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Improving Budgetary Outcomes
The Role of a MTEF
by
Malcolm Holmes
Three Levels of Expenditure Outcomes
Three Levels of Expenditure Outcomes
• Aggregate Fiscal Discipline
• Prioritization of the Composition of Expenditures
• Technical Efficiency in the Use of Budgeted Resources
Some PrinciplesSome Principles
• Transparency and accountability
• Comprehensiveness of budget
• Predictability of resources & policies
• Flexibility
• Contestability
• Existence and sharing of information
Fragmentation/Lack of Comprehensiveness
Fragmentation/Lack of Comprehensiveness
Across:• Policy Making, Planning, Budgeting• Fiscal activities• Types of expenditure• Sources of funds• Time• Inputs, outputs and outcomes
Dual BudgetingDual Budgeting
• Investment as basis of development
• Development Budget
• PIP
• R Coefficients
• The government should foster an environment that supports and demands performance before introducing performance, output or outcome budgeting.
• Control inputs before seeking to control outputs.
• Account for cash before accounting for accruals.
• Establish external controls before introducing internal control.
• Establish internal control before introducing managerial accountability.
• Operate a reliable accounting system before installing an integrated financial management system
• Budget for work to be done before budgeting for results to be achieved.
• Enforce contracts in the market sector before introducing contracts in the public sector.
Sequencing Public Sector Financial Management Reforms
Sequencing Public Sector Financial Management Reforms
Restraint with
FlexibilityRestraint with
Flexibility• Hard Budget Constraint
• Transparency
• Accountability
• Exit
• Voice
Flexibility
Information
Enabling Environment for Public Sector
Enabling Environment for Public Sector
• Link Policy, Planning, Budgeting
• Restrain decision making:– affordability– cost, expected results– evaluate
• Forum within which policies compete
• Capacity and willingness to reprioritize and reallocate.
Characteristics of Sound PEMCharacteristics of Sound PEM
Commitment, capacity & willingness to:• Prepare a budget (a) in line with development
priorities and (b) that can realistically be implemented
• Specify the budget’s intended results• execute budget as passed by the legislature• Account for results achieved• Evaluate impact of policies and programs and
take results into account in budget preparation.
A Contract for PerformanceA Contract for Performance
The Center• More predictable funding• More predictable policy• Greater transparency and predictability in
processes for reprioritizing and reallocating resources
• Leave management decisions to line managers
A Contract for PerformanceA Contract for Performance
The Line
• Living within budget• Clear sector strategies• Using resources efficiently and
effectively• Reporting on resource use
Using a Medium Term Expenditure FrameworkUsing a Medium Term
Expenditure Framework• Fiscal Targets (what is affordable)
• Forward Estimates of Existing Policy
• Institutional Mechanisms for Making the Trade-offs
• A Focus on Performance
• Enhanced Predictability
Implementing an MTEFImplementing an MTEF
• Pilot or whole of Government
• Budget unification (PIP elimination)
• Reduction of the number of budget line items
• Link between line items and objectives and impact
• introduction of a 3 year perspective
• mission statements (strategic plans) for sectors
Implementing an MTEF (Cont.)
Implementing an MTEF (Cont.)
• Use of strategic plans for budget preparation
• Emphasize costs of activities
• Merging of external and domestic financing
• Withdrawal of MoF from details of budget allocations in LM
• Engaging cabinet
• Focus on performance
Ghana: Explaining progressGhana: Explaining progress
• Commitment from Minister and Ministry of Finance, line ministers and donors
• MTEF based on GOG-led PER
• Consensus building efforts (losers and winners)
• MTEF becomes budget process
• Consistency between MTEF and sector approaches
Ghana: Explaining Progress (Cont.)
Ghana: Explaining Progress (Cont.)
• Link to other reforms
• Performance focus - matching authority and accountability
Ghana: Sustainability TestsGhana: Sustainability Tests
• Predictability of funding (domestic and external) – predictable macro/fiscal framework– cash flow estimates– cash available on time– budget voted on time by parliament
• Predictability of policies
- Cabinet Engaged
• controlling expenditure
• focus on outcomes
Ghana: Sustainability Tests (Cont.)
Ghana: Sustainability Tests (Cont.)
• Dynamic process of evaluation of policies
• Autonomy and accountability of LM
• Civil service management - pay policy, authority
• Decentralization
• Hard Budget Constraint
• Cohesive political executive
• Sector Strategies
• Forum within which decisions constrained by resource availability over medium term and policies compete
• Programmatic decisions devolved to line ministers (within hard sector ceilings)
PRIORITIZATIONInstitutional Arrangements
PRIORITIZATIONInstitutional Arrangements
PRIORITIZATIONInstitutional Arrangements
(Cont.)
PRIORITIZATIONInstitutional Arrangements
(Cont.)
• Strategic priorities and sustainability drive aid
• Information - Costs, Performance
Mechanisms for PrioritizationMechanisms for Prioritization
• Case: Australia
• Aggregate Fiscal Targets and Strategic Objectives
• Medium-term Costs of Competing Policies
0
5
10
15
82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93
Australia: Medium-term Costs of PoliciesAustralia: Medium-term Costs of Policies
Mar 84
May 85
Nov 85Dec 86
Aug 89
Real growth rate
Projection dates
Mechanisms for PrioritizationMechanisms for Prioritization
Case: Australia• Aggregate Fiscal Targets and Strategic Objectives
• Medium-term Costs of Competing Policies
• Arena for Contesting and Coordinating Policies
- Cabinet: Strategic Priorities
- Line: Spending-Savings within Hard Budgets
• Ex-post Evaluation
Outcomes:
- Deficit 4% GDP to surplus of 2% GDP
- Shifts in intra and intersectoral composition
- Greater funding predictability
Australia: Changes in Expenditure Composition, 1983-94
Australia: Changes in Expenditure Composition, 1983-94
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
Defense Educ Health Socsec Transp. Other
Spending
Saving
Net change
Source: Dixon, 1993 : 32
$ Millions
Net change
New spending
Savings from existing policy
• Sector-wide
• Clear Strategy and Policy Framework
• Program Focus
• Sector Expenditure Program
• Medium-term Perspective
• Consistent with Macroeconomic Framework
• Donor Coordination
Sector-wide Approaches as Performance Based Budgeting
Sector-wide Approaches as Performance Based Budgeting
• Strategic Policy
• Sector Envelopes
• Program: Individual Ministers
• Running Costs: Managers
Getting Decisions in the Right Hands
Getting Decisions in the Right Hands
• Legitimacy of policy
• Predictability of funding
• Delegation of authority to line managers
• Responsibility for producing outputs linked to outcomes
• Hard budget constraint -upwards and downwards- during budget execution
• Independent external audit
OPERATIONAL PERFORMANCE
Institutional Arrangements
OPERATIONAL PERFORMANCE
Institutional Arrangements
Improving Technical EfficiencyImproving Technical Efficiency
broader public sector
markets and the private sector
civil service
Strengthen “voice”
mechanisms
More “exit”
possibilities
Improve “rule-compliance” and
“loyalty”
Getting the Best out of Organizations
Getting the Best out of Organizations
• Hard, but Predictable, Budget Constraint
• Flexibility for Managers
• Clarity of Purpose and Task
• Ex-Ante Specification of Performance
• Contestability
• Evaluation and Audit
• Exit Options
• Voice
LINE ITEM
1. Input
Cash
2. Classification
Economic Type
3. Annual
PERFORMANCE BUDGETING
1. Input
Cash/Accrual
Output
Performance data/
indicators/standards
Authority
Accountability
Outcome
Clear Objectives
Indicators
Evaluation
2. Classification
Functional
Program
Organizational
3. Multi-year
LINKING:
• Inputs
• Outputs, and
• Outcomes
Performance Based BudgetingPerformance Based Budgeting
Resources used to produce the service:
• Hard budget constraint– central budget– user charging
• Full cost/Unit cost– cash– accrual
InputsInputs
The good or service produced:
• Who controls
• Who is accountable
• Measuring and reporting performance
OutputsOutputs
Purpose to be achieved by government intervention (including production of outputs):
• Who controls
• Who is accountable
• Measuring and reporting performance
OutcomeOutcome
Enabling Environment for Public Sector
Enabling Environment for Public Sector
• Link Policy, Planning, Budgeting
• Restrain decision making:– affordability– cost, expected results– evaluate
• Forum within which policies compete
• Capacity and willingness to reprioritize and reallocate.