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Module 2.2 MTEF and performance budgeting INTRODUCTION TO PUBLIC FINANCE MANAGEMENT.

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1 Module 2.2 MTEF and performance budgeting INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

2 Planning and budgeting 2.4 Budget Execution 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.1 Payroll, Procurement & IT 1.4 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 5.3 Assessing & Recapitulation 3.2 Internal Control & Audit 5.1 External Scrutiny & Oversight 2.2 MTEF and performance budgeting 1.3 The Budget and budget preparation 1.2 Budget Cycle Module map

3 Course outline 1. What is an MTEF? 2. Main features of an MTEF 3. Achievements and pitfalls 4. Performance budgeting 3

4 1. What is MTEF? $ $

5 “ It is said that the Inuit people (Eskimo)have 15 different words for snow. The opposite is true of MTEF, where the same term is used to refer to very different ways of stretching the time perspective of annual budgeting. Conflating a variety of different approaches into a single rubric has caused a host of problems” Schiavo-Campo, “Potemkin Villages: 'The' MTEF in Developing Countries” Public Budgeting and Finance, Summer 2009. 5 1. What is MTEF?

6 Variant 1: The MTEF is an instrument for fiscal discipline for prioritisation in confor- mity with the strategies for providing funding predictability OECD countries Some developing countries Variant 2: The MTEF(s) cost sector strategies. It is used for negotiating budget increases with the Ministry of Finance and additional financial support with the donors Other developing countries

7 7 1. MTEF for fiscal discipline and prioritisation 2. Strategy costing Ministerial (MoF) Sectoral Consistent with the MTFF Should be realistic, but may include financial gap and scenarios Rolling horizon Regularly updated, but may have a fixed horizon Projection period: 3 to 4 years A long term period is required in several sectors Unified budget-MTEF preparation processes Prepared outside the pressure of the budget preparation process 1. What is MTEF?

8 8 Instrument + Process Government strategic framework sector strategies & policies framework, laws Annual budget law appropriations & forward estimates MTEF

9 1. What is MTEF? The MTEF defines a strategy implementation path that takes into account the financial constraints We can distinguish: The MTFF, which defines the totals The Medium Term Budget Framework (MTBF) – or “global” MTEF- which allocates MTFF overall expenditure envelopes to ministries or sectors/functions The MTEF; detailing MTBF projections by programme 9

10 Development towards MTEF MTFF MTBF MTEF

11 MTFF: Fiscal discipline MTBF: Inter- sectoral resource allocation MTEF: Intra- ministerial resource allocation 11 1. What is MTEF?

12 12

13 Course outline 1. What is an MTEF? 2. Main features of MTEF 3. Achievements and pitfalls 4. Other special issues 13

14 MTEF in Tajikistan

15 Exercise Exercise: Identify key MTEF concepts Explain content of key concepts 2. Main features of MTEF

16 What is top-down / bottom-up in an MTEF? Top-down budget preparation Multi-year projections of resource envelope targets (what is affordable) Bottom-up budget preparation Multi-year cost estimates of sector programmes (what has to be financed, with a focus on programme performance) Integrating these two pillars Institutional (political-administrative) decision-making process to make the necessary trade-offs 2. Main features of MTEF Top-down Bottom-up Top-down Bottom-up

17 2. Main features of MTEF Year 0 Year 1 Year 2 Year 3 Baseline Expenditure ceiling Savings on existing programs MTEF expenditure projections New programs and policy changes Costing

18 2. Main Features of MTEF ? 18 Forward EstimatesBudget T T +1 T +2 BudgetForward Estimates Budget t +1 t +2t +3 t +4 t+5 Rolling Budget

19 MTEF process

20 Course outline 1. What is an MTEF? 2. Main features of MTEF 3. Achievements and pitfalls 3. Other special issues 20

21 1. Achievements and pitfalls The results are uneven….. “Developing comprehensive MTEF can be effective when circumstances and capacities permit…. Otherwise, … it might distract attention from the immediate needs for improving the annual budget and budget execution processes… in a number of African countries, the MTEF was introduced prematurely, and is turning out to be merely a paper exercise”. World Bank-IMF Global Economic Report 2006, page 146 21

22 Why uneven results?  Too complex/sophisticated approaches  Poor annual budget discipline  No impact on the annual budget: the MTEF prepared the previous year is ignored  Administrative and/or political instability. Every year MTEF preparation starts from scratch 22 2. Achievements and pitfalls

23 2. Achievements and Pittfalls Why uneven results?  Isolated sector MTEF prepared by external consultants to comply with a donor request  The MTEF remain a pure technical exercise; no political interference  Economic instability  Lack of predictability of resources

24 Supporting donor practice?? However, it does not make sense to demand a "sector MTEF" prematurely…. Taking stock from experience, it is recommended to adopt a process and systemic perspective on the development of a sector MTEF, rather than making it a pre-requisite for supporting a sector programme. EC. Support to sector programmes. Guidelines no2. July. 2007. Page 22. 24 2. Achievements and pitfalls

25 How to avoid the pittfalls? Before considering implementing MTEF: Make sure annual budget processes are disciplined Avoid complexity Prepare an MTBF Ensure there are capacities to prepare an MTFF Prepare costed sector strategies first Estimate the forward costs of existing activities Make sure decision makers are involved 25 2. Achievements and pitfalls BASICS FIRST MTBF +MTFF COSTING POLITICS

26 Course outline 1. What is an MTEF? 2. Main Features of MTEF 3. Achievements and pitfalls 4. Performance budgeting 26

27 27 4. Performance budgeting Performance indicators (PI): Activities Output indicator Outcome indicators

28 4. Performance budgeting Inputs Activities Outputs outcome Impact Money Buying books, building schools, hiring teachers Enrollment ratio Literacy rate Competitiveness, engaged citizens

29 4. Performance budgeting ANNUAL REPORT Q-1 MONITORING Q-3 MONITORING Q-2 MONITORING BUDGET Financial information Performance information

30 30 Main principles in selecting Performance indicators Indicators should be prioritised on the strategic and operational objectives There should not be more indicators than are necessary to capture the objectives (limited number) Performance indicators can be developed by asking ‘How will the objectives be achieved?

31 31 Criteria for Useful Performance Indicators CREAM-criteria Clear: Precise, understandable, unambiguous Relevant: Appropriate, useful to the objective at hand Economic: Data available at reasonable costs Adequate: Attributable, provide reliable and timely basis for the assessment of performance Monitorable: Availability of information, consistent over time and open to independent scrutiny

32  Sound MTEF processes may help in reinforcing the policy-budget link, but only if several preconditions are met  Strategy costing should be carried out, but planning documents with a financial gap should not be considered as financial commitment of the government  Programming documents and working plans should not be over-sophisticated Key messages 32

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