Managing Public Budget to Facilitate Economic Growth and Reduce Poverty
Public Expenditure Analysis & Management Staff Training Course
May 22--24, 2001
Washington, DC
Vinaya Swaroop, DECRG/PRMPS
22
Two issues on my agenda...
How the public sector in general & public budget in particular can...
Help create an enabling environment to
facilitate private-sector led growth;
Help the poor.
33
The public sector can facilitate economic growth & help the poor...
…but a necessary condition is that there be a
well-functioning budget system of...
• Planning,
• Policy;
• Execution, monitoring & evaluation.
44
Good public resource management...
…involves:
Getting budgetary allocations right;
Building build well-functioning institutions
for budget execution, monitoring &
evaluation.
55
The tool for improving public budget management...
…is a framework that helps in
assessing budgetary performance; and
strengthening budgetary management.
L e ve l (size ) o f S p e nd ing
[A g gre g a te F isca l D isc ip lin e ]
Eva lua tio n o f p ub lic re so urces a llo ca tio n
(w ith in a nd a cro ss se cto rs)
C o m p os it ion o f S p e nd ing[S tra te g ic P r io rity S e tt in g ]
1 . Pe rfo rman ce-ba sed bu dg eting2 . Pe rfo rma n ce -ba sed re wa rds3 . C lie n t surve ys4 . R etention o f u se r fees
E ffic ie n tP u b lic S e rvice D e live ry
(R eformin g Incetive s thro ug h...)
M a na g ing P u b lic E xpe n d itu re s : A F ram ew o rk
I. Level (Size) of Public Spending, Revenue & Deficit Issues
...Questions that any analysis of the level of
public expenditures should ask cover three
key areas...
First,
How comprehensive is the public budget?
Are contingent liabilities, off-budgeted
items, local spending, and so forth, included?
The concept of the “Consolidated General
Government”...
Second,
• How was the level of government revenues
determined?
• What kind of a tax structure exists in the
country?
Third,
How was the deficit figure chosen?
What assumptions underlie the analysis of its
sustainability?
I. Level (Size) of Public Spending & Deficit Issues (contd.)
Public spending level needs to be consistent with
the country’s long-run financing ability;
Persistently large deficits pose threats to stability
& growth of the economy;
Experience suggests deficit reduction usually
requires a cut in public spending.
I. Level (Size) of Public Spending & Deficit Issues (contd.)
A deficit reduction strategy should analyze the
following questions...
How is the deficit measured?
What is the composition of deficit financing?
What is the sustainable amount of fiscal deficits?
II. Resource Allocation ExerciseHow to?
A couple of points to remember…
Budgetary allocation process is foremost a
political decision;
In practice, there is no “optimal” allocation of the
public budget.
II. Resource Allocation Exercise
The technical part should be based on…
What is the rationale for government intervention?
Market failure (public goods, externalities)
Redistribution
What is the appropriate instrument?
What is the fiscal cost?
1515
D ecision Tree fo r Eva luating Pub lic P rogram s
1. Sugar & sh oe productio n2. G eneral fe rtilizer subsid y3. G eneral c urative hosp ital serv ices ?4. tertiary education ? ?
N o ra tio n a le
G overnm ent Building M aintenanc eCom m unity Developm e nt P rogram s
O u tso u rc ing
Clinic al H ealthSchool V ouchers
S u b s idy
Consum er, W ork ers, Environm en tSecuritie s and E xchang e
E lectric ity & T ele com m unication s
R e g u la tion
W h a t a re th e f is ca l co s ts?(tradeoffs based on costs )
Prim ary E ducatio nSafety Nets
Security (internal & external)Basic Health Educatio n
P u b lic p ro v is ion
W h a t is th e rig h t in s tru m e n t ?
T h e re is a ra tio n a le
W h at is the ra tiona le fo r pu b lic in te rvention?M a rke t fa ilu re (e x te rn a lit ie s , p ub lic g o o d)
R e d is trib u tion
1616
Education subsidy per capita by decile, Indonesia 1989
0
200
400
600
800
1000
1200P
oore
st 2 3 4 5 6 7 8 9
Ric
hes
t
Primary
Secondary
Tertiary
1717
Distribution of health care subsidies, Indonesia
0
20
40
60
80
100
120
140
160
180
200
Poore
st 2 3 4 5 6 7 8 9
Riches
t
Hospital inpatient
Hospital outpatient
Health center
Health sub-center
Who Benefits from Health Subsidy?Share of Total Subsidy to Health in
Bulgaria (1995), Ghana (1992) and Vietnam (1993)
0
5
10
15
20
25
30
35
1 (poorest)
2 3 4 5 (richest)
Shar
e of T
otal
Hea
lth S
ubsid
y
BulgariaGhanaVietnam
Share of Total Subsidy to Primary and Tertiary Education by
Population Quintile, Cote d'Ivoire (1995)
0
10
20
30
40
50
60
70
80
1 (poorest)
2 3 4 5 (richest)
Quintile
Shar
e of P
rimar
y an
d Te
rtiar
y Ed
ucat
ion
Subs
idy
Primary
Tertiary
2020
These incidence studies indicate that in most developing countries...
A few items in the public budget --
generally associated with helping the poor,
e.g., primary education, basic health
services, basic sanitation services -- can
help the poor if the allocated budget is
executed properly.
2121
Budgetary policy designed to help the poor may be only a necessary condition...
...Good budgetary management is very
important for effectively delivering services to
the poor…
A recent Public Expenditure Tracking Survey
in Uganda showed that on average less than
30% of public funds earmarked for primary
school reach their intended destinations. The
remainder are lost or diverted.
2222
Linking public spending with desirable outcomes…What is the evidence?
A generally accepted notion -- Efficacy of
public spending is improved if budget
institutions work well.
Research has shown that public health
spending has no demonstrable effect on
health indicators (e.g., infant mortality). A
conjecture: Mismanagement of funds!
2323
Fiscal Cost Comparison: An Example from Morocco
Farm subsidy, millions of dollars
160%
of preventive health
1989
1990
1991
1992
Average
0 60 120
67
76
90
107
85
20% of basic
education
III. Efficient Delivery of Public Services
A key requirement is to reform the incentives in the
public sector…
• Merit based recruitment and promotion in the
public sector;
• Performance-based budgeting and rewards;
• Assessment of public service delivery through
client surveys.
III. Efficient Delivery of Public Services (contd.)
Experience suggests...
Several countries--developed and developing--
have initiated such reforms (New Zealand and
Malaysia);
But such reforms take time, and the success is
based upon initial conditions in the country
including existing capacity and political readiness.
2626
Several issues relating to improving budgetary management...
Better planning of budget policy;
Successful budget execution;
Monitoring issues including better account
preparation and benefit evaluations; and
Oversight mechanisms including external
audit.
Improving Budgetary Management...
…by linking policy, planning and
budgeting through a medium-term
expenditure (MTEF)...
2828
What is a MTEF?
A tool for linking policy, planning & budgeting
over a medium-term ( 3 years) at the
Government-wide level;
It consists of a top-down resource envelope & a
bottom-up estimation of the current & medium-
term costs of existing policies;
2929
What is a MTEF?
Matching of the two in the context of the
annual budget process; and
Involves rolling over this exercise every year
by incorporating policy changes.
3030
What can it do?
If successfully applied, it can
Improve macroeconomic balance by developing a
multi-year resource framework (expenditure &
revenue);
Assist in improving resource allocation between &
across sectors;
Improve predictability of funding for line ministries.
3131
What it does not do?
MTEF is about budget planning given policy
choices;
It does not tell you about what public spending is
buying (i.e., the link between inputs & outputs); and
It is not about accountability (i.e., how are
resources being spend).
3232
A Checklist on MTEF...
Can the country do a reasonable 3-year projections of
expenditures & revenue?
Is the bottom-up exercise of 3-year cost projections
(capital & recurrent; programs & subprograms)
feasible?
3333
A Checklist on MTEF...
If the capacity does not exist, what would be a sequenced
process of building it?
What country preparations are needed before a MTEF
could be successfully adopted?
Last but not least: A MTEF will not solve all the service
delivery problems.