Medium-Term Expenditure
Frameworks (MTEF):
Logic, Benefits, Limitations
Presented by
Allen Schick
Special Course on Impact Evaluation and
Results-Based Planning and Budgeting
Kunming, China
18-21 June 2012
The Logic of the MTEF
The Problem

Politicians are cross-pressured by voters who want smaller government
but bigger programs. This tension between the whole budget and its
parts leads to outcomes in which efforts to constrain the totals are
defeated by pressure to spend more on individual programs and
activities.
The MTEF Solution

Decisions on the budget totals and on government priorities and
programs are made within a framework that requires the two sets of
policies to be consistent.

Major allocations are made concurrently with decisions on the budget totals

Coordinating fiscal aggregates and strategic priorities requires a strong
finance ministry, focusing cabinet actions on key budget issues, and
devolution of operational decisions to sectoral ministers
1
Using MTEF to Improve Development Results

The link between resources and results is weak in annual
budgeting

Because one year often is insufficient to produce significant
change, lengthening the budget’s time frame has the potential to
strengthen the government’s focus on results

When the budget’s time horizon is extended, government can act
on the basis of the resources that will be available over the full
MTEF cycle

To target results, it does not suffice to estimate what will be
accomplished in the years ahead: it also is important to establish
short-term milestones for monitoring progress

MTEF can achieve its potential only if the budget actually finances
the activities and services required to produce results
2
What the Medium-Term Expenditure Framework Does

Extends the time frame of budgeting from one year to 3-4 years

Establishes a fixed constraint on budget decisions

Projects the future cost of existing programs and policy changes

Restructures budgeting to focus on policy initiatives

Gives spending units incentives to reallocate resources

In some countries, divides the budget process into framework and
estimates stages

Activates procedures to assure that policy changes conform to budget
constraints

Rolls the MTEF forward each year by dropping the first year and adding a
year at the end
3
Basic Elements of an MTEF

Explicit fiscal targets (such as the deficit or total spending) for each
of the next 3-5 years

Baseline (forward) estimate of the future costs of existing policies

Procedures for proposing policy initiatives

Medium-Term projections of the cost of proposed and approved
policy changes

Allocation of a budget margin (positive or negative) to each sector
or department

Rules for assuring that the budget complies with fiscal targets

Procedures for updating the baseline projections and rolling the
MTEF forward
4
MTEF Constrains Future Spending and Deficits

A sound MTEF has an explicit limit on total expenditures and the
budget deficit for each year

The constraint is set by government on the basis of macroeconomic
conditions, baseline projections and program priorities

The constraint determines the “space” available in the medium-term
for policy initiatives. In some circumstances, it may determine the
volume of spending cuts required to meet fiscal objectives

The constraint usually is set in money terms such as total
expenditures: it may also be set as a percentage of GDP

It may be useful to establish sub-limits on each sector or ministry

It is important that government regard its preset limits as hard
constraints on the amounts allocated in the budget and projected for
the medium-term
5
The MTEF Budget Constraint
Should

Take account of approved plans

Be approved by the Government

Be realistic and achievable

Be sustainable over the medium-term and beyond

Be set before departments submit spending estimates

Be broken down into sectoral constraints (allocations)

Be supported by procedures for ensuring that policy changes are
consistent with it

Not be adjusted upward to accommodate spending pressures
6
Constructing the MTEF Baseline

The baseline is a projection of future budget amounts (revenues,
expenditures, and the fiscal balance) if current policies were continued
without change

The baseline is constructed for each year covered by MTEF. Some
governments prepare baseline projections that extend beyond the
medium-term

The baseline is an essential tool for measuring the space available in the
budget for policy initiatives

Fiscal space is the arithmetic difference between baseline projections and
the government’s fiscal target

The baseline takes account of medium term economic forecasts as well
as approved policy changes

The budget impact of policy changes is measured in reference to the
baseline

The central budget office maintains the baseline and estimates the budget
impact of proposed and approved policy changes
7
Rolling the MTEF Forward is a Critical Process

The Medium-Term Framework is rolled forward each year by dropping the
first (budget) year and adding a year at the end

The process of rolling MTEF forward starts the annual budget cycle

The first step in rolling MTEF forward is to update baseline projections to
take account of the latest economic forecasts, policy changes, and other
factors that affect spending levels

Once the baseline is updated, government estimates the fiscal space
available in the next budget for policy changes over the medium term

The next step is to decide whether the fiscal constraint should be adjusted
because of changes in the country’s financial condition or political priorities

It is important that the previously-adopted fiscal constraint be viewed as a
ceiling on future expenditure and not as a floor

MTEF may adversely affect the country’s fiscal position if the constraint is
treated as a floor and is adjusted upward each year to accommodate new
spending demands
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How is the Annual Budget Linked to MTEF?






Government continues to prepare an annual budget when it
adopts MTEF
The budget becomes the first year of the medium-term framework
When it is approved, the budget authorizes expenditure for the
next year, in contrast to MTEF which only indicates expenditure
for future years
The annual budget should not be a separate process: it should be
fully integrated into the MTEF
When it budgets for the next year, government projects the
medium-term implications of current decisions, determines
whether these projections are consistent with the medium-term
fiscal constraint, and specifies expected medium-term program
results
Government uses the annual budget to allocate money for policy
initiatives over the next 3-4 years
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Issues in Designing an MTEF

How many years does it cover?


Is it based on current or constant prices?


The reserve would accommodate unforeseen events or policy changes
How much spending detail does it include?


Usual practice is to update the baseline for price changes
Does it have a contingency reserve?


Usual practice is 3-5 years
Typically, allocations by major organization units or sectors
Are allocations for future years guaranteed?

MTEF can spur upward pressure on expenditure by creating
expectations that future allocations are guaranteed
10
MTEF Changes the Role of the Central Budget Office

In most developing countries, the primary role of the budget office is
to manage public finance

It performs this role by preparing the annual budget, monitoring
expenditures during the year, and controlling actions by spending
units

Line-item budgeting, which focuses on inputs, is well suited for
control-based management

MTEF continues these roles, but subordinates them to the policymaking functions of budgeting

In MTEF, the principal role of the budget office is to manage policy
changes by measuring their impacts on current and future budgets,
and assessing whether they are in accord with government
priorities, and can be accommodated within MTEF fiscal limits
11
MTEF Changes the Role of the Central Budget
Office,

continued
The budget office manages the baseline process by updating
projections annually or more often, and by costing proposed or
approved policy initiatives

To perform these tasks, the budget office has to curtail – but not
eliminate – its control function; it can do this by consolidating line
items into broad categories, and by giving spending units greater
flexibility

The extent to which the budget office can prudently shift from
control to policymaking depends on the country’s financial
condition and the reliability of its financial management systems
12
What Should the Legislature’s Role be in MTEF?

There is no uniform pattern: each country has to define the
legislature’s role in ways that are consistent with its governmental
system and political traditions

(1) in some countries, parliament does not take any action on the
MTEF prepared by government; (2) in others, the legislature
debates MTEF, and (3) in some, it formally approves the MediumTerm Framework

Parliament will have a bigger voice on MTEF in countries that
permit it to amend the government’s budget than in countries that
don’t

The legislature is likely to have a more active MTEF role when it
has its own budget experts and is not dependent on the
government for data and analysis

MTEF can promote fiscal discipline when the legislature’s budget
work is fragmented, and sectoral committees have a strong voice
in budget decisions
13
Is Your Country Ready for MTEF?

Many countries claim to have MTEF, but few have effective systems

Some countries that have MTEF lack the political will and administrative
capacity to operate a Medium-Term Framework

Several characteristics of its budget process indicate whether a
government is ready for MTEF

First, does the country have a reliable budget system? If there is significant
variance between budgeted and actual expenditures, MTEF will probably be
ineffective

Second, does the government have capacity to produce reliable economic
data and forecasts? Implementation of MTEF depends on these forecasts

Third, does the government produce timely and accurate financial reports?
Without these reports, MTEF will lack credibility

Fourth, does government have the capacity to measure the future budgetary
impacts of its policy decisions? These measurements are a vital feature of
successful MTEFs

Finally, is the country’s fiscal condition highly volatile and uncertain? If it is, it
will be difficult to make firm medium-term decisions
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MTEF Does Not Guarantee Effective Allocation

If MTEF is not used for allocation, it is useless


MTEF must become the government’s budget process


If MTEF is treated as a technical exercise, politicians will not pay attention to it
MTEF should focus budgeting on policy choices


Some countries have an annual budget plus a separate MTEF
MTEF should be used by political leaders to set fiscal policy and spending
priorities


Many countries have an MTEF but do not base budget decisions on it
If budgeting is used to control the details of spending, MTEF will not be of
much value
MTEF should be a rolling process: Last year’s decisions should be the
starting point

If the budget disregards medium-term decisions, MTEF will wither away
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Medium-Term Expenditure Frameworks (MTEF): Logic, Benefits