MTEFs ~ Does the walk match the talk?

From Diagnosis to Action Workshop Washington DC March 21, 2008

Jim Brumby World Bank

Outline

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Why we like MTEFs

ex ante

What we have found

ex post

PEFA’s relevant measures MTEFs going forward

Why MTEFs

 ‘potential to link the often competing short term imperatives of macroeconomic stabilization with the medium and longer term demands on the budget to contribute to improved policy making and planning, and to the efficiency and effectiveness of service delivery’

MTEFs help to create textbook world of public finance; the glue that can hold the three levels together

Overview

   MTEFs frequently recommended by Bank But the record is uneven   MTEF unit busy developing new processes, but annual budget still made the traditional way Political leadership has little understanding of MTEF and what it means to spending choices  Closer inspection reveals it never changed budget behavior MTEFs can become a means to…  present an unrealistic budget, rather than to provide a dynamic tool that successfully cuts across the three levels  provide an aggregate fiscal link to the macro framework “…to seriously cost existing policy, the results would be unpalatable to both politicians and donors, since some very hard choices would have to be faced”

MTEFs

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Complex political, institutional and technical task

Aspects of a working MTEF in the medium term

Envelope creation

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Macroeconomic and public sector envelopes developed Determination and articulation of high level policy priorities

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Policies and objectives constrained by resources, involves reallocation between sectors Departments bidding in compliance with amounts agreed

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Implementation of policies proposed by sector, can involve reallocation between ministries, and within ministries Iterated consideration of bids

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Recasting of departmental and sectoral bids to take account of emerging preferences and any changes in macro conditions Finalized credible budgets

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Reconciled policy, implementation and means

Implies these PFM system needs are integrated

Adequate data and skills to create credible macro framework, and to enforce it An ability to set priorities within and between sectors, and then to monitor against these priorities Acceptance within government of the central co-ordination role of the MOF; and within sectors of a co-ordinating minister Gate-keeping discipline, including management of budget bids and baseline control Enforcement and control in budget execution to make allocations credible

World Bank’s generalized lessons of implementation

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Expectations :

MTEF is designed to improve decision-making, and generally focuses on budget formulation.  It will not solve all PEM problems.

Definition :

MTEF is not a standardized product, per se. 

Customization

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MTEF needs to be customized to the country.

 The principles/approach can be implemented in various ways. Take account of initial conditions in PEM, human and IT capacity, and the nature of demand.

Overload

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With MTEF, and PEM reform generally, doing too much at once can overload the Government capacity and prevent progress on all reforms.

 Capacity and capability constraints (enablers) need to be factored in.

 Platforms.

Preliminary Impact Assessment (Africa; 2002)

EXPECTED OUTCOMES Improved macroeconomic balance, especially fiscal discipline Better inter- and intra sectoral resource allocation Greater budgetary predictability for line ministries Characteristic of Instrument Fiscal Control (aggregate revenue and expenditure reliable) ACTUAL OUTCOMES

With the possible exception of Uganda, no empirical evidence of improved macroeconomic balance

Strategy or Public Policy Preferences (sectoral and intrasectoral allocations not just incremental) Planning (outyears get rolled over; reconciliation is visible)

Some limited empirical evidence that MTEFs are associated with reallocations to subsets of priority sectors No empirical evidence of link between MTEFs and greater budgetary predictability

More efficient use of public monies Operational Management (budgets get executed)

No evidence that MTEFs are developed enough to generate efficiency gains in sectoral spending

Holmes & Evans (2003)

     Explicitly strategic phase introduced in the budget  reinforced by the introduction of PRSPs Uganda and South Africa only two cases where MTEFs initiated independently of donors Comprehensiveness brought into play; but progress uneven   Donor funding Lower level of government Excessive detail in outyears Over emphasis on economic type classification; relevant to how the budget estimates are presented

Evidence from PEFA

  Medium term focus is now more prevalent  Aggregate budget delivered  Lack of reconciliation in rolling over budgets  But… Poor integration of capital and recurrent     Classification (still dominated by economic)  Excessive detail in outer years Comprehensiveness lacking Execution often does not follow budget Arrears (stock and flow problems) Does this

really

constitute a framework?

MTEFs: Rich and Poor

Strategic Prioritization Planning Discipline Aggregate Control Operational Management

Going forward; some questions

   How does the MTEF fit with other PEM reforms and their sequencing?  What exactly is the budget problem that needs fixing; will an MTEF give the right tools? Is a sectoral MTEF the initial answer?

Is the MTEF appropriately designed?  Starting with MTFF and top-down portfolio envelopes, rather than a myriad of activities. Does it link meaningfully with public policy objectives or programs?

Is the finance ministry empowered and competent, with the political leadership on board?

 If not, the risk is that MTEF and most other PEM reforms will stall.

Desirable to address issues of: expectations; definition; customization; and overload.

Critical aspects to harness value from MTEFs

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Reconciliation of outyears to budget is fundamental   At least at sectoral level Needed for:   Top-down bottom-up credibility Planning predictability; but often within a constrained environment Transparent cash releases and reporting of uses    Criteria specified Ex post releases and uses reported on Fixing the stock and flow of arrears Sorting order from chaos where MTEFs have become excessively detailed   High costs, low value information requirements that produce illusion of control Classification and comprehensiveness issues a sequenced set of actions which increase the value from the medium term framework; making it relevant at sectoral level need to give consideration to demand side – the technical component is not always the most complex