Budgetary Processes and Public Expenditure Management Core Course

Promoting Allocative Efficiency (Strategic Prioritization)

David ShandWorld Bank

May 22, 2000

2

Addressing the “big issues” of public expenditure

Level 2 is always the hardest!The “big issues” have major

“political” elementsBut a “technocratic” approach

looking at objectives, alternatives, costs and benefits can assist in this political decision making.

3

Principles Expenditures should be affordable in

the medium term, be based on government priorities and on the effectiveness of public programs. The budget system should create conditions and incentives that facilitate reallocation from lesser to higher priorities and from less to more effective programs.

4

Affordability,Expected Results Relative Priority

Basic Elements: The capacity and willingness to reallocate Priority-setting process in government Information on program outcomes and

effectiveness

5

Requirements

Willingness to think about why we are spending money on particular purposes and what we are actually getting for it.

Recognition that resources are limited and that therefore we need to think about alternatives and opportunity cost.

Objectives to be determined or specified. But are governments willing to be explicit?

Relevant information on costs, outputs, and outcomes? (Is all this information useful?)

6

Requirements (cont’d)

A linkage between the analysis/evaluation and the decision-making processes

A “hard” medium-term budget constraint

Ability and incentives to reallocate resources

7

Allocative Efficiency at What Level?

Between broad objectives - economic growth, poverty reduction, regional development

Between sectors - education versus health versus defense

Within sectors -primary/secondary/tertiary/vocational

education/university educationpublic health/primary

care/hospitals/family planningarmy/air force/navy

8

Allocative Efficiency at What Level?

Between programs - what is a “program”?

Within sub-sectors - spending on teachers, schools or textbooks? Quality versus quantity.

9

Some Prior QuestionsIs this a function of government? Is the

activity delivering a public or a private good?

Is it aligned with government objectives?Or is it historical, dictated by interest

groups (client capture), result of drift, inaction and lack of information?

Are there alternative mechanisms apart from direct government expenditure? e.g. regulating the private sector, providing government guarantees.

10

Some Prior Questions (cont’d)

Also a need to consider tax expenditures

Who legitimizes organizational/program objectives? Need for cabinet/ ministerial involvement?

New Zealand 2010. Attempting to link strategic and operational objectives (SRAs and KRAs)

11

Some Examples of Major Expenditure “re-allocations”?

Achieving “quality fiscal adjustment”Reductions in civil service number and/or

cost, wage and/or recruitment freezes“Streamlining” of the public service (technical

efficiency)Across the board cuts in administrative costsProcurement reformsReform/reduction in cost of public enterprisesReductions in transfers to sub-national

governments

12

Some Examples of Major Expenditure “re-allocations?

(cont’d)

Reductions in capital works (which ones?)Reduction or abolition of

subsidy/assistance programs to industry, agriculture etc.

Redesign or re-targeting of social transfer programs - particularly public pension reforms

Reductions in defense expenditure To what extent are such reallocations

based on any systematic consideration of priorities?

13

Problems in Strategic Prioritization

Lack of linkage between the plan and the budget - “promise in the plan what you can’t deliver in the budget”

Investment led priorities, rather that program priorities

Donor driven prioritiesPriorities determined by other levels of

governmentProtected enclaves of government

spending

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Mechanisms which Promote Strategic Prioritization

Aggregate medium-term fiscal targetsHard budget constraint - no “add ons”

without corresponding reductionsConsideration of alternative

mechanisms - does this have to involve public expenditure?

Sectoral strategies (strategic plans?) - costed over the medium-term

15

Mechanisms which Promote Strategic Prioritization (cont’d)

A medium-term expenditure framework (MTEF)

Arena within which policies compete and coordinate - cabinet, budget office and ministries’ internal budget preparation processes focus on strategic matters, not process or details.

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Mechanisms which Promote Strategic Prioritization (cont’d)

Ex-ante and ex-post evaluationCreating capacity and willingness to

reprioritize and reallocate Spending ministries having greater

“ownership” of their budget Encouraging ministers/ministries to

reprioritize within budget envelopes