Medium-Term Expenditure Scenario Analysis USING BOOSTS Outline Why? Objectives of medium-term analysis How? Setting a macro-framework Selecting a unit of analysis Designing scenarios and options Limitations and constraints Why? Medium-Term Analysis Using BOOSTs Objectives of Medium-Term Analysis using BOOSTs BOOSTs provide detailed historical expenditure information Can be extrapolated to assess expenditure allocation options over the medium-term Objectives of Medium-Term Analysis using BOOSTs Analysis using BOOSTs provides powerful tool to illustrate: How sector or ministry-level expenditure can adjust to macroeconomic trends and shocks Impacts of expenditure decisions on fiscal aggregates Trade-offs and conflicts between expenditure in different priorities and sectors Trade-offs and conflicts between expenditure decisions and macro-fiscal policy objectives Example 1: Country with growing debt repayment obligations Policy targets to: Increase expenditure in “priority sectors” of health and education Reduce the share of expenditure on the wage bill BOOST analysis used to show how policy targets could be achieved within sustainable aggregate limits and while meeting repayment obligations Tax Revenue Grows by about 3 percent per year in real terms (slightly above GDP growth), as per DSA baseline Budget Support Remains at the level projected for FY13 (about 23 million TOP), as per DSA baseline Sector Priority Economic Law & Order Other Wage Expenditure Nominal spending grows by about 4¼ percent per year; Real spending falls by about 2½ percent per year Nominal spending grows by about 3¼ percent per year; Real spending falls by about 3½ percent per year Non-Wage Expenditure Nominal spending grows by 10 percent per year; Real spending grows by about 3¼ percent per year Nominal spending grows by 3 percent per year; Real spending falls by about 3¾ percent per year Output: share of expenditure by sector Output: share of expenditure on wage bill 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 60% 50% 40% 30% 20% 10% FY12 Priority FY13 FY14 Economic FY15 FY16 Law & Order FY17 Other 0% FY12 FY13 FY14 Actual Wage Ratio FY15 FY16 FY17 Target Wage Ratio Example 2: Country with deteriorating revenue effort, SOE subsidies imposing severe fiscal costs Policy target of maintaining the real value of Sovereign Wealth fund BOOST analysis used to demonstrate the need for revenue and SOE reforms if policy objectives were to be achieved without large cuts in expenditure in priority ministries Fiscal Aggregate Macroeconomic Outcomes Based on IMF projections, medium-term real growth GDP of 2% and inflation of around 2.5%. Revenue No growth in revenue in nominal terms. No budget support. Project grants remain at trend levels. Financing Commercial debt is maintained at current levels. 45 40 35 30 25 20 15 10 5 Priority Health Education Infrastructure Environment 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 0 2008 Real expenditure (2006 AUD million) Output: Expenditure and Fund Balance trends How? Medium-Term Analysis Using BOOSTs Setting a macro framework “Anchor” can be chosen according to objective of analysis Fix aggregate expenditure Used to demonstrate tradeoffs within sustainable expenditure limits Flexible aggregate expenditure Used to demonstrate short-term impacts of expenditure decisions on cash reserves/debt levels Setting a macro framework Fixed aggregate expenditure Copy aggregate expenditure limits from appropriate scenario of IMF/World Bank Debt Sustainability Analysis over projection period Divide expenditure types (ministries, sectors, inputs) into: Those determined by input assumptions that you control Residual expenditures that will be forced to adjust to accommodate change in manually-determined expenditure types Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline Input expenditure trajectories in dropdown menus Nominal Total Expenditure (DSA) GDP (DSA) Ministry of Health Ministry of Education Ministry of Infrastructure Ministry of Foreign Affairs Ministry of Internal Affairs Ministry of Environment Ministry of Commerce Ministry of Justice 1,954 8,011 2,003 8,212 2,053 8,417 2,104 8,865 2,157 8,905 2,211 9,064 2,266 9,291 2,323 9,523 Wages Other Wages Other Wages Other Input 5% real growth 5% real growth 5% real growth 5% real growth 5% real growth 5% real growth 211.03 316.55 180.55 229.79 93.79 218.85 221.58 332.38 189.58 241.28 98.48 229.79 232.66 348.99 199.06 253.34 103.41 241.28 244.30 366.44 209.01 266.01 108.58 253.34 256.51 384.77 219.46 279.31 114.00 266.01 269.34 404.00 230.43 293.28 119.71 279.31 282.80 424.20 241.95 307.94 125.69 293.28 296.94 445.41 254.05 323.34 131.97 307.94 Wages Other Wages Other Wages Other Wages Other Wages Other Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust 54.71 82.07 82.65 93.21 54.71 23.45 64.48 52.76 111.38 84.02 55.81 76.92 84.31 87.36 55.81 21.98 65.77 49.45 113.61 78.75 56.92 71.27 85.99 80.95 56.92 20.36 67.09 45.82 115.88 72.97 58.06 65.09 87.71 73.93 58.06 18.60 68.43 41.85 118.20 66.64 59.22 58.34 89.47 66.26 59.22 16.67 69.80 37.51 120.56 59.73 60.41 50.99 91.26 57.92 60.41 14.57 71.19 32.78 122.97 52.21 61.61 43.01 93.08 48.84 61.61 12.29 72.62 27.65 125.43 44.03 62.85 34.34 94.94 39.00 62.85 9.81 74.07 22.08 127.94 35.16 Taken from DSA Calculated based on input assumption Set to adjust automatically to keep deficit equal to DSA level –share of non-priority expenditure maintained Setting a macro framework Flexible aggregate expenditure All expenditure lines are manually determined Adjustments reflected in change in the deficit/surplus Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline All expenditure dynamics input from drop-down menu Taken from DSA Manually input based on policy assumptions Adjusts to reflect aggregate impact of sector/ministry expenditure decisions Selecting unit of analysis BOOSTs allow high level of disaggregation when analyzing expenditure Appropriate level at which to model expenditure choices will depend on policy issues Sectors – implications of achieving sector expenditure targets Ministries – implications of ministry expenditure targets Inputs – implications of public sector wage settlements Sub-national governments – implications of decentralization initiatives Etc. Expenditure categories taken from BOOST Level of disaggregation appropriate to complexity of analysis Sector, Ministry, Division, Input, subnational government unit, etc. Selecting Input Assumptions Based on policy options under consideration Based on policy decisions already made to understand implications Examples: Fixed rates of expenditure growth by sector Sector or ministry expenditure levels established in plans or policy commitments Changes in spending to achieve target expenditure ratios 5% Growth Ministry of Health Ministry of Education Ministry of Infrastructure Drop-down menus linked to scenario sheets are an easy way to update assumptions and examine the implications of different policy targets Ministry of Foreign Affairs Ministry of Internal Affairs Ministry of Environment Ministry of Commerce Ministry of Justice Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other 2013 211.032 316.548 180.5496 229.7904 93.792 218.848 54.712 82.068 82.6542 93.2058 54.712 23.448 64.482 52.758 111.378 84.022 2014 221.5836 332.3754 189.5771 241.2799 98.4816 229.7904 57.4476 86.1714 86.78691 97.86609 57.4476 24.6204 67.7061 55.3959 116.9469 88.2231 2015 232.6628 348.9942 199.0559 253.3439 103.4057 241.2799 60.31998 90.47997 91.12626 102.7594 60.31998 25.85142 71.09141 58.1657 122.7942 92.63426 2016 244.2959 366.4439 209.0087 266.0111 108.576 253.3439 63.33598 95.00397 95.68257 107.8974 63.33598 27.14399 74.64598 61.07398 128.934 97.26597 2017 256.5107 384.7661 219.4592 279.3117 114.0048 266.0111 66.50278 99.75417 100.4667 113.2922 66.50278 28.50119 78.37827 64.12768 135.3807 102.1293 2018 269.3363 404.0044 230.4321 293.2773 119.705 279.3117 69.82792 104.7419 105.49 118.9568 69.82792 29.92625 82.29719 67.33406 142.1497 107.2357 2019 282.8031 424.2046 241.9537 307.9411 125.6903 293.2773 73.31931 109.979 110.7645 124.9047 73.31931 31.42256 86.41205 70.70077 149.2572 112.5975 2020 296.9432 445.4148 254.0514 323.3382 131.9748 307.9411 76.98528 115.4779 116.3028 131.1499 76.98528 32.99369 90.73265 74.2358 156.72 118.2274 Running scenarios BOOST analysis can: Help communicate incompatibilities and required tradeoffs between competing commitments and priorities Identify the need for trade-offs within an overall resource constraint Show macro-fiscal impacts of expenditure policy decisions Illustrate required sector expenditure adjustments within a given macro framework Running scenarios Government considering ambitious program of expenditure in priority sectors identified in the national plan Real expenditure growth of 5% per annum for health, education and infrastructure Government has implemented a hiring freeze, but agreed with the public sector union to inflation indexing of wages and no layoffs Under the terms of an IMF program, there is no scope for additional borrowing Input appropriate spending trends Ministry of Health Ministry of Education Ministry of Infrastructure Ministry of Foreign Affairs Ministry of Internal Affairs Ministry of Environment Ministry of Commerce Ministry of Justice Wages Other Wages Other Wages Other Input 5% real growth 5% real growth 5% real growth 5% real growth 5% real growth 5% real growth 211.03 316.55 180.55 229.79 93.79 218.85 221.58 332.38 189.58 241.28 98.48 229.79 232.66 348.99 199.06 253.34 103.41 241.28 244.30 366.44 209.01 266.01 108.58 253.34 256.51 384.77 219.46 279.31 114.00 266.01 269.34 404.00 230.43 293.28 119.71 279.31 282.80 424.20 241.95 307.94 125.69 293.28 296.94 445.41 254.05 323.34 131.97 307.94 Wages Other Wages Other Wages Other Wages Other Wages Other Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust Zero real growth Adjust 54.71 82.07 82.65 93.21 54.71 23.45 64.48 52.76 111.38 84.02 55.81 76.92 84.31 87.36 55.81 21.98 65.77 49.45 113.61 78.75 56.92 71.27 85.99 80.95 56.92 20.36 67.09 45.82 115.88 72.97 58.06 65.09 87.71 73.93 58.06 18.60 68.43 41.85 118.20 66.64 59.22 58.34 89.47 66.26 59.22 16.67 69.80 37.51 120.56 59.73 60.41 50.99 91.26 57.92 60.41 14.57 71.19 32.78 122.97 52.21 61.61 43.01 93.08 48.84 61.61 12.29 72.62 27.65 125.43 44.03 62.85 34.34 94.94 39.00 62.85 9.81 74.07 22.08 127.94 35.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Change in Surplus/Deficit from DSA Because no additional borrowing, use “fixed aggregate expenditure, setting deficit as DSA levels Running Scenarios Expenditure growth can be absorbed by reductions in other sectors 2500.00 But, because of fixed real wages, required unfeasible compression of non-wage expenditure 80% 70% 2000.00 60% 1500.00 50% 40% 1000.00 30% 500.00 20% 10% 0.00 2013 2014 2015 2016 2017 2018 Total Health Total Education Total Infrastructure Total Others 2019 2020 0% 2013 Health 2014 2015 2016 Education 2017 2018 Infrastructure 2019 2020 Others Running scenarios Government facing economic shock, with expected decline in real revenue Committed to maintaining real expenditure on core public services, but has established nominal expenditure freeze in other areas Wishes to assess debt implications Input appropriate spending trends 2013 Nominal Total Expenditure GDP (DSA) Ministry of Health Ministry of Education Ministry of Infrastructure Ministry of Foreign Affairs Ministry of Internal Affairs Ministry of Environment Ministry of Commerce Ministry of Justice Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other Wages Other Input Zero real growth Zero real growth Zero real growth Zero real growth Zero real growth Zero real growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth Zero nominal growth 2014 2015 2016 1,954 1,856 1,745 8011.4 8211.685 8416.977 211.03 215.25 219.56 316.55 322.88 329.34 180.55 184.16 187.84 229.79 234.39 239.07 93.79 95.67 97.58 218.85 223.22 227.69 54.71 54.71 54.71 82.07 82.07 82.07 82.65 82.65 82.65 93.21 93.21 93.21 54.71 54.71 54.71 23.45 23.45 23.45 64.48 64.48 64.48 52.76 52.76 52.76 111.38 111.38 111.38 84.02 84.02 84.02 1,815 8865 223.95 335.92 191.60 243.86 99.53 232.24 54.71 82.07 82.65 93.21 54.71 23.45 64.48 52.76 111.38 84.02 2017 2018 2019 2020 1,869 1,925 1,983 2,042 8905 9064.164 9290.768 9523.037 228.43 233.00 237.66 242.41 342.64 349.49 356.48 363.61 195.43 199.34 203.33 207.39 248.73 253.71 258.78 263.96 101.52 103.55 105.63 107.74 236.89 241.63 246.46 251.39 54.71 54.71 54.71 54.71 82.07 82.07 82.07 82.07 82.65 82.65 82.65 82.65 93.21 93.21 93.21 93.21 54.71 54.71 54.71 54.71 23.45 23.45 23.45 23.45 64.48 64.48 64.48 64.48 52.76 52.76 52.76 52.76 111.38 111.38 111.38 111.38 84.02 84.02 84.02 84.02 Running scenarios Growth in budget share for priority sectors Short-term growth in deficit 0.0% 100% 0 Surples/Deficit (% GDP - Line) 80% 70% 60% 50% 40% 30% 20% 10% -0.5% -50 -1.0% -100 -1.5% -150 -2.0% -200 -2.5% -3.0% -250 -3.5% -300 0% 2013 2014 Health 2015 2016 Education 2017 2018 Infrastructure 2019 2020 Others Deficit Percent GDP Surplus/Deficit (millions - Bar) 2013 2014 2015 2016 2017 2018 2019 2020 90% Limitations and constraints Limitations and constraints Complement to, rather than substitute for, DSA BOOST analysis relies on a macro framework taken from a DSA BOOST does not provide data on economic growth, revenue, inflation, which needs to underpin all analysis BOOST data not sufficient for modeling debt dynamics Static analysis - No mechanism for tracing interactions between expenditure decisions and growth or revenue