Fiscal Space in Performance Budgeting and Medium-Term Expenditure Framework in Russia

1. Karen Vartapetov Ministry of Finance Russian Federation The case for fiscal space in performance budgeting and medium-term expenditure framework in Russia FISCAL SPACE – REVIEWING, ASSESSING AND PRIORITISING GOVERNMENT EXPENDITURE 14-15 MAY 2008

2. Fiscal space of the Russian federal budget Fiscal space is substantial = Budget surplus (3-4% GDP) + Oil-and-gas reserve funds (10-12% GDP) vs. Federal budget expenditures (16-17% GDP) Sustainable measures to increase fiscal space: • Raising revenues (space for better tax administration) • Rationalizing expenditures (a significant room for better allocation and efficiency gains, program-based budgeting) • Borrowing (a valid measure, but the current strategy is to reduce the debt burden) • External grants (in essence, the inflow of oil-and-gas export revenues represents an external grant of the unsustainable nature. Hence, Reserve and National Welfare Funds)

3. Two ways of delivering better public management • ‘Imposing order’ – strengthening of external control • Optimal decentralization – providing incentives for managers to deliver agreed outcomes

4. Performance budgeting enables an efficient use of fiscal space Decentralization of public finance management in Russia • Fiscal decentralization - devolution of revenue and expenditure decision-making authority to subnational governments • Administrative decentralization (‘agencification’)- granting financial management autonomy to accountable government agencies • Service delivery decentralization – separation of policy-making and service provision (‘steering rather that rowing’)

5. Russia’s case: Budget Reform Matrix3 waves of public finance decentralization

6. Models for performance budgeting Expenditure Traditional input budgeting Cost efficiency Inputs Activities Technical efficiency Efficiency Output budgeting Output Effectiveness Outcome budgeting Intermediate outcome Outcome

7. The planned trajectory of the Russian budget reform • Results-based medium-term budgeting (from 2008) • Long-term budget stability and sustainability • Revenue and expenditure delineations between government tiers • Meduim-term budget planning • Performance budgeting • International standards in public accounting and reporting • Input-based short-term budgeting (1991 - 2000) • establishment of budget procedures and regulation (Budget Code) • Cash-basis budget • Federal Treasury • fiscal dicsipline and expenditure control • Intergovernmental equalization transfers 2001-2008

8. Russia’s case: performance budgeting tools

9. Russia’s case: Performance budgeting tools Traditional budget documents (submitted to MoF) Expenditure 1. Expenditure programs 2. Budget allocation justifications (available to the public, assessed by MoF) 3. Register of existing expenditures Inputs Activities Lump sums to top-performers 3. Ministries’ performance reports (public, approved by Government) Output Intermediate outcome 4.Federal Government Long-term Economic Program (public, approved by Parliament) Outcome

10. Performance Budgeting and the budget process Medium-term planning Revenue policy Macroeconomic Planning Debt policy Performance audit Outcome planning Control Budget Preparation Internal audit Delegation and accountability Accounting and Reporting Outcome reporting Budget implementation Management accounting Budget programs

11. Transition to multi-year budgeting

12. Medium-term expenditure framework: comparing a medium term financial plan to a 3-year federal budget

13. Rolling three-year budget Current fiscal year 2 following years ADJUSTMENT Current fiscal year 2 following years PLANNING ADJUSTMENT Current fiscal year 2 following years PLANNING t +1 t +2 t +3 t +4 t +5 14

14. Sequencing in budget planning

15. Separate planning of existing and proposed expenditures Exiting expenditures (90-95%) • Social transfers • Debt service • Public services • Capital programs New policy proposals (5-10%) • new legislations • new programs Approval Inclusion in the budget

16. Performance-budgeting and fiscal space 1. Allocative efficiency gains Zero-based Budgeting All existing expenditure programs are revised every budget period (politically sensitive; lock-in expenditures ) Incrementalist Approach Only new policy proposals are considered (5-10% of total expenditures) VS 2. Technical efficiency gains Ministries’ efficiency gains do not usually exceed the inflation rate

17. Composition of federal expenditures, 2008

18. Separate planning of existing and new expenditures Expenditure limits Room for new policy proposals Investment objects Existing expenditures Register of existing expenditures Long-term earmarked expenditure programs State Arms program(till 2015) Public sector pay &fringe benefits, military pay and allowance Pensions and benefits (Public liabilities) 2015 2007 2008 2009 2010 2011 2012 2013 2014 3-year budget

19. Medium-term expenditure framework from 2008 Program for socioeconomic development for 12 years Macroeconomic forecast for 3 years Annual budget policy statement for 3 years Debt, revenue and intergovernmental fiscal relations strategies Ministerial strategic plans (performance reports) Sectoral strategies Strategic priorities Fiscal framework New and existing ‘expenditure justifications’ Ministries have to support their expenditure bids with performance information 3-year budget

20. Russia’s budget reform in the international context Medium-term Budgeting • Australia • New Zealand, Great Britain, • Nederland, Sweden Russia (2009-2010) France 2007 • USA Vietnam 2007 • Czech Republic Russia (2007) • Poland • Bulgaria • Kazakhstan • Russia(2003) Performance Budgeting • Ukraine

21. PB is instrumental in a specific institutional context In the last budget cycle Russia’s federal budget expenditures were increased by some 30% without any efficiency assessment or effectiveness consideration You can’t budget for results if you don’t manage for results. Yet the latter requires human skills and institutional arrangements (accountability, transparency, political commitment )

22. Models for performance budgeting Expenditure Traditional input budgeting Cost efficiency Inputs Russia 2008 Activities Technical efficiency Efficiency Output budgeting Output Effectiveness Outcome budgeting Intermediate outcome Outcome

23. PB is not the easiest way to create fiscal spaceALLAN SCHICK’S PRINCIPLES OF BUDGET REFORM SEQUENCING: • Foster an environment that supports and demands performance before introduction of performance and outcome budgeting • Control inputs before seeking to control outputs • Budget for work to be done before budgeting for results to be achieved • Enforce formal contracts in the private sector before introducing performance contracts in the public sector • Introduce effective financial auditing before moving to performance auditing • Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them

24. The question is: Whether to implement Performance Budgeting while basic institutional arrangements are not in place and fiscal space is excessive? • The Russian answer: “Probably, yes” • Performance information contributes to better accountability and transparency. • The change in fiscal behavior is a long-term process. The accumulation of performance information is time-consuming. The sooner you start the better • Take as many steps forward as possible as there always be a few steps back • 4. If you don’t sort out fiscal rules you might not be able to use fiscal space when it is really needed

25. Questions for consideration • Does performance budgeting present an efficient tool for enhancing fiscal space? • In what ways is performance information used in the budget process in your economy? • Do the basic pre-conditions (say, control of inputs) have to delivered before introducing performance budgeting?