Budget Formulation good practices Rob Taliercio World Bank

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

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

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

Expenditure Management Cycle Financial management system boundaries Project appraisal Planning system Resource allocation Medium term plans, e. g. three year rolling plans Annual budgets Development, recurrent and revenue idity Liqu ent agem man Expenditure review Public expenditure review Institutions Pro Accountability Fund release procedure, e. g. . . warranting t jec re tu di l o en xp ontr E c t ev revi ent ew g Pos n ori nit mo Audit system Reports and financial statements g itorin Mon g ollin contr & Accounting for revenue and expenditure 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. The World Bank 4

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

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

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

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

Medium Term Perspective n Medium Term Expenditure Framework (MTEF) n n 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. The World Bank 9

MTEF Concept 1 n An MTEF rests on three pillars: n n n 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) decisionmaking process to integrate the above two pillars (making the necessary trade-offs) The World Bank 10

MTEF Concept 2 STAGE CHARACTERISTICS I. Development of • Macroeconomic model that projects revenues Macroeconomic Framework and expenditure in medium term II. Development of Sectoral Programs • Agreement on sector objectives, outputs, and III. Development of Strategic Expenditure Framework • Analysis of inter- and intra-sectoral trade-offs activities • Review and development of programs and sub-programs • Program cost estimation • Consensus-building on strategic resource allocation IV. Definition of Sector Resource Allocations • Setting medium term sector budget ceilings V. Preparation of Sectoral Budgets • Medium term sectoral programs based on VI. Political Approval • Presentation of budget estimates to cabinet The World Bank budget ceilings and parliament for approval 11

Some Technical Issues DESIGN FEATURE KEY ELEMENTS Macro/Fiscal Framework (MFF) -Basis for framework (type of quantitative model) -Content of framework (projections, targets, aggregate and sectoral ceilings, etc. ) Sector Expenditure Framework (SEF) -Inclusion of policy framework and strategy -Type of costings of existing and proposed programs (level of detail) The World Bank 12

Some Organizational Issues DESIGN FEATURE KEY ELEMENTS Status in Budget Process -Fit in budget process (form and date of inclusion in annual process) -Approval/authorization process Management Structure -Central and sectoral agencies’ roles -Organizational locale of MTEF management -Civil society input into process -Method and form of dissemination internally and externally (formality) -Oversight of sectors by central ministries -Oversight of central ministries by sectors -Training support Dissemination Oversight and Support The World Bank 13

Some Lessons from Experience MTEF should be a complement to—not a substitute for—basic PE management reform (esp. execution) n Sequencing and phasing of the MTEF reform itself. In practice, most MTEFs have been implemented in a phased and piloted manner: n n n 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 The World Bank 14

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

Quality 2 n 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 n Decision papers – Basis for Minister of Finance, Gov’t decision – Pulls together academic, audit, performance, evaluation of prior years financial performance, other information The World Bank 16

Information to Factor in to Budget Papers n 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? n 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? n Policy Performance – Did the agency fulfill the policy directives for the prior year? Are they doing so for the current year? n 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? The World Bank 17

Information (continued) n 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? n Other studies – Were there any academic or private researcher papers or NGO studies published that have implications for funding, program structure, etc. ? n 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? The World Bank 18

Capital budgeting: good practice n Investment office n Central appraisal, process management – Cost-Benefit Analysis (CBA): financial, economic, and risk – Clear assumptions (e. g. life-span and maintenance) n n n 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 n Project proposal preparation – Supporting sector strategy n n Identify project manager Project preparation, management training The World Bank 19

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

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