The World Bank

Budget Management: Strengthening through a Medium-Term

Expenditure Framework

Bill DorotinskyThe World Bank

Seoul, Republic of KoreaMarch 15, 2004

The World Bank

Three Objectives of Public Expenditure Management Systems

• Macrofiscal discipline and stability– Avoid public finance crises– Support economic growth and stability

• Strategic allocation of resources– Match government policy with programs,

objectives• Technical efficiency

– Getting the most from each won spent

The World Bank

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

The World Bank

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– Digging a hole: complacency today, unaware of crisis tomorrow– Inability to climb out of poor fiscal situation

• 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 from experience• Not harnessing energies of all actors in system; mismatch of roles and

responsibilities• Taking piecemeal decisions without reference to over-all effect

The World Bank

Technical Objectives of MTEF• Improve macrofiscal situation

– lower deficits, improved economic growth– more rational approach to retrenchment and economic stabilization– enable more sustainable public finances

• Improve impact of Government policy– link between government priorities/policies and government programs– sustainable policy

• Improve program performance/impact– Shift bureaucracy from administrative to managerial culture

• Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies

• more efficient use of resources– Improved resource predictability

The World Bank

MTEF: New Budget and Planning Process

• Stage 1. Macroeconomic and public sector envelopes

• Stage 2. High-level policy: aligning policies & objectives under resource constraints

• Stage 3. Linking policy, resources, and means by sector

• Stage 4. Reconciling resources with means• Stage 5. Reconciling strategic policy and means

The World Bank

Stage 1. Macroeconomic and public sector envelopes

Macroeconomic Estimates

Revenue Estimates

Expenditure Estimates(current services)

Fiscal Policy

Expenditure Estimates(current law, normatives)

•Affordable/sustainable Fiscal Envelope•Monetary and Fiscal Policy•Debt and Deficits•Aid flowsAll in multi-year context

The World Bank

Stage 2. High-level policy: aligning policies & objectives under constraints

Fiscal Envelope

Setting Strategic Policy

Priorities Under

Resource Limits

(downsizing, or expansions)

Sectoral Resource Ceilings

Ministry Resource Ceilings

The World Bank

Stage 3. Linking policy, resources, and means by sector

Sector Policies and Objectives

Sector programs

Reconcile policy, laws, resource limits

Program priorities relative to objectives

Assess modalities for objective

Evaluate Production Function

Sector Budget Request

Again, multi-year

Under ceiling

Above ceiling

The World Bank

Stage 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

The World Bank

Stage 5. Reconciling strategic policy and means

Policy assessment

and reconciliation

Policy official dialogue

Modify baselines

Finalize decisions

Budget ProposalRevised

Requests, Unresolved

Issues

The World Bank

0

5

10

15

82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93

Mar 84

May 85

Nov 85Dec 86

Aug 89

Real growth rate

Projection dates

Macrofiscal stability:Australia’s Medium-term Costs of Policies

The World Bank

Implementing an MTEF

• Adopt framework– getting policy-official and technical staff buy-in– recognize this is continuous, long-term

endeavor• Customize implementation to country

needs, initial conditions– macro, sectoral policy

• Target institutional capacity development

The World Bank

Key Capacity Issues

• Technical– Staff skills

• policy analysis, budget examination, policy and activity-costing

– Accounting system– Budget execution system

• Policy– Capacity to enforce hard budget constraints– Commitment to continuous process of improvement

The World Bank

A further word on evolution of budget offices….longer-term trends

• Changing role of budget office– Control to monitoring/oversight– Policy analysis and development over excessive budget

detail– Shifting authority towards line ministries

• Emphasizing training and guidance• Performance over compliance

– Analysis of emerging issues, problems, and health of decision-making and finance system

• Integration of planning into budget process– Integration of capital and recurrent budgets

The World Bank

Budget roles and responsibilities before…

Ministry of Finance

Line Ministry

• Issues broad guidance at start of process, with cost increase assumptions

• Cutting spending requests uniformly or by economic class or line item to meet totals

• Heavy involvement in setting line item totals

•No idea of out-year implications of choices

• Develop requests in vacuum

• Request is wish list; incentive to ask for more, hoping that after cuts will have enough

• Little discretion to allocate funds in own budget

• Little incentive to focus on current programs, reallocate

• Minimal policy content in budget request

• Low likelihood of getting budget levels during year

The World Bank

…. And after reforms

Ministry of Finance

Line Ministry

• Issues broad guidance with multi-year sector ceilings at start of process (cabinet approved)

• Cuts spending requests only if above ceiling, leave most details of what to cut to line ministry (though with recommendations, frequently)

• Little involvement in setting line item totals, except perhaps capital and personnel; may set personnel ceilings too

•Clearer picture of future implications of current choices

•Focus more on policy and objectives, performance assessments (costs, objectives, effectiveness, efficiency)

• Clear resource framework for planning

• Request must prioritize between current and new programs

• Near complete discretion to allocate funds in own budget

• Potential for larger policy content in budget request

• Ceterus paribus, higher likelihood of receiving budget levels during year

The World Bank

“Benchmarking”Recent McKinsey Study looked at 7 dimensions of 7 country

Finance Ministries• Australia, Brazil, Malaysia, Singapore, Thailand, UK, US

• All had taken steps to ‘empower’ line ministries and professional managers

• All had made substantial efforts to strengthen external audit• All had taken measures to move away from input budgeting

towards performance or output budgets• Most had taken measures to improve transparency of

processes and information

Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

The World Bank

“Benchmarking” (continued)

• Six had made substantial effort to separate policy development and oversight from implementation

• All had taken strong measures to consolidate similar functions, especially cash and debt management

• Most had taken some measures towards greater checks and balances to MoF functions

Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.