Download Budget Analysis for Expenditure Rationalization

Budget Analysis
for Expenditure
Rationalization
Public Finance Analysis and Management
Course
World Bank, April 23-27, 2007
Marijn Verhoeven
Expenditure Policy Division
Fiscal Affairs Department, IMF
Overview
• Why expenditure rationalization?
• The analytical tool box for
expenditure rationalization:
– A word about data
– Measuring efficiency
• We found the problems—now
what? (very briefly!)
Why expenditure
rationalization?
• To achieve macroeconomic stability
and fiscal sustainability
• To create fiscal space
• To increase allocative efficiency by
cutting back or reforming
government activities
• To enhance X-efficiency by
achieving the same outputs with
less inputs
Why expenditure
rationalization? (cont’d)
Figure 5: Fiscal Space
Increase of
Grant Aid in
% GDP
5
4
3
2
Improved
Expend.
Efficiency
in % GDP
1
0
New
Borrowing in
% GDP
Improved
Revenue
Effort in %
GDP
A word about data
• Expenditure analysis is typically
data driven
• But data are problematic
• There are several competing
sources of spending data, each
with their strengths and
weaknesses
• Let us look at the example of data
on wage spending
Facts and figures:
measuring wage spending
• The wage bill is measured:
– As a share of GDP and total spending to
compare across countries
– As a share of domestic revenue to assess
sustainability
– At the sectoral level, compare to nonwage
spending to assess efficiency
• Source is IMF Government
Finance Statistics or national
data
Table 1. Central Government Wages and Salaries, 1990-2001
Sample Size
Central government wages and
salaries in percent of GDP
Central government wages and
salaries in percent of central
government expenditure
Africa
Francophone Africa
Non-Francophone Africa
Asia
South Asia
11
6
5
10
3
8.4
6.3
10.9
5.3
4.6
28.3
27.7
29.0
20.0
15.1
Europe and Central Asia
Central and Eastern Europe
Latin America & the Caribbean
Caribbean countries
Middle East and North Africa
21
12
16
3
6
3.9
5.1
5.6
8.6
9.1
12.6
14.4
25.0
31.1
30.4
European Union
15
5.4
13.3
Low-Income Countries
Middle-Income Countries
High-Income Countries
19
42
30
5.7
6.0
5.9
22.6
22.1
15.6
Memorandum items:
PRGF-Supported Programs 1/
OECD General Government 2/
28
21
4.8
11.4
19.9
Country Group
Sources: Government Financial Statistics database (IMF); International Financial Statistics database (IMF); World
Economic Outlook database (IMF); and IMF Staff.
1/ Data refers to 2001 outturn.
2/ OECD, 2000, "Summary of the Public Sector Pay and Employment Data Analysis and Future Direction for HRM Data Collection."
Data refers to 1997 total compensation cost, which includes the wage bill and employer contributions to social insurance.
Lies and statistics:
mismeasuring wage spending?
• Not all compensation may be captured in
wages and salaries: transfers (pension benefits
and subventions for education), other goods
and services (in-kind benefits and contractual
workers), and capital spending (donor-financed
projects) may hide substantial wage spending.
In Nicaragua, out of actual wage spending of
8.6 percent in 2005, less than 4 percent is
recorded as wages and salaries.
• When government is decentralized, central
government wage spending is biased
downward. But reliable data for general
government are rare for low-income countries.
Efficiency: the issue
Source: World Bank (2004) World Development Report 2004.
Spending refers to total annual public spending per child of primary school
age, in 1995 US dollars.
How should we think about the
efficiency of public spending?
• What is the mix of public programs that
best meets government objectives?
– Where to invest the marginal dollar across
sectors
• For example, can education goals be reached by
investing the marginal dollar in other sectors?
– Where to invest the marginal dollar within
sectors
• Primary versus secondary education
• Primary health care versus secondary health care
How should we think about the
efficiency of public spending?
(cont’d)
• Given allocative decisions, is output
maximized with given inputs?
– Common problems:
• Inappropriate student/teacher ratios
• Shortage of medicine or nurses relative to
doctors
• Shortage of textbooks
• Waste, leakage of funds
• Labor and utility costs crowding out
maintenance and capital spending
Assessing efficiency
Many roads lead to Rome:
• “Basic” benchmarking
• PETS
• Randomized evaluations
• Absenteeism studies
• Sectoral efficiency analysis
Choice depends on data availability,
objectives, and priors
Assessing efficiency always
begins with...
Review the basics of public spending
• Functional classification
– Primary, secondary, tertiary education
• Inputs, programs, types of intervention
– Education: Teachers, textbooks
– Health: Spraying, information and education
campaign, etc.
• Economic classification
– Wage versus non-wage
– Recurrent versus capital (investment) spending
• Central and local government budgets, other
Ministries
• Planned versus actual, nominal versus real
• Share of private, NGO, and donor spending
“Basic” benchmarking
• Selected useful descriptive statistics
– Budget data
– Unit costs
– Ratios of teachers, students, non-teaching staff
– Distribution of teachers among levels of
qualifications; percentage meeting basic
government standards
– Actual maintenance budget versus engineering
estimates for routine maintenance
– Enrollment rates, repetition rates, dropout rates
– Absenteeism, informal payments, etc.
“Basic” benchmarking
(cont’d)
• Comparisons
– Sub-national units, clinics, schools
– Private versus public schools
– Private versus public health facilities
– Comparator countries
• Cross-country information on real resources and output
– UNESCO education indicators
– Program for International Student Assessment (PISA)
– WHO Indicators of Health System Attainment
– Trends in International Mathematics and Science
Study (TIMSS)
– Progress in International Reading Literacy Study
(PIRLS) and the International Survey of Adults
(ISA)
Randomized evaluations
Randomized evaluations of educational reform
programs:
• Random selection of schools for the reform
– Colombian voucher program, Angrist and others
(2002)
• Randomized phase-in of programs
– Argentina: Decentralization took place across all
provinces, but at different periods and intensities,
Galliani and Schargrodsky (2002)
Public expenditure
tracking surveys
Trace the flow of resources through the
bureaucracy from the central government
down to the service facility:
• Comparing originally allocated funds with funds
that actually arrive at the facility
• Amount of time required for fund to arrive
• Reinikka and Svensson (2001): Uganda in the
1990s, significant leakage existed
Sectoral efficiency analysis:
basic concepts
• The measurement of efficiency
generally requires the following:
– (i) information on inputs and associated
costs;
– (ii) an estimation of output or benefit; and
– (iii) a comparison of (i) and (ii)
• Key question:
– Could the same level of output be achieved
with less input?
– Equivalently, could more output be
generated with the same level of input?
Sectoral efficiency analysis:
basic concepts (cont’d)
Overall
efficiency
Health Expenditure
Public health expenditure
Private health expenditure
Cost
effectiveness
Real Health Resources
(examples)
Hospital beds
Physicians/health workers
Immunizations
Doctors’ consultations
In-patient admissions
Lengths of stay
Bed occupancy rate
Health Outcomes
Health adjusted life
expectancy
Standardized death rate
Infant mortality rate
Child mortality rate
Maternal mortality rate
Incidence of tuberculosis
System
efficiency
Sectoral efficiency analysis:
Best-practice frontier
3
2.5
Product item
F
C
B
2
1.5
D
A
1
E
0.5
0
0
0.2
0.4
0.6
0.8
Input item
1
1.2
1.4
Sectoral efficiency analysis:
measuring efficiency
• Basic idea: measuring distance from the bestpractice frontier
• Regression analysis
– Corrected ordinary least squares (COLS)
• Evans et al (2000), WHO (2000): Efficiency of national health
systems
– Alternative: Greene (2004): Stochastic frontier analysis
• Nonparametric analysis:
– Free disposal hull analysis (FDH)
• Gupta and Verhoeven (2004) (Chapter 11): Efficiency of
health and education spending in 85 countries, 1984-95
– Data envelopment analysis (DEA)
• Herrera and Pang (2005): Efficiency of health and education
spending in 140 countries, 1996-2002
• Affonso and St. Aubyn (2004): Efficiency of health and
education spending in OECD countries
Sectoral efficiency analysis:
problems
• Lack of insight in nature of relationship
between inputs and outputs:
–
–
–
–
How to measure inputs and outputs?
Lags?
Impact of environmental factors?
Externalities across sectors?
• Parametric approaches are very data intensive
and require more assumptions about the
relationship
• Nonparametric approaches are less robust
(e.g., small sample bias) and sensitive to
outliers
• The analysis is only as good as the data—and
data are weak (e.g., on quality and policy
objectives)
Examples of FAD sectoral
efficiency analysis
• FAD research:
– The efficiency of education, health, and
social assistance spending in EU New
Member States
– The efficiency of education and health
spending in the G7
– The efficiency of government investment in
Latin America
• Focus here on the efficiency of health
spending in the Slovak Republic
Output-Oriented Efficiency Relative to the OECD
(distribution by quartiles of the ranking of OECD bias-corrected output-oriented
efficiency scores) 1/
Percentile
Public expenditures
Public and private expenditures
1-25
Bulgaria
26-50
Czech Republic
Latvia
Bulgaria
Czech Republic
Slovak Republic
Estonia
Romania
Poland
51-75
Estonia
Poland
Slovak Republic
Slovenia
Lithuania
Slovenia
76-100
Hungary
Lithuania
Romania
Hungary
Latvia
Source: IMF staff calculations
1/ Slovak Republic’s output-oriented efficiency scores for public expenditures ranked, on average, at
the 54th percentile of the overall ranking of efficiency scores in the sample of OECD countries. This
places Slovak Republic in the third (51-75) quartile of the OECD ranking distribution. The rankings are
based on each country’s average of the individual point estimates of the bias-corrected output-oriented
efficiency scores for various outcome indicators, including infant, child, and maternal mortality, the
incidence of tuberculosis and HALE (see Appendix II).
Rank of Health Efficiency Scores Relative to the OECD 1/
Slovak Republic
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovenia
System Efficiency 2/
Intermediate
Resources to
outcomes
1.7
2.0
1.4
1.9
1.9
2.2
2.0
1.6
2.0
0.7
NMS-10 average
EU-15 average
1.7
0.9
Overall Efficiency 3/
Public and private
expenditures to
Public expenditures
to outcomes
outcomes
1.1
0.4
0.5
0.5
0.7
0.5
1.4
0.7
1.5
1.4
1.0
1.5
1.6
1.1
1.0
0.5
1.5
0.6
1.1
1.0
1.1
1.0
0.8
1.1
Source: IMF staff calculations
1/ Ratio of output-oriented efficiency rankings of NMS-10 and EU-15 countries and the average
ranking in the sample of OECD countries. The ratio is 1 if the country is as efficient as the
average for the OECD, and is higher if the country is less efficient (see Appendix II).
2/ Based on output-oriented efficiency rankings using as inputs the average ranking of various real
resources (Table 3) and as output various outcome indicators, including infant, child, and maternal
mortality, the incidence of tuberculosis and HALE.
3/ Reflecting the output-oriented efficiency rankings of Table 6.
SVK health efficiency:
sources of inefficiencies
• Low co-payments
• Unproductive spending on
administration and collective care
• High spending on pharmaceuticals
• High doctors’ consultations, outpatient
contacts, and inpatient hospital care
Key challenge is changing the mix of
real resources!
SVK health efficiency:
recommendations
• Restrain pharmaceutical spending
– introducing a national procurement system
– introducing incentives for generics
– improving the pharmaceutical pricing and
reimbursement policy of the Ministry of Health
• Reduce the reliance on hospitals and
contain the cost of hospital care
– Eliminate excess hospital beds
– Impose hard budget constraint on public hospitals
– Restart hospital privatization
• Reintroduce co-payments for doctors’ visits
and hospital care
SVK health efficiency:
recommendations (cont’d)
• Enhance incentives for competition
and more cost-effective
administrative arrangements
– Introduce incentives for practitioners to be
cost-effective
– Define a stricter basic health care package,
thereby allowing some variations in basic
insurance premiums
– Increase the power of the Antitrust authority
and enhance the autonomy and
independence of the Health Care
Supervisory Board
– Refrain from introducing new limitations on
profits of private insurance companies
Thank You!