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

2. 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

3. 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

4. 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

5. 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?

6. 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.

7. 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.

8. 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).

9. 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.