Improving Budgetary Outcomes The Role of a MTEF by Malcolm Holmes

Three Levels of Expenditure Outcomes Aggregate Fiscal Discipline Prioritization of the Composition of Expenditures Technical Efficiency in the Use of Budgeted Resources

Some Principles Transparency and accountability Comprehensiveness of budget Predictability of resources & policies Flexibility Contestability Existence and sharing of information

Fragmentation/Lack of Comprehensiveness Across: Policy Making, Planning, Budgeting Fiscal activities Types of expenditure Sources of funds Time Inputs, outputs and outcomes

Dual Budgeting Investment as basis of development Development Budget PIP R Coefficients

Sequencing Public Sector Financial Management Reforms The government should foster an environment that supports and demands performance before introducing performance, output or outcome budgeting. Control inputs before seeking to control outputs. Account for cash before accounting for accruals. Establish external controls before introducing internal control. Establish internal control before introducing managerial accountability. Operate a reliable accounting system before installing an integrated financial management system Budget for work to be done before budgeting for results to be achieved. Enforce contracts in the market sector before introducing contracts in the public sector.

Restraint with Flexibility Hard Budget Constraint Transparency Accountability Exit Voice Flexibility Information

Enabling Environment for Public Sector Link Policy, Planning, Budgeting Restrain decision making: affordability cost, expected results evaluate Forum within which policies compete Capacity and willingness to reprioritize and reallocate.

Characteristics of Sound PEM Commitment, capacity & willingness to: Prepare a budget (a) in line with development priorities and (b) that can realistically be implemented Specify the budget’s intended results execute budget as passed by the legislature Account for results achieved Evaluate impact of policies and programs and take results into account in budget preparation.

A Contract for Performance The Center More predictable funding More predictable policy Greater transparency and predictability in processes for reprioritizing and reallocating resources Leave management decisions to line managers

A Contract for Performance The Line Living within budget Clear sector strategies Using resources efficiently and effectively Reporting on resource use

Using a Medium Term Expenditure Framework Fiscal Targets (what is affordable) Forward Estimates of Existing Policy Institutional Mechanisms for Making the Trade-offs A Focus on Performance Enhanced Predictability

Implementing an MTEF Pilot or whole of Government Budget unification (PIP elimination) Reduction of the number of budget line items Link between line items and objectives and impact introduction of a 3 year perspective mission statements (strategic plans) for sectors

Implementing an MTEF (Cont.) Use of strategic plans for budget preparation Emphasize costs of activities Merging of external and domestic financing Withdrawal of MoF from details of budget allocations in LM Engaging cabinet Focus on performance

Ghana: Explaining progress Commitment from Minister and Ministry of Finance, line ministers and donors MTEF based on GOG-led PER Consensus building efforts (losers and winners) MTEF becomes budget process Consistency between MTEF and sector approaches

Ghana: Explaining Progress (Cont.) Link to other reforms Performance focus - matching authority and accountability

Ghana: Sustainability Tests Predictability of funding (domestic and external) predictable macro/fiscal framework cash flow estimates cash available on time budget voted on time by parliament Predictability of policies - Cabinet Engaged controlling expenditure focus on outcomes

Ghana: Sustainability Tests (Cont.) Dynamic process of evaluation of policies Autonomy and accountability of LM Civil service management - pay policy, authority Decentralization

PRIORITIZATION Institutional Arrangements Hard Budget Constraint Cohesive political executive Sector Strategies Forum within which decisions constrained by resource availability over medium term and policies compete Programmatic decisions devolved to line ministers (within hard sector ceilings)

PRIORITIZATION Institutional Arrangements (Cont.) Strategic priorities and sustainability drive aid Information - Costs, Performance

Mechanisms for Prioritization Case: Australia Aggregate Fiscal Targets and Strategic Objectives Medium-term Costs of Competing Policies

Australia: Medium-term Costs of Policies Real growth rate Mar 84 Projection dates May 85 Nov 85 Dec 86 Aug 89

Mechanisms for Prioritization Case: Australia Aggregate Fiscal Targets and Strategic Objectives Medium-term Costs of Competing Policies Arena for Contesting and Coordinating Policies - Cabinet: Strategic Priorities - Line: Spending-Savings within Hard Budgets Ex-post Evaluation Outcomes: - Deficit 4% GDP to surplus of 2% GDP - Shifts in intra and intersectoral composition - Greater funding predictability

Australia: Changes in Expenditure Composition, 1983-94 $ Millions New spending Net change Savings from existing policy Source: Dixon, 1993 : 32

Sector-wide Approaches as Performance Based Budgeting Clear Strategy and Policy Framework Program Focus Sector Expenditure Program Medium-term Perspective Consistent with Macroeconomic Framework Donor Coordination

Getting Decisions in the Right Hands Strategic Policy Sector Envelopes Program: Individual Ministers Running Costs: Managers

OPERATIONAL PERFORMANCE Institutional Arrangements Legitimacy of policy Predictability of funding Delegation of authority to line managers Responsibility for producing outputs linked to outcomes Hard budget constraint -upwards and downwards- during budget execution Independent external audit

Improving Technical Efficiency broader public sector markets and the private sector civil service Strengthen “voice” mechanisms More “exit” possibilities Improve “rule-compliance” and “loyalty”

Getting the Best out of Organizations Hard, but Predictable, Budget Constraint Flexibility for Managers Clarity of Purpose and Task Ex-Ante Specification of Performance Contestability Evaluation and Audit Exit Options Voice

LINE ITEM 1. Input Cash 2. Classification Economic Type 3. Annual PERFORMANCE BUDGETING 1. Input Cash/Accrual Output Performance data/ indicators/standards Authority Accountability Outcome Clear Objectives Indicators Evaluation 2. Classification Functional Program Organizational 3. Multi-year

Performance Based Budgeting LINKING: Inputs Outputs, and Outcomes

Inputs Resources used to produce the service: Hard budget constraint central budget user charging Full cost/Unit cost cash accrual

Outputs The good or service produced: Who controls Who is accountable Measuring and reporting performance

Outcome Purpose to be achieved by government intervention (including production of outputs): Who controls Who is accountable Measuring and reporting performance

Enabling Environment for Public Sector Link Policy, Planning, Budgeting Restrain decision making: affordability cost, expected results evaluate Forum within which policies compete Capacity and willingness to reprioritize and reallocate.