Module 2.1: The Budget; Budget preparation and the MTEF INTRODUCTION TO PUBLIC FINANCE MANAGEMENT.

Module 2.1: The Budget; Budget preparation and the MTEF

INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module outline The Budget The Budget preparation process The Medium Term Expenditure Framework Key principles in Budget management

What is the Budget?

The most important instrument of the executive to carry out its policies.

“… the plan of the future financial activities of the government […] prepared annually, comprising a statement of the government’s proposed expenditures, revenues, borrowing and other financial transactions […] It is submitted to parliament, which authorises expenditure…” Allen & Tommasi (2001)

The Budget; legal and administrative framework

Principal legislation:1. Annual Budget Law

(Appropriations Act)2. Organic Budget

Law/Public Finance Management Act/Budget Code

Other legislation:Audit, Local Government Finance, Fiscal Responsibility, Public Procurement...

The Budget; legal framework• The key elements of legislation:

Enables the legislature (parliament) to provide ‘authority to spend’ to the executive (government) – the budget appropriation

Provides the framework for spending and collect, and for control thereafter

Establishes responsibility and accountability for the stewardship of public monies

Empowers the Minister of Finance – the central fiscal authority Sets out the principles for fiscal management Sets out the reporting obligations

The Budget; documentationThere are 12 elements in the new PEFA (test) 2015; Performance Indicator (PI) 5 requires 4 main elements:1. Forecast of the fiscal deficit or surplus 2. Previous year’s budget outturn [same format as budget proposal]3. Current year’s budget [same format as budget proposal]4. Budget Proposal: aggregated revenue and expenditure data by main head of

classification and detailed breakdown of revenue and expenditure estimatesAnother 8 important elements:5. Deficit financing6. Macro-economic assumptions (GDP, inflation, interest rates, exchange rates …)7. Debt stock8. Financial Assets9. Summary information of fiscal risks (incl. contingent liabilities and obligations)10.Budget implications of new policy initiatives11.Documentation on the medium-term framework12.Quantification of tax expenditures


8

Determine budgetary ceilings by sector/ministry

Min

istr

y of

Fin

ance

L

ine ministries

Submit to Parliament for Appropriation

Send budget circular

Submit bid

Hearings

Parliament

Cabinet

The Budget preparation process

The Budget preparation process • Two key features in the administrative process:

The Budget Calendar• Budget needs to be on time! ...should be appropriated by

legislature before the start of the next Fiscal Year.• The budget process needs time! …Ministries, Departments &

Agencies (MDAs) have to prepare budget submissions (minimum of 6 weeks between Budget circular and submission to MoF).

• Legislators need time to review draft Budget Law. The Budget Circular

• The formal administrative procedure that launches the Budget preparation process and includes the Calendar and technical Guidelines for MDA budget submission.

J F M A M J J A S O N DPreparation of macro-economic frameworkMDA estimate baseline & identify new initiativesCeilings by sector prepared by MOFCabinet approves strategy and ceilingsBudget circular is releasedLine ministries submit budget requestsBudget requests reviewed by MoF-NegotiationsDraft budget prepared by MOFDraft budget reviewed by CabinetBudget submitted to legislatureLegislature scrutines and approves budget

The Budget process plans time!



Basic principles... The process has 2 broad phases Link policies to the Budget Distinguish continuing and new policies Avoid fragmentation Budgeting in a multi-annual perspective

Line Ministries

Ministry of Finance, Prime Minister, Council of Ministers

Macro-economicanalysis

Decisions: Totals and Expenditure ceilings by ministry

Prioritisation within the ceilings

Sectorstrategiesupdated

Reconciliation• Estimates of the baseline

• Identification of fiscal space, new activities and savings

Planning Budget preparation


Ministry of Finance -

Line Ministries

Step 1Sector review

of ministry objectives/outputs and

activities

Step 1

Agreement on programs

and subprograms

Policy to Budget


Step 1Sector review


activities

Step 1


and subprograms

Step 2Detailed

expenditure and sector/

ministry ceilings for 3

years

Step 2Macro-

economic framework /

Availability of resources

Ministry of Finance

Line Ministries


Policy to Budget

Line Ministries

Step 1Sector review


activities

Step 1


and subprograms

Step 2Detailed



years

Step 2Macro-



Step 3Approval of ceilings by

Cabinet

Ministry of Finance


Policy to Budget

Step 1Sector review


activities

Step 1


and subprograms

Step 2Detailed



years

Step 2Macro-



Step 4Preparation

of 3 year estimates

within cabinet approved ceilings


Cabinet

Ministry of Finance

Line Ministries


Policy to Budget

Step 1Sector review


activities

Step 1


and subprograms

Step 2Detailed



years

Step 2Macro-



Step 4Preparation

of 3 year estimates


Step 5

Determine Fiscal

space for new

Policies


Cabinet

5

Ministry of Finance

Line Ministries

Policy to Budget


Step 1Sector review


activities

Step 1


and subprograms

Step 2Detailed



years

Step 2Macro-



Step 4Preparation

of 3 year estimates


Step 6

New Budget Policy Paper

Step 5

Determine Fiscal

space for new

Policies


Cabinet

5

Ministry of Finance

Line Ministries


Policy to Budget

Year 0 Year 1 Year 2 Year 3

Baseline

Expenditure ceiling

Savings on existing programs

Expenditure projections

New programs and

policy changes

Distinguishing continuing and new policies...


Form of fragmentation Cause of potential misallocation

Remedial action

Project loans and grants Imposition of donors’ priorities; draining of matching resources

Ensure transparency;Budget support

Dual budgeting (current<->capital)

May lead to new non-productive assets, unfunded recurrent costs

Unify budgeting process

Extra-budgetary funds, autonomous agencies

priorities of specific ministry or department dominate those of government

Mechanisms to review all expenditures together

Avoiding fragmentation...

Adapted from J. Brumby in Robinson “Performance budgeting”. IMF. 2007



“ It is said that the Inuit people (Eskimo)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.

What is MTEF?

Strengthen fiscal discipline and improve prioritisation in resource allocation

Convert sector policy/strategy under a ‘hard budget constraint’

• Ministry of Finance (central fiscal authority)

• Sector Ministries, Departments & Agencies (MDAs)

• Aggregate budget ceiling derived from MTFF (fiscal policy)

• Sector budgets to be realistic, but financing gap and options expected

• Projection period: 3 years with a rolling horizon

• Forward estimates prepared (costing of recurrent and capital needs)

• The first year in the projection becomes the Budget Law

• A long term planning period is required in several sectors

• Unified Budget-MTEF preparation processes

• Expenditure reviews, policy development

The MTEF; some basic elements

The MTEF; stylised illustration ...

MTBF

MTEF

MTFF: Fiscal discipline

MTBF: Inter-sectoral resource allocation

MTEF: Intra-ministerialresource allocation

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 grantsTotal 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

Edu

catio

n m

inis

try M

TEF

Actual

The MTEF; main features

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

Multi-year planning of aggregate resource allocation envelope (what is affordable)

Bottom-up budget processMulti-year forward cost estimates of sector programmes (what has to be financed, with a focus on implementation of sector policy )

Integrating the two processes...Institutional (political + administrative) negotiations and decision-making process to make the necessary trade-offs

Top-downBottom-upThe MTEF; main features

Forward EstimatesBudgetT

T +1

T +2

Budget Forward Estimates

Forward EstimatesBudget

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

Rolling Budget The MTEF; main features

CASE STUDY - EXERCISEANALYSIS

OF THE BUDGET PROCESS OF THE GOVERNMENT OF KENYA

20 mins

The MTEF; 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

• Why uneven results? Too complex/sophisticated approaches; common

misjudgment: MTEF reform with complex changes in the budgeting system (e.g. performance budgeting)

Poor budget discipline; lack of credibility of budget process Disconnect with annual budget: MTEF a parallel process

and ignored MTEF purely a technical exercise; no political engagement Political instability; MTEF preparation starts from scratch Economic instability; predictability of revenues


•How to avoid pitfalls? Annual budget process must be disciplined; Avoid complexity in reform; A credible MTFF is an absolute prerequisite; Ensure capacity exists and/or a strengthening

plan is in place; Sector strategies and policies must be costed; ... and Forward Estimates prepared; Political decision makers need to be involved.

BASICS FIRST

MTFF

COSTS

POLITICAL PROCESS


CAPACITY


Key principles in Budget management

Comprehensiveness in the Budget is essential:Reveal crucial information often the.. ‘hidden part of the iceberg’... i.e. fiscal risks, financial relationships with sub-national government and state-owned enterprises...

PI-6 in PEFA (test) 2015 requires for an ‘A’ score: Unreported extra-budgetary expenditure and revenue below 1% of total expenditure

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Key principles in Budget managementOECD – ten principles for an Annual Budget Law

Authoritativeness Decision-making authority lies is specified at each of the stages of the budget process. Supremacy of legislature.

Classical principles Annual basis Budget authority provided for a 12-month period. Annual budget enacted prior

to the year to which it refers. All transactions estimated for their one-year effect.

Universality All revenues and expenditures included in the budget on a gross basis. Revenues not earmarked. Expenditures not offset by revenues.

Unity The budget presents all receipts and payments at the same time, usually in the same document.

Specificity Revenues and expenditures shown with some detail in the budget estimates. Appropriations show legally binding maximum expenditures.

Balance Expenditures are balanced by budget revenues and financing. “Balance” well defined.

Modern principles Accountability The executive gives an account to the legislature. Within the executive,

accountability of budget managers clearly defined. An independent external audit body reports at least annually to the legislature on budget execution.

Transparency Roles of State bodies clear. Timely financial and non-financial information on the budget publicly available. Terms used in the budget law clearly defined.

Stability Budget and public debt objectives regularly updated in the medium-term budget framework. Rates and bases of taxes relatively stable.

Performance Results of budget programmes are reported in the budget. Principles of efficiency, economy and effectiveness.

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-

Tax Expenditures

Local-Government budgets deficit

Contingent Liabilities (implicit-explicit)

Extra-budgetary funds

Quasi fiscal activities

Budget overruns

State owned enterprises deficit

TheBudget Budget

Comprehensiveness


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Health

Education

Agriculture

Defence Justice

But the pie is nibbled…

Earmarked revenues

FundsAgencies

Special accounts


Budget

Comprehensiveness

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Module 2.1: The Budget; Budget preparation and the MTEF INTRODUCTION TO PUBLIC FINANCE MANAGEMENT.

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