Medium-term Budget Frameworks
Outline of Presentation
I. What is Medium-term Budgeting?
II. Four Main Elements
I.
II.
III.
IV.
Commitment mechanisms
Prioritization mechanisms
Control mechanisms
Accountability mechanisms
III. Prerequisites
IV. Classification and empirical results
V. Conclusions
2
I. What is Medium-Term Budgeting?
Why medium-term budgeting
• Decisions today have consequences tomorrow
– Capital investment
– Changes in entitlement criteria
– Mid-year changes
• All policies are discretionary in the mediumterm
– Legislative changes
– Contracts and inertia
• Lags in public decision making
– Decision lags
– Implementation and impact lags
• Another decision-making dimension
3
I. What is Medium-Term Budgeting?
Definition
• A Medium Term Budget Framework (MTBF) is a set of
institutional arrangements for prioritizing, managing and
presenting revenue expenditure in a multi year perspective
A top-down medium term
resource envelope
Consistent with macro
stability and broad policy
priorities
Bottom-up cost estimate
of policy. The current and
medium term cost of
existing national (sector)
programmes & activities
Reconciling costs with
resources
A decision-making process
that reconciles these costs
and new policy ideas with
available resources
4
I. What is Medium-Term Budgeting?
An illustration
2011
New Policy Proposals: Education and
Research
o/w
2012
250
2013
2014
2015
974
1 763
1 672
1 002
‘Teacher package’
73
120
215
115
Apprenticeship
44
146
277
327
Student health
250
400
Extended MNT-project
200
Extended support for basic subjects
400
Enhancing teaching, extended
support
250
250
Vocational training
250
250
Adult apprenticeship
250
102
126
Increased student support to
unemployed youth
50
25
12
Merging Teaching Standards Board
and School Inspection Agency
30
-70
-130
157
-50
5
I. What is medium-term budgeting?
Objectives
What MTBFs Do
1. Reinforce
aggregate fiscal
discipline
2. Facilitate a more
strategic allocation of
expenditure
How They Do It
presenting deferred effects of
today’s decisions
imposing restrictions on future
budgets
early reaction to future adverse
developments
abstracting from annual legal and
administrative constraints
provide an additional dimension
in policy making
Who Benefits
Finance Ministers
Taxpayers
Future Generations
Prime Ministers
Line Ministers
Parliamentarians
Line Ministries
3. Encourage more
efficient intertemporal planning
providing greater transparency and
certainty to budget holders about
their likely future resources
Agencies
Local Governments
6
II. Four Key Elements
Commitment elements
• Restricting medium-term discretion
• Binding or indicative frameworks
Prioritization elements
• Expose effects of current and proposed policies in the budget
• Set policy changes beyond the annual budget
Control elements
• Monitoring that policies are in line with overall commitments
• Managing unexpected events
Accountability elements
• Creating ownership and legitimacy
• Independent assessments
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II. Four Key Elements
Commitment elements
COVERAGE
COUNTRY
Soc
Sec
Debt
Interest
Local
Gov’t
SPECIFITY
% of CG
spending
DISCIPLINE
TIME
HORIZON
Years
Fixed
or Flexible
Frequency
of Update
3
3 -4 fixed
3rd-4th year
added each
year
4
4 fixed
Every 4 years
4
4 fixed
Every 4 years
AGGREGATE EXPENDITURE CEILINGS
Sweden
Yes
No
T’fers
96%
Finland
Some
No
No
78%
Netherlands
Yes
No
T’fers
80%
Total Spending
27 Policy Areas
Total Spending
13 Ministries
4 Sectors
26 Ministries
FIXED MINISTERIAL PLANS
United
Kingdom
No
No
T’fers
59%
25 Depts
3
3 fixed
Every 3 years
France
No
Yes
No
39%
35 Missions
3
2 fixed + 1
Flexible
Every 2 years
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II. Four Key Elements
Prioritization elements 1: Unit of estimates
Ministries
•
•
•
•
Provides direct link to implementation …
… and typically set a manageable number of aggregations …
… but is a compromise in the reflection of policies …
… and can lock in existing allocations
Programs
• Has the potential to highlight policies above bureaucracy …
• … but have to keep an unambiguous link to the implementing administration …
• … and has to be kept at a manageable number
Economic categories
• Is only relevant for aggregate economic analysis …
• … and does not support a prioritization between competing policies
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II. Four Key Elements
Prioritization elements 2: Level of detail
Ensures accuracy in
aggregate projections
Appropriation: Water Sanitation
t
Provides the link to
the annual budget
t+1
t+2
t+3
Gives predictability at
the micro-level
10
II. Four Key Elements
Control elements 1: Managing Uncertainty
• Integrity of the framework requires that
overall commitments are not revised
• Uncertainty grows with the timehorizon
• New policy initiatives are part of the
political reality
• Margins are needed
– Contingency margins
– Planning margins
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II. Four Key Elements
Control elements 2: Reconciliation
Reconciliation of General Government Fiscal Balance Estimates
2010-11
2009-10 Budget Fiscal Balance
2011-12
2012-13
2013-14
-39,598.0
-12,093.0
1,960.0
6,325.0
28.7
180.2
199.4
-1,482.8
Impact of Parameter Variations
282.0
2.682.0
3,387.0
5,092.0
Total Variations
310.7
2,862.2
3,586.4
3,609.2
-39,287.3
-9,230.8
5,546.4
9,934.2
Impact of Policy Decisions
2010-11 Budget Fiscal Balance
Reconciliation of Expenditure
2011
Total expenditure in the Budget for 2010
2012
1 1001.2
2013
1 1003.3
2014
1 020.1
1 038.5
Decisions/Reforms
9.8
8.4
7.8
6.9
Wage indexation
0.0
0.1
0.1
-0.1
-14.2
-11.5
-10.2
-6.9
-0.5
0.6
0.1
0.5
Technical adjustments
9.0
9.0
9.0
9.0
Other
0.3
-0.7
-4.5
-4.9
Total expenditure change
4.4
5.9
2.3
4.5
Other macroeconomic changes
Volume changes
Total expenditure in the Budget for 2011
1 005.5
1 009.2
1 022.4
1 043.0
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III. Four Key Elements
Accountability elements
Legislative
endorsement
Information only
No legislative role
Promotes parliamentary buy-in
…
Exposes the fiscal impact of
the government’s budget …
The medium-term framework
is an internal instrument for
the government …
… and elevates the status of
medium-term ceilings and
estimates …
… and increases the
government’s accountability …
… high risk of becoming a
technical exercise with little
impact on decision-making
…but can make the framework
rigid
… but risks being treated
lightly if no formal approval
Example: Austria, Australia,
Sweden
Example: UK, Finland
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III. Preconditions
Objective
Instrument
Content
Foundation for
fiscal
objectives
Fiscal Rule or
Responsibility Law
Principles of fiscal management
Numerical fiscal rule
Disclosure requirements
State multiyear fiscal
policy targets
Medium-term
Fiscal Framework
Multi-year macroeconomic forecast
Multi-year fiscal forecast
Medium-term fiscal target
Set multi-year
spending
plans
Medium-term
Budget Framework
Multi-year expenditure ceiling
Multi-year spending allocations
Planning margin
Authorize
annual
expenditure
Report actual
expenditure
Annual Budget
Detailed expenditure appropriations
Other budgetary controls
Reconciliation of changes from MTBF
Final Accounts
Detailed expenditure outturn
Reconciliation of change from Budget
Explanation of discrepancies
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III. Preconditions
a. Credible Annual Budget
b. Prudent Medium-term Macroeconomic
Projections
c. Stable Medium-term Aggregate Fiscal
Objectives
d. Comprehensive and Unified Budget
Process
15
III. Preconditions for Effective MTBFs:
a. A Credible Annual Budget
Average Overspend Against Budget Total, 1998-2007
(% of GDP, Actual-Forecast)
0.8
0.6
0.4
0.2
0
-0.2
-0.4
Binding MTEF
No Binding MTEF
-0.6
Turkey
Netherlands
Poland
Spain
Japan
Australia
Denmark
Austria
Canada
UK
Sweden
IRELAND
Slovak Rep
Portugal
Belgium
Czech Rep
Germany
Greece
Luxembourg
France
Iceland
Italy
-0.8
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II. Preconditions for Effective MTBFs:
b. Prudent Medium-term Macroeconomic Projections
Average Error in Forecasting Real GDP Growth, 1991-2006
(% age real growth, Actual-Forecast)
2.5
2.0
Binding MTEF
No Binding MTEF
1.5
1.0
0.5
0.0
-0.5
Czech Rep
Greece
Estonia
Netherlands
Slovenia
Latvia
IRELAND
Portugal
UK
Finland
Poland
Spain
Cyprus
Austria
Slovakia
Denmark
Belgium
Germany
France
Sweden
Hungary
Lithuania
-1.0
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II. Preconditions for Effective MTBFs:
c. Stable Fiscal Objectives
Characteristics of Good Fiscal Objectives/Rules
a. Simple: Can be clearly explained, monitored, and assessed
b. Clear Guide for Fiscal Policy: Direct link to annual fiscal stance
c. Counter-cyclical: Allows fiscal policy to stabilize the economy
d. Medium-term: Facilitates multi-year budget planning
e. Sustainable: Ensures fairness between generations
f.
Stable & Robust: Avoid frequent revisions
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II. Preconditions for Effective MTBFs:
c. Unified Budget Process
• Total expenditure is determined based on:
1. Total
Expenditure
• macroeconomic situation
• balance objective
• projected revenue
• Subject to the decision on total expenditure in stage 1, a sectoral
allocation is decided and formalized through ceilings
2. Sectoral
Allocation
• 15-40 sectors
• no-policy-change assessment of existing policies
• allocation of fiscal space/distribution of savings requirements
• Subject to sectoral ceilings, the details of the
budget are prepared
3. Budget
Details
• reallocations within ceilings can (normally) be allowed
• proposals in addition to the ceilings are rejected
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IV. Classification and empirical results
Binding
Indicative
No Medium-Term Framework
Australia
Belgium
Greece (pre 2010)
Austria
Canada
Iceland (pre 2010)
Finland (post 2003)
Czech Republic
Ireland (pre 2010)
France (post 2009)
Denmark
Poland
Netherlands
Estonia
Portugal (pre 2012)
Sweden
Germany
Spain (pre 2012)
United Kingdom
Hungary
USA
Italy
Japan
Latvia
Mexico
New Zealand
Slovakia
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IV. Classification and empirical results
Average Three-Year Ahead Forecast Error 1998-2007
percent of GDP
2.0
Binding
Indicative
None
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Expenditure
Revenue
Balance
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V. Conclusion
1. While the budget is annual, a structured consideration of medium-term
aspects is important
2. A medium-term budget framework can improve fiscal discipline, but also
helps effective prioritization of policies and stability and predictability
3. Binding elements are crucial for the framework to generate expected
results
4. Preconditions are demanding, and have to be addressed when
introducing medium-term budgeting
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