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
8
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)
10
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
11
Why medium-term budgeting?
1. Capturingdeferredeffects:– decisionstodayhaveconsequencestomorrow
2. Makingnon-discretionaryintodiscretionary:– allpoliciescanbechangedwithenoughtime
Itaddsakeydimension3. Signalingfuturechanges:
– managingexpectationsandallowingtimetoadapt4. Committingtofutureexpendituretargets:
– bindingorevenindicativetargetsaddresstime-inconsistencyoftoday’sspendingpreferences
12
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
15
PreparingandupdatinganMTBF
<<CourseAcronym>>
AtheoreticalapproachtoMTBFdevelopment
MTFFMediumTerm
Fiscal Framework
MTBFMediumTerm
Budget Framework
MTPFMediumTermPerformanceFramework
‘MTBF’willbeusedasagenerictermfortherestofthepresentation
• InternationalexperienceshowstherearevariouslevelsofMTBFsophistication
• MTEFimplementationusuallyfollowsapathfromaforecastingtooltoafullprogrammatictool
• SuccessfulMTBFsaredecisionmakingtools…• …soimplementationofMTBFwillgraduallytransform
budgetprocess(‘integration’)• MTBFleveldevelopmentstronglylinkedtodegreeof
integrationanddetailsofMTBF(seefollowingslides)
Anchoringthebudgettoeconomicpolicytargets(MTFFstage)
18
• Amediumtermfinancialplan– Keymacroeconomicparametersandrevenueforecasts– Setsatotalenvelopforexpenditureconsistentwith
mediumtermeconomicandfiscaltargets• Sequentialapproachtobudgetingprocess
– Financialplanasafirststepfortheformalannualbudgetprocess
– Top-downapproachonly
Revenue
Expe
nditu
re
Debt
Total
Economicaggregates
Detailed budget lines
Annual Budget
Medium term
economictarget
Definingafiscalstrategy(MTBFstage)
19
• Forecastofrevenueandexpenditurepereconomicclassification(orlargesectors)
• Iterativeprocesstoreconcile– Top-downapproach(asinMTFF)– And bottom-upestimatesofbaselineexpenditure
trends(currentpoliciesonly)
Revenue
Expe
nditu
re
Debt
Total
Economicaggregates
Detailed budget lines Annual Budget
Medium term
economic target
• Helpsdefineadetailedfiscalstrategy– Analysispereconomicclassificationorgroupofsectors– Strategic phaseinbudgetpreparationprocessbasedonatop-down/bottom-up“dialog”– Processstill positionedaheadoftraditionalpreparationofannualbudget
Towardsmulti-yearbudgetplan(MTPFstage)
20
• Budgetprocesstransformed– Mediumtermapproachintegratedtobudgetpreparationprocess– Estimatingbaselineforcurrentpolicyforeachbudgetlinebecomesfirststepinthebudget
process…– …implicationoflinesministries?(variedovertimeinAustraliaforinstance)
Revenue
Expe
nditu
re
Debt
Total
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
21
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
22
Updatingrollingandindicativeframeworks(Australia)
23
Y Y+1 Y+2Y Y+1 Y+2 Y+3
Y Y+1 Y+2Y Y+1 Y+2 Y+3
Y Y+1 Y+2Y Y+1 Y+2 Y+3
Y Y+1 Y+2Y Y+1 Y+2 Y+3
1
2
3
4
Startingpoint:MTEFpreparedlastyear;Yisbudgetforcurrentyear
Updateofbaseline:costofcurrentpoliciesisupdatedandanewyearisadded
Discussionofnewpolicies:• fiscalspaceestimatedtop-downconstraint)• discussionofsavingsonexistingpoliciesandnewmeasuresbasedonmedium-termimpact
FinalizationofnewMTEF:Y+1becomesnextannualbudget
Updatingfixedandbindingframeworks(UnitedKingdom)
24
• Fixedandbindingframeworkonpartoftotalexpenditure.UKframeworkdistinguishes– DepartmentExpenditureLimit(DEL):discretionarypoliciesimplementedbyministries– AnnuallyManagedExpenditure(AME):debtservice,entitlementprogramsandotherconstraint
spendingwhichcannotbemonitoredinyear• Fixedandbindingframework(theSpendingReview)preparedperiodicallyandcombined
withglobalrollingMTFF(economicandfiscaltargets)
Y+1 Y+2 Y+3
Revenue
Debt
Med
ium
te
rmec
ota
rget
Expenditure
RollingMTFF
AMEs
DELs
Revenue
Debt
Med
ium
te
rmec
ota
rget
Expenditure
Y+2
FullupdateofAMEs:similartoindicativerollingframeworks
Fullupdateofmacro-framework:macroassumptionmadefortotalDELsfortheout-yearsnotcoveredbycurrentSpendingReview
Spendingreview
FinalizationofministerialbudgetsbasedonDELlimits:ceilingperministryprovidedbySpendingReview;allocationwithincanberevised
Accountability ArrangementsSweden:Presentationofchangessince2007Budget
25
-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)
53.2(-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)
53.2(-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
26
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
YY
Baselineestimatesofcurrentpolicies(27“frames”)
NewpoliciesincludingprovisionsformeasurestostartinY+2(semi-planningapproach)
Expenditureceiling
Mandatorygrowingmarginstobekeptforfuturedecisionmakingandcontingencies
France:abundleofframeworkandspecificrules
27
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>>
29
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
31
A credible annual budget
32
AverageOverspendAgainstBudgetTotal,1998-2007(%ofGDP,Actual-Forecast)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Percen
tofExpe
nditu
re
Binding estimates Indicative estimates Neitherbindingnor indicative
Prudent medium-term macroeconomic projections
33
AverageErrorinForecastingRealGDPGrowth,2000-2007(Inpercentofrealgrowth,Actual-Forecast)
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
Percen
tagePointso
fGDP
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
34
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
36
Multi-yearspendinglimits
<<CourseAcronym>>
38
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)
39
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
40
Expenditureprioritization
<<CourseAcronym>>
Expenditureprioritization
42
COUNTRYNO. OF 1st LEVEL PRIORITIZATION
UNITS
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
44
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
45
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)
0
1
2
3
4
5
6
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
48
0%
1%
2%
3%
4%
5%
6%
7%
0
3
6
9
12
15
18
21
24
% o
f Tot
al D
EL
£ bn
Total DEL (LHS)
Capital DEL (LHS)
Resource DEL (LHS)
EYF Stock % of Total DEL (RHS)
0
5
10
15
20
25
0%
1%
2%
3%
4%
5%
6%
7%
ISKBn
% o
f Bud
get
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
50
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
52
Transparencyandaccountability
53
COUNTRY
CLASSIFICATION RECONCILIATION INDEPENDENT VALIDATION
SEPARATE
1ST
LEVEL BUDGET
DETAILED BUDGET
MACRO
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
AUS
FRA
GBRSWE
AUTNLD
ITA
BEL
DEU
HUN
JPNDNKNZL CHE USA
PRT
ESP
ISL
IRL
POL
EST ISR
0
200
400
600
800
1000
1200
-50% -25% 0% 25% 50% 75% 100% 125% 150%
Cre
dit D
efau
lt Sw
ap S
prea
d
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?
55
ABC
ABC
ABC
Empiricalresults
56
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
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
58
Otherinstitutions
<<CourseAcronym>>
LinkingwithotherPFMreforms
• ExperienceshowsthatsuccessfulMTBFswereintroducedwithotherreformstosupporttheirobjectives– Fiscalrules– Programbudgeting
• DetailedMTEFsneedabetterknowledgeofexpenditurecostdrivers• FranceandUK:detailedMTEFintroducedafterprogrambudgeting
– Appropriationstructureandrules• UK:reformofappropriationstructure(differencebetweenAMEsandDELs)tomovetobinding
framework
– Spendingreviews• Supportaneffectivestrategicallocationofresources• UK:MTEFprocessstronglyembeddedwiththree-yearspendingreviews
• MTBFdevelopmentcanbepartofapackageofPFMreformsimplementedsimultaneously(Sweden,UK)
60
UK:embeddingSpendingReviewwithMTBFprocess
61
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
62
• 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
63
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
64
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
66
• 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).