1 MEDIUM-TERM BUDGETING LESSONS FROM OTHER REGIONS The World Bank Pacific Department www.wordbank.org/pi Key Messages 2 Medium Term Budgeting does not have to mean complex technical processes Medium Term Budgeting is widely used and often leads to improved outcomes Medium Term Budgeting requires certain enabling conditions Medium Term Budgeting approaches should be tailored to the context Why have countries pursued MTB? 3 Achieving fiscal discipline and managing upcoming cost pressures Achieving greater efficiency in resource use Better linking expenditure to policy priorities Estimating sector resource needs for the achievement of policy outcomes Medium Term Budgeting does not have to mean complex technical processes 4 Stage Description Medium-Term Fiscal Forward aggregate expenditure ceilings informed by Framework (MTFF) estimates of future resource availability. Indicators: macro-fiscal strategy, fiscal forecasts, DSA, IMF program details. Medium-Term Budget Framework (MTBF) Agency and program expenditure ceilings informed by combination of top-down resource availability and bottom-up resourcing need. Indicators: budget or other reports detailing medium-term allocations to ministries or programs and showing a mediumterm strategic focus Medium-Term Performance Framework (MTPF) Focus on outputs and performance. Indicators: program or ministry strategies including output targets and results. Evidence of a performance focus. Medium Term Budgeting does not have to mean complex technical processes 5 Good Practice for a Medium-Term Fiscal Framework Debt and deficit targets are established using model-based debt sustainability analysis, taking into account constraints imposed by policy rules. Revenue forecasts are based on revenue department or other tax and non-tax receipt models. Independent macroeconomic forecasts are used, and fiscal forecasts are subject to scrutiny by an audit office, fiscal council or similar consultative body. Aid commitments are covered by debt sustainability analysis and/or revenue forecasts. Medium-term macro-fiscal objectives are described in a background paper included as part of the budget documentation. Medium Term Budgeting is widely used and often leads to improved outcomes 6 140 Number of Countries with MTB 120 100 80 60 40 20 0 1990 1991-93 MTEF MTB 1994-96 MTFF 1997-99 2000-02 MTBF 2003-05 MTPF 2006-08 Medium Term Budgeting is widely used and often leads to improved outcomes Number of Countries in Group (percentages of countries in region displayed at top) 7 16 33 33 14 12 46 43 39 37 53 10 29 42 8 6 4 2 0 63 16 11 9 16 7 11 0 0 MTFF MTBF MTPF 25 0 0 Medium Term Budgeting is widely used and often leads to improved outcomes 8 Some reviews and case studies suggested that MTB had not lived up to expectations Insufficient focus on macro-resources Overly-sophisticated and not used Recent empirical work has shown some benefits MTB improve fiscal discipline as measured by overall fiscal balance MTB improve allocative efficiency as measured by share of budget allocated to health But aggregate results obscure very different country experiences Medium Term Budgeting is widely used and often leads to improved outcomes 9 The fiscal balance tends to improve following the introduction of MTB Health expenditure tends to increases following introduction of MTB (72 obs) 3 -0.38 2 1 0 t-3 t-2 t-1 t t+1 t+2 -1 -2 -3 -4 -5 -3.09 t+3 General Govt Health Spending(% of GDP) Central Government Balance (% of GDP) (72 obs) 15 14 11.59 13 12 11 10 10.97 9 8 7 t-3 mtef 95% conf. interval before average after average t-2 t-1 t t+1 t+2 mtef 95% conf. interval before average after average Correlation is not causality: MTB is not a panacea! t+3 Medium Term Budgeting requires certain enabling conditions 10 Adequate budget systems Institutions and processes linking annual budget to MTB Adequate budget coverage Political commitment Adequate planning processes Effective MTB Predictable donor flows Medium Term Budgeting requires certain enabling conditions 11 MTB is not a technical fix to all expenditure management problems Political commitment: Whatever the technical details, MTB will only lead to improved outcomes if the framework is followed by decision-makers If not, MTB becomes a potentially costly distraction (Ghana) Budget coverage Usefulness of MTB undermined by substantial offbudget expenditure (broader African experience) Medium Term Budgeting requires certain enabling conditions 12 Institutions and processes to allow close integration with annual budget MoF leadership Annual budgets tightly linked to MTB framework MTB integrated/consistent with NDP Adequate budget systems Expenditure control Cash management Execution performance (realistic budgets) Medium Term Budgeting requires certain enabling conditions 13 Using the budget as planning tool requires a realistic budget How realistic is your budget? Country B: Average Variation for all line items by Ministry Country A: Variations by Economic Classification 90% Defense 80% Daily Paid 70% Travel& Communication 60% Established Staff 50% Operational Grants&Transfer 40% Purchase of Good&Services 30% 2006 2007 2008 2009 20% Maintenance& Operations 10% Equity Payment 0% -100% 0% 100% 200% 300% 400% Ministry of Finance and Ministry of Education and Treasury Human Resource Development Ministry of Health and Medical Services Medium Term Budgeting requires certain enabling conditions 14 Adequate planning processes MTB is ultimately about giving effect to policy plans Predictability of donor flows Vital for bottom-up and top-down processes Commitment to MTB can lead to the emergence of necessary conditions MTB can provide a tool for progressing broader reforms in context of strong political commitment. But some level of budget functionality is necessary in advance. Medium Term Budgeting should be tailored to the context 15 Ambition of MTB approach should be calibrated to existing PFM systems Poor record with “big bang” reforms in developing countries The MTB model should reflect what existing systems and capacity can support Doing everything at once does not work Take care when combining the introduction of MTB with broader reforms Capacity constraints necessitate a step-by-step approach to reform What will work depends on context Key considerations for PICs 16 Opportunity costs can be high Capacity constraints have been an important consideration worldwide Budget units already stretched thin Basic MTB (MTFF) need not be effort intensive Capacity supplementation can create opportunities if political commitment exists Adequacy of basic budget systems is key MTB to achieve an objective – not as an end in itself MTB is of little use if annual budgeting is not credible or cash management is weak Basic level of functionality in annual budgeting is probably a prerequisite PICs may face unique challenges in regards to extent of reliance on donor financing Introduces additional uncertainty Thank you 17 This presentation draws heavily on the following papers: • World Bank (2011) Review of Experience with Medium-Term Expenditure Frameworks, World Bank • Ilona Castro and Bill Dorotinsky (2006) Medium-Term Expenditure Frameworks – demystifying and unbundling the concept, OECD Journal of Budgeting • Le Houerou, Philippe and Robert Taliercio, (2002) Medium-term Expenditure Frameworks: From Concept to Practice, Africa Region Working Paper Series No. 28.