International Experience and Best
Practice in Implementing Medium
Term Expenditure Frameworks
David Shand
PFM Consultant
IMF Workshop,
Almaty, Kazakhstan
26-27 May, 2011
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Objectives of MTEF
• Aggregate fiscal discipline – spending is sustainable and limited by
resource availability
• Budget allocations reflect explicit spending priorities (allocative
efficiency)
• Delivery of goods and services is cost-efficient
• Also greater transparency and accountability of public finances
• Including greater involvement of sector ministries in the whole
budget process
• And better linking of the budget with national planning mechanisms
• These three main PFM objectives are closely linked
• Traditional (one year, incremental budgeting) typically does not
reliably meet these objectives
• The MTEF exercise is thus the budget exercise – not something
separate
• It must change the annual budget exercise
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Other introductory comments
• Many misconceptions about the nature of an MTEF – are we overengineering simple concepts ?
• The simple issue is that expenditure decisions have multi-year
implications and must be aligned with resources available in the
medium-term
• In other words medium-term budget planning
• The record in MTEF implementation is uneven – some successes
and some failures
• Perhaps reflecting misconceptions and confusion
• Some countries have the MTEF form but not the substance – for
display rather than fiscal decision making
• Unrealistic MTEFs can be used to hide or defer fiscal issues
• But World Bank research suggests that overall the impact of MTEFs
has been positive
• Most MTEFs extend over 3 years, but some 4 and 5 years
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Brief History
• First formally and transparently introduced in Australia in mid
1980s,
• (building on a previous forward budget estimates system not clearly
linked with the annual budgetary process)
• Leading to published three year indicative (but relatively firm)
budget allocations for all ministries
• Then adopted by many OECD countries in 1980s and 1990s –
Denmark, Netherlands, New Zealand, Norway etc)
• IMF a strong supporter of MTEF in developed countries
• Then MTEF developed in many developing countries (starting in
Africa) as a key PFM reform component
• Often at donor (IMF and World Bank) urging to ensure commitment
of resources to Poverty Reduction Strategies (PRSPs)
• By 2008 more than 100 countries had adopted elements of MTEF
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Major MTEF Components
• Medium term macro-fiscal forecasts
• These forecasts are used to develop a medium-term macro-fiscal plan
• Realism of this plans is key – reflected in credibility of the budget and
budget projections
• Sector strategies are developed and inform the allocation of resources to,
but in particular within, expenditure sectors
• This means a focus on performance issues
• The budget may be a medium term budget with formal medium term
budget allocations (Russia)
• Or (more commonly) an annual budget prepared within a medium-term
framework (fiscal plan) with indicative expenditure medium-term
expenditure allocations (Australia, New Zealand)
• How “firm” these medium term allocations can or should be is a matter of
debate
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Statements and Research on MTEF
• PEFA 2005, Indicator on Multi-Year perspective in fiscal planning,
expenditure policy and budgeting
- preparation of multi-year fiscal forecasts and allocations of funds
by function or program
- scope and frequency of debt sustainability analysis
- existence of sector strategies with multi-year costing of recurrent
and investment expenditures
- linkages between investment budgets and forward expenditure
estimates
• IMF Manual on Fiscal Transparency 2001 and Code of Good
Practices on Fiscal Transparency (updated) refer to
- aggregate fiscal projections 5-10 years ahead should be included
in budget documentation
- and forecasts two years ahead in the annual budget document
- need for fiscal sustainability analysis
- relevance of medium-term budget frameworks broken down by
spending ministries
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Statements and Research on MTEFs
• World Bank PEM Handbook 1998 – MTEF facilitates better
control of expenditure and better value for money within a
hard budget constraint
• Leherou and Taliercio (World Bank 2002) study of MTEFs in
13 African countries questioned feasibility of “fully fledged”
MTEFs in many countries and noted lack of attention to
institutional aspects
• But overlooked the issue that MTEFs cannot be expected
to work if the annual budget process does not work
• Holmes and Evans (ODI 2003) conclude more optimistically
that MTEFs are progressing, even if unevenly
• New World Bank research 2011based on econometric and
case study analysis – see later slides
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Possible MTEF Phases
• Medium-term fiscal framework (MTFF)- the macro-fiscal basis for
budget formulation
• Medium-term budgetary framework (MTBF) – specifies sector
ministry expenditure ceilings based on top-down MTFF and bottom
up sector strategies
• Medium term Program/Performance Framework (MTPF) –specifies
program/agency inputs, outputs and outcomes
• Introduction normally follows this sequence
• But it is possible to have selective MTBF based on sector strategies
before an MTFF
• But MTPF first requires sector strategies
• In effect getting to an MTPF means a performance based budgeting
system
• In 2008 71 country MTFFs, 42 MTBFs and 19 MTPFs
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Macro-fiscal framework
• A key component of annual budget documentation
• Importance of sound technical/professional skills in macroeconomic forecasting
• And budget revenue and expenditure forecasting
• Not influenced by “political” considerations
• Ensuring realism – with a tinge of conservatism (?)
• Note that this is also relevant to input oriented annual budgeting
• Various institutional arrangements may assist this
- Independent fiscal forecasting units (Austria, Chile)
- review by independent fiscal councils (Sweden, Romania)
- independent role of civil servants in the forecasts (New Zealand,
Australia)
• Fiscal risk analysis is an important component
• In principle this framework should be developed and owned by the
Government
• In practice the framework by be developed by donors due to
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country capacity constraints
Macro-Fiscal Framework
• Many developing countries have formal national planning systems
but only loosely linked with macro-economic forecasts
• Lack of realism and prioritization in these national plans may be a
problem
• Debt sustainability analysis is part of the framework
• Contingency margins and rolling over of plans, frequency of
updating ?
• Coverage - a comprehensive budget is needed. What about subnational governments
• Fiscal Responsibility Laws which require medium-term fiscal targets,
will assist
• Forecast of spending under existing policy may be the starting point
in fiscal analysis
• But forecasts must be translated into plans
• Some countries have published macro-fiscal targets but no plan of
how to achieve them
• In part this is an issue of what level of detail/aggregation to specify
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the framework
Sector Strategies
• World Bank has promoted these as part of Public Expenditure
Reviews and MTEF
• In principle provide an opportunity for input (voice) by sector
ministries
• And for greater predictability of funding for sector ministries
• The problem is to develop a results mind set
• Then achieving realism and sensible prioritization
• (this problem is not confined to developing countries)
• Do sector ministries actually know what they are doing , what is
“policy” and what is happening?
• Need for sound ex ante definition of the issues based on reasonable
data
• Sound cost information is required – consistency between MOF and
sector ministry figures is part of this
• Need for regular reviews/evaluation of performance under the
strategies
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Sector Strategies
• Is there capacity to do all this in MOF – quite apart from sector
ministries
• Planning ministries may often play a key role - must link with the
national planning system, including any Public Investment Program
(PIP)
• National plans usually contain major elements of sector strategies
• And with related strategies such as PRSP
• And having a fiscal envelope allocated by MOF - both recurrent and
capital expenditures
• Note that there may a legitimate role for sector strategies as
“fundraising” documents in discussion with donors
• Often with a strong emphasis on funding investment expenditures
• In principle sector strategies should be government owned (MOF
and sector ministries) and donor supported
• In practice they may be donor driven
• And reflect lack of donor coordination (e.g. multiple, competing
strategies for the same sector)
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Linking the Macro-Fiscal Framework
with Sector Strategies
• MOF budget circular to spending ministries outlines basis on which
they should prepare their medium-term budget requests
• Circular indicates indicative resource availability through ceilings
and indicates economic and other assumptions to be used
• Bids outside the ceiling will be returned to spending ministries for
revision
• But this does not start from scratch – the following year’s
expenditure from the MTEF is rolled over as the starting point
• In this sense an MTEF is always “incremental”
• Rules for bidding for new policies or quality improvements to
existing ones (based on proposed changes in sector strategies) are
set out
• “Indicative” ceilings for future years also to be determined
• How “firm” are these indicative ceilings ?
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World Bank Study 2011
• Investigates the effect of each MTEF phase on achieving the
3 objectives (fiscal discipline, allocative efficiency and
operational efficiency)
• Uses 10 country case studies
• What initial economic political and other conditions
determine the success of MTEFs?
• Are there key country, PFM and MTEF characteristics
critical for success?
• How should implementation be sequenced and
coordinated with other budget reforms?
• What role should Bank, bilateral donors and other
international agencies play?
• If MTEF is not the solution, then what is?
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World Bank Study 2011
• Is an MTEF always appropriate, given different country
circumstances?
• What has worked and not worked in MTEF implementation?
• What design features are likely to result in an MTEF?
• How to strengthen or reform existing MTEFs?
• Econometric analysis suggests
- MTEFs improve fiscal discipline and allocative efficiency
- results on operational efficiency are mixed – MTPF is more
significant here
• Case study analysis suggests
- MTEF has made budgeting more strategic
- has improved fiscal discipline
- has increased recognition of resource constraints
- has fostered cooperation between agencies
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Common Problems in MTEF
Development
• Lack of data
• MOF and line ministries not prepared for new roles (skills
and incentives)
• Lack of high level political support for clearer spending
choices
• MTEF system too complex and paper intensive
• Misconceptions about what an MTEF is – e.g. multi-year
estimates only, just a technical MOF exercise
• Not linked with the annual budget – but a separate
exercise, so budget behavior is not changed
• Not linked with national plans, PRSPs etc
• No evaluation of performance against plan
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Common Problems in MTEF
Development
• Resource envelopes may be over-estimated and
ceilings may be ignored by sector ministries
• That is a hard budget constraint is not achieved or
enforced
• Sector strategies may be pro-forma exercises
• And not adequately costed
• MTPF contains too many performance indicators of
dubious quality
• And they are not used in decision making processes
• This is a general issue in all performance management
initiatives
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