MTEFs: Concept and Lessons

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MTEFsConcept and Lessons

• Bill Dorotinsky
• The World Bank
• May 2, 2006

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Outline

• MTEF Concept
• Technical objectives
• Process View
• Sequenced decision-making
• Component View - unbundling
• Major Blocks
• More manageable pieces
• Output View
• Experience
• Ghana
• South Africa
• Uganda
• Lessons

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Three Objectives of Public Expenditure Management
Systems

• Macrofiscal discipline and stability
• Avoid public finance crises
• Support economic growth and stability
• Strategic allocation of resources
• Match government policy with programs, objectives
• Technical efficiency
• Getting the most from each ruble spent

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Technical Objectives of MTEF

• Improve macrofiscal situation
• lower deficits, improved economic growth
• more rational approach to retrenchment and
  economic stabilization
• Improve impact of Government policy
• link between government priorities/policies and
  government programs
• Improve program performance/impact
• Shift bureaucracy from administrative to
  managerial culture
• Managerial flexibility innovation lower
  cost/output greater effectiveness of
  programs/policies
• Improved resource predictability

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MTEF Improved Budget Process

• Stage 1. Macroeconomic and public sector
  envelopes
• Stage 2. High-level policy aligning policies
  objectives under resource constraints (top-down)
• Stage 3. Linking policy, resources, and means by
  sector (bottom-up)
• Stage 4. Reconciling resources with means
• Stage 5. Reconciling strategic policy and means

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Stage 1. Macroeconomic and public sector envelopes
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Stage 2. High-level policy aligning policies
objectives under constraints
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Stage 3. Linking policy, resources, and means by
sector
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Stage 4. Reconciling resources with means
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Stage 5. Reconciling strategic policy and means
Policy assessment and reconciliation
Policy official dialogue Modify
baselines Finalize decisions
Revised Requests, Unresolved Issues
Budget Proposal
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MTEF Major Components

• Medium-Term Fiscal Framework
• Aggregates, policy
• Medium-Term Budget Framework
• Ceilings and sector strategies
• Program budgeting/Activity-based costing
• Within ministries, programs, costing,
  input-output models
• Performance measures

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Unbundling MTEFs

• Medium-Term Fiscal Framework
• Multi-year Macroeconomic forecast
• Multi-year revenue, debt sustainability analysis
  and debt policy, yielding expenditure envelope
  (fiscal policy paper)
• Medium-Term Budget Framework
• Multi-year forecast of spending under current
  policy or current level of services, by ministry
  or program
• Multi-year ceilings for sector ministries
• Multi-year sector strategy
• Program budgeting/Activity-based costing
• Multi-year cost estimates of new policies or
  programs (recurrent), or expansion of existing
  programs, prepared by sector ministries
• Multi-year estimates of cost of existing
  policies, programs, subprograms, or activities
  prepared by sector ministries
• Multi-year estimates of cost of new projects
  (capital), or expansion of existing projects,
  prepared by sector ministries

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Unbundling MTEFs
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Unbundling MTEFs (2)
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Unbundling MTEFs (3)
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Unbundling MTEFs (4)
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Summary

• MTEF is about
• Process reform
• Integrating planning and budgeting
• Changing Incentives of Key Actors
• Integrating policy and technical aspects of
  budgeting
• Thinking multi-year
• Misconceptions
• MTEF is only multi-year estimates
• MTEF separate process, document only
• Preconditions?
• Civil service/administrative reform for
  allocative flexibility?

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Ghana

• MTEF first introduced in 1999
• Declared a success at first budget
• big-bang covering all MTEF aspects at once,
  plus IFMIS and Civil Service Reform
• Problems encountered
• Limited MDA capacity
• Data limitations
• EBFs
• Weak macroforecasting undermined MTEF
• Rigidity of spending inhibited reallocation

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Ghana (2)

• Problems encountered (continued)
• No visible change in budget formats, information
  provided (e.g. budget speech)
• Limited buy-in outside core MoF group
• Implemented as project versus reform of budget
  process, as technical versus policy-oriented
• Linking next budget with multi-year estimates
• Top-down implemented, but bottom-up not quite in
  place

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South Africa

• First attempt 1994
• Department of Finance only
• Failed, too internal
• Second attempt 1997
• Inclusive process, with sectoral working groups
• All departments at once
• Led by policy officials
• MTEF is budget process
• Have MTBPS and sectoral plans
• But sectoral plans formal
• Performance emphasized more recently
• Reprioritization within sectors has happened
• Over and under spending reduced

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Uganda

• Started in 1992
• in MoFPED
• With MTFF, major economic classes
• To address macrofiscal problems and counterpart
  funding problems
• Gradually expanded
• 1995 sector analysis (Ag, Roads, Health,
  Education)
• 1997 all sectors (sector working groups)
• 2000 local governments
• 2001 MTEF required submission to Parliament
• Donor-financed investments (PIP) separate process
• Limited performance orientation, though expanding
• More top-down, with limited detailed costing from
  the bottom-up
• MTEF home-grown but still not fully integrated
  with the budget process
• Emphasis on PEAP priority programs

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Lessons in Implementation

• MTEF is designed to improve decision-making, and
  focuses on budget formulation. It will not solve
  all PEM problems.
• MTEF is not a standardized product, per se. The
  principles can be implemented in various ways.
• MTEF needs to be customized to the country,
  including initial conditions in PEM, human and IT
  capacity.
• With MTEF, and PEM reform generally, doing too
  much at once can overload the Government capacity
  and prevent progress on all reforms.

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More lessons

• Start with a medium-term fiscal framework
• MTEFs should not be launched in selected sectors
  until there are medium-term ceilings in place
• Integration of capital and recurrent budgets need
  not be done immediately
• Performance information (outcomes, outputs) need
  not be incorporated immediately
• Flexibility for spending ministries to allocate
  resources across programs, subprograms, and
  activities can be introduced gradually
• Pressure on ministries to find resources within
  current expenditures may be more successful when
  accounting systems are in place to provide good
  information on program and activity costs