Budget Formulation: good practices

1. Budget Formulation: good practices Rob Taliercio, World Bank With material from Bill Dorotinsky, IMF Washington, DC April 24, 2007

2. Outline • Three PEM System Objectives • Process Issues • Quality Issues: Classification, MTEFs, etc. • Capital Budgeting • Budget office roles • References

3. Three Objectives of Public Expenditure Management Systems • Macrofiscal discipline and stability • Avoid public finance crises • Support economic growth and stability • Strategic allocation of resources • Match government policy with programs, objectives • Technical efficiency • Getting the most from each dollar spent

4. Expenditure Management Cycle Financial management system boundaries Project Resource Annual budgets Medium term appraisal allocation Development, Planning plans, e.g. three recurrent and system year rolling plans revenue Expenditure Liquidity management review Public expenditure Institutions review Fund release procedure, e.g... warranting Accountability Expenditure Project monitoring control Audit system Post event Accounting for Monitoring review revenue and & controlling expenditure Reports and financial statements Source: Adapted from Integrated Financial Management.Michael Parry, International Management Consultants Limited.Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

5. Process Issues • “Due process” • Fair hearing for proposals, requests within government • Coherence • Budget process is planning process • Planning within resource constraints • Indicative ceilings for budget offered early in the process • ‘hard budget constraint’ • Changing incentives (special ‘rights’) • Comprehensiveness • Capital, all revenues and expenses • Civil society participation (transparency) • ‘decentralized’ impact analysis • Legislative stage • In executive via white papers

6. Process (continued) • Proper decision sequence for coherent process • Macrofiscal, revenues, expenditures • Sectoral • Administrative/program/project • Accountability: Link resources with management responsibility • Schedule • Budget calendar issued • Sufficient time for sound proposals • Ministries • Budget office analysis • Legislative review

7. Classification 1 • Function—purpose of spending (general public services, social, economic, etc.) • Classification of the Functions of Gov’t (COFOG) • Economic—goods and services, subsidies, interest, capital, etc. • Government Finance Statistics (GFS)

8. Classification 2 • Object/line item—disaggregated categories for control and monitoring (travel, utilities, etc.) • Appropriate usage for management • Compatible with GFS • Administrative—hierarchical by governmental unit (ministry, department, province, district, etc.) • Program—disaggregated by function • Disconnect with administrative structure?

9. Medium Term Perspective • Medium Term Expenditure Framework (MTEF) • The MTEF provides the “linking framework” that allows expenditures to be driven by policy priorities and disciplined by budget realities.” • Gives a medium-term perspective to budgeting. The heart of the MT perspective is constraining choices to support LT development.

10. MTEF Concept 1 • An MTEF rests on three pillars: • the top-down multi-year projections of resource envelope targets (what is affordable) • the bottom-up multi-year cost estimates of sector programs (what has to be financed, with a focus on performance) • the institutional (politico-administrative) decision-making process to integrate the above two pillars (making the necessary trade-offs)

11. MTEF Concept 2

12. Some Technical Issues

13. Some Organizational Issues

14. Some Lessons from Experience • MTEF should be a complement to—not a substitute for—basic PE management reform (esp. execution) • Sequencing and phasing of the MTEF reform itself. In practice, most MTEFs have been implemented in a phased and piloted manner: • Phased vertically (macro, sector, service delivery) • Piloted horizontally (across sectors) • Tailor to capacity and time with respect to overall PEM reform (e.g., in a country with weak PEM focus on MFF first, then “phase-in” the SEFs, starting with sectoral strategies, objectives, and performance indicators before moving to costed programs) • MTEFs should be part of the annual budget process

15. Quality 1 • Budget ownership • Early, frequent engagement of policy officials on structured decisions • Fiscal policy paper to kick-off process • Communication (transparency) • Clear signals of direction, markets and agencies • Prepare public for change – sustainable adjustment

16. Quality 2 • Budget Information • Prior year actual, current year estimate, budget year +2, Staffing, Outputs • Classification: economic, administrative, functional, program • Requests distinguish between on-going, new spending; mandatory, discretionary • Decision papers • Basis for Minister of Finance, Gov’t decision • Pulls together academic, audit, performance, evaluation of prior years financial performance, other information

17. Information to Factor in to Budget Papers • Prior Year Spending • Did the agency stay within its budget? Why/why not? • Did the agency spend all of its funds? • Was there one-time funding included in last year’s budget that should not be included again this year? • Current Year Spending • Is the agency staying within its allotments? • Is the agency spending at a rate which will lead to over-spending, and what measures must be taken now to correct? • Policy Performance • Did the agency fulfill the policy directives for the prior year? Are they doing so for the current year? • Audit Results • Were there internal or external audits of the agency or its programs and activities last year or this year? What are the implications for funding? Did the agency make any corrections recommended in the audits?

18. Information (continued) • Program Evaluations • Were there any program evaluations of the agency or ministry completed since the last budget cycle? What were the results, and what are the implications for funding? • Other studies • Were there any academic or private researcher papers or NGO studies published that have implications for funding, program structure, etc.? • Performance Assessment • Did productivity (cost-effectiveness, e.g.) increase or decrease from the last budget cycle? • Did the activity or program attain planned outputs for the prior year? • Did average costs per output increase or decrease? • What did the agency accomplish over the past year? Is it achieving its objectives or fulfilling its mission? What is the outcome of the activity?

19. Capital budgeting: good practice • Investment office • Central appraisal, process management • Cost-Benefit Analysis (CBA): financial, economic, and risk • Clear assumptions (e.g. life-span and maintenance) • Avoid ‘dual budgeting’ problems • Recurrent costs – captured in budget • Quality control, managed database of approved projects • Monitoring physical, financial progress • Ex post evaluation of actual costs • Line ministry • Project proposal preparation • Supporting sector strategy • Identify project manager • Project preparation, management training

20. Budget office roles • Budget offices (center, ministry) • Manage process – vertical and horizontal • Vet assumptions in requests • Probe for efficiencies, alternative means • Independent source of advice on sector strategies, policy (advanced)

21. Handbooks • Public Expenditure Handbook, World Bank, 1998 • Managing Government Expenditure, S. Schiavo-Campo and D. Tommasi, Asian Development Bank , 1999 (on-line)