GAC Hub Training Addis Ababa

1. GAC Hub TrainingAddis Ababa Budget Reform and MTEFs 4-7 June 2007

2. Policy-based budgeting • PI – 12: Multi-year perspective in fiscal planning, expenditure policy and budgeting • Dimensions to be assessed • Preparation of multi-year fiscal forecasts and functional allocations • Scope and frequency of debt sustainability analysis • Existence of sector strategies with multi-year costing of recurrent and investment expenditure • Linkages between investment budgets and forward expenditure estimates • Rationale: policy decisions have multi-year implications and must be aligned with resource availabilities • Relevance to GAC – poorly functioning budgets facilitate fraud and corruption

3. A word of caution • Concept is simple: policies have multi-year spending implications, and should be made with the outer year costs related to projected available resources, projects have predictable spending cycle and incremental recurrent costs, debt payments should be known • PERs, CFAAs, CEMs, PEMFARs etc have all recommended MTEFs across SSA • Only a small number of really successful exemplars yet (Uganda, SA, and a proto MTEF in Botswana) – some promising (Tanzania) and some still to gain traction (Ghana). By contrast many long running OECD successful examples • Much depends on getting the diagnosis right, getting existing budget working more credibly, then designing an appropriate MTEF based budget reform process • Key message: take an interest in what is being proposed, ask whether it addresses the core of budget problems, and don’t leave specifications to consultants. • Budget reform is a journey – how far do you want the train to take you? • If you get this wrong, budget reform will stall, and the system will revert to default - incremental, line item input oriented dual budget system

4. Budget basics – three levels of a well performing budget system • Bank’s PEM Handbook first elaborated this framework about 10 years ago • Level 1: Fiscal efficiency - ability of budget system to set and achieve aggregate budget outturns consistent with fiscal objectives • Level 2: Allocative effficiency - allocating resources to areas of spending consistent with policy priorities of government and organizational goals of MDAs • Level 3: Operational efficiency - spending money efficiently and effectively to achieve outputs and outcomes

5. And some definitions • MTFF - Medium term fiscal framework • Typically 1+3 years rolled over annually, covering aggregate revenues and spending, perhaps disaggregated to major blocks: recurrent, capital, wage bill, debt servicing, deficit. Availabilities rather than needs determined, found in all IMF programs. • Addresses level 1 requirements – core of a fiscal strategy. • Just making annual budgets within MTFF is a major step towards fiscal sustainability and budget credibility

6. Contd. • MTEF - Medium term expenditure framework • Non-debt component of total expenditures, broken down by sector/MDA, 1+3 years, rolled. • Usually constant base year prices (but may also be current). • Basis for setting annual call circular ceilings – as MDA envelopes. • Top-down, derived from MTFF • Progressively also bottom-up as better cost information is developed • Addresses level 2 concerns • Disciplines policy-making • Discourages incrementalism, changes roles and responsibilities of MF and MDAs • Requires budget comprehensiveness (PI-7) • Scope for greater participation in budget making (budget calendar) • MTEF is a “whole of government system” and cannot be pilotted • Applicable to both unified and dual budgets

7. Contd. • PBB/PB - Program based budgeting/performance based budgeting. • PBB refers to budget structure – organizing budget by programs, sub-programs or activities (traditional budgeting is by organizational structure). • Programs express policy goals, and imply end of dual budgeting (current and capital spending merge in a single program) • In purest form, PBB may entail programs which cross departmental boundaries, in practice they follow organizational structure • PB means performance budgeting, the inclusion of performance information (outputs, results, outcomes) in budget document • In purest form, PB is a way of building up budgets by looking at alternative bundles of outputs, in practice it means adding a column of performance information to the PBB structure • Nowadays, the two concepts are run together – signifying a program structure with performance information • Old style dual budgets sometimes also had performance information – but only for the capital/development budget (which de facto is semi-program format).

8. Contd. • With PBB/PB comes strategic planning, necessary to clarify organizational goals, intended outputs, outcomes, key results and performance indicators. Strategic planning is business practice derived, unrelated to old style national development planning • Strategic planning also facitates modern personnel management (cf: Bank OPEs) • PBB/PB requires creation of a system of M&E, and much trial and error generating meaningful PIs • MTEF + PBB/PB creates incentives to manage for performance, thus addresses Level 3 • To manage for performance you need a governance culture that favours performance, this may require reform of the traditional CS model

9. Contd. • PBB/PB is broadly what is entailed when the Bank talks about “results based budgeting” or “results based management”, also “output-based” budgeting. Informing annual budgeting with results is fine, erecting a formal results based budget system may be a bridge too far • PBB/PB requires change to COA/classification systems (PEFA PI – 5), and is facilitated by IFMIS • PBB/PB also requires re-definition of how the budget is controlled (votes and programs), and thus Financial Regulations • This means modernization of finance law • Unwise to embark on PBB/PB if country is aid dependent and donors unwilling to shift to budget support. Conversely, PBB/PB encourages integrated view of current/capital spending

10. What are the capacity implications? • MTFF is straightforward – good debt data, capacity for macro-economic projections and spreadsheet skills • MTEF requires clear road map, understanding of roles, responsibilities, sequencing, and political discipline, and budget comprehensiveness • PBB/PB entails major change: at heart of OECD NPM reforms, possible for middle income, hugely challenging for poor countries • Budget reform may be resisted by Budget dept

11. What is happening? • Recommendation of MTEFs in countries where existing budget system is dysfunctional, and governance pre-conditions for budget reform are absent • Widespread misunderstanding by donors and governments of what exactly is entailed in budget reform • Poor oversight of consultants who pull inappropriate models out of briefcases • Finance ministries haven’t understood their changed role with MTEF based budgeting • Even when reforms supposedly are in place, the new system has little traction • Fiscal management may have improved (L1), allocations slightly (L2) but performance only a little (L3)