the world bank mtef’s: concept and lessons bill dorotinsky the world bank may 2, 2006

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MTEF’s:MTEF’s:Concept and LessonsConcept and Lessons

Bill DorotinskyBill DorotinskyThe World BankThe World Bank

May 2, 2006May 2, 2006

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OutlineOutline

MTEF ConceptMTEF Concept Technical objectivesTechnical objectives Process ViewProcess View

Sequenced decision-makingSequenced decision-making Component View - unbundlingComponent View - unbundling

Major BlocksMajor Blocks More manageable piecesMore manageable pieces

Output ViewOutput View ExperienceExperience

GhanaGhana South AfricaSouth Africa UgandaUganda LessonsLessons

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Three Objectives of Public Three Objectives of Public Expenditure Management Expenditure Management

SystemsSystems Macrofiscal discipline and stabilityMacrofiscal discipline and stability

Avoid public finance crisesAvoid public finance crises Support economic growth and stabilitySupport economic growth and stability

Strategic allocation of resourcesStrategic allocation of resources Match government policy with Match government policy with

programs, objectivesprograms, objectives Technical efficiencyTechnical efficiency

Getting the most from each ruble spentGetting the most from each ruble spent

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Technical Objectives of Technical Objectives of MTEFMTEF

Improve macrofiscal situationImprove macrofiscal situation lower deficits, improved economic growthlower deficits, improved economic growth more rational approach to retrenchment and more rational approach to retrenchment and

economic stabilizationeconomic stabilization Improve impact of Government policyImprove impact of Government policy

link between government priorities/policies link between government priorities/policies and government programsand government programs

Improve program Improve program performance/impactperformance/impact Shift bureaucracy from administrative to Shift bureaucracy from administrative to

managerial culturemanagerial culture Managerial flexibility & innovation: lower Managerial flexibility & innovation: lower

cost/output; greater effectiveness of cost/output; greater effectiveness of programs/policiesprograms/policies

Improved resource predictabilityImproved resource predictability

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MTEF: Improved Budget MTEF: Improved Budget ProcessProcess

Stage 1. Macroeconomic and public sector Stage 1. Macroeconomic and public sector envelopesenvelopes

Stage 2. High-level policy: aligning policies Stage 2. High-level policy: aligning policies & objectives under resource constraints & objectives under resource constraints (top-down)(top-down)

Stage 3. Linking policy, resources, and Stage 3. Linking policy, resources, and means by sector (bottom-up)means by sector (bottom-up)

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

meansmeans

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Stage 1. Macroeconomic and public sector Stage 1. Macroeconomic and public sector envelopesenvelopes

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

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

Fiscal Envelope

Setting Strategic

Policy Priorities

Under Resource

Limits(downsizing, or

expansions)

Sectoral Resource Ceilings

Ministry Resource Ceilings

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

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

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Stage 4. Reconciling Stage 4. Reconciling resources with meansresources 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

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Stage 5. Reconciling strategic Stage 5. Reconciling strategic policy and meanspolicy and means

Policy assessment

and reconciliation

Policy official dialogue

Modify baselines

Finalize decisions

Budget Proposal

Revised Requests,

Unresolved Issues

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MTEF Major ComponentsMTEF Major Components

Medium-Term Fiscal FrameworkMedium-Term Fiscal Framework Aggregates, policyAggregates, policy

Medium-Term Budget FrameworkMedium-Term Budget Framework Ceilings and sector strategiesCeilings and sector strategies

Program budgeting/Activity-based costingProgram budgeting/Activity-based costing Within ministries, programs, costing, input-Within ministries, programs, costing, input-

output modelsoutput models Performance measuresPerformance measures

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Unbundling MTEFsUnbundling MTEFs

Medium-Term Fiscal FrameworkMedium-Term Fiscal Framework Multi-year Macroeconomic forecastMulti-year Macroeconomic forecast Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure

envelope (fiscal policy paper)envelope (fiscal policy paper) Medium-Term Budget FrameworkMedium-Term Budget Framework

Multi-year forecast of spending under current policy or current level of services, by Multi-year forecast of spending under current policy or current level of services, by ministry or program ministry or program

Multi-year ceilings for sector ministries Multi-year ceilings for sector ministries Multi-year sector strategy Multi-year sector strategy

Program budgeting/Activity-based costingProgram budgeting/Activity-based costing Multi-year cost estimates of Multi-year cost estimates of new policies or programsnew policies or programs (recurrent),(recurrent), or expansion of or expansion of

existing programs, prepared by sector ministries existing programs, prepared by sector ministries Multi-year estimates of cost of Multi-year estimates of cost of existingexisting policies, programs, subprograms, or activities policies, programs, subprograms, or activities

prepared by sector ministries prepared by sector ministries Multi-year estimates of cost of Multi-year estimates of cost of new projects (capital)new projects (capital), or expansion of existing projects, , or expansion of existing projects,

prepared by sector ministriesprepared by sector ministries

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Unbundling MTEFsUnbundling MTEFsMulti-year Multi-year FeatureFeature

PEM PEM ObjectiveObjective

Intended EffectIntended Effect RequiresRequires ProductProduct

1. 1. Macroeconomic Macroeconomic forecastforecast

Macrofiscal Macrofiscal disciplinediscipline

Provides strategic Provides strategic framework for setting framework for setting fiscal and monetary fiscal and monetary policy, and allows policy, and allows proactive fiscal proactive fiscal adjustment to changing adjustment to changing economic trends.economic trends.

Forecasting model, Forecasting model, capacity, multi-year capacity, multi-year macro variable time macro variable time series, or access to series, or access to multiple non-multiple non-governmental governmental forecastsforecasts

Macroeconomic Macroeconomic Forecast paper, a key Forecast paper, a key topic for a fiscal topic for a fiscal policy paper that policy paper that draws together draws together products from Item products from Item 1, 2, 3, and 41, 2, 3, and 4

2. Multi-year 2. Multi-year revenue, debt revenue, debt sustainability sustainability analysis and analysis and debt policy, debt policy, yielding yielding expenditure expenditure envelopeenvelope

Macrofiscal Macrofiscal disciplinediscipline

Sets upward bound for Sets upward bound for expenditures, limiting expenditures, limiting deficits, inflation, and deficits, inflation, and currency depreciations; currency depreciations; supports sustainable supports sustainable fiscal policy, and fiscal policy, and realistic expenditure realistic expenditure planning within the planning within the expenditure envelope; expenditure envelope; supports focus on supports focus on adequate revenue adequate revenue mobilization.mobilization.

Forecasting models. Forecasting models. Stronger if Stronger if relationships relationships between macro between macro growth, income growth, income distribution, and distribution, and revenues revenues understood and understood and modeled. Debt modeled. Debt sustainability sustainability analysis/model, or analysis/model, or hard rule on hard rule on debt/deficit limits. debt/deficit limits.

Revenue and Tax Revenue and Tax Policy PaperPolicy Paper

Debt Sustainability Debt Sustainability Analysis and Policy Analysis and Policy PaperPaper

(Both key topics for (Both key topics for a fiscal policy paper a fiscal policy paper that draws together that draws together products from Item products from Item 1, 2, 3, and 4.)1, 2, 3, and 4.)

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Unbundling MTEFs (2)Unbundling MTEFs (2)Multi-year Multi-year FeatureFeature



3. Multi-year 3. Multi-year forecast of forecast of spending under spending under current policy current policy or current level or current level of services, by of services, by ministry or ministry or program program

Macrofiscal Macrofiscal discipline, discipline, Allocational Allocational efficiency efficiency (sector) (sector)

Broad indicator of Broad indicator of future cost of current future cost of current spending trends, spending trends, identification of identification of potential risk areas, and potential risk areas, and proactive, measured, proactive, measured, more rational fiscal more rational fiscal adjustment. Baseline adjustment. Baseline for evaluating policy for evaluating policy spending choices.spending choices.

MoF provided MoF provided inflators for pay, non-inflators for pay, non-pay, and clear pay, and clear guidance for guidance for projecting costs. Can projecting costs. Can be automated. Can be be automated. Can be budget year only, but budget year only, but more effective over more effective over several years. several years.

Expenditure Expenditure trends paper, a trends paper, a key topic for a key topic for a fiscal policy fiscal policy paper that draws paper that draws together products together products from Item 1, 2, from Item 1, 2, 3, and 4.3, and 4.

4. Multi-year 4. Multi-year ceilings for ceilings for sector ministries sector ministries

Allocational Allocational efficiency efficiency (sector), (sector), Macrofiscal Macrofiscal discipline, discipline, Operational Operational efficiency efficiency

Enabling more realistic Enabling more realistic planning, appropriate planning, appropriate policies; incentive for policies; incentive for reviewing existing reviewing existing programs for programs for effectiveness, effectiveness, reallocations within reallocations within sectors. At center, sectors. At center, explicit trade-offs explicit trade-offs between sectors. between sectors.

More credible if More credible if reflecting policy reflecting policy choices, which choices, which requires some explicit requires some explicit policy directions on policy directions on reallocation. More reallocation. More effective in changing effective in changing behavior if approved behavior if approved by cabinet or by cabinet or parliament. parliament.

Sector ceilings Sector ceilings table, as part of table, as part of fiscal policy fiscal policy paper (which paper (which draws together draws together the Papers and the Papers and forecasts forecasts produced in produced in Items 1, 2, 3 and Items 1, 2, 3 and 4)4)

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5. Multi-year 5. Multi-year sector strategy sector strategy

Allocational Allocational efficiency efficiency (sector), (sector), Operational Operational efficiency, efficiency, Macrofiscal Macrofiscal discipline discipline

Sector strategic plan Sector strategic plan links links outputs/outcomes with outputs/outcomes with inputs in multi-year inputs in multi-year framework. Effective framework. Effective onlyonly if prepared within if prepared within multi-year sectoral multi-year sectoral resource ceiling. resource ceiling.

Sector ministry Sector ministry strategic planning strategic planning capacity, on capacity, on program program outputs/outcomes outputs/outcomes information, and information, and relationship to relationship to activities and activities and inputs. inputs.

Sectoral plans, starting Sectoral plans, starting with sector ceiling, the with sector ceiling, the spells out objectives, spells out objectives, outcome targets, outcome targets, current outcome trends, current outcome trends, and actions to be taken, and actions to be taken, including priority including priority programs, capital and programs, capital and current spending, etc.current spending, etc.

6. Multi-year 6. Multi-year cost estimates cost estimates of of new policies new policies or programsor programs (recurrent),(recurrent), or or expansion of expansion of existing existing programs, programs, prepared by prepared by sector sector ministriesministries

Operational Operational efficiency, efficiency, Allocational Allocational efficiency efficiency (sector), (sector), Macrofiscal Macrofiscal disciplinediscipline

Identifies multi-year Identifies multi-year implications of new implications of new initiatives relative to initiatives relative to their objectives, and their objectives, and assessment of whether assessment of whether they can be financed they can be financed from within existing from within existing sectoral ceilings or sectoral ceilings or even within aggregate even within aggregate spending ceilings, and spending ceilings, and if they are financially if they are financially sustainable over time.sustainable over time.

Requires Requires guidance/training guidance/training for spending for spending ministry staff, and ministry staff, and spending ministry spending ministry staff capacity; staff capacity; MoF provision of MoF provision of common inflators common inflators for use by for use by ministries (pay ministries (pay rates, non-pay, rates, non-pay, capital costs). capital costs).

Budget tables Budget tables

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7. Multi-year 7. Multi-year estimates of cost estimates of cost of of existingexisting policies, policies, programs, programs, subprograms, or subprograms, or activities activities prepared by prepared by sector ministriessector ministries


Sensitizes sector Sensitizes sector ministry to cost ministry to cost drivers, drivers, affordability of affordability of existing policy or existing policy or programs, attention programs, attention to different means to different means of attaining of attaining objectives, unit objectives, unit cost.cost.

Can begin at Can begin at program, and later program, and later move to subprogram move to subprogram and activity costing. and activity costing. Requires trained staff Requires trained staff at spending at spending ministries, agencies; ministries, agencies; MoF guidance and MoF guidance and common inflators common inflators (pay rates, non-pay, (pay rates, non-pay, capital costs). capital costs).

Budget tablesBudget tables

8. Multi-year 8. Multi-year estimates of cost estimates of cost of of new projects new projects (capital)(capital), or , or expansion of expansion of existing projects, existing projects, prepared by prepared by sector ministriessector ministries


Many capital Many capital budget processes budget processes already include already include such estimates, such estimates, including the including the recurrent cost recurrent cost implications of new implications of new capital projects.capital projects.

Trained staff at Trained staff at spending ministries, spending ministries, guidance on costing, guidance on costing, understanding of understanding of project design and project design and work flow. work flow.

Budget tablesBudget tables

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SummarySummary MTEF is aboutMTEF is about

Process reformProcess reform Integrating planning and budgetingIntegrating planning and budgeting Changing Incentives of Key ActorsChanging Incentives of Key Actors Integrating policy and technical aspects of Integrating policy and technical aspects of

budgetingbudgeting Thinking multi-yearThinking multi-year

MisconceptionsMisconceptions MTEF is only multi-year estimatesMTEF is only multi-year estimates MTEF separate process, document onlyMTEF separate process, document only

Preconditions?Preconditions? Civil service/administrative reform for Civil service/administrative reform for

allocative flexibility?allocative flexibility?

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GhanaGhana

MTEF first introduced in 1999MTEF first introduced in 1999 Declared a success at first budgetDeclared a success at first budget ““big-bang” covering all MTEF aspects at big-bang” covering all MTEF aspects at

once, plus IFMIS and Civil Service Reformonce, plus IFMIS and Civil Service Reform Problems encounteredProblems encountered

Limited MDA capacityLimited MDA capacity Data limitationsData limitations EBFsEBFs Weak macroforecasting undermined MTEFWeak macroforecasting undermined MTEF Rigidity of spending inhibited reallocationRigidity of spending inhibited reallocation

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Ghana (2)Ghana (2)

Problems encountered (continued)Problems encountered (continued) No visible change in budget formats, No visible change in budget formats,

information provided (e.g. budget speech)information provided (e.g. budget speech) Limited buy-in outside core MoF groupLimited buy-in outside core MoF group

Implemented as ‘project’ versus reform of budget Implemented as ‘project’ versus reform of budget process, as ‘technical’ versus policy-orientedprocess, as ‘technical’ versus policy-oriented

Linking next budget with multi-year Linking next budget with multi-year estimatesestimates

Top-down implemented, but bottom-up not Top-down implemented, but bottom-up not quite in placequite in place

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South AfricaSouth Africa

First attempt 1994First attempt 1994 Department of Finance onlyDepartment of Finance only Failed, too internalFailed, too internal

Second attempt 1997Second attempt 1997 Inclusive process, with sectoral working groupsInclusive process, with sectoral working groups All departments at onceAll departments at once Led by policy officialsLed by policy officials MTEF is budget processMTEF is budget process Have MTBPS and sectoral plansHave MTBPS and sectoral plans

But sectoral plans formalBut sectoral plans formal Performance emphasized more recentlyPerformance emphasized more recently

Reprioritization within sectors has happenedReprioritization within sectors has happened Over and under spending reducedOver and under spending reduced

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UgandaUganda

Started in 1992 Started in 1992 in MoFPEDin MoFPED With MTFF, major economic classesWith MTFF, major economic classes To address macrofiscal problems and counterpart funding problemsTo address macrofiscal problems and counterpart funding problems

Gradually expandedGradually expanded 1995 sector analysis (Ag, Roads, Health, Education)1995 sector analysis (Ag, Roads, Health, Education) 1997 all sectors (sector working groups)1997 all sectors (sector working groups) 2000 local governments2000 local governments 2001 MTEF required submission to Parliament2001 MTEF required submission to Parliament

Donor-financed investments (PIP) separate processDonor-financed investments (PIP) separate process Limited performance orientation, though expandingLimited performance orientation, though expanding More top-down, with limited detailed costing from the bottom-upMore top-down, with limited detailed costing from the bottom-up MTEF “home-grown” but still not fully integrated with the budget MTEF “home-grown” but still not fully integrated with the budget

processprocess Emphasis on PEAP priority programsEmphasis on PEAP priority programs

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Lessons in ImplementationLessons in Implementation

MTEF is designed to improve decision-making, MTEF is designed to improve decision-making, and focuses on budget formulation. It will not and focuses on budget formulation. It will not solve all PEM problems.solve all PEM problems.

MTEF is not a standardized product, per se. The MTEF is not a standardized product, per se. The principles can be implemented in various ways. principles can be implemented in various ways.

MTEF needs to be customized to the country, MTEF needs to be customized to the country, including initial conditions in PEM, human and IT including initial conditions in PEM, human and IT capacity. capacity.

With MTEF, and PEM reform generally, doing too With MTEF, and PEM reform generally, doing too much at once can overload the Government much at once can overload the Government capacity and prevent progress on all reforms. capacity and prevent progress on all reforms.

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More lessonsMore lessons Start with a medium-term fiscal frameworkStart with a medium-term fiscal framework MTEFs should not be launched in selected sectors MTEFs should not be launched in selected sectors

until there are medium-term ceilings in placeuntil there are medium-term ceilings in place Integration of capital and recurrent budgets need Integration of capital and recurrent budgets need

not be done immediately not be done immediately Performance information (outcomes, outputs) need Performance information (outcomes, outputs) need

not be incorporated immediately not be incorporated immediately Flexibility for spending ministries to allocate Flexibility for spending ministries to allocate

resources across programs, subprograms, and resources across programs, subprograms, and activities can be introduced gradually activities can be introduced gradually

Pressure on ministries to find resources within Pressure on ministries to find resources within current expenditures may be more successful when current expenditures may be more successful when accounting systems are in place to provide good accounting systems are in place to provide good information on program and activity costs information on program and activity costs

the world bank mtef’s: concept and lessons bill dorotinsky the world bank may 2, 2006

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