1. The World Bank MTEF’s: Concept and Lessons Bill Dorotinsky The World Bank May 2, 2006

2. The World Bank Outline MTEF Concept MTEF Concept Technical objectives Technical objectives Process View Process View Sequenced decision-making Sequenced decision-making Component View - unbundling Component View - unbundling Major Blocks Major Blocks More manageable pieces More manageable pieces Output View Output View Experience Experience Ghana Ghana South Africa South Africa Uganda Uganda Lessons Lessons

3. The World Bank Three Objectives of Public Expenditure Management Systems Macrofiscal discipline and stability Macrofiscal discipline and stability Avoid public finance crises Avoid public finance crises Support economic growth and stability Support economic growth and stability Strategic allocation of resources Strategic allocation of resources Match government policy with programs, objectives Match government policy with programs, objectives Technical efficiency Technical efficiency Getting the most from each ruble spent Getting the most from each ruble spent

4. The World Bank Technical Objectives of MTEF Improve macrofiscal situation Improve macrofiscal situation lower deficits, improved economic growth lower deficits, improved economic growth more rational approach to retrenchment and economic stabilization more rational approach to retrenchment and economic stabilization Improve impact of Government policy Improve impact of Government policy link between government priorities/policies and government programs link between government priorities/policies and government programs Improve program performance/impact Improve program performance/impact Shift bureaucracy from administrative to managerial culture Shift bureaucracy from administrative to managerial culture Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies Improved resource predictability Improved resource predictability

5. The World Bank MTEF: Improved Budget Process Stage 1. Macroeconomic and public sector envelopes Stage 1. Macroeconomic and public sector envelopes Stage 2. High-level policy: aligning policies & objectives under resource constraints (top-down) Stage 2. High-level policy: aligning policies & objectives under resource constraints (top-down) Stage 3. Linking policy, resources, and means by sector (bottom-up) Stage 3. Linking policy, resources, and means by sector (bottom-up) Stage 4. Reconciling resources with means Stage 4. Reconciling resources with means Stage 5. Reconciling strategic policy and means Stage 5. Reconciling strategic policy and means

6. The World Bank Stage 1. Macroeconomic and public sector envelopes Macroeconomic Estimates Revenue Estimates Expenditure Estimates (current services) Fiscal Policy Expenditure Estimates (current law, normatives) Affordable/sustainable Fiscal Envelope Monetary and Fiscal Policy Debt and Deficits Aid flows All in multi-year context

7. The World Bank Stage 2. High-level policy: aligning policies & objectives under constraints Fiscal Envelope Setting Strategic Policy Priorities Under Resource Limits (downsizing, or expansions) Sectoral Resource Ceilings Ministry Resource Ceilings

8. The World Bank Stage 3. Linking policy, resources, and means by sector Sector Policies and Objectives Sector programs Reconcile policy, laws, resource limits Program priorities relative to objectives Assess modalities for objective Evaluate Production Function Sector Budget Request Again, multi-year Under ceiling Above ceiling

9. The World Bank Stage 4. Reconciling resources with means Sector Ceilings Sector Requests Technical Assessment and Reconciliatio n Vetting assumptions, policies, estimates Challenging modalities, production function Evaluate performance Revised requests and/or decision papers

10. The World Bank Stage 5. Reconciling strategic policy and means Policy assessment and reconciliation Policy official dialogue Modify baselines Finalize decisions Budget Proposal Revised Requests, Unresolved Issues

11. The World Bank MTEF Major Components Medium-Term Fiscal Framework Medium-Term Fiscal Framework Aggregates, policy Aggregates, policy Medium-Term Budget Framework Medium-Term Budget Framework Ceilings and sector strategies Ceilings and sector strategies Program budgeting/Activity-based costing Program budgeting/Activity-based costing Within ministries, programs, costing, input- output models Within ministries, programs, costing, input- output models Performance measures Performance measures

12. The World Bank Unbundling MTEFs Medium-Term Fiscal Framework Medium-Term Fiscal Framework Multi-year Macroeconomic forecast Multi-year Macroeconomic forecast Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope (fiscal policy paper) Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope (fiscal policy paper) Medium-Term Budget Framework Medium-Term Budget Framework Multi-year forecast of spending under current policy or current level of services, by ministry or program Multi-year forecast of spending under current policy or current level of services, by ministry or program Multi-year ceilings for sector ministries Multi-year ceilings for sector ministries Multi-year sector strategy Multi-year sector strategy Program budgeting/Activity-based costing Program budgeting/Activity-based costing Multi-year cost estimates of new policies or programs (recurrent), or expansion of existing programs, prepared by sector ministries Multi-year cost estimates of new policies or programs (recurrent), or expansion of existing programs, prepared by sector ministries Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries

13. The World Bank Unbundling MTEFs Multi-year Feature PEM Objective Intended Effect RequiresProduct 1. Macroeconomic forecast Macrofiscal discipline 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 Macroeconomic Forecast paper, a key topic for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4 2. Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope Macrofiscal discipline 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. Revenue and Tax Policy Paper Debt Sustainability Analysis and Policy Paper (Both key topics for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4.)

14. The World Bank Unbundling MTEFs (2) Multi-year Feature PEM Objective Intended Effect RequiresProduct 3. Multi-year forecast of spending under current policy or current level of services, by ministry or program Macrofiscal discipline, Allocational efficiency (sector) 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. Expenditure trends paper, a key topic for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4. 4. Multi-year ceilings for sector ministries Allocational efficiency (sector), Macrofiscal discipline, Operational efficiency 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. Sector ceilings table, as part of fiscal policy paper (which draws together the Papers and forecasts produced in Items 1, 2, 3 and 4)

15. The World Bank Unbundling MTEFs (3) Multi-year Feature PEM Objective Intended Effect RequiresProduct 5. Multi-year sector strategy Allocational efficiency (sector), Operational efficiency, Macrofiscal discipline Sector strategic plan links outputs/outcomes with inputs in multi-year framework. Effective only if prepared within multi-year sectoral resource ceiling. Sector ministry strategic planning capacity, on program outputs/outcomes information, and relationship to activities and inputs. Sectoral plans, starting with sector ceiling, the spells out objectives, outcome targets, current outcome trends, and actions to be taken, including priority programs, capital and current spending, etc. 6. Multi-year cost estimates 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). Budget tables

16. The World Bank Unbundling MTEFs (4) Multi-year Feature PEM Objective Intended Effect RequiresProduct 7. Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline 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). Budget tables 8. Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline 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. Budget tables

17. The World Bank Summary MTEF is about MTEF is about Process reform Process reform Integrating planning and budgeting Integrating planning and budgeting Changing Incentives of Key Actors Changing Incentives of Key Actors Integrating policy and technical aspects of budgeting Integrating policy and technical aspects of budgeting Thinking multi-year Thinking multi-year Misconceptions Misconceptions MTEF is only multi-year estimates MTEF is only multi-year estimates MTEF separate process, document only MTEF separate process, document only Preconditions? Preconditions? Civil service/administrative reform for allocative flexibility? Civil service/administrative reform for allocative flexibility?

18. The World Bank Ghana MTEF first introduced in 1999 MTEF first introduced in 1999 Declared a success at first budget Declared a success at first budget “big-bang” covering all MTEF aspects at once, plus IFMIS and Civil Service Reform “big-bang” covering all MTEF aspects at once, plus IFMIS and Civil Service Reform Problems encountered Problems encountered Limited MDA capacity Limited MDA capacity Data limitations Data limitations EBFs EBFs Weak macroforecasting undermined MTEF Weak macroforecasting undermined MTEF Rigidity of spending inhibited reallocation Rigidity of spending inhibited reallocation

19. The World Bank Ghana (2) Problems encountered (continued) Problems encountered (continued) No visible change in budget formats, information provided (e.g. budget speech) No visible change in budget formats, information provided (e.g. budget speech) Limited buy-in outside core MoF group Limited buy-in outside core MoF group Implemented as ‘project’ versus reform of budget process, as ‘technical’ versus policy-oriented Implemented as ‘project’ versus reform of budget process, as ‘technical’ versus policy-oriented Linking next budget with multi-year estimates Linking next budget with multi-year estimates Top-down implemented, but bottom-up not quite in place Top-down implemented, but bottom-up not quite in place

20. The World Bank South Africa First attempt 1994 First attempt 1994 Department of Finance only Department of Finance only Failed, too internal Failed, too internal Second attempt 1997 Second attempt 1997 Inclusive process, with sectoral working groups Inclusive process, with sectoral working groups All departments at once All departments at once Led by policy officials Led by policy officials MTEF is budget process MTEF is budget process Have MTBPS and sectoral plans Have MTBPS and sectoral plans But sectoral plans formal But sectoral plans formal Performance emphasized more recently Performance emphasized more recently Reprioritization within sectors has happened Reprioritization within sectors has happened Over and under spending reduced Over and under spending reduced

21. The World Bank Uganda Started in 1992 Started in 1992 in MoFPED in MoFPED With MTFF, major economic classes With MTFF, major economic classes To address macrofiscal problems and counterpart funding problems To address macrofiscal problems and counterpart funding problems Gradually expanded Gradually expanded 1995 sector analysis (Ag, Roads, Health, Education) 1995 sector analysis (Ag, Roads, Health, Education) 1997 all sectors (sector working groups) 1997 all sectors (sector working groups) 2000 local governments 2000 local governments 2001 MTEF required submission to Parliament 2001 MTEF required submission to Parliament Donor-financed investments (PIP) separate process Donor-financed investments (PIP) separate process Limited performance orientation, though expanding Limited performance orientation, though expanding More top-down, with limited detailed costing from the bottom-up More top-down, with limited detailed costing from the bottom-up MTEF “home-grown” but still not fully integrated with the budget process MTEF “home-grown” but still not fully integrated with the budget process Emphasis on PEAP priority programs Emphasis on PEAP priority programs

22. The World Bank Lessons in Implementation MTEF is designed to improve decision-making, and focuses on budget formulation. It will not solve all PEM problems. MTEF is designed to improve decision-making, and focuses on budget formulation. It will not solve all PEM problems. MTEF is not a standardized product, per se. The principles can be implemented in various ways. MTEF is not a standardized product, per se. The principles can be implemented in various ways. MTEF needs to be customized to the country, including initial conditions in PEM, human and IT capacity. MTEF needs to be customized to the country, including initial conditions in PEM, human and IT capacity. With MTEF, and PEM reform generally, doing too much at once can overload the Government capacity and prevent progress on all reforms. With MTEF, and PEM reform generally, doing too much at once can overload the Government capacity and prevent progress on all reforms.

23. The World Bank More lessons Start with a medium-term fiscal framework Start with a medium-term fiscal framework MTEFs should not be launched in selected sectors until there are medium-term ceilings in place MTEFs should not be launched in selected sectors until there are medium-term ceilings in place Integration of capital and recurrent budgets need not be done immediately Integration of capital and recurrent budgets need not be done immediately Performance information (outcomes, outputs) need not be incorporated immediately Performance information (outcomes, outputs) need not be incorporated immediately Flexibility for spending ministries to allocate resources across programs, subprograms, and activities can be introduced gradually Flexibility for spending ministries to allocate resources across programs, subprograms, and activities can be introduced gradually Pressure on ministries to find resources within current expenditures may be more successful when accounting systems are in place to provide good information on program and activity costs Pressure on ministries to find resources within current expenditures may be more successful when accounting systems are in place to provide good information on program and activity costs