7. Top Down Budgeting and MTBFs - MEF...2017/02/06 · Top-Down Budgeting and MTBFs Marco Cangiano...

transcript

7. Top-Down Budgeting and MTBFs

Marco Cangiano

Rome, February 6-8, 2017

Outline

• Whytop-downbudgeting?

• MotivatingandMTBF

• PreparingandupdatinganMTBF

• KeyfeaturesofanMTBF

• OtherinstitutionsthatcansupportMTBFdevelopment

• Conclusions<<CourseAcronym>>

Whytop-down?

<<CourseAcronym>>

Whatisit?• Atop-downbudgetprocessmeansthatabindingdecisiononbudgetaggregatesistakenbeforeallocatingexpenditurewithinthataggregate.

• Decisionsaretakeninacascadingmanner

• Itconsistsofensuringthatthetotallevel,andoverallallocation,ofexpenditurearedeterminedbeforedetaileditemsinthebudgetarenegotiated.

• Ithighlightsthetrade-offsthathavetobemade,andbringsclarityastohowtheprocessofprioritizationwillberesolved.

• Aninstitutionalizedseparationbetweenthedecisionsregardingaggregateexpenditureandoverallallocation,andtheprocessofdecidingonindividualprogramsandactivities,andtheircorrespondingbudgetlines

Budgetingasapoliticalbiddinggame• Atop-downapproachmustco-existwithnaturalbottom-upbiddingprocess,butitconstrainit.

• AspertheFinnishFreedomofInformationAct,thefinalbudgetsubmissionssenttotheministryoffinancearemadepubliclyavailable.

o Alargedeviationbetweentherequestedfigureandtheactualoutcomeinthebudgetwouldindicatethelineminister’sfiscalirresponsibilityorlackofpoliticalpower.

o Ahighdegreeoftransparencycancreateincentivesforfiscaldiscipline.

• Netherlands’Frameworkand(25)PolicyLetters.

• Sweden’sCabinetBudgetRetreatand27spendingareas.

MotivatinganMTBF

<<CourseAcronym>>

Definition and elementsAn MTBF is a set of systems, rules, and procedures ensuring that fiscalplans are drawn up with a view to:

• their impact over several years

• future events which may affect government accounts

Notatechnicaldevicebutafundamentalchangeindesigningandmanagingfiscalpolicy

An MTBF includes:

• requirementstopresentm-tinformationatspecifictimes

• proceduresformakingmulti-yearforecastsandplansforrevenueandexpenditure

• obligationstosetnumericalexpendituretargetsbeyondtheannualbudgethorizon

Objective of MTBFsWhatThey Do HowTheyDoIt WhoBenefits

1. Reinforceaggregatefiscaldiscipline

Byconstrainingbudgetappropriation&executioninfutureyearstolevelsconsistentwiththeGovernment’smedium-termfiscal

objectives

FinanceMinisters

Taxpayers

FutureGenerations

2.Facilitateamorestrategicallocation ofexpenditure

Byabstractingfromtheimmediatepressuresandlegalandadministrativeconstraintsthatimpingeupontheannualbudgetprocess

PrimeMinisters

PlanningMinisters

Parliamentarians

3.Encouragemoreefficientinter-temporalplanning

Byprovidinggreatertransparency andcertaintytobudgetholdersabouttheirlikelyfuture

resources

Line Ministries

Agencies

Local Governments

Medium-termFiscalFramework

PrinciplesoffiscalmanagementNumericalfiscalruleDisclosurerequirements

Multi-yearmacroeconomicforecastMulti-yearfiscalforecastMedium-termfiscaltarget

Multi-yearexpenditureceilingMulti-yearspendingallocationsPlanningmargin

DetailedexpenditureoutturnReconciliationofchangefromBudgetExplanationofdiscrepancies

Instrument Content

Medium-termBudget

Framework

FinalAccounts

Objective

Foundationforfiscalobjectives

Statemulti-yearfiscalpolicytargets

Setmulti-yearspendingplans

Reportactualexpenditure

DetailedexpenditureappropriationsOtherbudgetarycontrolsReconciliationofchangesfromMTBF

FiscalRuleorResponsibilityLaw

AnnualBudgetAuthorizeannualexpenditure

Where does it fit in?

Expandingtheoutlookfordecisionmaking

• CountriesthatsuccessfullyintroducedfullydevelopedMTBFwantedtoimprovedecisionmaking bytakingintoaccountthemedium-termcost ofpublicpolicies– Fundamentalnatureofbudgetdecisions(investment)– Helpsmitigateannualbudgetshortcomings(incremental…)

• Amedium-termorientationtobudgeting,notmultiannualbudgeting– Annualbudgetprocessremains,yetismoreorlesstransformed– Keepsnecessaryflexibility– Butrequiresaccountabilityandtransparencyoverforecastsreconciliation

(justifyingadjustments)

Tailoringthemediumtermapproach

• SuccessfulMTBFssharecommonmethodologies• Butactualdesignvaryalotacrosscountries

– Notonesinglewaytodoit– Manydifferencesreflectpre-existinginstitutions…– …butalsothediversityofobjectives

• Illustration:FranceandUK– Similarmodelonpaper:fixedandbindingframeworks– ButFrancetendstoreviseforwardyearsmuchmore– Reflectsdifferentobjectives:strongcommitmenttototalexpenditurerule

(France)vs.emphasisonministriesaccountabilityfordeliveringtargets(UK)– Linkedtodifferentbudgetingculture:strongcentralizedcontrol(France)vs.

oversightroleofMoF (UK)• Tailoringthedesigntoonecountry’sneedsandtraditionsisakeysuccessfactor

Why medium-term budgeting?

1. Capturingdeferredeffects:– decisionstodayhaveconsequencestomorrow

2. Makingnon-discretionaryintodiscretionary:– allpoliciescanbechangedwithenoughtime

Itaddsakeydimension3. Signalingfuturechanges:

– managingexpectationsandallowingtimetoadapt4. Committingtofutureexpendituretargets:

– bindingorevenindicativetargetsaddresstime-inconsistencyoftoday’sspendingpreferences

Signalingfuturechanges

2013Frame 2014 Frame 2015Frame 2016Frame

23.Governmentoffices 77 76 76 76

24.Foreignministry 1258 1251 1226 1257

25.Justiceministry 806 823 813 798

26.Interiorministry 1231 1163 1132 1133

27.Defenseministry 2449 2389 2294 2288

28.Financeministry 15126 15123 15109 14991

29.Educationandcultureministry 6056 5960 5887 5881

30. Agricultureandforestryministry 1815 1797 1762 1701

31.Communicationministry 2083 1879 1902 1806

32.Labour andindustryministry 2461 2381 2355 2216

33.Socialandhealthcareministry 8651 8658 8670 8746

35. Environmentministry 243 233 229 211

36.Debt interest 2093 2342 2649 2941

Sumofframes 42435 41907 41624 41271

Expenditureceiling 42801 42319 4200713

Finland:Medium-termframedecisionofApril2012

Capturingdeferredeffects

2010-11$m

2011-12$m

2012-13$m

2013-14$m

2014-15$m

Total$m

Taxreformandintegrity

Fringe benefitstax– reformofthecarfringebenefitrules

5.0 26.4 135.4 331.2 455.9 953.9

Sustainabilityoffamilypayments

Pauseindexationofupperlimitsandthresholdsforafurthertwoyears

0.0 -0.1 231.4 475.1 495.5 2,201.9

Supporting families

Supportingfamilies withteenagers -1.4 -89.5 -199.4 -237.6 -244.02 -771.914

Measuresinthe2011-12AustralianBudget

NotlosingcontrolwithMTBF

• MTBFsappeartoreducediscretion…• …bypromotingconsistencyandreconciliationbetween…

– macroeconomicpolicytargets– budgetallocations– publicpolicypriorities

• …whichcanparadoxicallyhelpMoF increaseitscontrolbymovingfrom“numbers”toward“costofpolicies”– InFrance,MTBFdesignedandpushedbyMoF (resourcepredictabilitywasthe

argumentto“sell”thereform)– Becauselineministriesweretoooftenobtainingdecisionscommittingfuture

years’fiscalspace– AndMoF wasunsuccessfulinpushingreformswithlimitedsavingsinnearterm

• Newformofcontrolmoreusefulwhenfiscalspaceisnotabundant

PreparingandupdatinganMTBF

<<CourseAcronym>>

AtheoreticalapproachtoMTBFdevelopment

MTFFMediumTerm

Fiscal Framework

MTBFMediumTerm

Budget Framework

MTPFMediumTermPerformanceFramework

‘MTBF’willbeusedasagenerictermfortherestofthepresentation

• InternationalexperienceshowstherearevariouslevelsofMTBFsophistication

• MTEFimplementationusuallyfollowsapathfromaforecastingtooltoafullprogrammatictool

• SuccessfulMTBFsaredecisionmakingtools…• …soimplementationofMTBFwillgraduallytransform

budgetprocess(‘integration’)• MTBFleveldevelopmentstronglylinkedtodegreeof

integrationanddetailsofMTBF(seefollowingslides)

Anchoringthebudgettoeconomicpolicytargets(MTFFstage)

• Amediumtermfinancialplan– Keymacroeconomicparametersandrevenueforecasts– Setsatotalenvelopforexpenditureconsistentwith

mediumtermeconomicandfiscaltargets• Sequentialapproachtobudgetingprocess

– Financialplanasafirststepfortheformalannualbudgetprocess

– Top-downapproachonly

Revenue

Economicaggregates

Detailed budget lines

Annual Budget

Medium term

economictarget

Definingafiscalstrategy(MTBFstage)

• Forecastofrevenueandexpenditurepereconomicclassification(orlargesectors)

• Iterativeprocesstoreconcile– Top-downapproach(asinMTFF)– And bottom-upestimatesofbaselineexpenditure

trends(currentpoliciesonly)

Revenue

Economicaggregates

Detailed budget lines Annual Budget

Medium term

economic target

• Helpsdefineadetailedfiscalstrategy– Analysispereconomicclassificationorgroupofsectors– Strategic phaseinbudgetpreparationprocessbasedonatop-down/bottom-up“dialog”– Processstill positionedaheadoftraditionalpreparationofannualbudget

Towardsmulti-yearbudgetplan(MTPFstage)

• Budgetprocesstransformed– Mediumtermapproachintegratedtobudgetpreparationprocess– Estimatingbaselineforcurrentpolicyforeachbudgetlinebecomesfirststepinthebudget

process…– …implicationoflinesministries?(variedovertimeinAustraliaforinstance)

Revenue

Economicaggregates

Detailed budget lines

Annual Budget

Medium term

economic target

• Amediumtermbudgetplan– Asdetailed asanyannualbudget– Year1is nextyear’sbudget– Roleofyear2et3differsfrom one

countrytoanother– Sodoesdegreeofdetailspublished

Whatimpactonthetraditionalbudgetprocess

• FullyintegratedMTBFscantriggertensions:– WithParliamentoveritsrole“vis-à-vis”Government(debate,vote?)– Withlineministriesandagencies“vis-à-vis”the“certainty”onresourceallocationin

forwardyears

• ExperiencesuggeststheroleofParliamentdoesnotevolvemuchcomparedtothetraditionofannualbudgets– AustraliaandUK:novoteonMTBF– France:formaladoptioninalawbutlimitedpowertoamend– Sweden:rolelimitedtoadoptinganexpenditureceiling(top-downapproachto

Parliamentaryapprovaladoptedafterthe1990scrisis),mediumtermestimatesnotdiscussed

• Roleofforwardyears’estimatesforfuturebudgetsvariesconsiderablyamongcountries

UpdatingtheMTBF:roleofforwardyears

• Roleofforwardyearsinbudgetpreparationiscentraltothedesign– Australia,Canada:rollingandindicativeestimates;informsonthesustainabilityofcurrentdecisions

butdonotbindfuturedecisions– FranceandUK:fixedandbinding;ministerialceilingsputconstraintfuturebudgets– Sweden:acombinedframework;rollingestimateswithinafixedtotalexpenditureceiling

• Inanycase,theforwardyearshouldserveasastartingpointforthefollowingbudgetpreparation

– Experiencesuggestsrollingframeworksareneverpurelyindicativeandfixedframeworksareneverfullybinding

• ImportanceofMTBFobjectivesandpre-existinginstitutions– Fixedframeworksassociatedwithresourcepredictability– Rollingframeworksmorefocusedonfiscaldisciplineandtransparency– Roleofexpenditureceilings(France,Sweden)canbelinkedtoanhistoryofdifficultytocontain

expendituregrowth

Updatingrollingandindicativeframeworks(Australia)

Y Y+1 Y+2Y Y+1 Y+2 Y+3

Startingpoint:MTEFpreparedlastyear;Yisbudgetforcurrentyear

Updateofbaseline:costofcurrentpoliciesisupdatedandanewyearisadded

Discussionofnewpolicies:• fiscalspaceestimatedtop-downconstraint)• discussionofsavingsonexistingpoliciesandnewmeasuresbasedonmedium-termimpact

FinalizationofnewMTEF:Y+1becomesnextannualbudget

Updatingfixedandbindingframeworks(UnitedKingdom)

• Fixedandbindingframeworkonpartoftotalexpenditure.UKframeworkdistinguishes– DepartmentExpenditureLimit(DEL):discretionarypoliciesimplementedbyministries– AnnuallyManagedExpenditure(AME):debtservice,entitlementprogramsandotherconstraint

spendingwhichcannotbemonitoredinyear• Fixedandbindingframework(theSpendingReview)preparedperiodicallyandcombined

withglobalrollingMTFF(economicandfiscaltargets)

Y+1 Y+2 Y+3

Revenue

Expenditure

RollingMTFF

Revenue

Expenditure

FullupdateofAMEs:similartoindicativerollingframeworks

Fullupdateofmacro-framework:macroassumptionmadefortotalDELsfortheout-yearsnotcoveredbycurrentSpendingReview

Spendingreview

FinalizationofministerialbudgetsbasedonDELlimits:ceilingperministryprovidedbySpendingReview;allocationwithincanberevised

Accountability ArrangementsSweden:Presentationofchangessince2007Budget

-0.4-0.3-2.4Net drawdown of carryovers

-22.3-21.6-24.3Total change in expenditure

-1.8-1.3-0.8Volume changes in entitlements

-4.5-3.9-4.6Other

984.1948.6928.0Total expenditure in Budget 2008

-14.9-14.2-13.7Accounting adjustments

4.03.51.8Other macroeconomic changes

2.11.00.0Recalculation of wages and prices

-12.4-12.0-8.6Discretionary cuts

5.55.64.0Discretionary increases

1,006.5970.2952.3Total expenditure in Budget 2007

201020092008Billions of kronor

Changes in Expenditure since 2007 Budget

-0.4-0.3-2.4Net drawdown of carryovers

-22.3-21.6-24.3Total change in expenditure

-1.8-1.3-0.8Volume changes in entitlements

-4.5-3.9-4.6Other

984.1948.6928.0Total expenditure in Budget 2008

-14.9-14.2-13.7Accounting adjustments

4.03.51.8Other macroeconomic changes

2.11.00.0Recalculation of wages and prices

-12.4-12.0-8.6Discretionary cuts

5.55.64.0Discretionary increases

1,006.5970.2952.3Total expenditure in Budget 2007

201020092008Billions of kronor

Changes in Expenditure since 2007 Budget

23217232Sustainable cities & climate investment

Etc...

-50Clean-up of polluted areas

-200-200-50Safeguarding biodiversity

40-20-60Environment

-6,853-6,463-4,579Total discretionary changes

-1,085-723-435Procurement & operational efficiencies

-105-103-74Crisis preparedness

211206147Integrated emergency radio

-987-627-356Defence and Security

201020092008Millions of kronor

Discretionary Changes

23217232Sustainable cities & climate investment

Etc...

-50Clean-up of polluted areas

-200-200-50Safeguarding biodiversity

40-20-60Environment

-6,853-6,463-4,579Total discretionary changes

-1,085-723-435Procurement & operational efficiencies

-105-103-74Crisis preparedness

211206147Integrated emergency radio

-987-627-356Defence and Security

201020092008Millions of kronor

Discretionary Changes

48.0(0.3)

47.1(0.3)

46.1(0.3)Number of parental benefit days

Etc…

53.2(-4.3)

53.4(-4.1)Number of illness compensation days

1,646,000(14,000)

1,653,000(11,000)

1,664,400(10,000)Number of child allowances

27.700(-2,300)

29,500(-500)

30,200(3,200)Number of asylum seekers

201020092008(change since 2007 Budget)

Entitlement Volumes

48.0(0.3)

47.1(0.3)

46.1(0.3)Number of parental benefit days

Etc…

53.2(-4.3)

53.4(-4.1)Number of illness compensation days

1,646,000(14,000)

1,653,000(11,000)

1,664,400(10,000)Number of child allowances

27.700(-2,300)

29,500(-500)

30,200(3,200)Number of asylum seekers

201020092008(change since 2007 Budget)

Entitlement Volumes

Sweden:acombinedframework

SwedenhasadoptedasophisticatedframeworkcombiningfeaturesfromvariousMTEFmodelsandfiscalrules• Fiscalrules:totalexpenditureceilingadoptedtwoyearsinadvance basedonmediumtermstructuralsurplusbalancerule• RollingandindicativeMTEFfor27policies, designedtotestcompliancewithapprovedceilings(updatedseveraltimesayear

basedonquasi-automaticformulasor“frames”)• Roomtoplannewpoliciesinadvancewithintheceilings• Obligationtokeepgrowingmarginsintheframework:contingenciesandfiscaldiscipline(fiscalspacecannotbefully

allocatedtooearly)

Y+1 Y+2Y+1 Y+2 Y+3

Budget

Baselineestimatesofcurrentpolicies(27“frames”)

NewpoliciesincludingprovisionsformeasurestostartinY+2(semi-planningapproach)

Expenditureceiling

Mandatorygrowingmarginstobekeptforfuturedecisionmakingandcontingencies

France:abundleofframeworkandspecificrules

State budget

Publicagencies

Social securityHealth spending

Subnational governments

1.AnMTFF coverswholeofgeneralgovernment• anchoredbyadeficitrule• aggregatesinformationfromthetwoMTEFonStatebudgetandHealthspending,andforecastsforotherlevelsofgovernment

2.AnMTPF forStatebudget• anchoredbyexpenditurerule• bindingministerialceilingsfortwoyears(+oneforecastingoutyear)• separateceilingfortransferstoSubnational governments

3.AnMTBF forhealthspending• anchoredbyexpenditurefiscalobjective• expenditureceilingnotbindingbutincludescontingencyreserves

FrancehasbundleddifferentMTEFmodelsandtailoredfiscalobjectivesandrulestoitsfragmentedpublicfinances• Ahighlyfragmented PFMenvironmentwithvariousautonomousinstitutions• Publicfinancesarrangementsvarylargelyamonglevelsofgovernment• OverarchingrollingandindicativeMTFFencapsulatesmoreaccurateandbindingMTEFtailored tospecificsofgeneral

governmentsubsets• ModelofMTEFandlevelofdetailsvaryacrosspartsoftheframework• Aspecificfiscalobjective/ruleisattachedtoeachpartwithcoverageconsistency• Sub-rulessetinaccordancewithoverallfiscalruletarget

KeyFeaturesofanMTBF

<<CourseAcronym>>

Key Features of MTBFs

c. Expenditure Controls

• Top-down Budgeting• Commitment Controls• Reserves & Margins• Carry-over Rules

a. Multi-year spending limits

• SW/FIN/NL: Aggregate Ceilings

• UK/FR: Ministerial Ceilings• AUS: Program Estimates

d. Accountability Arrangements

• Audit of Macro Assumptions

• Multi-year Costings• Budget Sincerity Rules• Reconciliation of

Changes

Legitimacy

DisciplineCredibility

Enforcement

PREREQUISITES

i. Credible annual budget

ii. Prudent macroecono

mic projections

iii. Medium-term fiscal objectives

iv. Unified & comprehensi

ve budget process

b. Expenditure Prioritization

• FIN/NL: Coal. Agreements

• SW: Frame Budgeting• UK: Spending Reviews• FR: RGPP• AUS: Exp Review Cttee

Prerequisites

<<CourseAcronym>>

Prerequisites

a. Credibleannualbudget

b. Prudentmedium-termmacroeconomicprojections

c. Stablemedium-termfiscalobjectives

d. Comprehensiveandunifiedbudgetprocess

A credible annual budget

AverageOverspendAgainstBudgetTotal,1998-2007(%ofGDP,Actual-Forecast)

Percen

tofExpe

Binding estimates Indicative estimates Neitherbindingnor indicative

Prudent medium-term macroeconomic projections

AverageErrorinForecastingRealGDPGrowth,2000-2007(Inpercentofrealgrowth,Actual-Forecast)

Percen

tagePointso

Binding MTEFestimates Indicative MTEFestimates Estimates neitherbindingnorindicative

Cautious

Optimistic

Medium-term fiscal objectives

Country Nationalobjective

Supranationalobjective

Statutory base Coverage Time-framePolitical Legal Central General Annual Multi-

yearAustralia Balance,Debt --- X X X

Brazil Expenditure,Debt

--- X X X

Chile Balance --- X X X

Canada Expenditure,Balance,Debt

--- X X X

France Expenditure Balance,Debt X X X X X

Indonesia Balance,Debt --- X X X

Japan Expenditure --- X X X

Mexico Balance --- X X X

Netherlands Expenditure Balance, Debt X X X X

Switzerland Balance --- X X X

UK Balance,Debt Balance,Debt X X X

A unified budget processIssue Explanation Typical Challenges

BudgetCoverage Nolargeextrabudgetary funds LargeSocial SecurityandHealthFunds

BudgetFragmentation Allexpenditureauthorizedtogether Budgetsplitbetweencurrentand capital

Earmarked Revenues Limited earmarkingofrevenuetoexpenditure

Fuel surchargesforroadmaintenance

Standing Commitments Noinputcommitmentsthat canconflictwithoverallceiling

Laws requiringfixedbudgettransfertospecificpurposes

ParliamentaryApproval LimitedscopeforParliament toamendbudget

Parliament canincreasewithoutfindingreductions

SupplementaryBudgets

Supplementary budgetsarerareorexpenditureneutral

Supplementaries aresignificantandimpact policy35

Key Features

a. Multi-yearspendinglimits

b. Expenditureprioritization

c. Expenditurecontrols

d. Accountabilityarrangements

Multi-yearspendinglimits

<<CourseAcronym>>

Multi-yearspending limits

COUNTRYCOVERAGE(percent of

central gov’t)

SPECIFITYBinding

Indicative

TIME HORIZON

YearsUPDATES BASIS

AGGREGATE EXPENDITURE CEILINGS

Austria 100 5 Rubrics 32 chapters 4 Defined parameters Legislation

Finland 80 Total Spending13 ministries 4 Inflation, technical adjustments Coalition agreement

Netherlands 80 4 Sectors26 ministries 4 Inflation, technical adjustments Coalition agreement

Sweden 96 Total Spending27 Policy areas 3 Technical adjustments Parliament decision

MINISTERIAL CEILINGS

United Kingdom 60 25 Departments 3 Technical adjustments, reserve claim

Government commitment

France 40 35 - 40 Missions 3 Technical reallocations, reserve claim Legislation

FORWARD ESTIMATES

Australia 100 Ongoing and new policies 4 Existing policy: parameters

New policy: with approvalGovernment commitment

Levelofdetails

• CountrieswithfullydevelopedMTBFinternally prepareexpenditureforecastsasdetailedasabudget but…

• …allinformationnotnecessarilypublished– AustraliaandCanadapublishinformationatprogram/subprogramlevel

(transparencyobjective)– FranceandUKpublishministerialceilingonly(bindinglevel)– Austriapublishministryinformationbutvoteon5sectors

• …involvementoflineministriesvariable– Fixedandbindingframeworksconsistentwithmultiannualbudgetdiscussions

withministries– Baselineestimatesframeworks:frompredefinedformulas(Sweden)toshared

responsibility(Canada)orpreparationbyMoF (Australiainitially)

Updating expenditure ceiling(s)Approach Country Pros Cons

IndicativeAll yearsrevisedannually

ItalyFlexibility toaccommodate

shocks

Scopetofundnewpolicy

Medium-term constraintnottakenseriously

Expendituredriftasnocorrectionforpastoverspends

OverlappingYear3ofSRn becomesYear1

ofSRn+1

UnitedKingdomFrance

Avoidsplanningblight

Chance torevisedyear3allocations

Year 3bonanza

NospacefornewpolicybetweenSRs

Add FinalYearOnly add3rd Year

Sweden

Always have3yearplanninghorizon

ScopetospendadditionalrevenueinY+3

Planninghorizonextends beyondelection

HavetowaituntilY+3tospendadditionalrevenue

FixedPeriodCeiling fixedinrealtermsfor

4-5yearParliament

FinlandNetherlands

Coincides withpoliticalcycle

Firmenvelopeforgovernmentprogram

Planning horizonshrinksasnextelectionapproaches

NospacefornewpolicyoverParliament

Lack offlexibility

Expenditureprioritization

<<CourseAcronym>>

Expenditureprioritization

COUNTRYNO. OF 1st LEVEL PRIORITIZATION

FIXITY MEDIUM-TERM PRIORITIZATION

DECISION IN GOV’T

PARLIAMENTARY STATUS

FIXED INDICATIVE LEGISLATED FOR INFO

MINISTERIAL ALLOCATIONS

United Kingdom 25 ü ü ü

Finland 12 ü ü ü

FUNCTIONAL/PROGRAM ALLOCATIONS

Australia 270 ü ü ü

Austria 32 ü ü ü

France 35 ü ü ü

Netherlands 20 ü ü ü

Sweden 27 ü ü ü

ECONOMIC CATEGORIES

Belgium 13 ü ü

Japan 5 ü ü

Mexico 7 ü ü

Expenditurecontrols

<<CourseAcronym>>

ExpenditureControls

ii.KeyCostDrivers&RisksResidualMoF controlson:• Workforce,pay,&pensions• GuaranteesandPPPs• Acquisition/disposalofassets• Taxexpenditures

iii.ReservesandMarginsMultiyearprojectionsmakeprovisionfor:

• Reserve forcontingenciesthatariseduringthebudgetyear

• Planningmargintofundnewpolicymeasuresinfuturebudgets

iv.CarryoverRestrictionsNumericalrestrictionsononeormoreof:• Annualaccumulation ofunderspends• Totalstock ofaccumulatedcarryover

“entitlement”• Annualdrawdown ofaccumulated

underspending overforthcomingyear

i. CommitmentControlsMoF authorizationneededbeforelineministriesorministerscanenterintomulti-year:

• contractualcommitments• legal commitments• policy commitments

ReservesandmarginsThreemarginsmodels

1. ImplicitprudencymargininGDPorrevenueforecasts– Canbeusedtoreestablishthecredibilityofthegovernment’sforecasts– Becomeshidden,andnotopenforbidding– Difficulttoquantifyaccurately

2. Unallocatedappropriationinthebudget– Transparentandeasytocontrol– Facilitatestheprocesswithparliament– Becomesvisibleandcreatesexpectations

3. Budgetmarginunderanexpenditureceiling– Protectstheintegrityofthebudgetandexpenditureforecasts– Createsexpectations

Contingency ReservesSizeandAccessRules

TypicalReserveRulesAccessCriteria:Expendituremustbe:• Unforeseeable• Unavoidable• Unabsorbable

AccessProcedure:Ministrymuststate:• Howpressurematchescriteria• Mitigatingactionstaken• Remainingpressure• Actiontoaddressunderlyingcause

ReportingonUtilization:• Qtrly toCabinetonclaims&“threats”• Qtrly toParliamentonclaims&balance• NAOauditofclaimsagainstcriteria• Claimsdeductedfromcarryoverstock

Contingency&PlanningReserves

(%ofGovernmentExpenditure)

UK Canada Australia Sweden Turkey

Y+1(Budget) Y+2 Y+3 Y+4

Carryoverrulesandrestrictions

SpendingCategories Carry-overCarry-backOperations Transfers Capital On-flow Stock Drawdown

Australia Yes No Yes Cabinetapproval Full Full No

Austria(2010-) Yes Yes Yes Full Full Full No

Finland Some Some Some Full Expiresafter2yrs Full No

France Yes No Yes Full Upto3%ofbudget Full No

Sweden Some Yes Yes Full Upto3%ofbudget Full No

Netherlands Yes No Yes Full Upto1%ofbudget Full MoF

approval

UK(1990-2009) Yes No Yes Full Full MoF

approvalNo

Carryoverofappropriation

Total DEL (LHS)

Capital DEL (LHS)

Resource DEL (LHS)

EYF Stock % of Total DEL (RHS)

Carryovers(LHS)

CarryoverStockas%ofBudget(RHS)

IcelandEvolutionofCarryovers

UnitedKingdomEvolutionofCarryovers(EYF)

Abolished

Accountabilityarrangements

<<CourseAcronym>>

AccountabilityArrangementsBudgetSincerityProvisions

Whatarethey?LegalobligationontheMoF tocertifythatbudgetprojectionspresentedtoParliamentreflect:• allpolicydecisionsannouncedbythegovernment;and

• anyothercircumstancesthatmayhaveanimpactontheeconomicorfiscaloutlook.

Examples• NZFiscalResponsibilityAct(1994)• AustraliaCharterofBudgetHonesty

(1998)• UKCodeforFiscalStability(1998)

ReconciliationofChangestoCeilingsFactor Explanation Examples

Macro-economic

Revisionstomacroeconomicparameters

GDP,inflation,exchangerate

OtherParameters

Revisionstooperationalparameters

Pricesofgoods,volumesofclaimants

AccountingAdjustments

Revisions inaccountingtreatment

Reclassifyingexpenditure

betweenministries

PolicyMeasures

Discretionaryadditionsorcutsto

ceilings

Newinvestment,efficiency savings

CarryoversNetdrawdown oraccumulationof

carryovers

AsauthorizedbyMoF atstartofyear

Over/UnderSpending

Operationaloverrunsorunderspends

Claimsonreserve,unauthorizedoverspending

Documentation• FullydevelopedMTEFarepresentedinsimilarfashions

• Publicationalignedwithbudget– Fullyembeddedinannualbudgetsubmission(Canada,Australia,Sweden)– Orstandalonedocumentpublishedeverytwo/threeyearstimelywithbudget

(France,UK)

• Amacrofiscal document– Macroeconomicforecastsandsupportingassumptions– Scenarios,sensitivities,andcomparisonswithotherforecasters– Discussionoffiscalrisks(Australia)

• Apolicydocument– Detailingfiscalstrategy,budgetpriorities,andpolicymeasures– Explainingmediumtermcostofnewpolicies(Canada,Sweden)andexplaining

differenceswithpreviousMTEF(Franceforforwardyearsbudget) 51

Parliamentary endorsement

Legislativeendorsement

Promotesparliamentarybuy-in…

…andelevatesthestatusofmedium-termceilingsandestimates…

…butcanmaketheframeworkrigid

Example:Austria,Australia,Sweden

Informationonly

Exposesthefiscalimpactofthegovernment’sbudget…

…andincreasesthegovernment’saccountability…

…butrisksbeingtreatedlightlyifnoformalapproval

Example:UK,Finland

Nolegislativerole

Themedium-termframeworkisaninternalinstrumentforthe

government…

…highriskofbecomingatechnicalexercisewithlittleimpactondecision-

making

Transparencyandaccountability

COUNTRY

CLASSIFICATION RECONCILIATION INDEPENDENT VALIDATION

SEPARATE

LEVEL BUDGET

DETAILED BUDGET

VOLUME

PARA.POLIC

Y ACC’T PROJECTIONS POLICY

FRAMEWORKS ENDORSED BY PARLIAMENT

Australia ü ü ü ü ü

Austria ü

Finland ü ü ü

France ü ü ü

Netherlands ü ü ü ü

Sweden ü ü ü ü ü ü ü

United Kingdom ü ü ü ü ü ü

STAND-ALONE FRAMEWORKS

Stability and Convergence

Prog.ü ü ü ü ü

National Development ü ü

IndependentAssessmentofMacroAssumptions

CountryInstitution

EX ANTE EX POST

Validate Macro Assumptions Scrutinize Fiscal Policy Evaluate Fiscal Performance

NetherlandsCentral Planning

Bureau

• Full economic forecast• Research on economic issues

Costs election platforms & Coalition Agreement None

CanadaParliamentary Budget Office

• Transparency of reporting• Full economic forecast• Baseline fiscal projections

• Assesses sustainability of fiscal policy

• Costs specific policiesUpon request

SwedenFiscal Policy

Council

Evaluates transparency & credibility of govt forecasts

Assesses sustainability of fiscal policy

Monitors compliance w/ 1% surplus target

HungaryFiscal Council(2009/2010)

• Full economic forecast• Baseline fiscal projections• Budget impact of all legislation• Methodological advice

Advises govt / parl on • Fiscal policy• Transparency• Accounting

Upon request

UKOffice of Budget Responsibility

Exclusive responsibility for:• Full economic forecast• Full fiscal forecast

Advises Parliament on probability of Gov’t meeting

its fiscal targets

Assesses Govt’sperformance against

fiscal targets

GBRSWE

AUTNLD

JPNDNKNZL CHE USA

EST ISR

-50% -25% 0% 25% 50% 75% 100% 125% 150%

General Government Net Debt

Binding MTBF

Indicative MTBF

No MTBF

Linear (Binding MTBF)

Linear (Indicative MTBF)Linear (No MTBF)

Default Risk vs. Government Debt Levels(2011)

GRC: (1.53, 8512)

Isitworthit?

Empiricalresults

t+1 t+2 t+3 t+1 t+2 t+3 t+1 t+2 t+3

Indicative Binding(aggregateceiling) Binding(ministerialceilings)

PercentofExpenditure

UKGeneralGovernmentExpenditureForecastError1981-2009

Cautious

Optimistic

Forecast errors are smaller under binding frameworks

Responsetoadverseeconomicshocks

• Excludingcyclically-sensitiveexpendituressuchasdebtinterestandunemploymentbenefits(NL,FR,FI,UK)

• Settingspendinglimitsinrealorvolumeterms(NL,FI)

• Contingencymargins(SWE)

• Reprofiling withinmulti-yearexpenditurelimits(UK)

• RevisingtheentireMTBFifeconomicshockrequireasignificantchangeintheoverallfiscalstrategy

Otherinstitutions

<<CourseAcronym>>

LinkingwithotherPFMreforms

• ExperienceshowsthatsuccessfulMTBFswereintroducedwithotherreformstosupporttheirobjectives– Fiscalrules– Programbudgeting

• DetailedMTEFsneedabetterknowledgeofexpenditurecostdrivers• FranceandUK:detailedMTEFintroducedafterprogrambudgeting

– Appropriationstructureandrules• UK:reformofappropriationstructure(differencebetweenAMEsandDELs)tomovetobinding

framework

– Spendingreviews• Supportaneffectivestrategicallocationofresources• UK:MTEFprocessstronglyembeddedwiththree-yearspendingreviews

• MTBFdevelopmentcanbepartofapackageofPFMreformsimplementedsimultaneously(Sweden,UK)

UK:embeddingSpendingReviewwithMTBFprocess

ContentofReport

1. MacroeconomicContext

2. BaselineFiscalScenario

3. ListofMeasures&Yield(+/-)

4. Post-MeasuresFiscalScenario

5. SummaryofKeyReforms

6. MinisterialSpendingLimits

7. ImplementationArrangements

8. MinisterialChaptersa. DetailedBudgetb. MajorReformsc. NewPoliciesd. PerformanceTargets

• “SpendingReview”designatestheMTBFprocess– Every3year– Setspendinglimitsatministeriallevel(DELsonly)– CombinedwithValueforMoney(VfM)detailedperformancetargets– EnshrinedinPerformanceServiceAgreements(PSAs)concludedbetweenMoF andeachministry

• UKtraditionoflargeautonomyofministrieswithfinancialmanagement

d.ValueforMoney(VfM)

c.Inputsb.Spending(DELs)

c.Outputs e.Outcomes(PSAs)

economy efficiency effectiveness

EnvironmentalFactors

a.PolicyPriorities

PoliticalFactors

1.Anintegrateddecisionmakingprocess:DELsceilings,VfM,andPSAsnegotiatedtogether

2.AfinalpublishedreportlinkingMTEFwithperformanceobjectivesandtargets

France:strengtheningmediumtermfinancialcontrol

• Francehasan“expenditurechain”system(commitment-validation-payment)formonitoringbudgetexecution

• ThiswasmodifiedbeforeMTEFdevelopmenttointroduceMulti-yearCommitmentAuthorization(MCA)directlyintheappropriationstructure

• Annualbudgetgrantsauthoritytospendontwogrounds– MCAsputacapontotalmulti-yearlegalobligationsministriescanenterin– Separateceilingscapcashpaymentsauthorization(CPA)duringayear– ITsystemsrecordsuseofbothauthoritiesandlinkspaymenttoindividualcommitments

• ThisnewframeworksupportedMTEFdevelopment(futurepaymentneedsconsideringcurrentcommitments)

• ApproachconsistentwithFrance’straditionofstrongcentralizedfinancialcontrol

Illustration:- athreeyearprojectisapprovedinthecontextofanMTEFpreparation- totalestimatedcostis100withexpectedoutlaysof20/50/30

MTEFprovisions Y Y+1 Y+2

MCA 100 0 0

CPA 20 50 30

Nextbudget(Y)willauthorizetotalcommitmentof100(necessarytosign

thecontract)and20forfirstpayments

MTEF provides50inCPAforsecondyear.NoneedfornewMCA.Whenbudget(Y+1) isprepared,CPAamountupdatedwithinministryceiling

Inanycase,totalpaymentcannotexceedrecordedMCAs(100)…

Keepimprovingforecasts• Acrediblebudgetisaprerequisite

• ButcountriesdevelopingMTEFshavekeptstrengtheningtheircapacitiesinforecasting

• Masteringbaselineprojection– Requiresanincreasedknowledgeofcostdrivers– Needforstandards(Swedenhas27‘frames’;Australiadefinesex-anteinflation

indexation)butnouniquemethodologyacrosscountries(politicaldimensiontowhatis‘baseline’)

• MostcountrieshaveintroduceddetailedMTEFwithsequencedapproach– UK:indicativeMTEFbeforebindingone– AustraliaandFrance:manyyearsofinternalMoF exercisesbeforegoingpublic

Lessonsfrominternationalexperience• MTBFpreparationprocessfollowsasimilarpatterninsuccessfulexamples

– Assessingthemediumtermimpactofpresent decisions– Integrationwithbudgetprocess– Reconciliationoftop-down/bottom-upapproaches– Separationofbaselineestimatesfromdiscussionofsavingsandnewpolicies

• Butdiversityinroleofforwardyearsinfuturebudgetpreparation– Fromrollingandindicativetofixedandbinding…– …buttailoringiscommon(UK,France,Sweden)– Reflectsdifferentobjectivesforthereformandpre-existinginstitutions

• NeedtoalignMTBFpreparationwithfiscalobjectives– MutualreinforcementofMTEFandfiscalrules– Importanceofscopeconsistency

• TheMTBFdevelopmentmustbethoughtwithinthePFMreformagenda– Somereformsmaysupportorbeprerequisiteforcertainstagesofdevelopment…andvice-versa– Importancetodefinetheobjectivesofthereformahead– Intheend“mediumtermapproach”shouldbeanaturalcomponentofdecisionmaking

Conclusionsa. NosingleMTBFmodel

i. Aggregatevs.Ministerialvs.Economicvs.ProgramCeilingsii. Fixedvs.RollingFrameworksiii. Between10and100%CoverageofCeilings

b. SuccessfulMTBFsaboutmorethanceilingsi. Politicalcommitmenttofiscaltargetsand“rulesofthegame”ii. Policyplanningandprioritizationmechanismsiii. Multi-yearflexibilityandcontrolsystemsiv. Transparencyandaccountabilityaboutforecastrevisions

c. MTBFscan’tdoeverythingatoncei. Choiceb/wfiscaldiscipline,allocative efficiency&dynamicefficiencyii. Reflectedintradeoffbetweencoverage,specificity,&certaintyofMTBF

d. Amedium-termbudgetframeworkcani. Improveaggregatefiscaldisciplineii. Supportastrategicallocationofresourcesiii. Improvemicro-levelefficiency

e. Successfullyintroductionrequiresi. Acredibleannualbudgetii. Arobustandprudentmacroeconomicframeworkiii. Stablemedium-termaggregatefiscalobjectivesiv. Acomprehensivetop-downbudgetpreparationprocess 65

Selected references

• Ljungman,Gosta,2009,“Top-DownBudgeting—AnInstrumenttoStrengthenBudgetManagement,”IMFWorkingPaper09/243(Washington:InternationalMonetaryFund).

• Harris,Jason,etal.,2013,“Medium-TermBudgetFrameworksinAdvancedEconomies:Objectives,Design,andPerformance,”Chapter4inPublicFinancialManagementanditsEmergingArchitecture,editedbyCangiano,Marco,TeresaCurristine,andMichelLazare,(InternationalMonetaryFund:WashingtonDC).

7. Top Down Budgeting and MTBFs - MEF...2017/02/06 · Top-Down Budgeting and MTBFs Marco Cangiano...

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