Improving Budgetary Outcomes The Role of a MTEF by Malcolm Holmes

1. Improving Budgetary Outcomes The Role of a MTEF by Malcolm Holmes

2. Three Levels of Expenditure Outcomes • Aggregate Fiscal Discipline • Prioritization of the Composition of Expenditures • Technical Efficiency in the Use of Budgeted Resources

3. SomePrinciples • Transparency and accountability • Comprehensiveness of budget • Predictability of resources & policies • Flexibility • Contestability • Existence and sharing of information

4. Fragmentation/Lack of Comprehensiveness Across: • Policy Making, Planning, Budgeting • Fiscal activities • Types of expenditure • Sources of funds • Time • Inputs, outputs and outcomes

5. Dual Budgeting • Investment as basis of development • Development Budget • PIP • R Coefficients

6. Sequencing Public Sector Financial Management Reforms • 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.

7. Restraint with Flexibility • Hard Budget Constraint • Transparency • Accountability • Exit • Voice Flexibility Information

8. EnablingEnvironment 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.

9. Characteristics 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.

10. A 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

11. A Contract for Performance The Line • Living within budget • Clear sector strategies • Using resources efficiently and effectively • Reporting on resource use

12. Using 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

13. Implementing 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

14. 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

15. Ghana: 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

16. Ghana: Explaining Progress (Cont.) • Link to other reforms • Performance focus - matching authority and accountability

17. Ghana: 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

18. Ghana: Sustainability Tests (Cont.) • Dynamic process of evaluation of policies • Autonomy and accountability of LM • Civil service management - pay policy, authority • Decentralization

19. PRIORITIZATIONInstitutional Arrangements • 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)

20. PRIORITIZATIONInstitutional Arrangements (Cont.) • Strategic priorities and sustainability drive aid • Information - Costs, Performance

21. Mechanisms for Prioritization • Case: Australia • Aggregate Fiscal Targets and Strategic Objectives • Medium-term Costs of Competing Policies

22. Australia: Medium-term Costs of Policies Real growth rate Mar84 Projection dates May 85 Nov 85 Dec 86 Aug 89

23. Mechanisms 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

24. Australia: Changes in Expenditure Composition, 1983-94 $ Millions New spending Net change Savings from existing policy Source: Dixon, 1993 : 32

25. Sector-wide Approaches as Performance Based Budgeting • Sector-wide • Clear Strategy and Policy Framework • Program Focus • Sector Expenditure Program • Medium-term Perspective • Consistent with Macroeconomic Framework • Donor Coordination

26. Getting Decisions in the Right Hands • Strategic Policy • Sector Envelopes • Program: Individual Ministers • Running Costs: Managers

27. OPERATIONAL PERFORMANCEInstitutional Arrangements • 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

28. More “exit” possibilities Strengthen “voice” mechanisms civil service broader public sector markets and the private sector Improve “rule-compliance” and “loyalty” Improving Technical Efficiency

29. 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

30. LINE ITEM 1. Input Cash 2. Classification Economic Type 3. Annual PERFORMANCEBUDGETING 1. Input Cash/Accrual Output Performance data/ indicators/standards Authority Accountability Outcome Clear Objectives Indicators Evaluation 2. Classification Functional Program Organizational 3. Multi-year

31. Performance Based Budgeting LINKING: • Inputs • Outputs, and • Outcomes

32. Inputs Resources used to produce the service: • Hard budget constraint • central budget • user charging • Full cost/Unit cost • cash • accrual

33. Outputs The good or service produced: • Who controls • Who is accountable • Measuring and reporting performance

34. Outcome Purpose to be achieved by government intervention (including production of outputs): • Who controls • Who is accountable • Measuring and reporting performance

35. EnablingEnvironment 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.