Improving Budgetary
Outcomes
The Role of a MTEF
by
Malcolm Holmes
Three Levels of Expenditure
Outcomes
• Aggregate Fiscal Discipline
• Prioritization of the Composition of
Expenditures
• Technical Efficiency in the Use of
Budgeted Resources
Some Principles
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Transparency and accountability
Comprehensiveness of budget
Predictability of resources & policies
Flexibility
Contestability
Existence and sharing of information
Fragmentation/Lack of
Comprehensiveness
Across:
• Policy Making, Planning, Budgeting
• Fiscal activities
• Types of expenditure
• Sources of funds
• Time
• Inputs, outputs and outcomes
Dual Budgeting
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Investment as basis of development
Development Budget
PIP
R Coefficients
Sequencing Public Sector Financial
Management Reforms
• The government should foster an environment that supports and
demands performance before introducing performance, output or
outcome budgeting.
• Control inputs before seeking to control outputs.
• Account for cash before accounting for accruals.
• Establish external controls before introducing internal control.
• Establish internal control before introducing managerial accountability.
• Operate a reliable accounting system before installing an integrated
financial management system
• Budget for work to be done before budgeting for results to be achieved.
• Enforce contracts in the market sector before introducing contracts in
the public sector.
Restraint with Flexibility
• Hard Budget Constraint
• Transparency
• Accountability
• Exit
• Voice
Flexibility
Information
Enabling Environment
for Public Sector
• Link Policy, Planning, Budgeting
• Restrain decision making:
– affordability
– cost, expected results
– evaluate
• Forum within which policies compete
• Capacity and willingness to reprioritize
and reallocate.
Characteristics of Sound PEM
Commitment, capacity & willingness to:
• Prepare a budget (a) in line with
development priorities and (b) that can
realistically be implemented
• Specify the budget’s intended results
• execute budget as passed by the legislature
• Account for results achieved
• Evaluate impact of policies and programs
and take results into account in budget
preparation.
A Contract for Performance
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The Center
More predictable funding
More predictable policy
Greater transparency and predictability
in processes for reprioritizing and
reallocating resources
Leave management decisions to line
managers
A Contract for Performance
The Line
• Living within budget
• Clear sector strategies
• Using resources efficiently and
effectively
• Reporting on resource use
Using a Medium Term
Expenditure Framework
• Fiscal Targets (what is affordable)
• Forward Estimates of Existing Policy
• Institutional Mechanisms for Making the
Trade-offs
• A Focus on Performance
• Enhanced Predictability
Implementing an MTEF
• Pilot or whole of Government
• Budget unification (PIP elimination)
• Reduction of the number of budget line
items
• Link between line items and objectives and
impact
• introduction of a 3 year perspective
• mission statements (strategic plans) for
sectors
Implementing an MTEF
(Cont.)
• Use of strategic plans for budget
preparation
• Emphasize costs of activities
• Merging of external and domestic financing
• Withdrawal of MoF from details of budget
allocations in LM
• Engaging cabinet
• Focus on performance
Ghana: Explaining progress
• Commitment from Minister and Ministry of
Finance, line ministers and donors
• MTEF based on GOG-led PER
• Consensus building efforts (losers and
winners)
• MTEF becomes budget process
• Consistency between MTEF and sector
approaches
Ghana: Explaining Progress
(Cont.)
• Link to other reforms
• Performance focus - matching
authority and accountability
Ghana: Sustainability Tests
• Predictability of funding (domestic and
external)
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–
–
–
predictable macro/fiscal framework
cash flow estimates
cash available on time
budget voted on time by parliament
• Predictability of policies
- Cabinet Engaged
• controlling expenditure
• focus on outcomes
Ghana: Sustainability Tests
(Cont.)
• Dynamic process of evaluation of
policies
• Autonomy and accountability of LM
• Civil service management - pay policy,
authority
• Decentralization
PRIORITIZATION
Institutional Arrangements
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Hard Budget Constraint
Cohesive political executive
Sector Strategies
Forum within which decisions constrained by
resource availability over medium term and
policies compete
• Programmatic decisions devolved to line
ministers (within hard sector ceilings)
PRIORITIZATION
Institutional Arrangements
(Cont.)
• Strategic priorities and sustainability drive
aid
• Information - Costs, Performance
Mechanisms for Prioritization
• Case: Australia
• Aggregate Fiscal Targets and Strategic
Objectives
• Medium-term Costs of Competing
Policies
Australia: Medium-term Costs of Policies
Mar 84
15
Projection dates
10
May 85
Nov 85
5
Dec 86
Aug 89
0
82/83
83/84
84/85
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
Mechanisms for Prioritization
Case: Australia
• Aggregate Fiscal Targets and Strategic Objectives
• Medium-term Costs of Competing Policies
• Arena for Contesting and Coordinating Policies
- Cabinet: Strategic Priorities
- Line: Spending-Savings within Hard Budgets
• Ex-post Evaluation
Outcomes:
- Deficit 4% GDP to surplus of 2% GDP
- Shifts in intra and intersectoral composition
- Greater funding predictability
Australia: Changes in Expenditure
Composition, 1983-94
Spending
Saving
Net change
$ Millions
5000
New spending
4000
3000
Net change
2000
1000
0
-1000
-2000
-3000
Savings from existing policy
-4000
Defense
Educ
Health
Source: Dixon, 1993 : 32
Socsec
Transp.
Other
Sector-wide Approaches as
Performance Based Budgeting
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Sector-wide
Clear Strategy and Policy Framework
Program Focus
Sector Expenditure Program
Medium-term Perspective
Consistent with Macroeconomic Framework
Donor Coordination
Getting Decisions in
the Right Hands
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Strategic Policy
Sector Envelopes
Program: Individual Ministers
Running Costs: Managers
OPERATIONAL
PERFORMANCE
Institutional Arrangements
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Legitimacy of policy
Predictability of funding
Delegation of authority to line managers
Responsibility for producing outputs linked
to outcomes
• Hard budget constraint -upwards and
downwards- during budget execution
• Independent external audit
Improving Technical Efficiency
More
“exit”
possibilities
Strengthen
“voice”
mechanisms
civil service
broader public sector
markets and the private sector
Improve “rulecompliance” and
“loyalty”
Getting the Best out of
Organizations
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Hard, but Predictable, Budget Constraint
Flexibility for Managers
Clarity of Purpose and Task
Ex-Ante Specification of Performance
Contestability
Evaluation and Audit
Exit Options
Voice
LINE ITEM
1. Input
Cash
2. Classification
Economic Type
3. Annual
PERFORMANCE BUDGETING
1. Input
Cash/Accrual
Output
Performance data/
indicators/standards
Authority
Accountability
Outcome
Clear Objectives
Indicators
Evaluation
2. Classification
Functional
Program
Organizational
3. Multi-year
Performance Based Budgeting
LINKING:
• Inputs
• Outputs, and
• Outcomes
Inputs
Resources used to produce the service:
• Hard budget constraint
– central budget
– user charging
• Full cost/Unit cost
– cash
– accrual
Outputs
The good or service produced:
• Who controls
• Who is accountable
• Measuring and reporting performance
Outcome
Purpose to be achieved by government
intervention (including production of
outputs):
• Who controls
• Who is accountable
• Measuring and reporting performance
Enabling Environment
for Public Sector
• Link Policy, Planning, Budgeting
• Restrain decision making:
– affordability
– cost, expected results
– evaluate
• Forum within which policies compete
• Capacity and willingness to reprioritize
and reallocate.