other economic
assumptions explicitly
‘cautious’
Reserves and margins
equal to 0.75 to 1% of
total spending
MoF targets ave. surplus
of 0.2% of GDP despite
Golden Rule
2.5 to 3%
Sweden
MoF claims to use central assumptions for
GDP and its determinants but recent
forecasts have proven cautious
Budget margin within
expenditure ceiling
rising from 1.5 to 2.5%
of total spending
MoF’s MT objective was
ave. surplus of 2% of
GDP over cycle (1% post
2007)
1.5 to 2.4%
Netherlands
Deficit target & expenditure ceiling in CA &
Budget based on cautious economic scenario
in which GDP 0.5 to 1% below outturn
Central contingency
reserve of 0.1% of total
spending
Most recent CA targets
structural surplus of 1%
of GDP
1 to 2%
Australia
Budget is based on central economic
assumptions
Contingency reserve
rising from 1.6 to 5.2%
of total spending
MoF targets a surplus of
1% of GDP despite
objective of balance
1.5 to 5%
New
Zealand
Budget is base on central economic
assumptions
Central contingency
reserve of 0.25% of
expenditure
No stable fiscal objective
but targeted surplus
since mid 90s
0.25%
9
Key to Success # 5: Fiscal Forecasting (II)
…which help to grease the wheels of future budget negotiations
Cautious
Caution reveals itself in outturn as
positive error on projections of the
budget balance and receipts…
Incautious
Cautious
…which many countries use to
fund the inevitable new spending
pressures / proposals.
Incautious
10
Post Script: Namibia’s MTEF
A Cause for Hope?
Namibia started with a relatively simple model…
…built on a credible annual budget…
since 01-02
2.1%
…with lots of caution in their revenue projections…
…and strong underpinning institutions.
Commitments
• Graduated system of
delegated limits
Adjustment
• 1% contingency
reserve
• Clear virement
rules
Core Competencies
Single
party govt
Capable
MoF
Credible
budget
Strong LM
capacity
Arbitration
• Medium-term
plans
• Budget hearings
Accountability
• Ceilings based on
ministries not programs
• Accountability report
11
V. Implications for MTEF design in L/MICs
Issue
Model
Design
Lesson from Advanced Countries
Tradeoff between coverage, detail and
discipline in MTEF design
Implications for L/MICs
a. Is the emphasis on detailed program-byprogram projections undermining the line
ministry as a unit of control and accountability?
b. Should we rethink the drive to include volatile
aid flows within MTEF ceilings?
Origins
Most MTEFs introduced to maintain discipline
after public finances had turned the corner
c. Should we be marketing MTEFs as a tool for
delivering fiscal consolidation?
Annual
Budget
All MTEFs had credible annual budget as a
foundation
d. What use is an MTEF in a country whose
annual forecast error for expenditure is more
than 50% real expenditure growth?
Caution
Supporting
Institutions
Political
Economy
All countries build considerable caution into
their medium-term fiscal projections
e. How much caution should L/MICs build into
their MTEF projections?
f. Should that caution be explicit or implicit in
those projections?
MTEFs underpinned by strong, capable MoFs
within powerful executives
g. How many MoFs have the capacity to enforce
the discipline demanded by an MTEF?
Clear procedures needed to ensure legitimacy,
responsibility, flexibility and discipline
h. Is TA too focused on MTEF preparation to the
neglect of MTEF enforcement?
Credibility of and commitment to MTEF
projections waxes and wanes with political
strength of the Govt
i.
Should we expect MTEFs to be any more
durable in L/MICs than in advanced countries?
12