Public Expenditure Management and the MediumTerm Expenditure Framework

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Public Expenditure Management and the Medium-Term Expenditure Framework: Overview Workshop on Bhutan Public Expenditure

Public Expenditure Management and the Medium-Term Expenditure Framework: Overview Workshop on Bhutan Public Expenditure Management August 16 -20, 2004 Christian Eigen-Zucchi The World Bank 1

Two Caveats Improving Public Expenditure Management is a process, not an event. MTEFs are

Two Caveats Improving Public Expenditure Management is a process, not an event. MTEFs are not a panacea that will immediately solve all problems. 2

Core Questions for Government Are national objectives being met (as best possible)? Are government

Core Questions for Government Are national objectives being met (as best possible)? Are government policies being implemented? Is the budget used as a tool for steering and managing government? Does government get the information and analysis it needs to make good choices? Does the budget process support good decision-making and effective programs? Are potential spending crises or major adjustments anticipated and managed (versus reacted to ex post)? Is spending efficient and effective? 3

Three Objectives of Public Expenditure Management Systems Macro-fiscal discipline and stability Avoid public finance

Three Objectives of Public Expenditure Management Systems Macro-fiscal discipline and stability Avoid public finance crises or the need for major adjustments Support economic growth and macroeconomic stability Strategic allocation of resources Match government policy with programs, objectives Technical efficiency Getting the most from each ngultrum spent 4

Basic principles of PEM Comprehensiveness include all revenue and expenditure, all agencies Accuracy record

Basic principles of PEM Comprehensiveness include all revenue and expenditure, all agencies Accuracy record actual transactions and flows Annuality cover a defined period of time (e. g. one year budget, multi-year forecasts) Authoritativeness only spend as authorized by law Transparency information on spending is public, timely, understandable 5

What is an MTEF? Conceptual framework for thinking about public finance systems Process oriented,

What is an MTEF? Conceptual framework for thinking about public finance systems Process oriented, not simply various components of the public expenditure system Process of government decision-making Multi-year emphasis Supports learning and continuous improvement Emphasizing policy linking policy, inputs, outputs, objectives Consists of top down estimate of aggregate resources and bottom up estimates of the cost of implementing policies. 6

Technical Objectives of MTEF Improve macro-fiscal situation Lower deficits, faster economic growth More rational

Technical Objectives of MTEF Improve macro-fiscal situation Lower deficits, faster economic growth More rational approach to retrenchment and economic stabilization (when needed) Improve impact of government policy Strengthen the link between government priorities/policies and government programs Improve program performance/impact Shift bureaucracy from administrative to managerial culture • Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies Generate greater resource predictability 7

Common PEM problems Weak links between policy, resource limits, and budgets failure to achieve

Common PEM problems Weak links between policy, resource limits, and budgets failure to achieve strategic objectives abstract planning, unrelated to ways and means Annual focus leads to suboptimal choices Separation between capital and recurrent budgets Lower than expected returns to capital Non-comprehensive budget Using other means to support favored programs Failure to think strategically about tools and objectives Not learning as much as possible from experience Not harnessing energies of all actors in system; mismatch of roles and responsibilities Taking piecemeal decisions without reference to over-all effect 8

MTEF: Budget Process Step 1. Macroeconomic and public sector envelopes Step 2. High-level policy:

MTEF: Budget Process Step 1. Macroeconomic and public sector envelopes Step 2. High-level policy: aligning policies & objectives under resource constraints Step 3. Linking policy, resources, and means by sector Step 4. Reconciling resources with means Step 5. Reconciling strategic policy and means 9

Step 1. Macroeconomic and public sector envelopes Macroeconomic Estimates Revenue Estimates Fiscal Policy Expenditure

Step 1. Macroeconomic and public sector envelopes Macroeconomic Estimates Revenue Estimates Fiscal Policy Expenditure Estimates (current services) Expenditure Estimates (current law, normatives) All in multi-year context • Affordable/sustainable Fiscal Envelope • Monetary and Fiscal Policy • Debt and Deficits • Aid flows 10

Step 2. Aligning policies & objectives subject to constraints Fiscal Envelope Sectoral Resource Ceilings

Step 2. Aligning policies & objectives subject to constraints Fiscal Envelope Sectoral Resource Ceilings Setting Strategic Policy Priorities Under Resource Limits Ministry Resource Ceilings (downsizing, or expansions) 11

Step 3. Linking policy, resources, and means by sector Sector Policies and Objectives Reconcile

Step 3. Linking policy, resources, and means by sector Sector Policies and Objectives Reconcile policy, laws, resource limits Program priorities relative to objectives Sector programs Assess modalities for objective Evaluate Production Function Sector Budget Request Again, multi-year Under ceiling Above ceiling 12

Step 4. Reconciling resources with means Sector Ceilings Sector Requests Technical assessment and reconciliatio

Step 4. Reconciling resources with means Sector Ceilings Sector Requests Technical assessment and reconciliatio n Vetting assumptions, policies, estimates Challenging modalities, production function Evaluate performance Revised requests and/or decision papers 13

Step 5. Reconciling strategic policy and means Policy assessment and reconciliatio n Revised Requests,

Step 5. Reconciling strategic policy and means Policy assessment and reconciliatio n Revised Requests, Unresolved Issues Policy official dialogue Modify baselines Finalize decisions Budget Proposal 14

Implementing an MTEF Adopting the framework requires policy-official and technical staff buy-in continuous, long-term

Implementing an MTEF Adopting the framework requires policy-official and technical staff buy-in continuous, long-term effort Framework should be adapted to the country’s needs, based on initial conditions macro, sectoral policy Institutional capacity development is central to success. 15

Key Capacity Issues Technical Staff skills • policy analysis, budget examination, policy and activitycosting

Key Capacity Issues Technical Staff skills • policy analysis, budget examination, policy and activitycosting Accounting system Budget execution system Policy Capacity to enforce hard budget constraints Commitment to a continuous process of improvement 16

Performance orientation Performance is multi-level Macrofiscal stability • Measure: Actual relative to approved budget

Performance orientation Performance is multi-level Macrofiscal stability • Measure: Actual relative to approved budget Strategic allocation • Measures: – Actual function/sector budget to approved budget – Actual to actual • Annual review of policies and sectoral performance relative to targets Operating efficiency • Review of programs relative to financial performance, outputs, objectives 17