Contemporary Challenges in Managing Public Expenditures

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Contemporary Challenges in Managing Public
Expenditures

• Allen Schick
• Training Course on Public Expenditure Analysis
  and Management
• The World BankJanuary 13, 2004

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FOUR BASIC REFORM OBJECTIVES

• MAINTAIN FISCAL DISCIPLINE
• The government should aim to stabilize its fiscal
  position in the medium-term and beyond
• PROMOTE EFFECTIVE ALLOCATION OF RESOURCES WITHIN
  AND BETWEEN SECTORS
• The government should shift funds to more
  effective, higher-priority needs
• IMPROVE EFFICIENCY IN THE PROVISION OF SERVICES
• The government should encourage ministries and
  agencies to improve performance
• BUILD MODERN BUDGET AND FINANCIAL MANAGEMENT
  CAPACITY
• The government should strengthen the
  informational basis for managing public money

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EACH OBJECTIVE IS ASSOCIATED WITH A CONTEMPORARY
BUDGETARY INNOVATION

• MAINTAIN FISCAL DISCIPLINE
• Fiscal Rules that limit budget total
• PROMOTE EFFECTIVE ALLOCATION
• Medium-term expenditure framework
• IMPROVE SERVICE EFFICIENCY
• Performance-based budgeting
• MODERN FINANCIAL MANAGEMENT
• Integrated financial information systems (IFIS)

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PUBLIC EXPENDITURE CONDITIONS ASSOCIATED WITH
ECONOMIC DEVELOPMENT
AS THE ECONOMY DEVELOPS AS THE ECONOMY DEVELOPS EXPLANATION
Public Spending Grows as a Percentage of GDP Rising expectations, strong demands for improved services, and easier availability of resources Rising expectations, strong demands for improved services, and easier availability of resources
Consumption Expenditure Rises Initial increases tend to be concentrated in services such as health, education, environment, and sanitation Initial increases tend to be concentrated in services such as health, education, environment, and sanitation
Transfer Payments Rise Later As development persists and matures, pressure rises to establish/enhance social security programs As development persists and matures, pressure rises to establish/enhance social security programs
Aggregate Fiscal Discipline May Weaken Budget deficits may rise as government overspends the dividends of economic growth and draws on its improved ability to borrow Budget deficits may rise as government overspends the dividends of economic growth and draws on its improved ability to borrow
Pressure to Improve Allocative Efficiency by Shift from Subsidiesto Transfers Pressure to remove/reduce subsidies to firms and to protect disadvantaged/dependent persons through income redistribution schemes and expansion of safety nets Pressure to remove/reduce subsidies to firms and to protect disadvantaged/dependent persons through income redistribution schemes and expansion of safety nets
Operation Efficiency May Decline Citizen pressure for better services, impeded by failure of government to pay competitive salaries as private employment opportunities advance and inability of pre-development bureaucracies to keep up with new demands/opportunities, and greater opportunity for corruption Citizen pressure for better services, impeded by failure of government to pay competitive salaries as private employment opportunities advance and inability of pre-development bureaucracies to keep up with new demands/opportunities, and greater opportunity for corruption
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GETTING THE BUDGET RIGHT

• FISCAL DISCIPLINE. Are total revenue, spending
  and the surplus or deficit appropriate in the
  light of current and prospective economic
  conditions, the governments taxing capacity, and
  demands for public services?
• EFFICIENT ALLOCATION. Are the governments
  priorities right in terms of developing society,
  financing public objectives, and carrying out the
  programs authorized in law?
• EFFICIENT OPERATIONS. Is the government spending
  money and managing operations in ways that
  provide high-quality public services that give
  value for money?

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BASIC REQUIREMENTS OF EFFECTIVE PUBLIC
EXPENDITURE MANAGEMENT

• FISCAL DISCIPLINE Budget totals should be the
  result of explicit, enforced decisions they
  should not merely accommodate spending demands.
  The totals should be set before spending
  decisions are made, they should be enforced
  during implementation of the budget, and should
  be sustainable over the medium-term and beyond.
• EFFICIENT ALLOCATION Expenditure decisions should
  be based on government priorities and on evidence
  concerning the effectiveness of public programs.
  Budgeting should facilitate reallocation from
  lesser to higher priorities and from less to more
  effective programs.
• EFFICIENT OPERATIONS/ Agencies should provide
  services at a cost that achieves
• SERVICES ongoing efficiency gains. Public
  services should be accessible to citizens and
  responsive to their needs and should be provided
  in a fair, courteous manner agencies should be
  operated in ways that give managers incentives to
  be efficient in using human and financial
  resources.

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INSTITUTIONS FOR SUSTAINABLE FISCAL DISCIPLINE

• RULES Limits on total spending are set before
  sectoral spending bids are considered. Total
  spending must be consistent with these limits.
  The limits are set for the medium-term (3-5
  years) and budget decisions are made within a
  multiyear framework.
• ROLES A strong Finance Ministry (or Cabinet
  Committee) enforces the fiscal aggregates in
  budget negotiations with spending departments and
  in cabinet actions. During implementation of the
  budget, the Finance Ministry may intervene to
  assure that the fiscal aggregates are maintained.
• INFORMATION A medium-term expenditure framework
  (MTEF) provides a baseline for measuring the
  budgetary impacts of proposed or approved policy
  changes. During implementation, actual spending
  is monitored to assure compliance with the
  aggregates.
• INCENTIVES Fiscal Rules and outcomes are
  transparent, and breaches carry political costs.
  When they work, the rules are politicians with
  determination to take stringent measures that
  uphold the fiscal aggregates.

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INSTITUTIONS FOR IMPROVING ALLOCATIVE EFFICIENCY

• RULES Spending limits are established for each
  sector or Ministry Ministers are encouraged to
  reallocate within these limits. Proposed
  reallocations must be based on evaluation of
  programs and/or performance measures.
• ROLES Government through the cabinet or other
  organ defines priorities and objectives, and
  makes sectoral allocations within a medium-term
  framework. Sectoral ministers have authority to
  reallocate within their areas of responsibility,
  subject to review by cabinet or parliament.
• INFORMATION Ministers and managers generate or
  review data on the actual or expected
  effectiveness of programs, as well as on social
  conditions and outcomes. They also consider
  information on the future spending impacts of
  authorized and proposed budget decisions.
• INCENTIVES Sectoral ministers have broader scope
  to reallocate within their portfolios, with less
  risk that doing so would cause them to lose
  resources.

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INSTITUTIONS FOR OPERATIONAL EFFICIENCY

• RULES Operating costs are cash-limited, but
  managers have broad discretion in using these
  resources and in providing services. Operating
  costs are reduced by a percentage equal to all or
  a portion of projected efficiency gains.
• ROLES Managerial responsibility is devolved to
  managers who have flexibility in organizing
  operations and delivering services but are
  accountable for their performance.
• INFORMATION Outputs are specified in advance and
  actual outputs are compared to targets. Costs
  are allocated to the activities responsible for
  them. Information on financial and
  organizational performance is published in annual
  reports and other documents.
• INCENTIVES Managers can use savings to improve
  services and may carryover unused operating funds
  to the next fiscal year. In some cases, a
  portion of their pay is based on performance.

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EFFECTIVE ALLOCATION

• Expenditures should be based on government
  priorities and on the effectiveness of public
  programs. The budget system should create
  conditions and incentives that facilitate
  reallocation from lesser to higher priorities and
  from less to more effective programs.
• BASIC ELEMENTS
• The capacity and willingness to reallocate
• Priority-setting process in government
• Information on program outcomes and effectiveness

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IMPEDIMENTS TO EFFECTIVE ALLOCATION

• In all countries
• Protected programs have their own financing and
  are walled off from the rest of the budget.
• Ministers and managers log roll to protect their
  budget shares and programs.
• Interest groups/citizens lobby to defend existing
  programs/benefits.
• When increments are available
• Government can respond to new priorities by
  allocating incremental resources, without
  reexamining old programs.
• When the budget is tight
• It is politically easier to continue existing
  programs than to cut them in order to finance
  program initiatives.

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THE INSTITUTIONAL FRAMEWORK FOR EFFECTIVE
ALLOCATION

• Fiscal Constraints
• Constraints or budget totals must be hard so that
  government cannot avoid reallocation by spending,
  taxing, or borrowing more.
• Medium-Term Framework
• Constrains budget allocation for 3-5 years ahead
  and establishes framework within which
  allocations and reallocations are considered.
• Strategic Capacity
• Government establishes realistic
  priorities/objectives along with
  policies/programs to implement its strategy.
• Reallocations Between Sectors
• Strong leadership at top of government including
  prime minister, finance minister, or cabinet.
  Central organs concentrate on strategic matters,
  and devolve expenditure details to sectoral
  ministers and program managers.
• Reallocations Within Sectors
• Made by sectoral ministers subject to review by
  government.

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INFORMATION FOR EFFECTIVE ALLOCATION

• Budget Baseline (Forward Estimates)
• Projections of future revenue and spending
  assuming no change in current policy including
  increases and decreases, previously agreed by
  government as changes to the baseline, and
  adjustments for changes in economic conditions.
• Measurement of Policy Changes
• Process by which the future budgetary impacts of
  proposed or agreed policy changes are measured in
  reference the budget baseline.
• Program Evaluation
• Systemic review of program effectiveness and
  process for feeding evaluations into budget
  decisions.
• Outcome Measures
• Quantitative and (in some cases) qualitative
  measures of program impacts on society
  comparison of planned and actual outcomes.

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WHY THE ANNUAL BUDGET IS NOT SUFFICIENT FOR
ALLOCATING RESOURCES EFFECTIVELY

• Budgeting is incremental each years allocations
  differ only marginally from the previous years.
• The budget looks backward emerging market and
  developing countries must look forward to build a
  more robust future.
• The budget focuses on short-term issues it lacks
  a long-term perspective.
• The budget is driven by fiscal pressures it
  slights program needs.

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THE MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF)

• Extends the time frame of budgeting from one year
  to 3-4 years
• A baseline (forward estimate) projects future
  expenditure for existing programs
• Annual budgeting is reorganized to focus on
  policy initiatives (changes to the baseline)
• The future cost of policy initiatives is measured
  to assure they are consistent with the fiscal
  constraint
• Some countries divide the annual budget process
  into two stages a framework (planning) stage
  during which the fiscal aggregates are set and
  sectoral allocations are made and an estimates
  stage
• The MTEF is rolled forward each year by dropping
  the first year and adding a year at the end

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BASIC ELEMENTS OF AN MTEF

• Explicit fiscal targets (such as total spending
  or the maximum deficit) for each of the next 3-5
  years
• Baseline (forward) estimates of future
  expenditure
• Procedures for proposing policy initiatives in
  the budget
• Allocation of a budget margin (positive or
  negative) to each minister, sector, or portfolio
• Rules for assuring that policy initiatives and
  budget requests are consistent with the fiscal
  targets
• Rules for updating the baseline estimates

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THE MTEF BUDGET CONSTRAINT

• Should
• Take account of approved plans
• Be approved by the Government
• Be realistic and achievable
• Be sustainable over the medium-term and beyond
• Be set before departments submitting spending
  estimates
• Be broken down into sectoral constraints
  (allocations)
• Be supported by procedures for ensuring that
  policy changes are consistent with it

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ISSUES IN OPERATING AN MTEF

• How many years should it cover?
• Should it have a contingency reserve for fiscal
  surprises or future policy changes?
• Should it be based on current or constant prices?
• How much spending detail should be included?
• Should allocations for forward years be
  guaranteed?
• How should the MTEF deal with fiscal shocks?

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MTEF DOES NOT GUARANTEE EFFECTIVE ALLOCATION

• If MTEF is not used for allocations, it is
  useless Many countries have an MTEF but do not
  base budget decisions on it
• MTEF must become the governments budget
  process Some countries have an annual budget
  plus a separate MTEF
• MTEF should be used by political leaders to set
  fiscal policy and spending priorities If MTEF is
  treated as a technical exercise, politicians will
  not pay attention to it
• MTEF should focus budgeting on policy choices If
  budgeting is used to control the details of
  spending, MTEF will not be of much value
• MTEF should be a rolling process Last years
  decisions should be the starting point If the
  budget disregards medium-term decisions, MTEF
  will wither away