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Introduction: Role of Budget Institutions, Public Budgeting and MTEFs Richard Allen I. Outline of Presentation II. Why budget institutions matter III. Fundamental stages of budgeting IV. Four key budget principles V. Different concepts/forms of MTEF VI. Conclusions Taking account of context and institutions in METAC countries 22 II. Why Budget Institutions Matter: 12 Budget Institutions and 9 Fiscal Indicators Phase of Adjustment Budget Institution Fiscal Adjustment Indicator a. Understanding the Fiscal Challenge b. Developing a Consolidation Strategy c. Implementing through the Budget Process 3 II. Budget Institutions & Fiscal Performance: Example - Macro Forecasting Absolute GDP Forecast Error (% of GDP) 3.0 % of GDP 2.5 • Countries with stronger institutions for fiscal reporting, forecasting and risk management saw smaller forecast errors impacting their plans. • The establishment the UK Office of Budget Responsibility in 2010 seems to have eliminated the historical bias in the UK’s official macro-economic forecast. 2.0 1.5 1.0 0.5 0.0 Strong Institutions Medium Institutions Weak Institutions Source: Country Documents Real GDP forecast minus WEO forecast 2.0 1.5 UK Case Study- Impact of Fiscal Council on Forecast Bias (Diff. b/w Official and WEO Forecast for Real GDP Growth) UK Advanced G20 economies with no independent macro forecast UK fiscal council established 1.0 0.5 0.0 -0.5 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Country Documents 4 II. Budget Institutions & Fiscal Performance: Example - Implementation of Adjustment Plans Absolute Deviation from Approved Budget vs Strength of Implementing Institutions (2010-2012) 80% 10% 70% 9% Percent Total of Budgeted Expenditure Share of Planned Adjustment Delivered. Share of Planned Adjustment Delivered vs Strength of Implementing Institutions (2010-2012) 60% 50% 40% 30% 20% 8% 7% 6% 5% 4% 3% 2% 10% 1% 0% Strong Institutions Source: MAP Medium Institutions Weak Institutions 0% Strong Institutions Medium Institutions Weak Institutions Source: National documents Having strong implementing institutions helped to ensure that budgets were respected and planned adjustments were largely delivered. 5 II. IMF G20 Board Paper: Key Findings • Most countries have made progress in strengthening their institutions – Consolidation has been a catalyst for institutional reform in many countries – Most progress in establishing fiscal councils, MTBF and fiscal rules – Less progress in improving reporting, risk management, & expenditure controls • Stronger institutions key component to successful adjustment – – – – • Countries with stronger institutions tended to consolidate sooner, faster, and more Countries with stronger institutions seemed to protected public investment Strong institutions tended to support better budget execution and delivery of plans Countries with stronger institutions seemed to respond better to adverse shocks Substantial institutional reforms are still required – Better reporting, forecasting, and risk management needed to improve insight in fiscal situation and reduce forecast errors – Weaknesses in “implementation” institutions remain largely unaddressed – Growing gap in institutional strength between advanced and emerging countries 6 III. Fundamental Stages of Budgeting Total expenditure • Reflection of ideology • Sustainability Sectoral allocation • Political priorities • Relatively stable from year-to-year … • … but can change over time Budget details • Efficient delivery of public services • Predominantly technical … • … budget can be politically sensitive 7 III. Fundamental Stages of Budgeting 1. Fiscal policy formulation 6. Control and audit 2. Budget preparation 5. Accounting and reporting 3. Budget approval 4. Budget execution 8 III. Fundamental Stages Bottom-Up 3. Total Expenditure 2. Sectoral Allocation 1. Budget Details • Line ministry budgets are consolidated to obtain total expenditure • If spending is too large, the negotiations are reopened, revenue proposals initiated or the fiscal targets revised (or a combination) • Line ministry proposals are prepared and submitted to the ministry of finance • Bilateral negotiations • The cost for individual lines in the budget are assessed • New initiatives are prepared 9 III. Fundamental Stages Top-Down • Total expenditure is determined based on 1. Total Expenditure • macroeconomic situation • Fiscal objectives or rules, e.g., fiscal balance or debt limit • projected revenue • Subject to decision on total expenditure in stage 1, a sectoral allocation is decided and formalized through ceilings 2. Sectoral Allocation • 15-40 sectors • no-policy-change assessment of existing policies • allocation of fiscal space/distribution of savings requirements • Subject to sectoral ceilings, the details of the budget are prepared 3. Budget Details • reallocations within ceilings can (normally) be allowed • proposals in addition to the ceilings are rejected 10 III. Case Study Top-down budgeting in Sweden Time Stages January-March Ministry of Finance updates macro forecasts and no-policy-change assessment for the multi-year budget framework. Mid-March Ministry of Finance’s develops broad spending proposals for coming year and following two years. End March Cabinet Budget Meeting with approval of total expenditure ceiling and allocation to 27 Expenditure Areas for coming year and following two years 15 April Government’s Spring Fiscal Policy Bill is sent to Parliament. April-May Spending ministries finalize allocations among individual appropriations within their Expenditure Areas. 15 June Parliament approves the Government’s Spring Fiscal Policy Bill. June-August Budget documentation prepared. Early September Cabinet agrees on the final budget proposal to be presented to Parliament. 20 September Budget bill is presented to Parliament. 11 IV. Four Fundamental Budget Principles Unity Universality One budget and one budget process All revenue finances all expenditure Specificity Annuality All appropriations have a distinct purpose All appropriations have a pre-defined end-date 12 IV. Four Fundamental Budget Principles Unity Fragmented Budget Comprehensive Budget Legislature • Budget is an instrument for aggregate fiscal control • Policies can be prioritized against each other EBF . . EBF . Audit Rev, Exp, Borrowing Fiscal rules Budget Audit Rev, Exp, Borrowing Fiscal rules Budget Assump. Priorities Executive Assump. Priorities Executive EBF Legislature • Executive and legislative fiscal control becomes more difficult • Inefficient use of resources 13 IV. Four Fundamental Budget Principles Universality Universal Budget Subsidies Non-tax Entitlements Tax revenue Budget Ear-Marked Budget Fuel excise Tax revenue Capital 5% to Defense Subsidies Admin. Admin. University fees • Facilitates annual policy prioritization •Gives the government more options when making savings 10% to Education Budget Borrowing Borrowing Road construction Higher education • Causes rigidities and obstacles for reallocation and consolidation •Leads to inefficiencies 14 Earmarking and EBFs in the region are widespread … • Egypt – 2014 Constitution mandates minimum level of spending on health, education and research (4, 2 and 1% of GDP) • Iraq - portion of surplus funds in oil revenue account are outside the budget • Most METAC countries maintain special accounts and special funds outside budget 15 IV. Four Fundamental Budget Principles Specificity • Parliament and public should have prior information about how the government will spend the budget • Unit of control – Organization – Program – Economic category • Level of detail • Contingency arrangements and margins 16 IV. Four Fundamental Budget Principles Specificity Central Statistics Bureau—Fiscal year 1967/68 Remuneration to personnel 1 1. Salaries to employees 2. Contractual fees and reimbursements General outlays for the Office 1. Health care 2 2. Travel and subsistence allowance 3. Office and general supplies a) fuel, electricity and water b) other office supplies 4. Printing and publication 5. Other expenditure items a) maintenance of library b) reimbursement to the Computer Center for processing information c) reimbursement to the Research Institute for interviews d) costs for renewal of some samples for agricultural surveys e) costs for collection of information through other organs Special surveys Research Institute Remunerations and personnel costs 1. Salaries to personnel in the Research Institute, temporary projects, etc. 2. Remuneration to representatives 3. Pension costs 4. Employer’s fees to the general health insurance 5. Reimbursement to the Central Statistics Bureau for administrative costs: remunerations Office and general supplies 1. Health care 2. Travel and subsistence allowance 3. Recruitment of representatives 4. Office rental 5. Fuel, electricity and water 6. Other office supplies 7. Reimbursement to the Postal Service for forwarding official mail 8. Reimbursement to the Central Statistics Bureau for administrative costs Revenues 1. Reimbursement for executed interviews Net expenditure Costs for 1965 year’s census of citizens and households Costs for 1966 year’s census of agricultural farms Central company register Central Statistics Bureau—Fiscal year 2007 17 217 000 FINANCING 10 071 000 1.5 Central Statistics Bureau (frame appropriation) At the disposal of the Central Statistics Bureau 17 100 000 117 000 110 000 66 000 473 184 th. kr Customs Service—Fiscal year 2007 162 000 1 721 000 1 554 000 5. FINANCING 25 000 4 795 000 3:3 Customs Service (frame appropriation) At the disposal of the Customs Service 1 800 000 1 472 992 th. kr Conditions for appropriation 3:3 13 000 The cost for an official, nominated by the Ministry of Finance, stationed at Sweden’s permanent representation at the EU in Brussels is covered by the appropriation. 50 000 2 150 000 1 000 4 385 000 2 700 000 1 100 000 500 000 40 000 45 000 1 985 000 8 000 50 000 150 000 50 000 30 000 1 679 000 14 000 4 000 6 369 000 6 369 000 1 000 2 300 000 170 000 915 000 1. A maximum of 20 000 kronor of the appropriation item can be used for payment to authors of articles and reviews in the Statistical Bulletin. 2. A maximum of 48 000 of the appropriation item Travel and subsistence allowance can be used for foreign travel. 17 IV. Four Fundamental Budget Principles Annuality • Budget authorizations are for a discrete time period—sunset clauses – Cabinet/parliamentary control – Repeated to justification spending programs – One year is the norm • Carry-overs – Justified to allow a smooth transition between budget years … – … but can build up and create expenditure risks • Multi-annual commitments 18 V. MTFFs, MTBFs and MTPFs • MTFF – top-down specification of aggregate resource envelope and allocation of resources across spending agencies • MTBF - Bottom-up determination of spending agency resource needs and reconciliation of these with the overall resource envelope • MTPF – Includes in addition to the MTBF an emphasis on the measurement of the outcomes and outputs of spending programs, and measures of key performance indicators 19 20 20 Country Type Year of Adoption Afghanistan MTFF 2005 Jordan MTFF 2005 MTBF 2008 Iraq MTFF 2006 Yemen MTFF 2007 Lebanon MTFF 2008 West Bank & Gaza MTFF 2008 Syria - Sudan Work in progress - Egypt MTFF 2005 MTFF 1990 MTPF 2005 MTFF 2005 Turkey MTFF & MTBF 2006 Malaysia MTFF 2007 Indonesia MTFF 2008 Other countries: Korea Morocco 21 V. MTBFs: A Variety of Models Unit of Multi-Year Planning Total Expenditure Status of Multi-Year Expenditure Estimates Binding Indicative Austria (post 2010) Finland (post 2003) Netherlands Sweden France (pre 2009) Italy Czech Republic Economic Categories Belgium Germany Hungary Japan Turkey Ministries France (post 2009) United Kingdom Austria (pre 2010) Canada Denmark Slovakia Finland (pre 2003) Programs Australia New Zealand None Greece Iceland Ireland Poland Portugal Spain 22 22 V. MTBFs: Evolution over Time Time Frame Control Regime Coverage Fixity Unit of Control Basis of Planning % of Gen Govt Main Items Excluded Time Horizon Frequency of Revision Total GG Primary Spending Nominal Cash 87% Debt Interest 3 Years Annual Total GG Primary Spending Real Cash 87% Debt Interest 3 Years Annual 1984-93 Total GG Primary Spending Nominal Cash 85% Debt Interest 3 Years Annual 1994-97 Control Total Total GG Structural Spending 3 Years Triennial 1998-Now Departmental Expenditure Limits 25 Individual Ministerial Budgets 3 Years Bi/Triennial Name 1967-80 1981-83 Planning Total Debt Interest Nominal Cash 83% Working Age Benefits Debt Interest Nominal Accrual 60% LG Own Exp. Social Security 23 V. MTEFs can lead to better fiscal outcomes …… A recent World Bank study provides: • Empirical evidence that MTEFs improve fiscal disciple • Also evidence that MTEFs are associated with gains in allocational efficiency • Case studies suggest that MTEFs are linked with improved quality of PFM systems • But some MTEFs are not well designed and implemented, and benefits not achieved • Essential preconditions must be met …. Source. World Bank. 2013. Beyond the Annual Budget: Global Experience with Medium-Term Expenditure Frameworks 24 24 VI. Conclusion 1. Sound budget institutions are strongly correlated with improved fiscal performance 2. Well-managed budget systems are based on a mixture of top-down and bottom-up principles, but the latter predominate in developing countries 3. Countries should give attention to the four key principles of budget design 4. A medium-term budget framework can improve fiscal discipline, but also helps effective prioritization of policies and stability and predictability 5. Preconditions are demanding, and have to be addressed when introducing medium-term budgeting 25 25