7. Top-Down Budgeting and
MTBFs
Marco Cangiano
Rome, February 6-8, 2017
Outline
• Whytop-downbudgeting?
• MotivatingandMTBF
• PreparingandupdatinganMTBF
• KeyfeaturesofanMTBF
• OtherinstitutionsthatcansupportMTBFdevelopment
• Conclusions
<<CourseAcronym>>
Whytop-down?
<<CourseAcronym>>
Whatisit?
• Atop-downbudgetprocessmeansthatabindingdecisiononbudget
aggregatesistakenbeforeallocatingexpenditurewithinthat
aggregate.
• Decisionsaretakeninacascadingmanner
• Itconsistsofensuringthatthetotallevel,andoverallallocation,of
expenditurearedeterminedbeforedetaileditemsinthebudgetare
negotiated.
• Ithighlightsthetrade-offsthathavetobemade,andbringsclarityas
tohowtheprocessofprioritizationwillberesolved.
• Aninstitutionalizedseparationbetweenthedecisionsregarding
aggregateexpenditureandoverallallocation,andtheprocessof
decidingonindividualprogramsandactivities,andtheir
correspondingbudgetlines
Budgetingasapoliticalbiddinggame
• Atop-downapproachmustco-existwithnaturalbottom-upbidding
process,butitconstrainit.
• AspertheFinnishFreedomofInformationAct,thefinalbudget
submissionssenttotheministryoffinancearemadepublicly
available.
o Alargedeviationbetweentherequestedfigureandtheactual
outcomeinthebudgetwouldindicatethelineminister’sfiscal
irresponsibilityorlackofpoliticalpower.
o Ahighdegreeoftransparencycancreateincentivesforfiscal
discipline.
• Netherlands’Frameworkand(25)PolicyLetters.
• Sweden’sCabinetBudgetRetreatand27spendingareas.
MotivatinganMTBF
<<CourseAcronym>>
Definition and elements
An MTBF is a set of systems, rules, and procedures ensuring that fiscal
plans are drawn up with a view to:
• their impact over several years
• future events which may affect government accounts
Notatechnicaldevicebutafundamentalchangein
designingandmanagingfiscalpolicy
An MTBF includes:
• requirementstopresentm-tinformationatspecifictimes
• proceduresformakingmulti-yearforecastsandplansforrevenue
andexpenditure
• obligationstosetnumericalexpendituretargetsbeyondthe
annualbudgethorizon
Objective of MTBFs
WhatThey Do
HowTheyDoIt
1. Reinforceaggregatefiscal
discipline
Byconstrainingbudgetappropriation&
executioninfutureyearstolevelsconsistent
withtheGovernment’smedium-termfiscal
objectives
2.Facilitateamorestrategic
allocation ofexpenditure
3.Encouragemoreefficient
inter-temporalplanning
Byabstractingfromtheimmediatepressures
andlegalandadministrativeconstraintsthat
impingeupontheannualbudgetprocess
Byprovidinggreatertransparency andcertainty
tobudgetholdersabouttheirlikelyfuture
resources
WhoBenefits
FinanceMinisters
Taxpayers
FutureGenerations
PrimeMinisters
PlanningMinisters
Parliamentarians
Line Ministries
Agencies
Local Governments
8
Where does it fit in?
Objective
Foundationforfiscal
objectives
Statemulti-year
fiscalpolicytargets
Setmulti-year
spendingplans
Authorizeannual
expenditure
Reportactual
expenditure
Instrument
Content
FiscalRuleor
ResponsibilityLaw
Principlesoffiscalmanagement
Numericalfiscalrule
Disclosurerequirements
Medium-term
FiscalFramework
Multi-yearmacroeconomicforecast
Multi-yearfiscalforecast
Medium-termfiscaltarget
Medium-term
Budget
Framework
Multi-yearexpenditureceiling
Multi-yearspendingallocations
Planningmargin
AnnualBudget
Detailedexpenditureappropriations
Otherbudgetarycontrols
ReconciliationofchangesfromMTBF
FinalAccounts
Detailedexpenditureoutturn
ReconciliationofchangefromBudget
Explanationofdiscrepancies
Expandingtheoutlookfordecision
making
• Countriesthatsuccessfullyintroducedfullydeveloped
MTBFwantedtoimprovedecisionmaking bytaking
intoaccountthemedium-termcost ofpublicpolicies
– Fundamentalnatureofbudgetdecisions(investment)
– Helpsmitigateannualbudgetshortcomings(incremental…)
• Amedium-termorientationtobudgeting,not
multiannualbudgeting
– Annualbudgetprocessremains,yetismoreorlesstransformed
– Keepsnecessaryflexibility
– Butrequiresaccountabilityandtransparencyoverforecastsreconciliation
(justifyingadjustments)
10
Tailoringthemediumtermapproach
•
•
•
•
SuccessfulMTBFssharecommonmethodologies
Butactualdesignvaryalotacrosscountries
– Notonesinglewaytodoit
– Manydifferencesreflectpre-existinginstitutions…
– …butalsothediversityofobjectives
Illustration:FranceandUK
– Similarmodelonpaper:fixedandbindingframeworks
– ButFrancetendstoreviseforwardyearsmuchmore
– Reflectsdifferentobjectives:strongcommitmenttototalexpenditurerule
(France)vs.emphasisonministriesaccountabilityfordeliveringtargets(UK)
– Linkedtodifferentbudgetingculture:strongcentralizedcontrol(France)vs.
oversightroleofMoF (UK)
Tailoringthedesigntoonecountry’sneedsandtraditionsisakeysuccessfactor
11
Why medium-term budgeting?
1. Capturingdeferredeffects:
– decisionstodayhaveconsequencestomorrow
2. Makingnon-discretionaryintodiscretionary:
– allpoliciescanbechangedwithenoughtime
Itaddsakeydimension
3. Signalingfuturechanges:
– managingexpectationsandallowingtimetoadapt
4. Committingtofutureexpendituretargets:
– bindingorevenindicativetargetsaddresstimeinconsistencyoftoday’sspendingpreferences
12
Signalingfuturechanges
Finland:Medium-termframedecisionofApril2012
2013Frame
2014 Frame
2015Frame
2016Frame
77
76
76
76
1258
1251
1226
1257
806
823
813
798
26.Interiorministry
1231
1163
1132
1133
27.Defenseministry
2449
2389
2294
2288
28.Financeministry
15126
15123
15109
14991
29.Educationandcultureministry
6056
5960
5887
5881
30. Agricultureandforestryministry
1815
1797
1762
1701
31.Communicationministry
2083
1879
1902
1806
32.Labour andindustryministry
2461
2381
2355
2216
33.Socialandhealthcareministry
8651
8658
8670
8746
243
233
229
211
2093
2342
2649
2941
Sumofframes
42435
41907
41624
Expenditureceiling
42801
42319
42007
41271
13
23.Governmentoffices
24.Foreignministry
25.Justiceministry
35. Environmentministry
36.Debt interest
Capturingdeferredeffects
Measuresinthe2011-12AustralianBudget
2010-11
$m
2011-12
$m
2012-13
$m
2013-14
$m
2014-15
$m
Total
$m
5.0
26.4
135.4
331.2
455.9
953.9
0.0
-0.1
231.4
475.1
495.5
2,201.9
-1.4
-89.5
-199.4
-237.6
-244.02
14
-771.9
Taxreformandintegrity
Fringe benefitstax– reformofthe
carfringebenefitrules
…
Sustainabilityoffamilypayments
Pauseindexationofupperlimitsand
thresholdsforafurthertwoyears
…
Supporting families
Supportingfamilies withteenagers
NotlosingcontrolwithMTBF
• MTBFsappeartoreducediscretion…
• …bypromotingconsistencyandreconciliationbetween…
– macroeconomicpolicytargets
– budgetallocations
– publicpolicypriorities
• …whichcanparadoxicallyhelpMoF increaseitscontrolbymovingfrom“numbers”
toward“costofpolicies”
– InFrance,MTBFdesignedandpushedbyMoF (resourcepredictabilitywasthe
argumentto“sell”thereform)
– Becauselineministriesweretoooftenobtainingdecisionscommittingfuture
years’fiscalspace
– AndMoF wasunsuccessfulinpushingreformswithlimitedsavingsinnearterm
• Newformofcontrolmoreusefulwhenfiscalspaceisnotabundant
15
PreparingandupdatinganMTBF
<<CourseAcronym>>
AtheoreticalapproachtoMTBF
development
MTFF
MediumTerm
Fiscal Framework
MTBF
MediumTerm
Budget Framework
MTPF
MediumTerm
Performance
Framework
• Internationalexperienceshowstherearevariouslevelsof
MTBFsophistication
• MTEFimplementationusuallyfollowsapathfroma
forecastingtooltoafullprogrammatictool
• SuccessfulMTBFsaredecisionmakingtools…
• …soimplementationofMTBFwillgraduallytransform
budgetprocess(‘integration’)
• MTBFleveldevelopmentstronglylinkedtodegreeof
integrationanddetailsofMTBF(seefollowingslides)
‘MTBF’willbeusedasagenerictermfortherestofthepresentation
Anchoringthebudgettoeconomic
policytargets(MTFFstage)
Revenue
Medium
term
economic
target
Debt
Expenditure
Total
Economicaggregates
Annual
Budget
•
Amediumtermfinancialplan
–
–
Detailed budget lines
•
Keymacroeconomicparametersandrevenueforecasts
Setsatotalenvelopforexpenditureconsistentwith
mediumtermeconomicandfiscaltargets
Sequentialapproachtobudgetingprocess
–
–
Financialplanasafirststepfortheformalannualbudget
process
Top-downapproachonly
18
Definingafiscalstrategy(MTBFstage)
Revenue
Medium
term
economic
target
Debt
Expenditure
Total
Economicaggregates
•
Detailed budget lines
Annual
Budget
•
Forecastofrevenueandexpenditurepereconomic
classification(orlargesectors)
Iterativeprocesstoreconcile
–
–
•
Top-downapproach(asinMTFF)
And bottom-upestimatesofbaselineexpenditure
trends(currentpoliciesonly)
Helpsdefineadetailedfiscalstrategy
–
–
–
Analysispereconomicclassificationorgroupofsectors
Strategic phaseinbudgetpreparationprocessbasedonatop-down/bottom-up“dialog”
Processstill positionedaheadoftraditionalpreparationofannualbudget
19
Towardsmulti-yearbudgetplan
(MTPFstage)
Revenue
Medium
term
economic
target
Debt
Expenditure
Total
•
Economicaggregates
Annual
Budget
Amediumtermbudgetplan
–
–
–
Detailed budget lines
–
•
Asdetailed asanyannualbudget
Year1is nextyear’sbudget
Roleofyear2et3differsfrom one
countrytoanother
Sodoesdegreeofdetailspublished
Budgetprocesstransformed
–
–
–
Mediumtermapproachintegratedtobudgetpreparationprocess
Estimatingbaselineforcurrentpolicyforeachbudgetlinebecomesfirststepinthebudget
process…
…implicationoflinesministries?(variedovertimeinAustraliaforinstance)
20
Whatimpactonthetraditionalbudget
process
• FullyintegratedMTBFscantriggertensions:
– WithParliamentoveritsrole“vis-à-vis”Government(debate,vote?)
– Withlineministriesandagencies“vis-à-vis”the“certainty”onresourceallocationin
forwardyears
• ExperiencesuggeststheroleofParliamentdoesnotevolvemuchcomparedtothe
traditionofannualbudgets
– AustraliaandUK:novoteonMTBF
– France:formaladoptioninalawbutlimitedpowertoamend
– Sweden:rolelimitedtoadoptinganexpenditureceiling(top-downapproachto
Parliamentaryapprovaladoptedafterthe1990scrisis),mediumtermestimatesnot
discussed
• Roleofforwardyears’estimatesforfuturebudgetsvariesconsiderablyamong
countries
21
UpdatingtheMTBF:roleofforward
years
•
Roleofforwardyearsinbudgetpreparationiscentraltothedesign
– Australia,Canada:rollingandindicativeestimates;informsonthesustainabilityofcurrentdecisions
butdonotbindfuturedecisions
– FranceandUK:fixedandbinding;ministerialceilingsputconstraintfuturebudgets
– Sweden:acombinedframework;rollingestimateswithinafixedtotalexpenditureceiling
•
Inanycase,theforwardyearshouldserveasastartingpointforthefollowingbudget
preparation
– Experiencesuggestsrollingframeworksareneverpurelyindicativeandfixedframeworksarenever
fullybinding
•
ImportanceofMTBFobjectivesandpre-existinginstitutions
– Fixedframeworksassociatedwithresourcepredictability
– Rollingframeworksmorefocusedonfiscaldisciplineandtransparency
– Roleofexpenditureceilings(France,Sweden)canbelinkedtoanhistoryofdifficultytocontain
expendituregrowth
22
Updatingrollingandindicative
frameworks(Australia)
Discussionofnewpolicies:
• fiscalspaceestimatedtopdownconstraint)
• discussionofsavingson
existingpoliciesandnew
measuresbasedonmediumtermimpact
Startingpoint:MTEF
preparedlastyear;Yis
budgetforcurrentyear
Y
Y+1
Y+2
Y+3
Updateofbaseline:
costofcurrentpolicies
isupdatedandanew
yearisadded
1
3 Y
2
4
Y+1
Y+2
Y+3
FinalizationofnewMTEF:
Y+1becomesnextannual
budget
Y
Y+1
Y+2
Y+3
Y
Y+1
Y+2
Y+3
23
Updatingfixedandbinding
frameworks(UnitedKingdom)
•
Fixedandbindingframeworkonpartoftotalexpenditure.UKframeworkdistinguishes
– DepartmentExpenditureLimit(DEL):discretionarypoliciesimplementedbyministries
– AnnuallyManagedExpenditure(AME):debtservice,entitlementprogramsandotherconstraint
spendingwhichcannotbemonitoredinyear
Fixedandbindingframework(theSpendingReview)preparedperiodicallyandcombined
withglobalrollingMTFF(economicandfiscaltargets)
Revenue
Revenue
Debt
Expenditure
Debt
Expenditure
Spending
review
Medium
term
eco target
Rolling
MTFF
Medium
term
eco target
•
Fullupdateofmacro-framework:macroassumption
madefortotalDELsfortheout-yearsnotcoveredby
currentSpendingReview
FullupdateofAMEs:similartoindicative
rollingframeworks
AMEs
FinalizationofministerialbudgetsbasedonDELlimits:
ceilingperministryprovidedbySpendingReview;
allocationwithincanberevised
DELs
Y+1
Y+2
Y+3
Y+2
24
Accountability Arrangements
Sweden:Presentationofchangessince2007Budget
Discretionary Changes
Changes in Expenditure since
2007 Budget
Billions of kronor
Total expenditure
in Budget 2007
Discretionary increases
Discretionary cuts
2008
2009
2010
-356
-627
-987
Integrated emergency radio
147
206
211
Crisis preparedness
-74
-103
-105
-435
-723
-1,085
-60
-20
40
32
172
232
Safeguarding biodiversity
-50
-200
-200
Clean-up of polluted areas
-50
-4,579
-6,463
-6,853
Millions of kronor
2008
2009
2010
952.3
970.2
1,006.5
Defence and Security
Procurement & operational efficiencies
4.0
5.6
5.5
-8.6
-12.0
-12.4
Environment
Sustainable cities & climate investment
Recalculation of wages
and prices
Other macroeconomic
changes
0.0
1.8
1.0
3.5
2.1
4.0
Etc...
Total discretionary changes
-13.7
-14.2
-14.9
Other
-4.6
-3.9
-4.5
Entitlement Volumes
Net drawdown of
carryovers
-2.4
-0.3
-0.4
(change since 2007 Budget)
2008
2009
2010
Number of asylum seekers
30,200
(3,200)
29,500
(-500)
27.700
(-2,300)
1,664,400
(10,000)
1,653,000
(11,000)
1,646,000
(14,000)
53.4
(-4.1)
53.2
(-4.3)
53.2
(-4.3)
46.1
(0.3)
47.1
(0.3)
48.0
(0.3)
Accounting adjustments
Volume changes in
entitlements
-0.8
-1.3
-1.8
Number of child allowances
Total change in
expenditure
Total expenditure
in Budget 2008
-24.3
928.0
-21.6
948.6
-22.3
984.1
Number of illness compensation days
Number of parental benefit days
Etc…
25
Sweden:acombinedframework
SwedenhasadoptedasophisticatedframeworkcombiningfeaturesfromvariousMTEFmodels
andfiscalrules
•
•
•
•
Fiscalrules:totalexpenditureceilingadoptedtwoyearsinadvance basedonmediumtermstructuralsurplusbalancerule
RollingandindicativeMTEFfor27policies, designedtotestcompliancewithapprovedceilings(updatedseveraltimesayear
basedonquasi-automaticformulasor“frames”)
Roomtoplannewpoliciesinadvancewithintheceilings
Obligationtokeepgrowingmarginsintheframework:contingenciesandfiscaldiscipline(fiscalspacecannotbefully
allocatedtooearly)
Mandatorygrowingmarginstobekept
forfuturedecisionmakingand
contingencies
Expenditure
ceiling
Newpoliciesincludingprovisionsfor
measurestostartinY+2(semi-planning
approach)
Baselineestimatesofcurrentpolicies(27
“frames”)
Budget
Y
Y+1
Y+2
Y+3
26
France:abundleofframeworkand
specificrules
FrancehasbundleddifferentMTEFmodelsandtailoredfiscalobjectivesandrulestoits
fragmentedpublicfinances
•
•
•
•
•
•
Ahighlyfragmented PFMenvironmentwithvariousautonomousinstitutions
Publicfinancesarrangementsvarylargelyamonglevelsofgovernment
OverarchingrollingandindicativeMTFFencapsulatesmoreaccurateandbindingMTEFtailored tospecificsofgeneral
governmentsubsets
ModelofMTEFandlevelofdetailsvaryacrosspartsoftheframework
Aspecificfiscalobjective/ruleisattachedtoeachpartwithcoverageconsistency
Sub-rulessetinaccordancewithoverallfiscalruletarget
1.AnMTFF coverswholeofgeneral
government
• anchoredbyadeficitrule
• aggregatesinformationfromthe
twoMTEFonStatebudgetand
Healthspending,andforecastsfor
otherlevelsofgovernment
State budget
Publicagencies
Social security
Health spending
Subnational governments
2.AnMTPF forStatebudget
• anchoredbyexpenditurerule
• bindingministerialceilingsfortwoyears
(+oneforecastingoutyear)
• separateceilingfortransfersto
Subnational governments
3.AnMTBF forhealthspending
• anchoredbyexpenditurefiscal
objective
• expenditureceilingnotbindingbut
includescontingencyreserves
27
KeyFeaturesofanMTBF
<<CourseAcronym>>
Key Features of MTBFs
Credibility
d. Accountability
Arrangements
• Audit of Macro
Assumptions
• Multi-year Costings
• Budget Sincerity Rules
• Reconciliation of
Changes
Enforcement
a. Multi-year
spending limits
• SW/FIN/NL: Aggregate
Ceilings
• UK/FR: Ministerial Ceilings
• AUS: Program Estimates
PREREQUISITES
i. Credible
annual
budget
ii. Prudent
macroecono
mic
projections
iii. Mediumterm fiscal
objectives
iv. Unified &
comprehensi
ve budget
process
c. Expenditure
Controls
•
•
•
•
Top-down Budgeting
Commitment Controls
Reserves & Margins
Carry-over Rules
Discipline
b. Expenditure
Prioritization
• FIN/NL: Coal.
Agreements
• SW: Frame Budgeting
• UK: Spending Reviews
• FR: RGPP
• AUS: Exp Review Cttee
Legitimacy
29
Prerequisites
<<CourseAcronym>>
Prerequisites
a. Credibleannualbudget
b. Prudentmedium-termmacroeconomicprojections
c. Stablemedium-termfiscalobjectives
d. Comprehensiveandunifiedbudgetprocess
31
A credible annual budget
AverageOverspendAgainstBudgetTotal,1998-2007
(%ofGDP,Actual-Forecast)
6%
Binding estimates
4%
Indicative estimates
Neitherbindingnor indicative
PercentofExpenditure
2%
0%
-2%
-4%
-6%
-8%
32
Prudent medium-term
macroeconomic projections
AverageErrorinForecastingRealGDPGrowth,2000-2007
(Inpercentofrealgrowth,Actual-Forecast)
1
0.5
Cautious
PercentagePointsofGDP
0
Optimistic
-0.5
-1
-1.5
Binding MTEFestimates
Indicative MTEFestimates
Estimates neitherbindingnorindicative
-2
-2.5
33
Medium-term fiscal objectives
Country
National
objective
Statutory base
Coverage
Time-frame
Supranational
Political Legal Central General Annual Multiobjective
year
Australia
Balance,Debt
---
Brazil
Expenditure,
Debt
---
Chile
Balance
---
Canada
Expenditure,
Balance,Debt
---
France
Expenditure
Balance,Debt
X
Balance,Debt
---
X
Expenditure
---
X
Balance
---
X
Netherlands
Expenditure
Balance, Debt
Switzerland
Balance
---
Indonesia
Japan
Mexico
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
34
A unified budget process
Issue
Explanation
Typical Challenges
BudgetCoverage
Nolargeextrabudgetary funds
LargeSocial Securityand
HealthFunds
BudgetFragmentation
Allexpenditureauthorizedtogether
Budgetsplitbetweencurrent
and capital
Earmarked Revenues
Limited earmarkingofrevenueto
expenditure
Fuel surchargesforroad
maintenance
Standing Commitments
Noinputcommitmentsthat can
conflictwithoverallceiling
Laws requiringfixedbudget
transfertospecificpurposes
ParliamentaryApproval
LimitedscopeforParliament toamend
budget
Parliament canincrease
withoutfindingreductions
Supplementary
Budgets
Supplementary budgetsarerareor
expenditureneutral
Supplementaries are
significantandimpact policy35
Key Features
a. Multi-yearspendinglimits
b. Expenditureprioritization
c. Expenditurecontrols
d. Accountabilityarrangements
36
Multi-yearspendinglimits
<<CourseAcronym>>
Multi-yearspending limits
COUNTRY
COVERAGE
(percent of
central gov’t)
Binding
Indicative
TIME
HORIZON
Years
UPDATES
BASIS
SPECIFITY
AGGREGATE EXPENDITURE CEILINGS
Austria
100
5 Rubrics
32 chapters
4
Defined parameters
Legislation
Finland
80
Total Spending
13 ministries
4
Inflation, technical adjustments
Coalition agreement
Netherlands
80
4 Sectors
26 ministries
4
Inflation, technical adjustments
Coalition agreement
Sweden
96
Total Spending
27 Policy areas
3
Technical adjustments
Parliament decision
United Kingdom
60
25 Departments
3
Technical adjustments, reserve
claim
Government
commitment
France
40
35 - 40 Missions
3
Technical reallocations, reserve
claim
Legislation
100
Ongoing and new
policies
4
Existing policy: parameters
New policy: with approval
MINISTERIAL CEILINGS
FORWARD ESTIMATES
Australia
38
Government
commitment
Levelofdetails
• CountrieswithfullydevelopedMTBFinternally prepareexpenditure
forecastsasdetailedasabudget but…
• …allinformationnotnecessarilypublished
– AustraliaandCanadapublishinformationatprogram/subprogramlevel
(transparencyobjective)
– FranceandUKpublishministerialceilingonly(bindinglevel)
– Austriapublishministryinformationbutvoteon5sectors
• …involvementoflineministriesvariable
– Fixedandbindingframeworksconsistentwithmultiannualbudgetdiscussions
withministries
– Baselineestimatesframeworks:frompredefinedformulas(Sweden)toshared
responsibility(Canada)orpreparationbyMoF (Australiainitially)
39
Updating expenditure ceiling(s)
Approach
Indicative
All yearsrevisedannually
Overlapping
Year3ofSRn becomesYear1
ofSRn+1
Add FinalYear
Only
add3rd
Year
FixedPeriod
Ceiling fixedinrealtermsfor
4-5yearParliament
Country
Pros
Italy
Flexibility toaccommodate
shocks
Scopetofundnewpolicy
UnitedKingdom
France
Sweden
Finland
Netherlands
Avoidsplanningblight
Cons
Medium-term constraintnottaken
seriously
Expendituredriftasnocorrectionfor
pastoverspends
Year 3bonanza
Chance torevisedyear3
allocations
NospacefornewpolicybetweenSRs
Always have3yearplanning
horizon
Planninghorizonextends beyond
election
Scopetospendadditional
revenueinY+3
HavetowaituntilY+3tospend
additionalrevenue
Coincides withpoliticalcycle
Planning horizonshrinksasnext
electionapproaches
Firmenvelopefor
governmentprogram
Nospacefornewpolicyover
Parliament
Lack offlexibility
40
Expenditureprioritization
<<CourseAcronym>>
Expenditureprioritization
COUNTRY
NO. OF 1st LEVEL
PRIORITIZATION
UNITS
FIXITY
FIXED
INDICATIVE
MEDIUM-TERM
PRIORITIZATION
DECISION IN GOV’T
PARLIAMENTARY STATUS
LEGISLATED
FOR INFO
MINISTERIAL ALLOCATIONS
United Kingdom
25
Finland
12
ü
ü
ü
ü
ü
ü
ü
FUNCTIONAL/PROGRAM ALLOCATIONS
Australia
270
ü
ü
Austria
32
ü
ü
ü
France
35
ü
ü
Netherlands
20
ü
ü
ü
Sweden
27
ü
ü
ü
Belgium
13
ü
ü
Japan
5
ü
ü
Mexico
7
ü
ü
ü
ECONOMIC CATEGORIES
42
Expenditurecontrols
<<CourseAcronym>>
ExpenditureControls
i. CommitmentControls
MoF authorizationneededbeforelineministries
orministerscanenterintomulti-year:
• contractualcommitments
• legal commitments
• policy commitments
iii.ReservesandMargins
Multiyearprojectionsmakeprovisionfor:
• Reserve forcontingenciesthatarise
duringthebudgetyear
• Planningmargintofundnewpolicy
measuresinfuturebudgets
ii.KeyCostDrivers&Risks
ResidualMoF controlson:
• Workforce,pay,&pensions
• GuaranteesandPPPs
• Acquisition/disposalofassets
• Taxexpenditures
iv.CarryoverRestrictions
Numericalrestrictionsononeormoreof:
• Annualaccumulation ofunderspends
• Totalstock ofaccumulatedcarryover
“entitlement”
• Annualdrawdown ofaccumulated
underspending overforthcomingyear
44
Reservesandmargins
Threemarginsmodels
1. ImplicitprudencymargininGDPorrevenueforecasts
–
–
–
Canbeusedtoreestablishthecredibilityofthegovernment’sforecasts
Becomeshidden,andnotopenforbidding
Difficulttoquantifyaccurately
2. Unallocatedappropriationinthebudget
–
–
–
Transparentandeasytocontrol
Facilitatestheprocesswithparliament
Becomesvisibleandcreatesexpectations
3. Budgetmarginunderanexpenditureceiling
–
–
Protectstheintegrityofthebudgetandexpenditureforecasts
Createsexpectations
45
Contingency Reserves
SizeandAccessRules
Contingency&Planning
Reserves
(%ofGovernmentExpenditure)
6
5
TypicalReserveRules
AccessCriteria:Expendituremustbe:
• Unforeseeable
• Unavoidable
• Unabsorbable
AccessProcedure:Ministrymuststate:
• Howpressurematchescriteria
• Mitigatingactionstaken
• Remainingpressure
• Actiontoaddressunderlyingcause
4
3
2
1
0
UK
Canada
Y+1(Budget)
Australia
Y+2
Sweden
Y+3
Y+4
Turkey
ReportingonUtilization:
• Qtrly toCabinetonclaims&“threats”
• Qtrly toParliamentonclaims&balance
• NAOauditofclaimsagainstcriteria
• Claimsdeductedfromcarryoverstock
Carryoverrulesandrestrictions
SpendingCategories
Carry-over
Carryback
Operations
Transfers
Capital
On-flow
Stock
Drawdown
Australia
Yes
No
Yes
Cabinet
approval
Full
Full
Austria
(2010-)
Yes
Yes
Yes
Full
Full
Full
Finland
Some
Some
Some
Full
Expires
after2yrs
Full
France
Yes
No
Yes
Full
Upto3%of
budget
Full
No
Sweden
Some
Yes
Yes
Full
Upto3%of
budget
Full
No
Netherlands
Yes
No
Yes
Full
Upto1%of
budget
Full
MoF
approval
UK
(1990-2009)
Yes
No
Yes
Full
Full
MoF
approval
No
No
No
No
Carryoverofappropriation
UnitedKingdom
EvolutionofCarryovers
EvolutionofCarryovers(EYF)
Carryovers(LHS)
7%
7%
24
CarryoverStockas%ofBudget(RHS)
Total DEL (LHS)
6%
21
5%
18
20
6%
Capital DEL (LHS)
Resource DEL (LHS)
5%
10
3%
£ bn
4%
ISKBn
15
% of Budget
EYF Stock % of Total DEL (RHS)
15
4%
12
3%
% of Total DEL
25
Iceland
9
2%
2%
6
5
0
1%
3
0%
0
1%
0%
Abolished
48
Accountabilityarrangements
<<CourseAcronym>>
AccountabilityArrangements
BudgetSincerityProvisions
Whatarethey?
LegalobligationontheMoF tocertifythat
budgetprojectionspresentedto
Parliamentreflect:
• allpolicydecisionsannouncedbythe
government;and
• anyothercircumstancesthatmayhave
animpactontheeconomicorfiscal
outlook.
ReconciliationofChangestoCeilings
Factor
Explanation
Examples
Macroeconomic
Revisionsto
macroeconomic
parameters
GDP,inflation,
exchangerate
Other
Parameters
Revisionsto
operational
parameters
Pricesofgoods,
volumesof
claimants
Accounting
Adjustments
Revisions in
accounting
treatment
Reclassifying
expenditure
betweenministries
Policy
Measures
Discretionary
additionsorcutsto
ceilings
Newinvestment,
efficiency savings
Carryovers
Netdrawdown or
accumulationof
carryovers
Asauthorizedby
MoF atstartofyear
Over/Under
Spending
Operational
overrunsor
underspends
Claimsonreserve,
unauthorized
overspending
Examples
•
•
•
NZFiscalResponsibilityAct(1994)
AustraliaCharterofBudgetHonesty
(1998)
UKCodeforFiscalStability(1998)
50
Documentation
•
FullydevelopedMTEFarepresentedinsimilarfashions
•
Publicationalignedwithbudget
– Fullyembeddedinannualbudgetsubmission(Canada,Australia,Sweden)
– Orstandalonedocumentpublishedeverytwo/threeyearstimelywithbudget
(France,UK)
•
Amacrofiscal document
– Macroeconomicforecastsandsupportingassumptions
– Scenarios,sensitivities,andcomparisonswithotherforecasters
– Discussionoffiscalrisks(Australia)
•
Apolicydocument
– Detailingfiscalstrategy,budgetpriorities,andpolicymeasures
– Explainingmediumtermcostofnewpolicies(Canada,Sweden)andexplaining
51
differenceswithpreviousMTEF(Franceforforwardyearsbudget)
Parliamentary endorsement
Legislative
endorsement
Informationonly
Nolegislativerole
Promotesparliamentarybuy-in…
Exposesthefiscalimpactofthe
government’sbudget…
Themedium-termframeworkisan
internalinstrumentforthe
government…
…andelevatesthestatusofmediumtermceilingsandestimates…
…andincreasesthegovernment’s
accountability…
…highriskofbecomingatechnical
exercisewithlittleimpactondecisionmaking
…butcanmaketheframeworkrigid
…butrisksbeingtreatedlightlyifno
formalapproval
Example:Austria,Australia,Sweden
Example:UK,Finland
52
Transparencyandaccountability
CLASSIFICATION
COUNTRY
SEPARA
TE
INDEPENDENT
VALIDATION
RECONCILIATION
1ST
VOLU
DETAILED MACR
POLIC
PROJECTIO
LEVEL
ME
ACC’T
BUDGET
O
Y
NS
BUDGET
PARA.
POLICY
FRAMEWORKS ENDORSED BY PARLIAMENT
Australia
ü
Austria
ü
Finland
ü
ü
ü
ü
ü
ü
ü
ü
France
ü
ü
Netherlands
ü
ü
Sweden
ü
ü
United Kingdom
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
STAND-ALONE FRAMEWORKS
Stability and
Convergence
Prog.
National
ü
ü
ü
53
IndependentAssessmentofMacro
Assumptions
EX ANTE
Country
Institution
Netherlands
Central Planning
Bureau
Canada
Parliamentary
Budget Office
Validate Macro Assumptions
• Full economic forecast
• Research on economic issues
• Transparency of reporting
• Full economic forecast
• Baseline fiscal projections
Sweden
Fiscal Policy
Council
Hungary
Fiscal Council
(2009/2010)
UK
Office of Budget
Responsibility
Evaluates transparency &
credibility of govt forecasts
•
•
•
•
Full economic forecast
Baseline fiscal projections
Budget impact of all legislation
Methodological advice
Exclusive responsibility for:
• Full economic forecast
• Full fiscal forecast
EX POST
Scrutinize Fiscal Policy
Evaluate Fiscal
Performance
Costs election platforms &
Coalition Agreement
None
• Assesses sustainability of
fiscal policy
• Costs specific policies
Assesses sustainability of
fiscal policy
Advises govt / parl on
• Fiscal policy
• Transparency
• Accounting
Advises Parliament on
probability of Gov’t meeting
its fiscal targets
Upon request
Monitors compliance w/
1% surplus target
Upon request
Assesses Govt’s
performance against
fiscal targets
Isitworthit?
Credit Default Swap Spread
Default Risk vs. Government Debt Levels
(2011)
ABC Binding MTBF
1200
ABC Indicative MTBF
PRT
GRC: (1.53,
8512)
ABC No MTBF
1000
800
Linear (Binding MTBF)
Linear (Indicative
MTBF)
Linear (No MTBF)
IRL
HUN
600
ITA
ESP
400
ISL
POL
200
SWE
0
-50%
-25%
FRA
AUTISR
EST
DNK
NZL
AUS
0%
BEL
25%
NLD
DEU
CHE
50%
JPN
GBR
USA
75%
100%
General Government Net Debt
125%
150%
55
Empiricalresults
UKGeneralGovernmentExpenditureForecastError
1981-2009
Percentof
Expenditure
2%
Cautious
1%
0%
-1%
Optimistic
-2%
-3%
-4%
-5%
-6%
-7%
t+1
t+2
Indicative
t+3
t+1
t+2
t+3
Binding(aggregateceiling)
t+1
t+2
t+3
Binding(ministerialceilings)
56
Forecast errors are smaller under
binding frameworks
Responsetoadverseeconomicshocks
• Excludingcyclically-sensitiveexpendituressuchasdebtinterestand
unemploymentbenefits(NL,FR,FI,UK)
• Settingspendinglimitsinrealorvolumeterms(NL,FI)
• Contingencymargins(SWE)
• Reprofiling withinmulti-yearexpenditurelimits(UK)
• RevisingtheentireMTBFifeconomicshockrequireasignificant
changeintheoverallfiscalstrategy
58
Otherinstitutions
<<CourseAcronym>>
LinkingwithotherPFMreforms
• ExperienceshowsthatsuccessfulMTBFswere
introducedwithotherreformstosupporttheir
objectives
– Fiscalrules
– Programbudgeting
• DetailedMTEFsneedabetterknowledgeofexpenditurecostdrivers
• FranceandUK:detailedMTEFintroducedafterprogrambudgeting
– Appropriationstructureandrules
• UK:reformofappropriationstructure(differencebetweenAMEsandDELs)tomovetobinding
framework
– Spendingreviews
• Supportaneffectivestrategicallocationofresources
• UK:MTEFprocessstronglyembeddedwiththree-yearspendingreviews
• MTBFdevelopmentcanbepartofapackageofPFM
reformsimplementedsimultaneously(Sweden,UK)
60
UK:embeddingSpendingReviewwith
MTBFprocess
•
“SpendingReview”designatestheMTBFprocess
–
–
–
–
•
Every3year
Setspendinglimitsatministeriallevel(DELsonly)
CombinedwithValueforMoney(VfM)detailedperformancetargets
EnshrinedinPerformanceServiceAgreements(PSAs)concludedbetweenMoF andeachministry
UKtraditionoflargeautonomyofministrieswithfinancialmanagement
1.Anintegrateddecisionmakingprocess:DELsceilings,
VfM,andPSAsnegotiatedtogether
2.AfinalpublishedreportlinkingMTEFwith
performanceobjectivesandtargets
ContentofReport
Political
Factors
a.Policy
Priorities
b.Spending
(DELs)
economy
c.Inputs
c.Outputs
efficiency
d.ValueforMoney
(VfM)
e.Outcomes
(PSAs)
effectiveness
Environmental
Factors
1.
MacroeconomicContext
2.
BaselineFiscalScenario
3.
ListofMeasures&Yield(+/-)
4.
Post-MeasuresFiscalScenario
5.
SummaryofKeyReforms
6.
MinisterialSpendingLimits
7.
ImplementationArrangements
8.
MinisterialChapters
a.
b.
c.
d.
DetailedBudget
MajorReforms
NewPolicies
PerformanceTargets
61
France:strengtheningmediumterm
financialcontrol
•
Francehasan“expenditurechain”system(commitment-validation-payment)formonitoringbudget
execution
•
ThiswasmodifiedbeforeMTEFdevelopmenttointroduceMulti-yearCommitmentAuthorization(MCA)
directlyintheappropriationstructure
Annualbudgetgrantsauthoritytospendontwogrounds
•
•
•
–
MCAsputacapontotalmulti-yearlegalobligationsministriescanenterin
–
Separateceilingscapcashpaymentsauthorization(CPA)duringayear
–
ITsystemsrecordsuseofbothauthoritiesandlinkspaymenttoindividualcommitments
ThisnewframeworksupportedMTEFdevelopment(futurepaymentneedsconsideringcurrent
commitments)
ApproachconsistentwithFrance’straditionofstrongcentralizedfinancialcontrol
Illustration:
- athreeyearprojectis
approvedinthecontextof
anMTEFpreparation
- totalestimatedcostis100
withexpectedoutlaysof
20/50/30
MTEF
provisions
Y
Y+1
Y+2
MCA
100
0
0
CPA
20
50
30
Nextbudget(Y)willauthorizetotal
commitmentof100(necessarytosign
thecontract)and20forfirst
payments
MTEF provides50inCPAforsecond
year.NoneedfornewMCA.
Whenbudget(Y+1) isprepared,CPA
amountupdatedwithinministryceiling
Inanycase,totalpayment
cannotexceedrecorded
MCAs(100)…
62
Keepimprovingforecasts
•
Acrediblebudgetisaprerequisite
•
ButcountriesdevelopingMTEFshavekeptstrengtheningtheircapacitiesin
forecasting
•
Masteringbaselineprojection
– Requiresanincreasedknowledgeofcostdrivers
– Needforstandards(Swedenhas27‘frames’;Australiadefinesex-anteinflation
indexation)butnouniquemethodologyacrosscountries(politicaldimensiontowhatis
‘baseline’)
•
MostcountrieshaveintroduceddetailedMTEFwithsequencedapproach
– UK:indicativeMTEFbeforebindingone
– AustraliaandFrance:manyyearsofinternalMoF exercisesbeforegoingpublic
63
Lessonsfrominternationalexperience
•
MTBFpreparationprocessfollowsasimilarpatterninsuccessfulexamples
–
–
–
–
•
Assessingthemediumtermimpactofpresent decisions
Integrationwithbudgetprocess
Reconciliationoftop-down/bottom-upapproaches
Separationofbaselineestimatesfromdiscussionofsavingsandnewpolicies
Butdiversityinroleofforwardyearsinfuturebudgetpreparation
– Fromrollingandindicativetofixedandbinding…
– …buttailoringiscommon(UK,France,Sweden)
– Reflectsdifferentobjectivesforthereformandpre-existinginstitutions
•
NeedtoalignMTBFpreparationwithfiscalobjectives
– MutualreinforcementofMTEFandfiscalrules
– Importanceofscopeconsistency
•
TheMTBFdevelopmentmustbethoughtwithinthePFMreformagenda
– Somereformsmaysupportorbeprerequisiteforcertainstagesofdevelopment…andvice-versa
– Importancetodefinetheobjectivesofthereformahead
– Intheend“mediumtermapproach”shouldbeanaturalcomponentofdecisionmaking
64
Conclusions
a. NosingleMTBFmodel
i. Aggregatevs.Ministerialvs.Economicvs.ProgramCeilings
ii. Fixedvs.RollingFrameworks
iii. Between10and100%CoverageofCeilings
b. SuccessfulMTBFsaboutmorethanceilings
i.
ii.
iii.
iv.
Politicalcommitmenttofiscaltargetsand“rulesofthegame”
Policyplanningandprioritizationmechanisms
Multi-yearflexibilityandcontrolsystems
Transparencyandaccountabilityaboutforecastrevisions
c. MTBFscan’tdoeverythingatonce
i. Choiceb/wfiscaldiscipline,allocative efficiency&dynamicefficiency
ii. Reflectedintradeoffbetweencoverage,specificity,&certaintyofMTBF
d.
Amedium-termbudgetframeworkcan
i. Improveaggregatefiscaldiscipline
ii. Supportastrategicallocationofresources
iii. Improvemicro-levelefficiency
e. Successfullyintroductionrequires
i.
ii.
iii.
iv.
Acredibleannualbudget
Arobustandprudentmacroeconomicframework
Stablemedium-termaggregatefiscalobjectives
Acomprehensivetop-downbudgetpreparationprocess
65
Selected references
• Ljungman,Gosta,2009,“Top-DownBudgeting—AnInstrumenttoStrengthenBudget
Management,”IMFWorkingPaper09/243(Washington:InternationalMonetaryFund).
• Harris,Jason,etal.,2013,“Medium-TermBudgetFrameworksinAdvancedEconomies:
Objectives,Design,andPerformance,”Chapter4inPublicFinancialManagementandits
EmergingArchitecture,editedbyCangiano,Marco,TeresaCurristine,andMichelLazare,
(InternationalMonetaryFund:WashingtonDC).
66