1. Public Expenditure Management: Budget Formulation
Bill Dorotinsky,
PREM public sector group
PEAM Course
March 21, 2005

2. Outline What is Public Expenditure Management? Applications
What institutions matter?
Process: Expenditure Management Cycle
Functions
Organizations, Systems
Three- objectives
Applications
Rules
Roles
Information
Performance Measurement

3. Expenditure Management Cycle
Planning
system
Medium term
plans, e.g. three
year rolling plans
Annual budgets
Development,
recurrent and
revenue
Fund release
procedure, e.g...
warranting
Accounting for
revenue and
expenditure
Public expenditure
review
Institutions
Reports and
financial statements
Audit system
Project monitoring
Project
appraisal
Resource
allocation
Liquidity
management
Expenditure
control
Monitoring
& controlling
Post event
Accountability
Financial management system boundaries
Formulation covers ‘expenditure review’ insofar as this is a step in preparation of future plans, and goes through to “annual budgets..”
-- need for good budget
-- Brazil roads, congress, MoF
-- linking budget to cash management
-- dc grants management
Execution covers from ‘liquidity management’ through to PER’s, insofar as PER’s are part of the ex poste accountability system.
Half of cycle
(2) Hardware and software do not solve problems in human systems. Must know source of problem, and seriously assess whether computerization will solve the core problem. (DC Example)
Underlying all of this is good recording of transactions and reporting!
Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

4. Scenario 1 You are the minister of a line ministry
The half-life of a minister is 18 months
Your predecessor lost their position for proposing sector restructuring based on a foreign advisor recommendation
The fiscal year begins January 1
The MoF issues a budget circular June 15, asking for budget submissions by August 1
The circular includes inflation estimates and forms
The Ministry of Planning issues a July 15 call for capital budget submissions by August 15
The circular includes forms
You are not sure of your current on-board employment, and ‘current’ fiscal information is incomplete and 45 days late
On what basis do you prepare your budget request?
What is your budget bid strategy?

5. Scenario 2 The Cabinet has convened to consider the budget
The aggregate bids exceed likely recurrent revenue by 19 percent, and capital resources by 157 percent
The MoF has provided a table summarizing bids, and showing estimated total recurrent and capital resources
The MoF has noted a fall in customs revenue, and donor funds are shifting to other geographic priorities, suggesting budget reductions are needed
The prior government fell from not meeting public expectations for greater capital investment and better services
On what basis should Cabinet make budget choices?

6. Common PEM problems
Weak links between policy, resource limits, and budgets
failure to achieve strategic objectives
abstract planning, unrelated to ways and means
Annual focus leads to suboptimal choices
Digging a hole; inability to climb out
Complacency today, unaware of crisis tomorrow
Separation between capital and recurrent budgets
Lower than expected returns to capital
Non-comprehensive budget
Using other means to support favored programs
Revenues not captured in budget
Taking piecemeal decisions without reference to over-all effect
Rigid budget
Trying to solve conflict of goals, objectives through direct control rather than dialogue, consensus --- exacerbates the principle agent problem, rather than addressing it head-on and resolving.
Labor productivity: span of control;

7. Common Reforms MTEF Performance Budgeting New Public Management
Separate policy and administration
Accrual accounting
‘Fragmentation’
Procurement, Debt
Deconcentration, decentralization
Administrative & Civil Service

8. 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

9. 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

10. 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

11. 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

12. 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

13. Core elements of an MTEF
Changing rules to promote different outcomes
Multi-year fiscal framework
Setting broad policy priorities (sectors)
Multi-year Budget Framework
sector ceilings, sector budgets prepared under constraints
Strategy, policy and objectives under constraints
Multi-year expenditure framework
Costing programs, policies within sectors
Delivering resources as budgeted