Public Expenditure Management and the Medium-Term Fiscal Framework

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Public Expenditure Management and the Medium-Term
Fiscal Framework

• Workshop on
• Bhutan Public Expenditure Management
• August 16-20, 2004
• Christian Eigen-Zucchi
• The World Bank

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What is an MTFF?

• Typically consists of integrated macroeconomic
  and revenue projections, and a policy commitment
  to a set of strategic fiscal policy goals.
• An MTFF is a first step of an MTEF in moving the
  budget process from a needs basis to an
  availability basis determines the aggregate
  resource envelope.

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Going Back to the Three Objectives of Public
Expenditure Management Systems

• Macro-fiscal discipline and stability
• Avoid public finance crises or the need for major
  adjustments
• Support economic growth and macroeconomic
  stability
• Strategic allocation of resources
• Match government policy with programs, objectives
• (allocative efficiency).
• Technical efficiency
• Getting the most from each ngultrum spent

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Macroeconomic Projections

• In order to develop sound revenue forecasts, some
  key macroeconomic variables need to be projected
• GDP growth
• Inflation
• Power sales
• Tourist arrivals
• Others?

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A Robust Multi-year Projection of Revenues

• Base revenue projections on the forecasts of key
  macroeconomic variables.
• Build from the bottom up.
• Seek coherence across agencies.
• Refine and improve methodology over time.

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Commitment to Fiscal Path

• Choose fiscal targets deemed consistent with
• Desired macroeconomic path (inflation, external
  accounts, available finance).
• Overall strategic policy goals (such as size of
  government as a share of GDP, pillar of 9FYP of
  fostering private sector led growth).

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Commitment is Essential

• The key to the credibility of the targets is the
  extent to which expenditure adjustments would be
  made to compensate for any revenue shortfalls.
• If no adjustments would be made, then the targets
  are purely notional, and not likely to be met.
• If serious spending adjustments would be demanded
  of the line ministries in the event of a revenue
  short-fall, then the targets become meaningful
  (AP example).

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Step 1. Macroeconomic and public sector envelopes
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The MTFF process gives

• A more predictable resource envelop over a
  medium-term horizon.
• For example, the overall balance target, say a
  deficit equivalent to 5 of GDP, combined with a
  revenue forecast equal to 35 of GDP, yields an
  aggregate fiscal envelop for spending of 40 of
  GDP.
• A commitment from the Government to follow a
  sustainable fiscal policy.
• Key step in moving budgeting from a needs to an
  availability basis.

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Capacity is a Significant Issue

• Technical
• Staff skills
• policy analysis, macro forecasting, budget
  examination
• Policy
• Capacity to enforce hard budget constraints
• Commitment to a continuous process of improvement