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Medium-Term Expenditure Scenario Analysis

Medium-Term Expenditure Scenario Analysis. USING BOOSTS. Outline. Why? Objectives of medium-term analysis How? Setting a macro-framework Selecting a unit of analysis Designing scenarios and options Limitations and constraints. Why? Medium-Term Analysis Using BOOSTs.

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Medium-Term Expenditure Scenario Analysis

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  1. Medium-Term Expenditure Scenario Analysis USING BOOSTS

  2. Outline • Why? • Objectives of medium-term analysis • How? • Setting a macro-framework • Selecting a unit of analysis • Designing scenarios and options • Limitations and constraints

  3. Why?Medium-Term Analysis Using BOOSTs

  4. Objectives of Medium-Term Analysis using BOOSTs BOOSTs provide detailed historical expenditure information Can be extrapolated to assess expenditure allocation options over the medium-term

  5. Objectives of Medium-Term Analysis using BOOSTs • Analysis using BOOSTs provides powerful tool to illustrate: • How sector or ministry-level expenditure can adjust to macroeconomic trends and shocks • Impacts of expenditure decisions on fiscal aggregates • Trade-offs and conflicts between expenditure in different priorities and sectors • Trade-offs and conflicts between expenditure decisions and macro-fiscal policy objectives

  6. Example 1: • Country with growing debt repayment obligations • Policy targets to: • Increase expenditure in “priority sectors” of health and education • Reduce the share of expenditure on the wage bill • BOOST analysis used to show how policy targets could be achieved within sustainable aggregate limits and while meeting repayment obligations

  7. Output: share of expenditure on wage bill Output: share of expenditure by sector

  8. Example 2: Country with deteriorating revenue effort, SOE subsidies imposing severe fiscal costs Policy target of maintaining the real value of Sovereign Wealth fund BOOST analysis used to demonstrate the need for revenue and SOE reforms if policy objectives were to be achieved without large cuts in expenditure in priority ministries

  9. Output: Expenditure and Fund Balance trends

  10. How?Medium-Term Analysis Using BOOSTs

  11. Setting a macro framework • “Anchor” can be chosen according to objective of analysis • Fix aggregate expenditure • Used to demonstrate tradeoffs within sustainable expenditure limits • Flexible aggregate expenditure • Used to demonstrate short-term impacts of expenditure decisions on cash reserves/debt levels

  12. Setting a macro framework • Fixed aggregate expenditure • Copy aggregate expenditure limits from appropriate scenario of IMF/World Bank Debt Sustainability Analysis over projection period • Divide expenditure types (ministries, sectors, inputs) into: • Those determined by input assumptions that you control • Residual expenditures that will be forced to adjust to accommodate change in manually-determined expenditure types

  13. Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline Input expenditure trajectories in drop-down menus Taken from DSA Calculated based on input assumption Set to adjust automatically to keep deficit equal to DSA level –share of non-priority expenditure maintained

  14. Setting a macro framework • Flexible aggregate expenditure • All expenditure lines are manually determined • Adjustments reflected in change in the deficit/surplus

  15. Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline All expenditure dynamics input from drop-down menu Taken from DSA Manually input based on policy assumptions Adjusts to reflect aggregate impact of sector/ministry expenditure decisions

  16. Selecting unit of analysis • BOOSTs allow high level of disaggregation when analyzing expenditure • Appropriate level at which to model expenditure choices will depend on policy issues • Sectors – implications of achieving sector expenditure targets • Ministries – implications of ministry expenditure targets • Inputs – implications of public sector wage settlements • Sub-national governments – implications of decentralization initiatives • Etc.

  17. Expenditure categories taken from BOOST Level of disaggregation appropriate to complexity of analysis Sector, Ministry, Division, Input, sub-national government unit, etc.

  18. Selecting Input Assumptions • Based on policy options under consideration • Based on policy decisions already made to understand implications • Examples: • Fixed rates of expenditure growth by sector • Sector or ministry expenditure levels established in plans or policy commitments • Changes in spending to achieve target expenditure ratios

  19. Drop-down menus linked to scenario sheets are an easy way to update assumptions and examine the implications of different policy targets

  20. Running scenarios • BOOST analysis can: • Help communicate incompatibilities and required trade-offs between competing commitments and priorities • Identify the need for trade-offs within an overall resource constraint • Show macro-fiscal impacts of expenditure policy decisions • Illustrate required sector expenditure adjustments within a given macro framework

  21. Running scenarios • Government considering ambitious program of expenditure in priority sectors identified in the national plan • Real expenditure growth of 5% per annum for health, education and infrastructure • Government has implemented a hiring freeze, but agreed with the public sector union to inflation indexing of wages and no layoffs • Under the terms of an IMF program, there is no scope for additional borrowing

  22. Input appropriate spending trends Because no additional borrowing, use “fixed aggregate expenditure, setting deficit as DSA levels

  23. Running Scenarios But, because of fixed real wages, required unfeasible compression of non-wage expenditure Expenditure growth can be absorbed by reductions in other sectors

  24. Running scenarios Government facing economic shock, with expected decline in real revenue Committed to maintaining real expenditure on core public services, but has established nominal expenditure freeze in other areas Wishes to assess debt implications

  25. Input appropriate spending trends

  26. Running scenarios Short-term growth in deficit Growth in budget share for priority sectors

  27. Limitations and constraints

  28. Limitations and constraints • Complement to, rather than substitute for, DSA • BOOST analysis relies on a macro framework taken from a DSA • BOOST does not provide data on economic growth, revenue, inflation, which needs to underpin all analysis • BOOST data not sufficient for modeling debt dynamics • Static analysis - No mechanism for tracing interactions between expenditure decisions and growth or revenue

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