“Resource allocation decisions in the
public sector may be guided by technical
analysis but are made through a political
process in which technical analysis is but
one, and not always the most important,
part.”
A. Fozzard, 2001, “The Basic Budgeting Problem: Approaches to
Resource Allocation in the Public Sector and their Implications for
Pro-Poor Budgeting”, London: Overseas Development Institute.
Outline of the Presentation
I. Context
II. Traditional vs. Emerging Budget
Practices
III. Improving Budget Preparation - Key
Elements
IV. Advanced Budgeting Techniques –
Blessing or Curse?
V. Conclusion
I. Context
Macro-fiscal policy environment
• A starting point for budget preparation is a coherent framework
of macroeconomic policies and objectives, e.g., for sustainable
management of government borrowing and debt.
• It is essential that a country develops its capability to prepare
robust forecasts of macroeconomic aggregates, and of
government spending and revenue.
• In recent years, interest in fiscal responsibility laws and fiscal
rules that aim to reinforce discipline have grown substantially –
e.g., EU convergence criteria - but these have had mixed
success.
• Some countries employ a 2-stage budget process where
overall fiscal targets and spending ceilings are agreed first
(“strategic budgeting”), and detailed appropriations determined
later.
I. Context
Four Fundamental Budget Principles
Unity
Universality
One budget and one
budget process
All revenue finances all
expenditure
Specificity
Annuality
All appropriations have a
distinct purpose
All appropriations have a
pre-defined end-date
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I. Context
Budget credibility is a key requirement
• Credible macroeconomic framework and projections
- Financial programming methods
• Realistic revenue forecasting assumptions
- Shortfalls of revenue necessitate cash rationing
- Overestimation of revenues undermines credibility of
budget and particularly impacts level of capital spending
• Realistic estimation of expenditures
If the budget is not credible, there is no prospect that
that budget as executed will be consistent with the
government’s overall fiscal goals/targets
I. Context
Most of the budget is pre-committed spending
• In most countries, at least 90% of the budget is precommitted in the form of mandated spending (e.g., social
welfare or pension obligations), wages and salaries of
public servants, which are very hard to change in the
short term, pre-existing contracts with suppliers, or
increases in prices of goods and services.
• Thus, the margin of maneuver each year in formulating
the budget in practice is usually no more than 10% of
aggregate expenditure.
II. Traditional vs. Emerging Practices
Characteristics
“Emerging”
Traditional
Macro-fiscal framework
Limited
MTFF
Time frame for
budgeting
Annual
Medium-term
Budget negotiations
Incremental, legalistic
Challenge with
expenditure review
Spending ceilings
None
Indicative / binding
Coverage of budget
Narrow
Broad
Appropriation structure
Line items
Programs
Supplementary budgets Unlimited
Limited
Capacity of Budget
Dept.
10-20 staff
50-100 staff
ITC systems
Manual / Excel
FMIS
II. Traditional vs. Emerging Practices
Possible Way Forward
Emerging countries cannot be expected to achieve the
status of advanced countries’ systems in a short period,
and they should not attempt to import advanced models
(e.g., an MTBF) without adapting to country
requirements. They may face challenges of low capacity
and institutional constraints, e.g., national planning
mechanisms, dual budgets, absence of “strategic
budgeting”, weak legislatures.
Instead, emerging countries should consider advancing
on a series of fronts – “toning-up the traditional line-item
budget” (Peterson). What should these steps comprise?
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III. Improving Budget Preparation
a. Review Legal Framework
The budget law should provide a comprehensive
framework for the budget process, and the roles
of the finance ministry and other players. There
are many good examples of budget laws in
developed and developing countries (e.g., Chile,
Cyprus, Korea, S. Africa) that can be adapted
elsewhere.
What is the current status of the PFM legal
framework in METAC countries? Are there any
plans to modernize these laws?
III. Improving Budget Preparation
b. Build Capacity in Macro Forecasting
Strong economic and fiscal forecasting capacity
underpins a credible budget, together with
analysis of fiscal policy options, fiscal risk
assessment, debt strategy, tax policy analysis,
etc.
Developing such capacity in the finance ministry
should be given priority in middle-income
countries (e.g., Egypt, Jordan, Kuwait).
What is the assessment of capacity needs in
METAC countries?
III. Improving Budget Preparation
c. Institutionalize the Budget Cycle
The optimal length of the budget preparation cycle
is country-specific – not too short, not too long and depends on economic and political
circumstances. In general, a cycle that starts
about six months before submitting the budget to
the legislature is appropriate for many countries –
see Table 1.
What form does the budget calendar take in
METAC countries? Does it include an initial
strategic phase where macro targets and spending
ceilings are set?
Table 1. Illustrative budget timetable
III. Improving Budget Preparation
d. Keep Control of Supplementary Budgets
Amendments to the budget during budget
execution should generally receive legislative
approval using the same process as the annual
budget. The number of supplementary budgets
should be restricted, thus avoiding “repetitive
budgeting”. Rules for who approves
supplementary appropriations should be clear and
strictly enforced. Virement rules reduce the need
for supplementary budgets.
What are the current practices in METAC
countries?
III. Improving Budget Preparation
e. Introduce an MTEF in Stages
“MTEF” is an umbrella term comprising
- MTFF (fiscal framework)
- MTBF (budget framework)
- MTPF (performance framework)
Less advanced countries should probably not
advance beyond an MTFF initially, or an
aggregated form of MTBF. Examples: Estonia,
Indonesia, Morocco, S. Africa.
How far have METAC countries progressed in
implementing an MTEF? (See also L4)
III. Improving Budget Preparation
f. Improve Public Investment Management
Modernizing PIM requires (i) eliminating dual
budgets; (ii) subjecting new investment projects to
cost-benefit appraisal; (iii) developing a government
balance sheet that shows capital assets; (iv)
upgrading techniques of procurement and project
management. Not all these steps can be taken
immediately, as they require substantial capacity
building, e.g., Indonesia, Malaysia.
What progress have METAC countries made in
areas (i) through (iv)?
III. Improving Budget Preparation
g. Eliminate “Dual Budgets” in 3 Stages
• Presentational integration: separate budget
processes for capital and recurrent spending exist,
but presentation in the budget document is
combined.
• Budget process integration: budget preparation is
combined in a single budget calendar/circular, and
a single set of budget regulations and instructions.
• Institutional integration: the ministries preparing
the capital and recurrent budgets are integrated
into a single budget/finance ministry.
At which stage are METAC countries?
III. Improving Budget Preparation
h. Assess Key Fiscal Risks
Fiscal risks include: macroeconomic risks;
contingent liabilities and quasi-fiscal risks; tax
expenditures.
Statement of main fiscal risks can be included in the
annual budget document. Does not require
sophisticated analysis, accrual accounting or welldeveloped government balance sheets, e.g., Chile,
Indonesia, Slovenia.
How much data on fiscal risks are incorporated in
budget decision-making, and are published in
METAC countries?
III. Improving Budget Preparation
i. Improve Budget Presentation
Many advanced countries have moved ahead in:
developing analysis of the macro-fiscal framework
for budgeting, simplifying presentation of the budget
(e.g., reducing number of line items), eliminating
extra-budgetary funds, making budget information
more plentiful and accessible (e.g., citizens’ budget),
including analysis of fiscal risks and tax
expenditures.
Emerging countries can also develop some of these
features, e.g., Malaysia, Mauritius, Turkey.
How much progress has there been in METAC?
III. Improving Budget Preparation
j. Reorganize / Build Capacity in the MoF
Two areas are critical for middle-income
countries: (i) develop capability in
macroeconomic forecasting and fiscal policy
analysis; and (ii) strengthen the institutional
capacity of the budget department.
What progress have METAC countries made in
areas (i) and (ii)?
See next slide.
Assessing the Capacity of the Budget
Department: Sample Questions
Are systematic comparisons made of ministries spending
proposals and outturns?
Is budget credibility systematically assessed (variances
between forecast and actual revenues and expenditure)?
Does the Budget Department (BD) employ sector specialists
who can assess trends in volume and price of different
spending categories in agriculture, education, defense, health?
Do budget analysts employ norms and standard costing tools
to evaluate new spending proposals (e.g., class-rooms, roads,
fuel, stationary, etc.)?
How are the costs of exceptional events (e.g., floods, inflow of
refugees) assessed by the BD?
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IV. Advanced Budgeting Techniques –
Blessing or Curse?
a) Performance and Program Budgeting
Middle-income countries should introduce a
program classification, but performance-based
budgeting is unlikely to add significant value until
robust accounting and reporting systems are well
established, and the budget has a high proven
degree of credibility.
Toning up the traditional line-item, incremental
budget should be given priority.
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IV. Advanced Budgeting Techniques –
Blessing or Curse?
b) Accrual-based budgeting
Emerging countries should consider the merits of
introducing accrual-based accounting (ABA) on a
step-by-step basis, but a move to accrual-based
budgeting (ABB) is not recommended.
Only a few advanced countries have introduced
ABB, with mixed results.
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IV. Advanced Budgeting Techniques –
Blessing or Curse?
c) Expenditure Reviews
Comprehensive “expenditure reviews” are
popular in Australia, Canada, the Netherlands,
New Zealand, the U.K., and some other
advanced countries, but have more limited
applicability in less developed countries. They
require strong centers of government, a
disciplined approach, and advanced analytical
techniques.
Simple tools of expenditure review can be
useful, but middle-income countries should
focus on strengthening basic budget functions
IV. Advanced Budgeting Techniques –
Blessing or Curse?
d) Independent fiscal councils
In many countries, especially in Europe,
independent fiscal councils or agencies have been
established. These agencies, some of which are
modeled on the CBO in the U.S.A., have varying
powers, e.g., to make/validate macroeconomic
forecasts or advise on the fiscal performance of
the executive branch.
Independent budget agencies can play a useful
role in advanced countries, but their role in
emerging countries, with weaker institutions and
more limited capacity, is questionable.
V. Conclusion
1. The “traditional” line item, incremental budget has many merits (as well as some
drawbacks) – the model should be developed and enhanced not scrapped
2. The introduction of “advanced” budgeting techniques based on “good practice” models
from other countries should be approached with caution, and adapted to local context –
establishing the necessary institutional preconditions is of fundamental importance
3. The transition to more advanced budgeting practices is a learning process that
requires the development of human capacity and experience; much less important is the
introduction of new systems and processes
4. Some “advanced” budgeting techniques, e.g., performance-related budgeting, accrualbased budgeting, or the establishment of fiscal councils are not appropriate for emerging
countries except in the longer-term
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