BHUTAN - WORKSHOP ON PEM

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BHUTAN - WORKSHOP ON PEM

• MTEF EXPERIENCES OF OTHER COUNTRIES
• Mike Stevens

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Introduction

• MTEFs frequently recommended by Bank
• But the record is spotty
• MTEF unit busy developing new processes, but
  annual budget still made the traditional way
• Political leadership has little understanding of
  MTEF and what it means to spending choices
• Launched with fanfare, MTEF soon crashes
• Closer inspection reveals it never changed budget
  behaviour

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Some Questions to Ask

• Thus PEM specialists in Bank are stepping back
  and asking - what have we learned from nearly a
  decade of MTEFs?
• What has happened in countries attempting a MTEF?
• Has the MTEF gained traction on annual
  budget-making?
• Did we get the technical design recommendations
  right?
• What were the other PEM reforms the country
  needed to pursue?
• Was the sequence of reform right?
• Did the finance ministry have the technical
  capacity to lead PEM reform?
• Did policy-makers understand the ambit of reforms
  and back them?

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Some emerging answers

• Unquestionably MTEFs are a desirable component of
  budget reform.
• All major OECD countries make annual budgets
  within a MT framework, with good reasons
• Every major OECD country has a medium term fiscal
  strategy
• Correcting 3 decades of incremental budgeting
  resulting in unsustainable taxation levels and
  deficits
• Demographic change and inter-generational effects
  (LT framework)
• Changing the incentives of departmental budget
  making, shifting from adversarial conflict to
  emphasis on performance

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Developing country arguments for MTEFs

• Poorer countries have just as many reasons for
  making annual budgets in a medium term framework
• Classic argument to capture incremental
  recurrent costs of investment projects
• Fitting PRSP policies and programs into budget
  propoor spending typically has high cost drivers
• Implementing Civil Service Reform managing wage
  bill change
• Changing role of government implies portfolio
  spending shifts
• Planning implementation of big ticket policies
  funded pension schemes, reducing arrears,
  rescheduling and reducing debt
• Managing revenue volatility (eg mineral revenue
  dependent)
• Improving budget predictability, escaping cash
  release budgeting

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Three African Examples

• South Africa Well functioning MTEF on second
  try, driven by need to control deficit, reduce
  debt, reallocate spending across and within
  ministerial portfolios, and change the culture of
  budgeting from incrementalism to performance,
  strong National Treasury
• Ghana Ambitious MTEF, integrating current and
  capital budgets, new budget classification
  system, accounting changes, performance
  indicators, MTEF run by separate PIU
• Uganda Less sophisticated but more durable,
  retained dual budget, delayed performance
  indicators, lengthened budget calendar, highly
  participatory, strong MF

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Three critical questions

• Does MTEF fit into sequence of PEM reform?
• Is the design of the MTEF right?
• Is the finance ministry strong and competent and
  the political leadership on board?

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What is the Sequencing of PEM reform?

• What is it that the government is trying to fix
  with budget reform?
• Some contenders
• Off-budget spending
• Revenue not remitted to Treasury
• Aid funds outside budget
• Budget classification does not permit function
  and economic analysis
• Dysfunctional accounting system
• Weak fiscal reporting
• Low development value PIP

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Is the design of the MTEF right?

• Tendency in many countries to overspecify the
  MTEF a particular risk with consultants
• Not starting with a MTFF
• Believing that you can launch a MTEF in selected
  sectors
• Moving too quickly to integrating RB DB in
  program structure
• Prematurely incorporating performance information
• Giving departments too much flexibility too
  quickly to determine sector budgets within
  overall envelopes
• Moving to concepts of headroom before
  accounting system generates reliable costs

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Is political leadership on board?

• Does the political leadership understand the new
  rules of the game?
• How strong is the finance ministry?
• Is there a clear overall strategy for PEM reform,
  and how well does the MTEF fit into this
  strategy?
• Is there institutional capacity in MF and line
  ministries to operate a MTEF?
• Capacity to project revenues and spending over MT
  and develop fiscal strategy
• Capacity within sector ministries to move beyond
  incremental budgeting
• Capacity of MF to play a challenge role

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Conclusions

• Three key questions to ask before embarking on a
  MTEF
• How does the MTEF fit with other PEM reforms and
  their sequencing? (If not, more dialogue on
  budget reform priorities may be needed). What is
  the budget problem that needs fixing?
• Is the MTEF design appropriate? (Keep it simple
  MTFF and top-down portfolio envelopes,
  maintaining MF scrutiny)
• Is the finance ministry politically and
  technically strong?(If not, risk is that MTEF and
  most other PEM reforms will founder).