International Experience and Best Practice in Implementing Medium Term Expenditure Frameworks

1. International Experience and Best Practice in Implementing Medium Term Expenditure Frameworks David Shand PFM Consultant IMF Workshop, Almaty, Kazakhstan 26-27 May, 2011

2. Objectives of MTEF • Aggregate fiscal discipline – spending is sustainable and limited by resource availability • Budget allocations reflect explicit spending priorities (allocative efficiency) • Delivery of goods and services is cost-efficient • Also greater transparency and accountability of public finances • Including greater involvement of sector ministries in the whole budget process • And better linking of the budget with national planning mechanisms • These three main PFM objectives are closely linked • Traditional (one year, incremental budgeting) typically does not reliably meet these objectives • The MTEF exercise is thus the budget exercise – not something separate • It must change the annual budget exercise

3. Other introductory comments • Many misconceptions about the nature of an MTEF – are we over-engineering simple concepts ? • The simple issue is that expenditure decisions have multi-year implications and must be aligned with resources available in the medium-term • In other words medium-term budget planning • The record in MTEF implementation is uneven – some successes and some failures • Perhaps reflecting misconceptions and confusion • Some countries have the MTEF form but not the substance – for display rather than fiscal decision making • Unrealistic MTEFs can be used to hide or defer fiscal issues • But World Bank research suggests that overall the impact of MTEFs has been positive • Most MTEFs extend over 3 years, but some 4 and 5 years

4. Brief History • First formally and transparently introduced in Australia in mid 1980s, • (building on a previous forward budget estimates system not clearly linked with the annual budgetary process) • Leading to published three year indicative (but relatively firm) budget allocations for all ministries • Then adopted by many OECD countries in 1980s and 1990s – Denmark, Netherlands, New Zealand, Norway etc) • IMF a strong supporter of MTEF in developed countries • Then MTEF developed in many developing countries (starting in Africa) as a key PFM reform component • Often at donor (IMF and World Bank) urging to ensure commitment of resources to Poverty Reduction Strategies (PRSPs) • By 2008 more than 100 countries had adopted elements of MTEF

5. Major MTEF Components • Medium term macro-fiscal forecasts • These forecasts are used to develop a medium-term macro-fiscal plan • Realism of this plans is key – reflected in credibility of the budget and budget projections • Sector strategies are developed and inform the allocation of resources to, but in particular within, expenditure sectors • This means a focus on performance issues • The budget may be a medium term budget with formal medium term budget allocations (Russia) • Or (more commonly) an annual budget prepared within a medium-term framework (fiscal plan) with indicative expenditure medium-term expenditure allocations (Australia, New Zealand) • How “firm” these medium term allocations can or should be is a matter of debate

6. Statements and Research on MTEF • PEFA 2005, Indicator on Multi-Year perspective in fiscal planning, expenditure policy and budgeting - preparation of multi-year fiscal forecasts and allocations of funds by function or program - scope and frequency of debt sustainability analysis - existence of sector strategies with multi-year costing of recurrent and investment expenditures - linkages between investment budgets and forward expenditure estimates • IMF Manual on Fiscal Transparency 2001 and Code of Good Practices on Fiscal Transparency (updated) refer to - aggregate fiscal projections 5-10 years ahead should be included in budget documentation - and forecasts two years ahead in the annual budget document - need for fiscal sustainability analysis - relevance of medium-term budget frameworks broken down by spending ministries

7. Statements and Research on MTEFs • World Bank PEM Handbook 1998 – MTEF facilitates better control of expenditure and better value for money within a hard budget constraint • Leherou and Taliercio (World Bank 2002) study of MTEFs in 13 African countries questioned feasibility of “fully fledged” MTEFs in many countries and noted lack of attention to institutional aspects • But overlooked the issue that MTEFs cannot be expected to work if the annual budget process does not work • Holmes and Evans (ODI 2003) conclude more optimistically that MTEFs are progressing, even if unevenly • New World Bank research 2011based on econometric and case study analysis – see later slides

8. Possible MTEF Phases • Medium-term fiscal framework (MTFF)- the macro-fiscal basis for budget formulation • Medium-term budgetary framework (MTBF) – specifies sector ministry expenditure ceilings based on top-down MTFF and bottom up sector strategies • Medium term Program/Performance Framework (MTPF) –specifies program/agency inputs, outputs and outcomes • Introduction normally follows this sequence • But it is possible to have selective MTBF based on sector strategies before an MTFF • But MTPF first requires sector strategies • In effect getting to an MTPF means a performance based budgeting system • In 2008 71 country MTFFs, 42 MTBFs and 19 MTPFs

9. Macro-fiscal framework • A key component of annual budget documentation • Importance of sound technical/professional skills in macro-economic forecasting • And budget revenue and expenditure forecasting • Not influenced by “political” considerations • Ensuring realism – with a tinge of conservatism (?) • Note that this is also relevant to input oriented annual budgeting • Various institutional arrangements may assist this - Independent fiscal forecasting units (Austria, Chile) - review by independent fiscal councils (Sweden, Romania) - independent role of civil servants in the forecasts (New Zealand, Australia) • Fiscal risk analysis is an important component • In principle this framework should be developed and owned by the Government • In practice the framework by be developed by donors due to country capacity constraints

10. Macro-Fiscal Framework • Many developing countries have formal national planning systems but only loosely linked with macro-economic forecasts • Lack of realism and prioritization in these national plans may be a problem • Debt sustainability analysis is part of the framework • Contingency margins and rolling over of plans, frequency of updating ? • Coverage - a comprehensive budget is needed. What about sub-national governments • Fiscal Responsibility Laws which require medium-term fiscal targets, will assist • Forecast of spending under existing policy may be the starting point in fiscal analysis • But forecasts must be translated into plans • Some countries have published macro-fiscal targets but no plan of how to achieve them • In part this is an issue of what level of detail/aggregation to specify the framework

11. Sector Strategies • World Bank has promoted these as part of Public Expenditure Reviews and MTEF • In principle provide an opportunity for input (voice) by sector ministries • And for greater predictability of funding for sector ministries • The problem is to develop a results mind set • Then achieving realism and sensible prioritization • (this problem is not confined to developing countries) • Do sector ministries actually know what they are doing , what is “policy” and what is happening? • Need for sound ex ante definition of the issues based on reasonable data • Sound cost information is required – consistency between MOF and sector ministry figures is part of this • Need for regular reviews/evaluation of performance under the strategies

12. Sector Strategies • Is there capacity to do all this in MOF – quite apart from sector ministries • Planning ministries may often play a key role - must link with the national planning system, including any Public Investment Program (PIP) • National plans usually contain major elements of sector strategies • And with related strategies such as PRSP • And having a fiscal envelope allocated by MOF - both recurrent and capital expenditures • Note that there may a legitimate role for sector strategies as “fundraising” documents in discussion with donors • Often with a strong emphasis on funding investment expenditures • In principle sector strategies should be government owned (MOF and sector ministries) and donor supported • In practice they may be donor driven • And reflect lack of donor coordination (e.g. multiple, competing strategies for the same sector)

13. Linking the Macro-Fiscal Framework with Sector Strategies • MOF budget circular to spending ministries outlines basis on which they should prepare their medium-term budget requests • Circular indicates indicative resource availability through ceilings and indicates economic and other assumptions to be used • Bids outside the ceiling will be returned to spending ministries for revision • But this does not start from scratch – the following year’s expenditure from the MTEF is rolled over as the starting point • In this sense an MTEF is always “incremental” • Rules for bidding for new policies or quality improvements to existing ones (based on proposed changes in sector strategies) are set out • “Indicative” ceilings for future years also to be determined • How “firm” are these indicative ceilings ?

14. World Bank Study 2011 • Investigates the effect of each MTEF phase on achieving the 3 objectives (fiscal discipline, allocative efficiency and operational efficiency) • Uses 10 country case studies • What initial economic political and other conditions determine the success of MTEFs? • Are there key country, PFM and MTEF characteristics critical for success? • How should implementation be sequenced and coordinated with other budget reforms? • What role should Bank, bilateral donors and other international agencies play? • If MTEF is not the solution, then what is?

15. World Bank Study 2011 • Is an MTEF always appropriate, given different country circumstances? • What has worked and not worked in MTEF implementation? • What design features are likely to result in an MTEF? • How to strengthen or reform existing MTEFs? • Econometric analysis suggests - MTEFs improve fiscal discipline and allocative efficiency - results on operational efficiency are mixed – MTPF is more significant here • Case study analysis suggests - MTEF has made budgeting more strategic - has improved fiscal discipline - has increased recognition of resource constraints - has fostered cooperation between agencies

16. Common Problems in MTEF Development • Lack of data • MOF and line ministries not prepared for new roles (skills and incentives) • Lack of high level political support for clearer spending choices • MTEF system too complex and paper intensive • Misconceptions about what an MTEF is – e.g. multi-year estimates only, just a technical MOF exercise • Not linked with the annual budget – but a separate exercise, so budget behavior is not changed • Not linked with national plans, PRSPs etc • No evaluation of performance against plan

17. Common Problems in MTEF Development • Resource envelopes may be over-estimated and ceilings may be ignored by sector ministries • That is a hard budget constraint is not achieved or enforced • Sector strategies may be pro-forma exercises • And not adequately costed • MTPF contains too many performance indicators of dubious quality • And they are not used in decision making processes • This is a general issue in all performance management initiatives