INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 2.3 :MTEF and other special issues

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Module map

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Course outline

• What is an MTEF?

• Main features of an MTEF

• The MTEF preparation procedure

• Achievements and pitfalls

• Other special issues

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Course outline

• What is an MTEF?

• Main features of an MTEF

• The MTEF preparation procedure

• Achievements and pitfalls

• Other special issues

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What is MTEF?

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“ It is said that the Inuit people have 15 different words for snow. The opposite is true of MTEF, where the same term is used to refer to very different ways of stretching the time perspective of annual budgeting. Conflating a variety of different approaches into a single rubric has caused a host of problems”

Schiavo-Campo, “Potemkin Villages: 'The' MTEF in Developing Countries” Public Budgeting and Finance, Summer 2009 .

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What is MTEF?

What is MTEF?

Variant 1/ The MTEF is an instrument for fiscal discipline, for prioritisation in conformity with the strategies and for providing funding predictabilityOECD countriesSome developing countries

Variant 2/ The MTEF(s) cost sector strategies. It is used for negotiating budget increases with the Ministry of Finance and additional financial support with the donorsOther developing countries

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1.MTEF for fiscal discipline and prioritisation

2.Strategy costing

Ministerial Sectoral

Consistent with the MTFF Should be realistic, but may include financial gap and scenarios

Rolling horizon Regularly updated, but may have a fixed horizon

Projection period: 3 to 4 years A long term period is required in several sectors

Unified budget-MTEF preparation processes

Prepared outside the pressure of the budget preparation process

Expenditure projections are the result of the budget process

Simulation models are frequently used to prepare the projections

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Instrument +Process

Government strategic framework sector strategies & policies framework, laws

Annual budget law appropriations & forward estimates

MTEF

What is MTEF?

• The MTEF defines a strategy implementation path that takes into account the financial constraints

• We can distinguish:

• The MTFF, which defines the totals

• The Medium Term Budget Framework (MTBF) –or “global” MTEF- which allocates MTFF overall expenditure envelopes to ministries or sectors/functions

• The MTEF; detailing MTBF projections by programme 10

What is MTEF?

Financial constraint

Pre

pare

d a

nnually

SectorMT/LT plans &

strategies

National strategyDevelopment plans

PRSP

Macroeconomic framework

MTFFMTBF-Expenditure ceilings

by ministry/sector

Budget Ministry MTEFs

MT

EF

Economic situationCosting

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What is MTEF?

• The MTEF projects expenditures according to their purpose. It is aimed at:• Planning policy changes that need several years

to be implemented, finding a fiscal space for priority programmes

• IF, the processes are disciplined, improving operational efficiency through providing managers with predictability of funding

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Fiscal discipline

Inter-sectoral resource allocation

Intra-ministerialresource allocation

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t-3 t-2 t-1 t t+1 t+2 t+3Budget

Medium-Term Macro-economic FrameworkProjection of national accounts including the government account (i.e. the MTFF)

Medium-Term Fiscal Famework (MTFF)Revenue and grants

Total expenditures PersonnelGoods and servicesInterestTransfersCapital

Medium-Term Budget Framework (MTBF)Defence

PersonnelGoods, services and transfers Capital

EducationPersonnelGoods, services and transfers Capital

Administration PersonnelGoods, services and transfers Capital

Primary EducationPersonnelGoods, services and transfers Capital

Secondary EducationPersonnelGoods, services and transfers Capital

Etc

TourismPersonnelGoods, services and transfers Capital

Etc

Balance (deficit/surplus)

Financing

Projection

Educa

tion m

inis

try

MT

EF

ActualMedium-TermFrameworks

Course outline

• What is an MTEF?

• Main features of an MTEF

• Achievements and pitfalls

• Other special issues

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MTEF in TajikistanMTEF in Tajikistan

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ExerciseExercise:

•Identify key MTEF concepts

•Explain content of key concepts

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What is top-down / bottom-up in an MTEF?• Top-down budget preparation

Multi-year projections of resource envelope targets (what is affordable)

• Bottom-up budget preparation

Multi-year cost estimates of sector programmes (what has to be financed, with a focus on programme performance)

• Integrating these two pillars

Institutional (political-administrative) decision-making process to make the necessary trade-offs

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What is baseline costing?

Year 0 Year 1 Year 2 Year 3

Baseline

Expenditure ceiling

Savings on existing

programs

MTEF expenditure projections

New programs and policy changes

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What is a rolling budget??

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Forward EstimatesBudgetT

T +1

T +2

Budget Forward Estimates

Forward EstimatesBudget

t +1 t +2 t +3 t +4 t+5 19

MTEF processTop-down (MoF)

Bottom-up (Line Ministries)

Step 1Sector review

of ministry objectives/outputs and

activities

Step 2Agreement

on programs and

subprograms

Step 3Costing of

agreed programs

and subprograms

for 3 years

Step 2Detailed

expenditure and sector/

ministry ceilings for 3

years

Step 1Macro-

economic framework /

Availability of resources

Step 4Preparation

of 3 year estimates

within cabinet approved ceilings

Parliament

Step 5Review of

estimates in MoF and

presentation to Cabinet

Step 4Hearings to

agree on objectives and priority programs

Budget Submission

Step 3Approval of ceilings by

Cabinet

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MTEF Features of an MTEF

Projection period: 3 to 4 years

Encompass all expenditures whatever their economic nature and financing source

Generally, the MTEF is rolling.

The MTEF is consistent with the MTFF

The first year of the MTEF is consistent with the budget

The out-years are indicative, but they show a political commitment

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Main features of an MTEF

• The Ministerial MTEF

For accountability and to ensure a close link with budget management

Sector/cross-ministry MTEFs if any, should be divided in ministerial MTEFs

providing managers with some predictability

providing a framework for performance monitoring

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Main features of an MTEF The Ministerial MTEF

Generally structured in programmes, they may include performance indicators

Degree of detail variable from the same degree of detail as the budget to a presentation by broad programmes

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Course outline

• What is an MTEF?

• The MTEF preparation procedure

• Achievements and pitfalls

• Other special issues

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Achievements and pitfalls

• The results are uneven…..

• “Developing comprehensive MTEF can be effective when circumstances and capacities permit…. Otherwise, … it might distract attention from the immediate needs for improving the annual budget and budget execution processes… in a number of African countries, the MTEF was introduced prematurely, and is turning out to be merely a paper exercise”.World Bank-IMF Global Economic Report 2006, page 146

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• Why uneven results?

Too complex/sophisticated approaches.

Poor annual budget discipline.

No impact on the annual budget, the MTEF prepared the previous year is ignored.

Administrative and/or political instability. Every year MTEF preparation starts from scratch.

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Achievements and pitfalls

Achievements and Pittfalls

• Why uneven results?

Isolated sector MTEF prepared by external consultants to comply with a donor request.

The MTEF remain a pure technical exercise; no political interference

Economic instability

Lack of predictability of resources

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Supporting donor practice??

• However,it does not make sense to demand a "sector MTEF" prematurely…. Taking stock from experience, it is recommended to adopt a process and systemic perspective on the development of a sector MTEF, rather than making it a pre-requisite for supporting a sector programme.

EC. Support to sector programmes. Guidelines no2. July. 2007. Page 22.

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Achievements and pitfalls

•How to avoid the pittfalls?

•Before considering implementing an MTEF

• Make sure annual budget processes are disciplined

• Make sure decision makers are involved

• Ensure there are capacities to prepare an MTFF

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Achievements and pitfalls

• How to avoid the pittfalls?

• Prepare costed sector strategies first • Estimate the forward costs of existing activities (the

baseline)• Prepare an MTBF• Avoid complexity

• Once these tasks completed, consider implementing an MTEF, eventually starting with few pilot ministries

• avoid complexity

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Achievements and pitfalls

Course outline

• What is an MTEF?

• The MTEF preparation procedure

• Achievements and pitfalls

• Other special issues

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Performance information

ActivitiesInputs OutputsIntermediate

outcomes

Efficiency Quality

End outcomes

Effectiveness

Operational arrangements;or other benchmarks

Policy objectives

Economy

Performance indicators: •Input•Output indicator •Outcome indicators

• Some points to keep in mind• The link between performance information and

resource allocation is generally indirect• PI should be attributable to the programme or

the organisation the performance is measured• PI published for the legislature and the

citizens should be: aimed at measuring the efficiency and the

effectiveness of the relevant activities in a limited number

Performance information

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Function of the performance information

Link between performance information and funding

Planned or actual

performance

Main purpose in budget process

Presentational No link Performance targets and/or performance results

Accountability

Performance informed budgeting

Loose/indirect link

Performance targets and/or performance results

Planning and/or

accountability

Direct/formula performance budgeting

Tight/direct link

Performance results

Resource allocation and accountability

Performance information Performance budgeting in OECD countries. OECD 2007

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Performance information

• Prepared in many countries, notably in the social sectors

• May have two functions:

• Support budget preparation within MDAs

• Support budget implementation and its monitoring

The annual activities plan

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•

• But these activities plans should be kept simple

• In some poor countries there are plans of about 8000 thousands activities. Such plans cannot be monitored.

The annual activities plan

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Sound MTEF processes may help in reinforcing the policy-budget link, but only if several preconditions are met

Strategy costing should be carried out, but planning documents with a financial gap should not be considered as financial commitment of the government

Programming documents and working plans should not be over-sophisticated

Key messages

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