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Public Expenditure Management and the Medium-Term Fiscal Framework

Public Expenditure Management and the Medium-Term Fiscal Framework Workshop on Bhutan Public Expenditure Management August 16-20, 2004 Christian Eigen-Zucchi The World Bank What is an MTFF?

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Public Expenditure Management and the Medium-Term Fiscal Framework

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  1. Public Expenditure Management and the Medium-Term Fiscal Framework Workshop on Bhutan Public Expenditure Management August 16-20, 2004 Christian Eigen-Zucchi The World Bank

  2. What is an MTFF? • Typically consists of integrated macroeconomic and revenue projections, and a policy commitment to a set of strategic fiscal policy goals. • An MTFF is a first step of an MTEF in moving the budget process from a needs basis to an availability basis – determines the aggregate resource envelope.

  3. Going Back to the Three Objectives of Public Expenditure Management Systems… • Macro-fiscal discipline and stability • Avoid public finance crises or the need for major adjustments • Support economic growth and macroeconomic stability • Strategic allocation of resources • Match government policy with programs, objectives (allocative efficiency). • Technical efficiency • Getting the most from each ngultrum spent

  4. Macroeconomic Projections • In order to develop sound revenue forecasts, some key macroeconomic variables need to be projected • GDP growth • Inflation • Power sales • Tourist arrivals • Others?

  5. A Robust Multi-year Projection of Revenues • Base revenue projections on the forecasts of key macroeconomic variables. • Build from the bottom up. • Seek coherence across agencies. • Refine and improve methodology over time.

  6. Commitment to Fiscal Path • Choose fiscal targets deemed consistent with: • Desired macroeconomic path (inflation, external accounts, available finance). • Overall strategic policy goals (such as size of government as a share of GDP, pillar of 9FYP of fostering private sector led growth).

  7. Commitment is Essential • The key to the credibility of the targets is the extent to which expenditure adjustments would be made to compensate for any revenue shortfalls. • If no adjustments would be made, then the targets are purely notional, and not likely to be met. • If serious spending adjustments would be demanded of the line ministries in the event of a revenue short-fall, then the targets become meaningful (AP example).

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

  9. The MTFF process gives… • A more predictable resource envelop over a medium-term horizon. • For example, the overall balance target, say a deficit equivalent to 5% of GDP, combined with a revenue forecast equal to 35% of GDP, yields an aggregate fiscal envelop for spending of 40% of GDP. • A commitment from the Government to follow a sustainable fiscal policy. • Key step in moving budgeting from a needs to an availability basis.

  10. Capacity is a Significant Issue • Technical • Staff skills • policy analysis, macro forecasting, budget examination • Policy • Capacity to enforce hard budget constraints • Commitment to a continuous process of improvement

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