1. International Monetary Fund Fiscal Affairs Department Holger van Eden
Extending Budgeting to the Medium Term: From Fiscal Forecasts to Programmatic MTEFs
International Monetary Fund
Fiscal Affairs Department
Holger van Eden
ASIAN REGIONAL SEMINAR: PROMOTING FISCAL SUSTAINABILITY
Kuala Lumpur, February 28 - March 2, 2011

2. Outline Why Medium-Term Budgeting? The typical development path
When is a framework really a framework?
The constituent parts of an MTEF
Have MTEFs delivered on their promise?
Why is Medium-Term Budgeting so hard?
Prerequisites for introducing MTEFs
How to make MTEFs work – For Discussion!

3. The promise of medium-term budgeting
Improved aggregate fiscal discipline through estimation of realistic medium-term resource envelopes and setting of aggregate and sectoral ceilings
More effective fiscal policy; improved planning and execution of stimulus and exit strategies by identifying fiscal space and possible/required policy measures over medium-term
Linkage of budget to long-term fiscal targets
Enhanced strategic prioritization by linking budget to strategic planning and sectoral priorities, and building in decision-phase on new expenditure priorities in budget cycle
Increased planning certainty for budget managers
Increased fiscal policy transparency and accountability
If linked with development of program budgeting – programmatic MTEF - >>> linkage to expenditure outputs and outcomes, improved policy impact of the budget, shift from administrative to managerial culture, improved expenditure efficiency

4. What is a medium-term [fiscal/ budget/ expenditure] framework?
A medium-term framework is a technical and institutional mechanism for setting multi-year objectives for [fiscal aggregates/budget expenditure/programs and outcomes] and ensuring that they are respected in budget formulation, approval and execution

5. Usual development path for medium-term budgeting (Phase I)
Fiscal outlook: macroeconomic forecast +top-down estimates of fiscal aggregates; debt sustainability analysis
Multi-year budget estimates: bottom-up estimates of budget items (often using very simple parameters)
Medium term fiscal framework (MTFF): involves cabinet decision on fiscal aggregates over the medium-term; agreement on major policy direction; uses high-level economic presentation
>>> sometimes MTFF is achieved, sometimes immediate jump to step 4

6. Usual development path for medium-term budgeting (Phase 2)
Forward estimates: incorporation in budget estimates of existing and agreed policies. Implies development of baseline methodology + multi-year baseline estimates. Starts top-down with economic classification, can gradually incorporate bottom-up estimates aligned with budget classification.
Medium term budgetary framework (MTBF/or partial MTEF): cabinet decision-making on aggregate and line ministry spending ceiling over the medium term, reconciliation with forward estimates; decision-making over medium-term cutbacks, new initiatives, fiscal space
>>> sometimes MTBF is achieved, sometimes immediate jump to step 6

7. Usual development path for medium-term frameworks (Phase 3)
Linking policy to medium term budget: Development of programmatic budget classification, linkage of sectoral strategies and policy initiatives to medium term budgeting. Not constrained yet by expenditure ceilings.
Full MTEF or Programmatic MTEF: Involves cabinet decisions on sectoral expenditure ceilings, fiscal space, policy priorities and expenditure programs (and their outputs and outcomes) over the medium term.
>>> Without cabinet decision making, medium term budgeting remains a technical exercise with limited impact on the budget
>>> mostly countries do not progress to multi-year appropriations

8. When is a medium-term framework really a framework?
Decision on multi-year fiscal targets/expenditure ceilings by Cabinet (and possibly by legislature)
Targets/ceilings are enforced in budget preparation (linkage to the budget)
Out-years of the MTFF/MTEF are rolled over; starting point for next MTFF/MTEF
Framework presents main allocative decisions that need to be made to reconcile baseline with ceilings (reconciliation for MTFF much less detailed then for MTBF and MTEF)
>>Many countries have fiscal or budgetary outlooks rather than frameworks
>>Fiscal and budgetary outlooks are useful by themselves to inform on (required) direction of government spending >>> a framework obviously has much greater benefits!

9. Key Design Elements of MTEFs
Linkage to fiscal objectives/targets/rules
Comprehensiveness
Unit of planning and control (Aggregate, Ministry, Economic/Line item, Program)
Time horizon: budget year + 2,3 or 4 years
Forecasts/Baselines vs. Ceilings
Introduction of strategic decision-making phase in budget process
Clear identification of fiscal space and new policy initiatives (and their costs over the medium term);
Rolling vs. Fixed (in any case one should not every year start from scratch)
Real vs. Nominal Baselines/Ceilings
Planning and/or contingency reserve
Performance orientation

10. Different countries have different models

11. Strategic Phase in MTEF should involve Cabinet and Legislature
Does Cabinet endorse fiscal targets, and aggregate and line ministry expenditures ceilings for the medium term?
Are main cutbacks and new policies identified, costed and agreed upon?
Is an MTFF or MTEF document agreed upon
Do expenditure ceilings survive in the later budget process
Is the MTEF rolled-over in the next year, starting from last year’s decision-making
Parliament
Does parliament debate the MTFF or MTEF document
Does parliament approve aggregate and sectoral ceilings
Does parliament vote on budget in two steps (aggregate envelope and then detailed expenditure plans)
Do budget amendments respect MTEF ceilings?

12. WB Interim assessment of MTEFs

13. Evidence from PEFA
Medium term focus is now prevalent in many countries
Annual budget credibility is increasing
Lack of reconciliation in rolling over budgets
Poor integration of capital and recurrent
But…
Classification (still dominated by economic)
Excessive detail in outer years
Comprehensiveness lacking
Execution often does not follow budget

14. Why MTEF is difficult to implement (1)
Political environment not ready to deal with budgetary decisions over the medium term – political time horizon often even shorter than one year
Institutional separation between MTFF/MTEF preparation and budget process
Lack of capacity in fiscal and macro forecasting;
Inappropriate design:
(1) no two-step budget process;
(2) no reconciliation in top-down/bottom-up;
(3) no recalibration of MTFF/MTEF at budget time;
(4) no roll-over of out-year figures /yearly restart of MTEF
Countries jump to MTEF while MTFF not functioning

15. Why MTEF is difficult to implement (2)
Coverage of MTFF/MTEF (and budget) is not comprehensive >>> EBFs, quasi-fiscal activities are excluded >>>aggregate control not realized
Expenditure ceilings set in strategic phase are systematically not enforced
Expenditure commitments are not controlled
Budget execution does not follow original budget given cash constraints/in-year changes to budget
>>> these issues relate not only to MTEF but also to annual budget process
>>>without a sound, credible annual budget process, an MTEF will not fulfill a useful role

16. Prerequisites for introducing MTEF
Reasonable level of macroeconomic stability
Adequate macro, fiscal and debt data, and projection skills/capacity to create realistic macrofiscal framework
Basic PFM process are functioning:
Credible budget preparation
Adequate fiscal reporting
Competent cash planning
Reliable budget implementation
Core strategic planning, fiscal and budgetary policy capacity in finance ministry/central agencies
Commitment from Cabinet and Parliament
Capacity to enforce hard budget constraint at sector/ministry level (systems capacity and political will)
Executive commitment to a more transparent budget process
Capacity in sector policy analysis and expenditure planning

17. Some suggestion to strengthen the use of MTEFs - I
Diagnose existing budget processes >>>PEFA, ROSC, PE(I)R, CFAA to identify weaknesses
Ensure PFM basics are in place
Develop MTFF first, ensure forecasting and policy making capacity of MF unit
Integrate MTEF unit into DG Budget; stand-alone units (even if positioned next to Minister) can be ignored
Ensure political and managerial support for multi-year perspective and decision making
Limit the time horizon; for emerging market and developing countries a 4-5 year horizon is much too long
Keep program budgeting component simple

18. Some suggestion to strengthen the use of MTEFs - II
Produce a MTEF decision-document, separate from budget, and split budget preparation process in two phases
Have Cabinet vote on the fiscal targets, expenditure ceilings, and main policy measures >>> send to Parliament for information or approval to enhance accountability
Reconcile MTEF with previous year’s out-years, i.e. ensure roll-over
Enhance fiscal reporting/transparency to increase political accountability for MTEF
Consider fiscal rule(s) as potential anchor of MTFF/MTEF to ensure fiscal sustainability and stability

19. Thank You!