Medium-Term Expenditure Framework: Lessons Bill Dorotinsky The World Bank Istanbul June 6, 2005

Lessons in Implementation MTEF is designed to improve decision-making, and focuses on budget formulation ---- one process for allocating resources will not solve all PEM problems is not a standardized product, per se. The principles can be implemented in various ways needs to be customized to the country, including initial conditions in PEM, human and IT capacity should be viewed as a multi-year exercise, built and improved upon annually over years With MTEF, and PEM reform generally, doing too much at once can overload the Government capacity and prevent progress on all reforms

More lessons Not all aspects need to be undertaken at once Integration of capital and recurrent budgets need not be done immediately Performance information (outcomes, outputs) need not be incorporated immediately Budget comprehensiveness critical, but can be improved over time (start from where you are) Flexibility for spending ministries to allocate resources across programs, subprograms, and activities can be introduced gradually Many start with a medium-term fiscal framework Sound fiscal framework important to start Use as opportunity to educate policy-officials of constraints MTEFs should not be launched in selected sectors until there are medium-term ceilings in place

And more lessons Consider legislatures role early Pressure on ministries to find resources within current expenditures may be more successful when accounting systems are in place to provide good information program and activity structure in place as focal point for discussion, costing Need not be contentious between line ministries and MoF/budget office (South Africa) Over-all, can be used to build consensus across government actors (US troika) Consider legislatures role early Educate them as appropriate Encourage good internal legislative decision process

How to implement? Identify major limiting factor first Policy-level – high-level decision process Adequate policy-level input, ownership of budget? Adequate trade-offs of major policy directions? Adequate policy-level incentives? Technical – tools to support process Unbundling MTEF technical aspects Which aspect of the budget process needs to be improved?

Unbundling MTEFs Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires Macroeconomic forecast Macrofiscal discipline Finance, Planning or Economy Ministry Provides strategic framework for setting fiscal and monetary policy, and allows proactive fiscal adjustment to changing economic trends. Forecasting model, capacity, multi-year macro variable time series, or access to multiple non-governmental forecasts Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope Sets upward bound for expenditures, limiting deficits, inflation, and currency depreciations; supports sustainable fiscal policy, and realistic expenditure planning within the expenditure envelope; supports focus on adequate revenue mobilization. Forecasting models. Stronger if relationships between macro growth, income distribution, and revenues understood and modeled. Debt sustainability analysis/model, or hard rule on debt/deficit limits.

Unbundling MTEFs (2) Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires Multi-year forecast of spending under current policy or current level of services, by ministry or program Macrofiscal discipline, Allocational efficiency (sector) Finance, Planning or Economy Ministry, or in some cases spending ministries with clear guidance Broad indicator of future cost of current spending trends, identification of potential risk areas, and proactive, measured, more rational fiscal adjustment. Baseline for evaluating policy spending choices. MoF provided inflators for pay, non-pay, and clear guidance for projecting costs. Can be automated. Can be budget year only, but more effective over several years. Multi-year ceilings for sector ministries Allocational efficiency (sector), Macrofiscal discipline, Operational efficiency Finance, Planning or Economy Ministry Enabling more realistic planning, appropriate policies; incentive for reviewing existing programs for effectiveness, reallocations within sectors. At center, explicit trade-offs between sectors. More credible if reflecting policy choices, which requires some explicit policy directions on reallocation. More effective in changing behavior if approved by cabinet or parliament.

Unbundling MTEFs (3) Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires Multi-year sector strategy Allocational efficiency (sector), Operational efficiency, Macrofiscal discipline Spending Ministry Sector strategic plan links outputs/outcomes with inputs in multi-year framework. Effective only if prepared within multi-year sectoral resource ceiling. Strategic planning capacity at sector ministry, information on outputs/outcomes of programs, and relationship to activities and inputs. Multi-year estimates of cost of new policies or programs (recurrent), or expansion of existing programs, prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Identifies multi-year implications of new initiatives relative to their objectives, and assessment of whether they can be financed from within existing sectoral ceilings or even within aggregate spending ceilings, and if they are financially sustainable over time. Requires guidance/training for spending ministry staff, and spending ministry staff capacity; MoF provision of common inflators for use by ministries (pay rates, non-pay, capital costs).

Unbundling MTEFs (4) Multi-year Feature PEM Objective Responsible Agent Intended Effect Requires Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Spending Ministries Sensitizes sector ministry to cost drivers, affordability of existing policy or programs, attention to different means of attaining objectives, unit cost. Can begin at program, and later move to subprogram and activity costing. Requires trained staff at spending ministries, agencies; MoF guidance and common inflators (pay rates, non-pay, capital costs). Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries Many capital budget processes already include such estimates, including the recurrent cost implications of new capital projects. Trained staff at spending ministries, guidance on costing, understanding of project design and work flow.