Budget Formulation: good practices Bill Dorotinsky PREM PREM-FM Budget Execution and Financial Accountability Course January 2005

Outline Why formulation in an execution course? Three PEM System Objectives Process Issues Quality Issues Budget office roles New Resources References

Why budget formulation in a budget execution course? Other half of an integrated system Problems emerging in execution may have origin in formulation You cannot implement well a badly formulated budget Some execution and formulation processes and reforms interdependent Cannot formulate well without actual expenditure data as starting point To properly diagnose and reform execution requires some understanding of formulation

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 dollar spent

Process Issues “Due process” Coherence Civil society participation Fair hearing for proposals, requests within government Coherence Budget process is planning process Planning within resource constraints Indicative ceilings for budget offered early in the process ‘hard budget constraint’ Changing incentives Comprehensiveness Capital, all revenues and expenses Civil society participation ‘decentralized’ impact analysis Legislative stage In executive via white papers

Process (continued) Proper decision sequence for coherent process Macrofiscal, revenues, expenditures Sectoral Administrative/program/project Accountability: Link resources with management responsibility Schedule Budget calendar issued Sufficient time for sound proposals Ministries Budget office analysis Legislative review Two stage process

Quality Issues (improving process outcome) Multi-year perspective Setting multi-year policy objectives Conservative economic, revenue forecast Likely versus ‘hoped for’ Benchmarked against non-governmental forecasts Realistic expenditure forecast Provision for recurring ‘unanticipated’ events Contingency reserves – with clear rules for use Indicative ceilings linked to second-year of prior budget forecast (policy) Requests reconciled to prior year actuals, current year estimates Two aggregate forecasts (advanced) Proposed policy Current services/policy Capital and recurrent

Quality (continued) Budget ownership Early, frequent engagement of policy officials on structured decisions Fiscal policy paper to kick-off process Distinguish policy from recurrent revenue Proposed revenue sources versus historical trends No spending allowed against proposed unless they materialize (grants, tax revenue) Communication Clear signals of direction, markets and agencies Prepare public for change – sustainable adjustment

Quality (continued) Budget Information Decision papers Prior year actual, current year estimate, budget year +2, Staffing, Outputs Classification: economic, administrative, functional, program Requests distinguish between on-going, new spending; mandatory, discretionary Decision papers Basis for Minister of Finance, Gov’t decision Pulls together academic, audit, performance, evaluation of prior years financial performance, other information

Budget office roles Budget offices (center, ministry) Manage process Vett assumptions in requests Probe for efficiencies, alternative means Independent source of advice on sector strategies, policy (advanced)

New Resources World Bank – IMF Budget Law Database Currently http://www1.worldbank.org/publicsector/pe/countrybudgetlaws.cfm Currently 41 country budget laws, 3 draft budget laws, 10 fiscal responsibility laws, and 15 other public finance laws on-line Users can and should contribute

New Resources (2) World Bank – OECD Budget Practices and Procedures database http://ocde.dyndns.org/ 44 developed and developing countries Covers formulation, execution, basic structure, budget documents, performance management, intergovernmental fiscal relations, special issues (e.g. HR)

Example Source: World Bank – OECD budget procedures database at http://ocde/dyndns.org/

Selected References Public Expenditure Handbook, World Bank, 1998. Managing Government Expenditure, S. Schiavo-Campo and D. Tommasi, Asian Development Bank , 1999. (on-line) Managing Public Expenditures: A Reference Book for Transition Countries. Richard Allen and D. Tommasi, editors. Organization for Economic Cooperation and Development (2001)