Flagship Course on Governance and Anticorruption April 22, 2003 Allen Schick

1. MANAGING PUBLIC EXPENDITURE:Objectives and Approaches Flagship Course on Governance and Anticorruption April 22, 2003 Allen Schick

2. How Public Expenditure ManagementDiffers from Conventional Budgeting • Conventional budgeting emphasizes procedures; PEM focuses on outcomes • Conventional budgeting assumes that policymakers are rational; PEM argues that they act on the basis of incentives • Conventional budgeting often results in big deficits; PEM demands fiscal discipline • Conventional budgeting often results in frozen priorities; PEM enlarges governments capacity to allocate resources on the basis of new priorities • Conventional budgeting often results in inefficient operations; PEM encourages efficient provision of services

3. Fiscal Discipline - Budget totals should be the result of explicit, enforced decisions. They should not merely accommodate spending demands. These totals should be set before spending decisions are made, should be enforced during implementation of budget, and should be sustainable over the medium term and beyond. Allocative Efficiency: Expenditure decisions should be based on government priorities and on evidence concerning the effectiveness of public programs. The budget system should facilitate reallocation from lesser to higher priorities and from less to more effective programs. Operational Efficiency: Agencies should provide goods and services at a cost that achieves ongoing efficiency gains. These services should be accessible to citizens and responsive to their needs and should be provided in a fair and courteous manner. Basic Elements of Effective Government Budgeting

4. RULESLimits on total spending (and, in some cases on sectoral spending) are established before individual spending bids are considered. Total spending must be consistent with these limits. The limits may be expressed in a variety of ways: in money terms, relative of GDP, as rates of change, or in terms of the balance between revenues and expenditures. The limits are set for the medium-term (3-5 years) and budget decisions are made within this medium-term framework. Institutional Arrangements for Enforcing Aggregate Fiscal Discipline

5. Alternative roles forFiscal discipline

6. Institutional Arrangements for Enforcing Aggregate Fiscal Discipline ROLES A strong finance ministry enforces the budget aggregates in cabinet decisions and bilateral negotiations with spending departments. The finance ministry measures the budgetary impact of spending proposals and of other actions affecting the totals, and advises the government on the status of the budget. During implementation of the budget, the Finance Ministry may intervene to block (or notify the government) of actions that would cause the fiscal aggregates to be breached.

7. Factors that Undermine fiscal discipline INFORMATION The medium-term expenditure framework establishes a baseline for measuring the budgetary impact of proposed or adopted policy changes. Throughout formulation of the budget, information is provided on deviations from the baseline due to new policies, changes in economic conditions, or re-estimates of existing programs. During implementation, spending is monitored to ensure compliance with the fiscal aggregates.

8. Factors That Undermine Fiscal Discipline

9. Practices that Strengthen Fiscal Discipline • Targets should reflect political commitments made by government leaders. • Targets must be realistic and achievable. • Targets should be set and enforced within a medium-term fiscal framework. • Limits on aggregates should be supported by sub-targets on sector/portfolios. • Fiscal constraints should cover mandatory spending. • Government should publish audited financial statements on fiscal condition.

10. Institutional Arrangements for Improving Operational Efficiency

11. The Institutional Framework for Reallocation Fiscal Constraints Constraints must be sufficiently effective so that government cannot avoid reallocation by spending, taxing, or borrowing more. . Medium-Term Framework Constraints budget allocation for 3-5 years ahead and establishes Framework within which allocations and reallocations are considered.. Strategic Capacity Government establishes realistic priorities/objectives along with policies/programs to implement its strategy. . Reallocations Between Sectors Strong leadership at top of government including prime minister, finance minister, or cabinet. Central organs concentrate on strategic matters, and devolve expenditure details to sectoral ministers and program managers.. Reallocations Within Sectors Made by sectoral ministers subject to review by government.

12. Tools for Improving Allocative Efficiency STRATEGIC PLANNING Sets government objectives and priorities MEDIUM-TERM FISCAL FRAMEWORK Sets budget constraints for allocating resources PROGRAM BUDGETING Allocates resources in accord with priorities PROGRAM EVALUATION Assesses impact of programs on public objectives OUTCOME MEASURES Measures the effectiveness of programs and activities

13. Institutional Arrangements for Improving Operational Efficiency

14. Innovations for Improving Operational Efficiency

15. Factors that Degrade Operational Efficiency Perverse incentives Spenders have incentive to use all the resources provided them; if they don’t, they risk cuts in the next budget Information asymmetry Service providers know more about outputs and costs than do those who allocate resources: To get more money, providers manipulate or withhold information from superiors Rigidity Managers have no opportunity to use their skills and information to improve efficiency Compliance costs Detailed, ex ante controls are costly and drive out initiative and variation Budget maximizing behavior Inasmuch as government must pay whatever it costs to operate its programs, inefficient producers are rewarded with bigger budgets Capture Government is captured by service providers: it lacks independent information on performance and must purchase services from them