Medium-term Budget Frameworks: Objectives, Design, and Performance

8/3/2019 Medium-term Budget Frameworks: Objectives, Design, and Performance

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Medium-term Budget Frameworks:Outline of Presentation

I. What is a Medium-term Budget Framework (MTBF)?

II. What do MTBFs try to achieve?

III. What are the different MTBF models?

IV. How have different MTBF models performed?

V. What are the key elements of successful MTBFs?

VI. How have MTBF performed during the crisis?

VII.What are the lessons from experience with MTBFs?


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I. What is a Medium-term Budget Framework (MTBF)?Where the fiscal strategy and the annual budget meet

Medium-termFiscal Framework

(MTFF)

Principles of fiscal managementNumerical fiscal ruleDisclosure requirements

Multi-year macroeconomic forecastMulti-year fiscal forecast

Fiscal risk analysisMedium-term fiscal target

Multi-year expenditure ceilingMulti-year spending allocationsPlanning marginPerformance indicators/targets

Detailed expenditure outturnReconciliation of change from BudgetExplanation of discrepancies

Instrument Content

Medium-termBudget Framework

(MTBF)

Final Accounts

Objective

Fix permanentfiscal

objectives

State multi-

year fiscaltargets

Set multi-yearspending

plans

Report actual

expenditure

Detailed expenditure appropriationsOther budgetary controlsReconciliation of changes from MTBF

Fiscal Rule orResponsibility Law

Annual BudgetAuthorize

annualexpenditure


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II. What do MTBFs try to achieve?Three objectives of medium-term budget planning

What MTBFs Do How They Do It Who Benefits

1. Reinforceaggregate fiscal

discipline

By constraining budgetappropriation & execution in futureyears to levels consistent with the

Governments fiscal objectives

Finance Ministers

Taxpayers

Future Generations

2. Promote a morestrategic allocation

of expenditure

By abstracting from the immediatepressures & legal & administrativeconstraints that impinge upon the

annual budget process

Prime Ministers

Planning Ministers

Parliamentarians

3. Facilitate moreefficient inter-

temporal planning

By providing greater transparencyand certainty to budget holders

about their likely future resources

Line Ministries

Agencies

Local Governments

4


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III. What are the different MTBF Models?Typology of MTBFs in advanced country MTBFs

Unit of Multi-YearPlanning

Status of Multi-Year Expenditure EstimatesBinding Indicative None

Total Expenditure

Austria (post 2010)Finland (post 2003)

Netherlands

Sweden

France (pre 2009)Italy

Czech Republic

GreeceIcelandIrelandPoland

PortugalSpain

Economic Categories

BelgiumGermanyHungaryJapanTurkey

MinistriesFrance (post 2009)

United Kingdom

Austria (pre 2010)CanadaDenmarkSlovakia

Finland (pre 2003)

Programs Australia New Zealand

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IV. How have different MTBFs performed?a. Reinforcing aggregate fiscal discipline

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Expenditure Revenue Balance

%

ofGDP

Average 3-Year Ahead Forecast Error, 1998-2007(% of GDP)

Binding Indicative Neither

Cautious

Optimistic


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IV. How have different MTBFs performed?b. Promoting a more strategic allocation of expenditure

7

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Binding Indicative None

StandardDeviation

Dispersion in Sector Growth Rates(Ave SD in Real Growth b/w Functions)

1995-2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Binding Indicative None

Use of Performance Information(Share of Countries, 2007)


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IV. How have different MTBFs performed?c. Facilitating multi-year expenditure planning

8

0%

1%

2%

3%

4%

5%

6%

Binding Indicative Neither

Volatility

Volatility of Real General Government Spending(Average year-on-year change in real growth rate)1998-2007


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IV. How have binding MTBFs performed?a. Reinforcing aggregate fiscal discipline

9

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Expenditure Revenue Balance

PercentagePoints

ofGDP

Average 3-Year Ahead Forecast Error 1998-2007(In Percentage Points of GDP)

Fixed Aggregate Fixed Ministerial Rolling Program

Cautious

Optimistic


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IV. How have binding MTBFs performed?b. Promoting a more strategic allocation of expenditure

10

0%

1%

2%

3%

4%

5%

6%7%

8%

9%

Fixed Aggregate Fixed Ministry Rolling Program

StandardDeviation

Dispersion in Sector Growth Rates(Ave Standard Deviation in Real Growth between Functions)1995-2007


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IV. How have binding MTBFs performed?c. Facilitating multi-year expenditure planning

11

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Fixed Aggregate Fixed Ministry Rolling Program

Volatility

Volatility of Real General Government Spending(Average year-on-year change in real growth rate)

1998-2007


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V. What are the key elements of successful MTBFs?

c. ControlMechanisms

Top-down Budgeting

Commitment Controls

Reserves & Margins

Carry-over Rules

a. Commitment

Mechanisms SW/FIN/NL: Aggregate Ceilings

UK/FR: Ministerial Ceilings

AUS: Program Estimates

d. AccountabilityMechanisms

Audit of Macro Assumptions

Multi-year Costings

Budget Sincerity Rules

Reconciliation of Changes

Legitimacy

DisciplineCredibility

Enforcement

Prerequisites

i. Credibleannual budget

ii. Prudentmacroeconomic

projections

iii. Medium-termfiscal

framework

iv. Unified &comprehensivebudget process

b. PrioritizationMechanisms

FIN/NL: Coal. Agreements

SW: Frame Budgeting

UK: Spending Reviews

FR: RGPP

AUS: Exp Review Cttee


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V. Prerequisites for successful MTBFs:i. A credible annual budget

13

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Italy

Iceland

France

Luxembourg

Greece

Germany

C

zechRep

Belgium

Portugal

S

lovakRep

IRELAND

SwedenUK

Canada

Austria

Denmark

Australia

Japan

Spain

Poland

Ne

therlands

Turkey

Binding MTEF

No Binding MTEF

Average Overspend Against Budget Total, 1998-2007(% of GDP, Actual-Forecast)


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V. Design Features of Successful MTBFsa. Commitment mechanisms

COUNTRYCOVERAGE SPECIFITY

Binding

Indicative

TIMEHORIZON

Years

DISCIPLINESocSec

DebtInterest

LocalGovt

% of CGspending

Rolling

or Fixed

Frequency

of Update

AGGREGATE EXPENDITURE CEILINGS

Sweden Yes No Tfers 96%Total Spending

27 Policy Areas3 3 fixed

3rd year addedeach year

Finland Some No No 78%Total Spending

13 Ministries4 4 fixed Every 4 years

Netherlands Yes No Tfers 80%4 Sectors

26 Ministries4 4 fixed Every 4 years

FIXED MINISTERIAL PLANS

United

KingdomNo No Tfers 59% 25 Depts 3 3 fixed Every 3 years

France No Yes No 39% 35 Missions 3 2 fixed + 1 rolling Every 2 years

ROLLING PROGRAM ESTIMATES

Australia Yes Yes Tfers 100%20 Depts

267 Progs4 Rolling Every year


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V. Design Features of Successful MTBFs:a. Coverage of expenditure restrictions

0

10

20

30

40

50

60

70

80

90

100

Coverage of Ceilings(% of Central Government) Expenditures Outside Ceilings

Criterion Example Countries

MandatoryDebt Interest

Finland, NLSweden, UK

EU Contribution UK

Automaticstabilizer

UnemploymentBenefits

Finland, France,NL, UK

Fiscally

neutral

EU Structural Funds UK, Finland

Earmarked RevenueUK (Lottery)NL (Gas)

Tax on Public BodiesFinland (VAT)

AccountingAdjustments

UK (Defence)

Formula-driven

Social Security France, UK

CG to LG Transfers Finland, France

Volatile Privatization Windfalls Finland

The most effective ceilings cover

at least of central government

and have clearly-defined criteria for

exclusion of expenditure items.


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V. Design Features of Successful MTBFs:b. Prioritization Mechanisms

CHARACTERISTIC DEFINITION BEST PRACTICE

UniqueNo competing source of

expenditure authority

AustraliaExpenditure Review

Committee

Legitimate

Combines bottom-up input

from ministries with top-downengagement from politicians

France

Rvision General desPolitique Publique

ComprehensiveCovers all expenditure over the

whole planning horizon

United Kingdom

ComprehensiveSpending Review

CappedOperates withing a fixed, multi-

year budget constraintSweden

Expenditure Ceiling

DefinitiveThe final verdict from theCabinet and Parliament

Finland / NL

Coalition Agreement


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V. Design Features of Successful MTBFs:c. Reserves and Margins

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Implicit Margins Explicit Margins TotalContingency

GDP forecastother economic

assumptionswithin expenditure

estimatewithin budget

balance% of totalspending

CanadaMoF uses ave of

ind. forecast

MoF adds 0.5 to 1% tointerest rates and runs

through model

Contingency reserveof 1.5 to 2% of total

spending

MoF targets a surplus of0.1% of GDP despite

balance rule3.5 to 4%

UnitedKingdom

MoF uses GDP

forecast 0.25%below trend

7 other economic

assumptions explicitlycautious

Reserves and margins

equal to 0.75 to 1% oftotal spending

MoF targets ave. surplus

of 0.2% of GDP despiteGolden Rule

2.5 to 3%

SwedenBudget based on central assumptions for

GDP and other macro variables

Budget margin withinexpenditure ceiling

rising from 1.5 to 2.5%of total spending

None 1 to 2.5%

Netherlands

Deficit target & expenditure ceiling in CA &Budget based on cautious economic

scenario in which GDP 0.5 to 1% belowoutturn

Central contingencyreserve of 0.1% of

total spending

Most recent CA targetsstructural surplus of 1%

of GDP

1 to 2%

Australia

Budget is basedon centraleconomic

assumptions

Conservative bias inforward estimates of0.5-1.5% of spending

No centralcontingency reserve

None 0.5-1.5%

IrelandBudget based on central assumptions for

GDP and other macro variables0.03% contingency

margin in budget year

0.2% of GDPoverachievement against3% deficit target in 2014

0.03 - 0.5%


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V. Design Features of Successful MTBFs:d. Reconciliation of Changes between MTBFs (Sweden)

-0.4-0.3-2.4Net drawdown ofcarryovers

-22.3-21.6-24.3Total change inexpenditure

-1.8-1.3-0.8Volume changes inentitlements

-4.5-3.9-4.6Other

984.1948.6928.0Total expenditurein Budget 2008

-14.9-14.2-13.7Accounting adjustments

4.03.51.8Other macroeconomicchanges

2.11.00.0Recalculation of wagesand prices

-12.4-12.0-8.6Discretionary cuts

5.55.64.0Discretionary increases

1,006.5970.2952.3Total expenditurein Budget 2007

201020092008Billions of kronor

Changes in Expenditure since

2007 Budget

-0.4-0.3-2.4Net drawdown ofcarryovers

-22.3-21.6-24.3Total change inexpenditure

-1.8-1.3-0.8Volume changes inentitlements

-4.5-3.9-4.6Other

984.1948.6928.0Total expenditurein Budget 2008

-14.9-14.2-13.7Accounting adjustments

4.03.51.8Other macroeconomicchanges

2.11.00.0Recalculation of wagesand prices

-12.4-12.0-8.6Discretionary cuts

5.55.64.0Discretionary increases

1,006.5970.2952.3Total expenditurein Budget 2007

201020092008Billions of kronor

Changes in Expenditure since

2007 Budget

23217232Sustainable cities & climate investment

Etc...

-50Clean-up of polluted areas

-200-200-50Safeguarding biodiversity

40-20-60Environment

-6,853-6,463-4,579Total discretionary changes

-1,085-723-435Procurement & operational efficiencies

-105-103-74Crisis preparedness

211206147Integrated emergency radio

-987-627-356Defence and Security

201020092008Millions of kronor

Discretionary Changes

23217232Sustainable cities & climate investment

Etc...

-50Clean-up of polluted areas

-200-200-50Safeguarding biodiversity

40-20-60Environment

-6,853-6,463-4,579Total discretionary changes

-1,085-723-435Procurement & operational efficiencies

-105-103-74Crisis preparedness

211206147Integrated emergency radio

-987-627-356Defence and Security

201020092008Millions of kronor

Discretionary Changes

48.0

(0.3)

47.1

(0.3)

46.1

(0.3)Number of parental benefit days

Etc

53.2

(-4.3)

53.2

(-4.3)

53.4

(-4.1)Number of illness compensation days

1,646,000

(14,000)

1,653,000

(11,000)

1,664,400

(10,000)Number of child allowances

27.700

(-2,300)

29,500

(-500)

30,200

(3,200)Number of asylum seekers

201020092008(change since 2007 Budget)

Entitlement Volumes

48.0

(0.3)

47.1

(0.3)

46.1

(0.3)Number of parental benefit days

Etc

53.2

(-4.3)

53.2

(-4.3)

53.4

(-4.1)Number of illness compensation days

1,646,000

(14,000)

1,653,000

(11,000)

1,664,400

(10,000)Number of child allowances

27.700

(-2,300)

29,500

(-500)

30,200

(3,200)Number of asylum seekers

201020092008(change since 2007 Budget)

Entitlement Volumes


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VI. How have MTBFs performed during the crisis?How MTBFs can support fiscal consolidation

1. Require government to underpin theirdeficit reduction plans with specify policies

2. Overcome tendency for ministries to delaycuts, wait and see, or hope for the best

3. Constrain future budgets to the medium-term consolidation path

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AUS

FRA

GBRSWE

AUT

NLD

ITA

BEL

DEU

HUN

JPNDNKNZL CHE USA

PRT

ESP

ISL

IRL

POL

EST ISR

0

200

400

600

800

1000

1200

-50% -25% 0% 25% 50% 75% 100% 125% 150%

C

reditDefaultSwapSpread

General Government Net Debt

Binding MTBF

Indicative MTBF

No MTBF

Linear (Binding MTBF)

Linear (Indicative MTBF)

Linear (No MTBF)

Default Risk vs. Government Debt Levels(2011)

GRC: (1.53, 8512)(not shown)

VI. How have MTBFs performed during the crisis?Credibility of government debt reduction plans

20

ABC

ABC

ABC


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VII. What lessons from experience with MTBFs?

1. Range of objectives to multi-year budget planninga. Multi-year fiscal disciplineb. Reallocation of expenditurec. Promote multi-year budget planning

2. No single, monolithic MTBF model

a. Level of multi-year planningb. Degree of fixity

3. Some MTBF models work better than othersa. Binding MTBFs better at promoting fiscal discipline & multi-year planningb. No model clearly better at facilitating expenditure reallocation

4. Binding MTBFs have demanding prerequisitesa. Credible annual budgetb. Prudent macroeconomic forecastsc. Comprehensive and top-down budget processd. Medium-term fiscal framework


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VII. What lessons from experience with MTBFs?

5. Tradeoffs in designing binding MTBF between ensuringa. Coverage of expenditure restrictionsb. Detail of budget allocationsc. Certainty for budget managers

6. Binding MTBFs about more than ceilingsa. Expenditure prioritization mechanismsb. Controls expenditure commitmentsc. Accounting for forecast revisions

7. Binding MTBFs dont stop countries getting into fiscal trouble

a. Countries with no MTBFs have low deficit and debt levelsb. Countries with binding MTBFs have a range of deficit and debt levels

8. Binding MTBFs can lend credibility to fiscal consolidation plans:a. Countries with binding MTBFs have lower perceived default riskb. Binding MTBFs weaken link between debt level and default risk

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Medium-term Budget Frameworks: Objectives, Design, and Performance