Managing Public Budget to Facilitate Economic Growth and Reduce Poverty Public Expenditure Analysis & Management Staff Training Course May , 2001 Washington, DC Vinaya Swaroop, DECRG/PRMPS

2 Two issues on my agenda... How the public sector in general & public budget in particular can...   Help create an enabling environment to facilitate private-sector led growth;     Help the poor.

3 The public sector can facilitate economic growth & help the poor... …but a necessary condition is that there be a well-functioning budget system of... Planning, Policy; Execution, monitoring & evaluation.

4 Good public resource management... …involves:   Getting budgetary allocations right;   Building build well-functioning institutions for budget execution, monitoring & evaluation.

5 The tool for improving public budget management... …is a framework that helps in l l assessing budgetary performance; and l l strengthening budgetary management.

I. Level (Size) of Public Spending, Revenue & Deficit Issues...Questions that any analysis of the level of public expenditures should ask cover three key areas...

First,   How comprehensive is the public budget?   Are contingent liabilities, off-budgeted items, local spending, and so forth, included? The concept of the “Consolidated General Government”...

Second, How was the level of government revenues determined? What kind of a tax structure exists in the country?

Third,   How was the deficit figure chosen?   What assumptions underlie the analysis of its sustainability?

I. Level (Size) of Public Spending & Deficit Issues (contd.)   Public spending level needs to be consistent with the country’s long-run financing ability;   Persistently large deficits pose threats to stability & growth of the economy;   Experience suggests deficit reduction usually requires a cut in public spending.

I. Level (Size) of Public Spending & Deficit Issues (contd.) A deficit reduction strategy should analyze the following questions... How is the deficit measured? What is the composition of deficit financing? What is the sustainable amount of fiscal deficits?

II. Resource Allocation Exercise How to? A couple of points to remember…   Budgetary allocation process is foremost a political decision;   In practice, there is no “optimal” allocation of the public budget.

II. Resource Allocation Exercise The technical part should be based on…   What is the rationale for government intervention?   Market failure (public goods, externalities)   Redistribution   What is the appropriate instrument?   What is the fiscal cost?

Education subsidy per capita by decile, Indonesia 1989

Distribution of health care subsidies, Indonesia

20 These incidence studies indicate that in most developing countries... A few items in the public budget -- generally associated with helping the poor, e.g., primary education, basic health services, basic sanitation services -- can help the poor if the allocated budget is executed properly.

21 Budgetary policy designed to help the poor may be only a necessary condition......Good budgetary management is very important for effectively delivering services to the poor… A recent Public Expenditure Tracking Survey in Uganda showed that on average less than 30% of public funds earmarked for primary school reach their intended destinations. The remainder are lost or diverted.

22 Linking public spending with desirable outcomes…What is the evidence?   A generally accepted notion -- Efficacy of public spending is improved if budget institutions work well.   Research has shown that public health spending has no demonstrable effect on health indicators (e.g., infant mortality). A conjecture: Mismanagement of funds!

Fiscal Cost Comparison: An Example from Morocco Farm subsidy, millions of dollars 160% of preventive health Average % of basic education

III. Efficient Delivery of Public Services A key requirement is to reform the incentives in the public sector… Merit based recruitment and promotion in the public sector; Performance-based budgeting and rewards; Assessment of public service delivery through client surveys.

III. Efficient Delivery of Public Services (contd.) Experience suggests...   Several countries--developed and developing-- have initiated such reforms (New Zealand and Malaysia);   But such reforms take time, and the success is based upon initial conditions in the country including existing capacity and political readiness.

26 Several issues relating to improving budgetary management...   Better planning of budget policy;   Successful budget execution;   Monitoring issues including better account preparation and benefit evaluations; and   Oversight mechanisms including external audit.

Improving Budgetary Management... …by linking policy, planning and budgeting through a medium-term expenditure (MTEF)...

28 What is a MTEF? A tool for linking policy, planning & budgeting over a medium-term ( 3 years) at the Government-wide level; It consists of a top-down resource envelope & a bottom-up estimation of the current & medium-term costs of existing policies;

29 What is a MTEF?   Matching of the two in the context of the annual budget process; and   Involves rolling over this exercise every year by incorporating policy changes.

30 What can it do? If successfully applied, it can   Improve macroeconomic balance by developing a multi-year resource framework (expenditure & revenue);   Assist in improving resource allocation between & across sectors;   Improve predictability of funding for line ministries.

31 What it does not do? MTEF is about budget planning given policy choices; It does not tell you about what public spending is buying (i.e., the link between inputs & outputs); and It is not about accountability (i.e., how are resources being spend).

32 A Checklist on MTEF...   Can the country do a reasonable 3-year projections of expenditures & revenue?   Is the bottom-up exercise of 3-year cost projections (capital & recurrent; programs & subprograms) feasible?

33 A Checklist on MTEF... If the capacity does not exist, what would be a sequenced process of building it? What country preparations are needed before a MTEF could be successfully adopted? Last but not least: A MTEF will not solve all the service delivery problems.