Improving Budgetary Outcomes

The Role of a MTEF

by

Malcolm Holmes

Three Levels of Expenditure Outcomes

Three Levels of Expenditure Outcomes

• Aggregate Fiscal Discipline

• Prioritization of the Composition of Expenditures

• Technical Efficiency in the Use of Budgeted Resources

Some PrinciplesSome Principles

• Transparency and accountability

• Comprehensiveness of budget

• Predictability of resources & policies

• Flexibility

• Contestability

• Existence and sharing of information

Fragmentation/Lack of Comprehensiveness

Fragmentation/Lack of Comprehensiveness

Across:• Policy Making, Planning, Budgeting• Fiscal activities• Types of expenditure• Sources of funds• Time• Inputs, outputs and outcomes

Dual BudgetingDual Budgeting

• Investment as basis of development

• Development Budget

• PIP

• R Coefficients

• The government should foster an environment that supports and demands performance before introducing performance, output or outcome budgeting.

• Control inputs before seeking to control outputs.

• Account for cash before accounting for accruals.

• Establish external controls before introducing internal control.

• Establish internal control before introducing managerial accountability.

• Operate a reliable accounting system before installing an integrated financial management system

• Budget for work to be done before budgeting for results to be achieved.

• Enforce contracts in the market sector before introducing contracts in the public sector.

Sequencing Public Sector Financial Management Reforms

Sequencing Public Sector Financial Management Reforms

Restraint with

FlexibilityRestraint with

Flexibility• Hard Budget Constraint

• Transparency

• Accountability

• Exit

• Voice

Flexibility

Information

Enabling Environment for Public Sector

Enabling Environment for Public Sector

• Link Policy, Planning, Budgeting

• Restrain decision making:– affordability– cost, expected results– evaluate

• Forum within which policies compete

• Capacity and willingness to reprioritize and reallocate.

Characteristics of Sound PEMCharacteristics of Sound PEM

Commitment, capacity & willingness to:• Prepare a budget (a) in line with development

priorities and (b) that can realistically be implemented

• Specify the budget’s intended results• execute budget as passed by the legislature• Account for results achieved• Evaluate impact of policies and programs and

take results into account in budget preparation.

A Contract for PerformanceA Contract for Performance

The Center• More predictable funding• More predictable policy• Greater transparency and predictability in

processes for reprioritizing and reallocating resources

• Leave management decisions to line managers

A Contract for PerformanceA Contract for Performance

The Line

• Living within budget• Clear sector strategies• Using resources efficiently and

effectively• Reporting on resource use

Using a Medium Term Expenditure FrameworkUsing a Medium Term

Expenditure Framework• Fiscal Targets (what is affordable)

• Forward Estimates of Existing Policy

• Institutional Mechanisms for Making the Trade-offs

• A Focus on Performance

• Enhanced Predictability

Implementing an MTEFImplementing an MTEF

• Pilot or whole of Government

• Budget unification (PIP elimination)

• Reduction of the number of budget line items

• Link between line items and objectives and impact

• introduction of a 3 year perspective

• mission statements (strategic plans) for sectors

Implementing an MTEF (Cont.)

Implementing an MTEF (Cont.)

• Use of strategic plans for budget preparation

• Emphasize costs of activities

• Merging of external and domestic financing

• Withdrawal of MoF from details of budget allocations in LM

• Engaging cabinet

• Focus on performance

Ghana: Explaining progressGhana: Explaining progress

• Commitment from Minister and Ministry of Finance, line ministers and donors

• MTEF based on GOG-led PER

• Consensus building efforts (losers and winners)

• MTEF becomes budget process

• Consistency between MTEF and sector approaches

Ghana: Explaining Progress (Cont.)

Ghana: Explaining Progress (Cont.)

• Link to other reforms

• Performance focus - matching authority and accountability

Ghana: Sustainability TestsGhana: Sustainability Tests

• Predictability of funding (domestic and external) – predictable macro/fiscal framework– cash flow estimates– cash available on time– budget voted on time by parliament

• Predictability of policies

- Cabinet Engaged

• controlling expenditure

• focus on outcomes

Ghana: Sustainability Tests (Cont.)

Ghana: Sustainability Tests (Cont.)

• Dynamic process of evaluation of policies

• Autonomy and accountability of LM

• Civil service management - pay policy, authority

• Decentralization

• Hard Budget Constraint

• Cohesive political executive

• Sector Strategies

• Forum within which decisions constrained by resource availability over medium term and policies compete

• Programmatic decisions devolved to line ministers (within hard sector ceilings)

PRIORITIZATIONInstitutional Arrangements

PRIORITIZATIONInstitutional Arrangements

PRIORITIZATIONInstitutional Arrangements

(Cont.)

PRIORITIZATIONInstitutional Arrangements

(Cont.)

• Strategic priorities and sustainability drive aid

• Information - Costs, Performance

Mechanisms for PrioritizationMechanisms for Prioritization

• Case: Australia

• Aggregate Fiscal Targets and Strategic Objectives

• Medium-term Costs of Competing Policies

0

5

10

15

82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93

Australia: Medium-term Costs of PoliciesAustralia: Medium-term Costs of Policies

Mar 84

May 85

Nov 85Dec 86

Aug 89

Real growth rate

Projection dates

Mechanisms for PrioritizationMechanisms for Prioritization

Case: Australia• Aggregate Fiscal Targets and Strategic Objectives

• Medium-term Costs of Competing Policies

• Arena for Contesting and Coordinating Policies

- Cabinet: Strategic Priorities

- Line: Spending-Savings within Hard Budgets

• Ex-post Evaluation

Outcomes:

- Deficit 4% GDP to surplus of 2% GDP

- Shifts in intra and intersectoral composition

- Greater funding predictability

Australia: Changes in Expenditure Composition, 1983-94

Australia: Changes in Expenditure Composition, 1983-94

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

Defense Educ Health Socsec Transp. Other

Spending

Saving

Net change

Source: Dixon, 1993 : 32

$ Millions

Net change

New spending

Savings from existing policy

• Sector-wide

• Clear Strategy and Policy Framework

• Program Focus

• Sector Expenditure Program

• Medium-term Perspective

• Consistent with Macroeconomic Framework

• Donor Coordination

Sector-wide Approaches as Performance Based Budgeting

Sector-wide Approaches as Performance Based Budgeting

• Strategic Policy

• Sector Envelopes

• Program: Individual Ministers

• Running Costs: Managers

Getting Decisions in the Right Hands

Getting Decisions in the Right Hands

• Legitimacy of policy

• Predictability of funding

• Delegation of authority to line managers

• Responsibility for producing outputs linked to outcomes

• Hard budget constraint -upwards and downwards- during budget execution

• Independent external audit

OPERATIONAL PERFORMANCE

Institutional Arrangements

OPERATIONAL PERFORMANCE

Institutional Arrangements

Improving Technical EfficiencyImproving Technical Efficiency

broader public sector

markets and the private sector

civil service

Strengthen “voice”

mechanisms

More “exit”

possibilities

Improve “rule-compliance” and

“loyalty”

Getting the Best out of Organizations

Getting the Best out of Organizations

• Hard, but Predictable, Budget Constraint

• Flexibility for Managers

• Clarity of Purpose and Task

• Ex-Ante Specification of Performance

• Contestability

• Evaluation and Audit

• Exit Options

• Voice

LINE ITEM

1. Input

Cash

2. Classification

Economic Type

3. Annual

PERFORMANCE BUDGETING

1. Input

Cash/Accrual

Output

Performance data/

indicators/standards

Authority

Accountability

Outcome

Clear Objectives

Indicators

Evaluation

2. Classification

Functional

Program

Organizational

3. Multi-year

LINKING:

• Inputs

• Outputs, and

• Outcomes

Performance Based BudgetingPerformance Based Budgeting

Resources used to produce the service:

• Hard budget constraint– central budget– user charging

• Full cost/Unit cost– cash– accrual

InputsInputs

The good or service produced:

• Who controls

• Who is accountable

• Measuring and reporting performance

OutputsOutputs

Purpose to be achieved by government intervention (including production of outputs):

• Who controls

• Who is accountable

• Measuring and reporting performance

OutcomeOutcome

Enabling Environment for Public Sector

Enabling Environment for Public Sector

• Link Policy, Planning, Budgeting

• Restrain decision making:– affordability– cost, expected results– evaluate

• Forum within which policies compete

• Capacity and willingness to reprioritize and reallocate.