Budget Analysis for Expenditure Rationalization Public Finance Analysis

Budget Analysis for Expenditure Rationalization Public Finance Analysis and Management Course World Bank, April 23 -27, 2007 Marijn Verhoeven Expenditure Policy Division Fiscal Affairs Department, IMF

Overview • Why expenditure rationalization? • The analytical tool box for expenditure rationalization: – A word about data – Measuring efficiency • We found the problems—now what? (very briefly!)

Why expenditure rationalization? • To achieve macroeconomic stability and fiscal sustainability • To create fiscal space • To increase allocative efficiency by cutting back or reforming government activities • To enhance X-efficiency by achieving the same outputs with less inputs

Why expenditure rationalization? (cont’d)

A word about data • Expenditure analysis is typically data driven • But data are problematic • There are several competing sources of spending data, each with their strengths and weaknesses • Let us look at the example of data on wage spending

Facts and figures: measuring wage spending • The wage bill is measured: – As a share of GDP and total spending to compare across countries – As a share of domestic revenue to assess sustainability – At the sectoral level, compare to nonwage spending to assess efficiency • Source is IMF Government Finance Statistics or national data

Lies and statistics: mismeasuring wage spending? • Not all compensation may be captured in wages and salaries: transfers (pension benefits and subventions for education), other goods and services (in-kind benefits and contractual workers), and capital spending (donor-financed projects) may hide substantial wage spending. In Nicaragua, out of actual wage spending of 8. 6 percent in 2005, less than 4 percent is recorded as wages and salaries. • When government is decentralized, central government wage spending is biased downward. But reliable data for general government are rare for low-income countries.

Efficiency: the issue Source: World Bank (2004) World Development Report 2004. Spending refers to total annual public spending per child of primary school age, in 1995 US dollars.

How should we think about the efficiency of public spending? • What is the mix of public programs that best meets government objectives? – Where to invest the marginal dollar across sectors • For example, can education goals be reached by investing the marginal dollar in other sectors? – Where to invest the marginal dollar within sectors • Primary versus secondary education • Primary health care versus secondary health care

How should we think about the efficiency of public spending? (cont’d) • Given allocative decisions, is output maximized with given inputs? – Common problems: • Inappropriate student/teacher ratios • Shortage of medicine or nurses relative to doctors • Shortage of textbooks • Waste, leakage of funds • Labor and utility costs crowding out maintenance and capital spending

Assessing efficiency Many roads lead to Rome: • “Basic” benchmarking • PETS • Randomized evaluations • Absenteeism studies • Sectoral efficiency analysis Choice depends on data availability, objectives, and priors

Assessing efficiency always begins with. . . Review the basics of public spending • Functional classification – Primary, secondary, tertiary education • Inputs, programs, types of intervention – Education: Teachers, textbooks – Health: Spraying, information and education campaign, etc. • Economic classification – Wage versus non-wage – Recurrent versus capital (investment) spending • Central and local government budgets, other Ministries • Planned versus actual, nominal versus real • Share of private, NGO, and donor spending

“Basic” benchmarking • Selected useful descriptive statistics – Budget data – Unit costs – Ratios of teachers, students, non-teaching staff – Distribution of teachers among levels of qualifications; percentage meeting basic government standards – Actual maintenance budget versus engineering estimates for routine maintenance – Enrollment rates, repetition rates, dropout rates – Absenteeism, informal payments, etc.

“Basic” benchmarking (cont’d) • Comparisons – Sub-national units, clinics, schools – Private versus public health facilities – Comparator countries • Cross-country information on real resources and output – UNESCO education indicators – Program for International Student Assessment (PISA) – WHO Indicators of Health System Attainment – Trends in International Mathematics and Science Study (TIMSS) – Progress in International Reading Literacy Study (PIRLS) and the International Survey of Adults (ISA)

Randomized evaluations of educational reform programs: • Random selection of schools for the reform – Colombian voucher program, Angrist and others (2002) • Randomized phase-in of programs – Argentina: Decentralization took place across all provinces, but at different periods and intensities, Galliani and Schargrodsky (2002)

Public expenditure tracking surveys Trace the flow of resources through the bureaucracy from the central government down to the service facility: • Comparing originally allocated funds with funds that actually arrive at the facility • Amount of time required for fund to arrive • Reinikka and Svensson (2001): Uganda in the 1990 s, significant leakage existed

Sectoral efficiency analysis: basic concepts • The measurement of efficiency generally requires the following: – (i) information on inputs and associated costs; – (ii) an estimation of output or benefit; and – (iii) a comparison of (i) and (ii) • Key question: – Could the same level of output be achieved with less input? – Equivalently, could more output be generated with the same level of input?

Sectoral efficiency analysis: basic concepts (cont’d)

Sectoral efficiency analysis: Best-practice frontier

Sectoral efficiency analysis: measuring efficiency • Basic idea: measuring distance from the bestpractice frontier • Regression analysis – Corrected ordinary least squares (COLS) • Evans et al (2000), WHO (2000): Efficiency of national health systems – Alternative: Greene (2004): Stochastic frontier analysis • Nonparametric analysis: – Free disposal hull analysis (FDH) • Gupta and Verhoeven (2004) (Chapter 11): Efficiency of health and education spending in 85 countries, 1984 -95 – Data envelopment analysis (DEA) • Herrera and Pang (2005): Efficiency of health and education spending in 140 countries, 1996 -2002 • Affonso and St. Aubyn (2004): Efficiency of health and education spending in OECD countries

Sectoral efficiency analysis: problems • Lack of insight in nature of relationship between inputs and outputs: – – How to measure inputs and outputs? Lags? Impact of environmental factors? Externalities across sectors? • Parametric approaches are very data intensive and require more assumptions about the relationship • Nonparametric approaches are less robust (e. g. , small sample bias) and sensitive to outliers • The analysis is only as good as the data—and data are weak (e. g. , on quality and policy objectives)

Examples of FAD sectoral efficiency analysis • FAD research: – The efficiency of education, health, and social assistance spending in EU New Member States – The efficiency of education and health spending in the G 7 – The efficiency of government investment in Latin America • Focus here on the efficiency of health spending in the Slovak Republic

SVK health efficiency: sources of inefficiencies • Low co-payments • Unproductive spending on administration and collective care • High spending on pharmaceuticals • High doctors’ consultations, outpatient contacts, and inpatient hospital care Key challenge is changing the mix of real resources!

SVK health efficiency: recommendations • Restrain pharmaceutical spending – introducing a national procurement system – introducing incentives for generics – improving the pharmaceutical pricing and reimbursement policy of the Ministry of Health • Reduce the reliance on hospitals and contain the cost of hospital care – Eliminate excess hospital beds – Impose hard budget constraint on public hospitals – Restart hospital privatization • Reintroduce co-payments for doctors’ visits and hospital care

SVK health efficiency: recommendations (cont’d) • Enhance incentives for competition and more cost-effective administrative arrangements – Introduce incentives for practitioners to be cost-effective – Define a stricter basic health care package, thereby allowing some variations in basic insurance premiums – Increase the power of the Antitrust authority and enhance the autonomy and independence of the Health Care Supervisory Board – Refrain from introducing new limitations on profits of private insurance companies

Thank You!