Transcript Budget Formulation: good practices Rob Taliercio, World Bank

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

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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
Financial management system boundaries
Planning
system
Project
appraisal
Medium term
plans, e.g. three
year rolling plans
Resource
allocation
Annual budgets
Development,
recurrent and
revenue
Expenditure
review
Public expenditure
review
Institutions
Fund release
procedure, e.g...
warranting
Accountability
Audit system
Reports and
financial statements
Accounting for
revenue and
expenditure
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”

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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)


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‘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

Function—purpose of spending (general
public services, social, economic, etc.)


Classification of the Functions of Gov’t
(COFOG)
Economic—goods and services,
subsidies, interest, capital, etc.

Government Finance Statistics (GFS)
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Classification 2

Object/line item—disaggregated categories
for control and monitoring (travel, utilities,
etc.)


Appropriate usage for management
Compatible with GFS
Administrative—hierarchical by governmental
unit (ministry, department, province, district,
etc.)
 Program—disaggregated 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) decisionmaking process to integrate the above two pillars
(making the necessary trade-offs)
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MTEF Concept 2
STAGE
CHARACTERISTICS
I.
Development of
Macroeconomic
Framework
•Macroeconomic
II.
Development of Sectoral
Programs
•Agreement
III.
Development of Strategic
Expenditure Framework
•Analysis
IV.
Definition of Sector
Resource Allocations
•Setting
V.
Preparation of Sectoral
Budgets
•Medium
VI.
Political Approval
•Presentation
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model that projects revenues
and expenditure in medium term
on sector objectives, outputs, and
activities
•Review and development of programs and
sub-programs
•Program cost estimation
of inter- and intra-sectoral trade-offs
•Consensus-building on strategic resource
allocation
medium term sector budget ceilings
term sectoral programs based on
budget ceilings
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
-Method and form of dissemination
internally and externally (formality)
Dissemination
Oversight and Support
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-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 to—not a substitute
for—basic 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:


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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
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Budget ownership
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Early, frequent engagement of policy officials on
structured decisions
Fiscal policy paper to kick-off process
Communication (transparency)
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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, Gov’t 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 year’s 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)
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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
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Project proposal preparation
– Supporting sector strategy
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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)
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