Subnational Public Finance Management in Myanmar Budget Brief Series: Ayeyarwaddy | No.1 January 2017 Introduction 1. Public Finance Management refers to resource mobilization and expenditure management in government. Effective, efficient and equitable revenue collection and government expenditure form crucial functions of the governance process. Effective public finance management allows for better allocation of limited resources to pursue policy objectives, ways to reduce poverty, improve service delivery and send appropriate market signals to potential investors. It will play an essential role in Ayeyarwaddy’s development, as well as the development of other States and Regions. We hope the series to provide valuable data analysis and enhance understanding of subnational budgets, which is fundamental to successful public finance management. In the future, access to more detailed revenue and expenditure data will provide an opportunity to undertake greater value reviews into expenditure and revenue, allocative efficiency and more. 2. The aim of the budget brief series is to encourage continuous debate on policy priorities, sustainability, overall state of public finance as well as to promote budget transparency and accountability. The newly elected government in Ayeyarwaddy is in the process of setting a development agenda and a reform strategy. This first Ayeyarwaddy budget brief provides a reference point with an overview of the current fiscal environment in the Region and reviews the composition of its revenue and expenditure. Between 2011 and 2016 Union transfers to States and Regions increased from 2.2 percent of Union expenditures to 8.7 percent. Driven by Union transfers, Ayeyarwaddy’s total expenditure grew over 6 times during the period. Despite increased transfers Ayeyarwaddy’s per capita available fiscal resources are smaller than in most of the country Data suggests modest improvements in fiscal discipline following the introduction of a formula based Union grant transfer mechanism under MTFF reforms. 1 Subnational tax revenues remains constrained, with heavy reliance on receipts from fisheries and excise tax. Changing classification and accounting norms pose challenges to accurate data analysis on overall revenue performance. Own revenue performance shows a decline in recent years, largely driven by the changed accounting arrangement following the reorganization of Public Works within the Ministry of Construction in 2015. The share of capital expenditure has grown considerably as a percentage of total expenditure in Ayeyarwaddy, with largest share of resources spent by the Department of Highways. 1 MTFF – Medium Term Fiscal Framework
Transcript
Subnational Public Finance Management in Myanmar Budget Brief Series: Ayeyarwaddy | No.1
January 2017
Introduction
1. Public Finance Management refers to resource mobilization and expenditure management in government. Effective, efficient and equitable revenue collection and government expenditure form crucial functions of the governance process. Effective public finance management allows for better allocation of limited resources to pursue policy objectives, ways to reduce poverty, improve service delivery and send appropriate market signals to potential investors. It will play an essential role in Ayeyarwaddy’s development, as well as the development of other States and Regions. We hope the series to provide valuable data analysis and enhance understanding of subnational budgets, which is fundamental to successful public finance management. In the future, access to more detailed revenue and expenditure data will provide an opportunity to undertake greater value reviews into expenditure and revenue, allocative efficiency and more. 2. The aim of the budget brief series is to encourage continuous debate on policy priorities, sustainability, overall state of public finance as well as to promote budget transparency and accountability. The newly elected government in Ayeyarwaddy is in the process of setting a development agenda and a reform strategy. This first Ayeyarwaddy budget brief provides a reference point with an overview of the current fiscal environment in the Region and reviews the composition of its revenue and expenditure. Between 2011 and 2016 Union transfers to States and Regions increased from 2.2 percent of Union expenditures to 8.7 percent. Driven by Union transfers, Ayeyarwaddy’s total expenditure grew over 6 times during the period. Despite increased transfers Ayeyarwaddy’s per capita available fiscal resources are smaller than in most of the country Data suggests modest improvements in fiscal discipline following the introduction of a formula based Union grant transfer mechanism under MTFF reforms.1
Subnational tax revenues remains constrained, with heavy reliance on receipts from fisheries and excise tax. Changing classification and accounting norms pose challenges to accurate data analysis on overall revenue performance. Own revenue performance shows a decline in recent years, largely driven by the changed accounting arrangement following the reorganization of Public Works within the Ministry of Construction in 2015. The share of capital expenditure has grown considerably as a percentage of total expenditure in Ayeyarwaddy, with largest share of resources spent by the Department of Highways.
1 MTFF – Medium Term Fiscal Framework
AyeyarwaddyBudgetBrief|No1
Aggregatefiscalenvironment
3. Overall government spending in Ayeyarwaddy grew significantly between 2011-12 and 2016-17. Total expenditure grew from under MMK 20 billion in 2011-12 to MMK 137 billion in 2016-17 budget estimate. This translates to an increase in spending from around 3,500 MMK per citizen to 22,000 MMK during the same period. However, the revenue performance did not keep pace with the fiscal expansion. The government’s own per capita revenue collection is estimated to be 3,300 MMK per year in 2016-17 budget estimate, with the total revenue collection in the Region around MMK 20 billion for the same year (Fig. 1).2 3
4. Ayeyarwaddy government’s fiscal resources, a sum of the Union transfers and own revenue collection, are some of the lowest in the country on per capita basis. Union grant transfer to Ayeyarwaddy grew significantly from MMK 8.7 billion in 2011-12 to MMK 116 billion in 2016-17.4 While large in size, the most recent transfer is one of the lowest in the country on per capita basis (Fig. 2). In 2016-17 budget estimate the Union grant transfer comes up to about around MMK 19,000 per person.
2 BE = Budget Estimate, RE = Revised Budget Estimate, PA = Provisional Actual (Preliminary approved data before the Auditor General
approved) , A = Actual (Approved by Auditor General). 3 Revenue and Expenditure data used in this budget brief was provided by the Budget Department of the Ayeyarwaddy Region.4 Grant “deficit” transfer refers to the formula generated unconditional block grant to all States and Regions. It is the largest transfer from Union to subnational governments.
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Fig.1:RevenueandExpenditure
Revenue Expenditure Per Capita Own Revenue Per capita expenditure
Note: Own revenue may include other smaller transfers from the Union. Available budget formats pose a challenge in disaggregating all transfers.
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5. Ayeyarwaddy relies on Union transfers and own revenue growth has not kept pace with economic growth in the Region, with the revenue to GDP ratio declining from 0.77 to 0.31 percent between 2012-13 and 2016-17 fiscal years (Fig. 3).5 According to the national plan, the Gross Domestic Product (GDP) growth rate in Ayeyarwaddy Region averaged 6 percent between 2012-13 and 2016-17 fiscal years. Figure 3 suggests that fiscal expansion has helped drive growth in the Region (GDP growth rate, represented by a grey dotted line, correlates with changes in the government expenditure).6 Revenue to GDP ratio in the Region peaked at 1.37 percent in 2014-15, however, that is still significantly lower than 8 percent at the Union level.
6. The Regional government run a few surpluses in recent years and now estimates to run a balanced budget. Budget data reveals over MMK 14 billion in surpluses over 6 years and nearly a MMK 7 billion deficit during the 2013-14 fiscal year (Fig. 4). It is unclear, whether these surpluses were rolled over to the following fiscal year or placed in a regional or national fund. Currently, the government estimates a balanced budget. This could be seen as a positive response to the newly introduced Union formula based transfer scheme, as it indicates an improved coordination and foresight with regards to Region’s available fiscal space. Another notable aspect of local finances is that despite rapid increases in spending, the government maintains a relatively low recurrent budget deficit (recurrent revenue covering recurrent expenditure) (Fig. 5). Keeping a positive current balance will be an important aspect for fiscal sustainability in the future.
5 States and Regions’ GDP data are from 2015-16 national planning document and are presented in constant 2011 prices. 6 The annual growth rate data are from Ministry of Planning and Finance (Ministry of National Planning and Economic Development for 2012-13, 2013-14, 2014-15 and 2015-16). According to the Ministry’s data, growth rate during the first half of 2016-17 in the Region was estimated at 4.7 % annualized, lower than the projected 6.4 %. The growth rate data are just projections, and it is important to recognize that actual growth rates could be different.
Revenue to GDP Expenditure to GDP GDP Growth Rate Budget Deficit to GDP (%)
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Fig.4:BudgetBalance(post-Uniontransfer)
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Fig.5:Budgetbalance(pre-Uniontransfer)
Overallbudgetbalance Currentaccountbalance
AyeyarwaddyBudgetBrief|No1
RevenuePerformance
7. Changing classification and accounting norms pose challenges to accurate data analysis on revenue performance. Although a more detailed revenue analysis is necessary, Ayeyarwaddy revenue mobilization, like in the rest of the country, appears to be constrained. After significant increases, albeit from a low base, between 2011 and 2014 own revenue growth has since showed a decline (Fig. 9). Budget books in 2016-17 show a 24 percent year-on-year decrease in own revenue collection (excluding Union transfers), with a decline to MMK 20,544 million from the peak of MMK 82,221 million in 2014-15. This follows the trend consistent with broader estimated declines across the country, with the exception of Yangon and Mandalay. However, the drop could be the result of a change in accounting arrangements (see point 10). It is important to note that similar growth rates in Figure 6 do not reveal the actual revenue base for each State and Region.7
8. Fiscal expansion has been primarily financed through increased Union transfers and fiscal autonomy remains weak. Expenditure financed by own revenue has declined over the last 5 years, from 53 percent in 2012-13 to 15 percent in 2016-17 budget estimate. The tax revenue has accounted for 5 to 8 percent of total revenue during the same period (Fig. 7).8
7 Data unavailable for other States and Regions in 2012-13 FY.8 Union transfer in Figure 7 refers to the general “deficit” grant transfer, the formula generated unconditional block grant to all States and Regions. Other current revenue may include other smaller Union transfers.
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Own revenue as % of total expenditure
AyeyarwaddyBudgetBrief|No1
9. Ayeyarwaddy Region has the fourth largest economy in the country, however, its per capita revenue collection lags behind other States and Regions with smaller economies.9 The government of Ayeyarwaddy projects to collect MMK 20.5 billion in 2016-17, which compares to collection by other States and Regions. However it is the third smallest per capita revenue collection in the country, after Rakhine and Kayin (Fig. 8). More empirical research is required to comment on the low per capita revenue collection in Ayeyarwaddy.
10. Recorded own revenue decline on recent budgets is largely driven by the change in accounting arrangements following the reorganization of Public Works within the Ministry of Construction (Fig. 9). In 2015, the government reformed the structure of Public Works (SEE) in all States and Regions and transformed it into the Department of Highways (DOH). During its last year on Ayeyarwaddy budget books in 2014-15 FY, Public Works expenditures on roads & bridges were recorded as enterprise revenues and amounted to around 68 percent of own revenue. The reorganization meant that road & bridge expenditures were no longer recorded as enterprise revenues, resulting in the observed drop on budgets. The accounting change largely contributes to the observed overall negative current own revenue growth.10
9 The 3 largest economics are Yangon, Mandalay and Sagaing. 10Pre-restructuring accounting norms of Public Works might have also inflated own current revenue collection numbers.
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Fig.8:OwnRevenue
AcrossStates/Regions,2016-17BE
Revenue Revenue per capita
Note: Own revenue may include other smaller transfers from the Union. Available budget formats pose a challenge in disaggregating all transfers.
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Fig.9:TotalOwnRevenueByDepartments
PublicWorks DAOsFisheries CentralBodiesGAD Others
7,081 7,828 8,935 8,037 7,570
34,291 47,101 73,268 19,097 12,974
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Fig.10:TaxandNon-taxRevenueAsshareoftotalrevenue
Own Revenue
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11. Non-tax current revenue makes up the majority of Regional own revenue. Own revenue can be classified as tax revenue and non-tax current revenue. Non-tax current revenue has consistently contributed to over 60 percent of the Region’s own revenue collection over the last 5 fiscal years (Fig. 10).11 A more detailed economic breakdown of recurrent revenue collection is required for a more meaningful budget analysis and assessment of revenue sustainability.
Tax revenue collection has consistently contributed between MMK 7,080 and 8,934 million during the 12.last 6 fiscal years. Revenue collection by the Department of Fishery accounts for the largest share with 56 percent of total tax receipts in 2016-17 budget estimate. General Administration Department (GAD) and Development Affairs Organizations (DAO) make the second and third largest contributors, respectively (Fig. 11). Excise tax, collected by GAD, is the largest tax item totaling around 11 percent of total tax collection in 2016-17 budget estimate (Fig. 12). 12
CompositionofExpenditure
13. Regional government expenditure has grown over 6 times between 2011 and 2017. The largest increase in expenditure occurred in 2012-13 fiscal year with a 256 percent expansion, albeit from a low base. More recently, the expenditure changes appear more constant.
11 Non-tax current revenue may include small transfers from the Union, and hence cannot be entirely classified as own-revenue. 12 Property tax is collected by DAO.
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Fig.11:TaxRevenueBydepartments
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Fig.12:TaxRevenueByitem,2016-17BE
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Fig.13:YearonYearExpenditureGrowth
AyeyarwaddyBudgetBrief|No1
14. The share of capital expenditure has been growing as a percentage of total expenditure (Fig. 14). Capital expenditure accounts for over 60 percent of total expenditure in 2016-17 budget estimate. This is largely driven by large capital expenditure by the newly established Department of Highways (DOH) and the Cabinet of the Regional Government, with 61 and 20 percent of total capital expenditure, respectively. Questions remain whether this shift is a reflection of more capital spending by DOH or a change in accounting practices associated with the reorganizations within the Ministry of Construction and Public Works. Current expenditure is largely driven by General Administration Department (GAD) and Department of Agriculture (Fig. 15).
15. Department of Highways (DOH) accounts for half of the total Regional expenditure, according to the 2016-17 budget estimate.13 Expenditure by the Ministry of Construction (previously by the department of Public Works and expenditure on maintenance of buildings, roads and bridges) has consistently taken the majority share of the Regional budget over the last 5 fiscal years. Since the reorganization of Public Works, expenditure by the Ministry of Construction has taken a smaller share of the budget (now executed by DOH). Central administrative bodies combined are the second biggest spender in the Regional budget (Fig. 16).14 Specifically, nearly 80 percent of Central Bodies expenditure is budgeted under the Regional Cabinet Office. It is unclear what type of expenditure falls under the Cabinet Office. A more detailed expenditure breakdown is necessary to assess sustainability, strategic allocation of resources and efficiency.
13 Department of Highways is part of the Ministry of Construction 14 Central Bodies are comprised of (1) Regional Cabinet Office (2) Regional Parliament (3) Court (4) Attorney General Office and (5) Auditor Office.
16. The classification of budget data imposes limits on analysis. Despite recent progress in disclosure of budget information, there is room for improvement with a more detailed breakdown of current expenditure to help further analysis on sustainability and strategic allocation of resources. Aggregate reporting of budget data poses challenges in estimating resource distribution to a specific function of government or assessing expenditure efficiency. Economic or functional classification of the Region budget will help in addressing some of the challenges. Furthermore, a more transparent view of the Union government’s spending in Ayeyarwaddy, specifically in areas of education and health, would present a better picture of development in the Region. 17. There remains scope for more analysis in the subsequent Ayeyarwaddy budget brief. With additional data on actual budget revenue/expenditure for the 2016-17 fiscal year and budget estimate for 2017-18, the brief could examine budget credibility and access changes in the budget stemming from shifts in new government’s priorities. Township level expenditure will allow for a more sophisticated expenditure review. 18. Despite large unconditional transfers from the Union questions remain about the degree of Regional autonomy for prioritizing resources. Union transfers make up over 80 percent of fiscal resources in the most recent Ayeyarwaddy budget; however, the degree of Regional influence over strategic allocation of its resources is uncle
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