1. The World Bank Budget Management: Strengthening through a Medium-Term Expenditure Framework Bill Dorotinsky The World Bank Seoul, Republic of Korea March 15, 2004

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

3. The World Bank Basic principles of PEM Comprehensiveness –include all revenue and expenditure, all agencies Accuracy –record actual transactions and flows Annuality –cover a defined period of time (e.g. one year budget, multi-year forecasts) Authoritativeness –only spend as authorized by law Transparency –information on spending is public, timely, understandable

4. The World Bank 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: complacency today, unaware of crisis tomorrow –Inability to climb out of poor fiscal situation Separation between capital and recurrent budgets –Lower than expected returns to capital Non-comprehensive budget –Using other means to support favored programs Failure to think strategically about tools and objectives Not learning from experience Not harnessing energies of all actors in system; mismatch of roles and responsibilities Taking piecemeal decisions without reference to over-all effect

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

6. The World Bank MTEF: New Budget and Planning Process Stage 1. Macroeconomic and public sector envelopes Stage 2. High-level policy: aligning policies & objectives under resource constraints Stage 3. Linking policy, resources, and means by sector Stage 4. Reconciling resources with means Stage 5. Reconciling strategic policy and means

7. 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

8. 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

9. 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

10. 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

11. 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

12. The World Bank Mar 84 May 85 Nov 85 Dec 86 Aug 89 Real growth rate Projection dates Macrofiscal stability: Australia’s Medium-term Costs of Policies

13. The World Bank Implementing an MTEF Adopt framework –getting policy-official and technical staff buy-in –recognize this is continuous, long-term endeavor Customize implementation to country needs, initial conditions –macro, sectoral policy Target institutional capacity development

14. The World Bank Key Capacity Issues Technical –Staff skills policy analysis, budget examination, policy and activity- costing –Accounting system –Budget execution system Policy –Capacity to enforce hard budget constraints –Commitment to continuous process of improvement

15. The World Bank A further word on evolution of budget offices….longer-term trends Changing role of budget office –Control to monitoring/oversight –Policy analysis and development over excessive budget detail –Shifting authority towards line ministries Emphasizing training and guidance Performance over compliance –Analysis of emerging issues, problems, and health of decision-making and finance system Integration of planning into budget process –Integration of capital and recurrent budgets

16. The World Bank Budget roles and responsibilities before… Ministry of Finance Line Ministry Issues broad guidance at start of process, with cost increase assumptions Cutting spending requests uniformly or by economic class or line item to meet totals Heavy involvement in setting line item totals No idea of out-year implications of choices Develop requests in vacuum Request is wish list; incentive to ask for more, hoping that after cuts will have enough Little discretion to allocate funds in own budget Little incentive to focus on current programs, reallocate Minimal policy content in budget request Low likelihood of getting budget levels during year

17. The World Bank …. And after reforms Ministry of Finance Line Ministry Issues broad guidance with multi-year sector ceilings at start of process (cabinet approved) Cuts spending requests only if above ceiling, leave most details of what to cut to line ministry (though with recommendations, frequently) Little involvement in setting line item totals, except perhaps capital and personnel; may set personnel ceilings too Clearer picture of future implications of current choices Focus more on policy and objectives, performance assessments (costs, objectives, effectiveness, efficiency) Clear resource framework for planning Request must prioritize between current and new programs Near complete discretion to allocate funds in own budget Potential for larger policy content in budget request Ceterus paribus, higher likelihood of receiving budget levels during year

18. The World Bank “Benchmarking” Recent McKinsey Study looked at 7 dimensions of 7 country Finance Ministries Australia, Brazil, Malaysia, Singapore, Thailand, UK, US All had taken steps to ‘empower’ line ministries and professional managers All had made substantial efforts to strengthen external audit All had taken measures to move away from input budgeting towards performance or output budgets Most had taken measures to improve transparency of processes and information Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

19. The World Bank “Benchmarking” (continued) Six had made substantial effort to separate policy development and oversight from implementation All had taken strong measures to consolidate similar functions, especially cash and debt management Most had taken some measures towards greater checks and balances to MoF functions Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.