Ministry of Finance of Russia Karen Vartapetov Ministry of Finance Russian Federation FISCAL SPACE – REVIEWING, ASSESSING AND PRIORITISING GOVERNMENT EXPENDITURE MAY 2008 The case for fiscal space in performance budgeting and medium-term expenditure framework in Russia

Ministry of Finance of Russia Fiscal space of the Russian federal budget Fiscal space is substantial = Budget surplus (3-4% GDP) + Oil-and-gas reserve funds (10-12% GDP) vs. Federal budget expenditures (16-17% GDP) Sustainable measures to increase fiscal space: Raising revenues (space for better tax administration) Rationalizing expenditures (a significant room for better allocation and efficiency gains, program-based budgeting) Borrowing (a valid measure, but the current strategy is to reduce the debt burden) External grants (in essence, the inflow of oil-and-gas export revenues represents an external grant of the unsustainable nature. Hence, Reserve and National Welfare Funds)

Ministry of Finance of Russia Two ways of delivering better public management ‘Imposing order’ – strengthening of external control Optimal decentralization – providing incentives for managers to deliver agreed outcomes

Ministry of Finance of Russia Performance budgeting enables an efficient use of fiscal space Decentralization of public finance management in Russia Fiscal decentralization - devolution of revenue and expenditure decision-making authority to subnational governments Administrative decentralization (‘agencification’)- granting financial management autonomy to accountable government agencies Service delivery decentralization – separation of policy-making and service provision (‘steering rather that rowing’)

Ministry of Finance of Russia Russia’s case: Budget Reform Matrix 3 waves of public finance decentralization

Ministry of Finance of Russia Expenditure Inputs Activities Output Outcome Traditional input budgeting Output budgeting Outcome budgeting Cost efficiency Technical efficiency Intermediate outcome Effectiveness Efficiency Models for performance budgeting

Ministry of Finance of Russia The planned trajectory of the Russian budget reform Input-based short-term budgeting ( )  establishment of budget procedures and regulation (Budget Code)  Cash-basis budget  Federal Treasury  fiscal dicsipline and expenditure control  Intergovernmental equalization transfers Results-based medium- term budgeting (from 2008)  Long-term budget stability and sustainability  Revenue and expenditure delineations between government tiers  Meduim-term budget planning  Performance budgeting  International standards in public accounting and reporting

Ministry of Finance of Russia Russia’s case: performance budgeting tools

Ministry of Finance of Russia 4.Federal Government Long-term Economic Program (public, approved by Parliament) 3. Ministries’ performance reports (public, approved by Government) Traditional budget documents (submitted to MoF) Expenditure Inputs Activities Output Outcome Russia’s case: Performance budgeting tools Intermediate outcome 1. Expenditure programs 2. Budget allocation justifications (available to the public, assessed by MoF) 3. Register of existing expenditures Lump sums to top- performers

Ministry of Finance of Russia Russia’s case: Policy area - Transportation Expenditure65 bln roubles Inputs …… ActivitiesConstruction of roads, maintaining of roads Output Proportion of national motorways satisfying international standards Outcome Decrease of transportation costs share in average production costs (from 15-20% to 7-8%) Goal 1 Development of modern and effective transport network, providing reduction of transport costs in economy Implementation Results

Ministry of Finance of Russia Performance Budgeting and the budget process Macroeconomic Planning Budget Preparation Budget implementation Accounting and Reporting Control Revenue policy Debt policy Internal audit Performance audit Outcome planning Outcome reporting Medium-term planning Management accounting Budget programs Delegation and accountability

Ministry of Finance of Russia Transition to multi-year budgeting

Ministry of Finance of Russia Medium-term expenditure framework: comparing a medium term financial plan to a 3-year federal budget Indicators Medium-term financial plan Three-year budget Basic indicators of the budget and budget policyYes Separation of existing expenditures and new expenditure proposals ConstrainedYes Planning of performance resultsConstrainedYes Long-term contracts with service providersConstrainedYes Possibility to re-allocate funds among yearsYes Pre-conditions for temporarily even allocation of budget funds Yes Predictability of intergovernmental grantsYes

Ministry of Finance of Russia 14 2 following yearsCurrent fiscal year t +1 t +2 t +3t +4 t +5 ADJUSTMENT PLANNING Rolling three-year budget Current fiscal year2 following years Current fiscal year2 following years ADJUSTMENT PLANNING

Ministry of Finance of Russia Sequencing in budget planning

Ministry of Finance of Russia New policy proposals (5-10%) new legislations new programs Approval Inclusion in the budget Separate planning of existing and proposed expenditures Exiting expenditures (90-95%) Social transfers Debt service Public services Capital programs

Ministry of Finance of Russia Performance-budgeting and fiscal space Zero-based Budgeting All existing expenditure programs are revised every budget period (politically sensitive; lock-in expenditures ) Incrementalist Approach Only new policy proposals are considered (5-10% of total expenditures) VS 1. Allocative efficiency gains 2. Technical efficiency gains Ministries’ efficiency gains do not usually exceed the inflation rate

Ministry of Finance of Russia Composition of federal expenditures, 2008

Ministry of Finance of Russia Separate planning of existing and new expenditures Public sector pay & fringe benefits, military pay and allowance Register of existing expenditures Room for new policy proposals Expenditure limits Existing expenditures Pensions and benefits (Public liabilities) 3-year budget State Arms program (till 2015) Long-term earmarked expenditure programs Investment objects

Ministry of Finance of Russia Program for socioeconomic development for 12 years Macroeconomic forecast for 3 years Medium-term expenditure framework from year budget New and existing ‘expenditure justifications’ Ministerial strategic plans (performance reports) Annual budget policy statement for 3 years Fiscal framework Strategic priorities Debt, revenue and intergovernmental fiscal relations strategies Sectoral strategies Ministries have to support their expenditure bids with performance information

Ministry of Finance of Russia Russia’s budget reform in the international context Ukraine Australia New Zealand, Great Britain, Nederland, Sweden USA Medium-term Budgeting Performance Budgeting Russia (2007) Russia (2003) Bulgaria Russia ( ) Vietnam 2007 France 2007 Czech Republic Poland Kazakhstan

Ministry of Finance of Russia PB is instrumental in a specific institutional context In the last budget cycle Russia’s federal budget expenditures were increased by some 30% without any efficiency assessment or effectiveness consideration You can’t budget for results if you don’t manage for results. Yet the latter requires human skills and institutional arrangements (accountability, transparency, political commitment )

Ministry of Finance of Russia Expenditure Inputs Activities Output Outcome Traditional input budgeting Output budgeting Outcome budgeting Cost efficiency Technical efficiency Intermediate outcome Effectiveness Efficiency Models for performance budgeting Russia 2008

Ministry of Finance of Russia PB is not the easiest way to create fiscal space ALLAN SCHICK’S PRINCIPLES OF BUDGET REFORM SEQUENCING: Foster an environment that supports and demands performance before introduction of performance and outcome budgeting Control inputs before seeking to control outputs Budget for work to be done before budgeting for results to be achieved Enforce formal contracts in the private sector before introducing performance contracts in the public sector Introduce effective financial auditing before moving to performance auditing Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them

Ministry of Finance of Russia The question is: Whether to implement Performance Budgeting while basic institutional arrangements are not in place and fiscal space is excessive? The Russian answer: “Probably, yes” 1.Performance information contributes to better accountability and transparency. 2.The change in fiscal behavior is a long-term process. The accumulation of performance information is time-consuming. The sooner you start the better 3.Take as many steps forward as possible as there always be a few steps back 4. If you don’t sort out fiscal rules you might not be able to use fiscal space when it is really needed

Ministry of Finance of Russia Questions for consideration 1)Does performance budgeting present an efficient tool for enhancing fiscal space? 2)In what ways is performance information used in the budget process in your economy? 3)Do the basic pre-conditions (say, control of inputs) have to delivered before introducing performance budgeting?