What is MTEF and Why It is Important?: A Brief Overview
Migara De Silva Senior Economist World Bank Institute 1
What is MTEF
?
MTEF is a whole-of-government strategic policy &
expenditure framework which balances what is affordable (in the aggregate) against policy priorities of the government. An MTEF consists of: ¾ ¾ ¾
Top-down resource envelop A bottom-up estimation of current & medium-term (usually a 3-5 year period) costs of existing policies Matching these costs with available resources. This should take place in the context of annual budget process
MTEF will shift the psychology of budgeting from “needs”
to an “availability of resources” mentality
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MTEF: Main Objectives Improve macro-fiscal situation ¾ Lower deficits, improved economic growth ¾ Rational approach to retrenchment and economic stabilization Improve the impact of government policy ¾ Better allocation of resources to strategic priorities between and within sectors Greater predictability of both policy and funding Improve Program Performance and Impact ¾ Shift bureaucracy from ‘administrative’ to ‘managerial’ culture ¾ Greater room for managerial flexibility and innovation 3
Macro-fiscal objectives: Two key areas to pay close attention to. ¾ Fiscal Sustainability which is forward looking: fiscal
balance, evolution of public debt, capacity of the government to finance its budget (borrowing etc.) requirements and refinance maturing debt, assess fiscal risks, etc. ¾ Fiscal Space: additional expenditure needed to promote development, stimulate growth, increase gov. revenue, etc. – create fiscal space to finance increasing demands (health, education, etc.) ¾ These two criteria are better incorporated in a multiyear framework as opposed to an annual budgeting framework. 4
MTEF: Improved Budget Process Strategic Policy priorities Top-down Budgeting:
Macro/fiscal framework Policy prioritization, alignment of policies and objectives under resource constraints Establish expenditure ceilings for sectors and agencies (mandatory and discretionary spending)
Bottom- up Budgeting:
Expenditure baseline (developed for each line-ministry to estimate fiscal impact of current government policies) Linking policies, resources by sector Impact assessment (systematic assessment of future cost of newly adopted policies 5
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Macroeconomic and Fiscal Envelopes Macroeconomic Estimates Revenue Estimates Fiscal Policy Expenditure Estimates (current services)
Expenditure Estimates (current law, normatives)
All in multi-year context
•Affordable/sustainable Fiscal Envelope •Monetary and Fiscal Policy •Debt and Deficits •Aid flows 7
Macroeconomic Framework Predictions of main macroeconomic indicators
(GDP, inflation, BOP, employment, unemployment, wages,.) Indicate available statistical data and are produced for a medium-term (3-5 years) framework Conservative estimates to avoid cut-backs during the fiscal year Take into account fiscal policy objectives and their impact on the economy (real and monetary sector) 8
Fiscal Framework Revenue and expenditure estimates are developed for two
scenarios (baseline estimates) – optimistic and conservative – with the former reflecting a high probability of macro stability and the latter a more uncertain macro environment where these estimates could be quite low. Revenue estimates (mainly taxes and other forms of revenue, grants, etc.) are done in line with the macroeconomic framework Deficit target is set at an appropriate level, taking into account the current macroeconomic situation (economic stability due to sound fiscal and monetary policy mix) Maximum space (fiscal space) for public expenditures is calculated
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High-level policy: Aligning policies & objectives under top-down resource constraints Fiscal Envelope Sectoral Resource Ceilings
Setting Strategic Policy Priorities Under Resource Limits
Ministry Resource Ceilings
(downsizing, or expansions)
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Establishing policy priorities and sectoral ceilings
Policy priorities (by sector) are decided by the
President/Cabinet Different expenditure growth rates are attributed to different priorities according to their importance (example, education an increase from 3% to 5% of the GDP, ect.) Sector strategies are formulated to link budget allocations with expected policy achievements at each sectoral level Sector spending: mandatory (usually defined by law: transfers, wages, etc.) vs. discretionary 11
Linking policy, resources, and means by sector Sector Policies and Objectives
Reconcile policy, laws, resource limits Program priorities relative to objectives
Sector programs
Assess modalities for objective Evaluate Production Function
Sector Budget Request Again, multi-year
Under ceiling Above ceiling 12
Bottom-up Budgeting Establish baselines: developed for each line-ministry to
estimate fiscal impact of current government policies; A baseline provides information on future costs of current government policies; Changes in policies are NOT taken into account; only the changes in cost drivers (prices, quantity, workload, ...) Alternative baseline scenarios for estimating budgetary impacts of policy changes could be developed
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Expenditure baselines for the sectors Baselines can and will differ from budget
allocations; They indicate whether or not policies are sustainable and are in line with the budget in medium-term; Line ministries will be responsible for preparing expenditure baselines; MoF provides the methodological support and reviews the expenditure baselines 14
Calculating the Baseline Policies have to be known and underlying
data available; Costing the inputs needed for performing activities and producing outputs; One-off effects (expenditures for activities that come to an end) should be eliminated; Already adopted new policies should be part of the baseline calculation 15
Calculating the Baseline: Some Key Issues Will government be able to sustain the current policy
also in the future? Take into account that costs for sustaining the current policy are rising rapidly
Example: increasing number of pensioners gaining benefits from the PAYG system rely on a decreasing number of employed population (reduction in population growth (such as in Japan)
Can the same outputs be achieved more economically? Example: introduce IT to reduce paper work, etc., 16
Stage 4. Reconciling resources with means
Sector Ceilings Sector Requests
Technical Assessment and Reconciliation
Vetting assumptions, policies, estimates Challenging modalities, production function Evaluate performance
Revised requests and/or decision papers 17
Stage 5. Reconciling strategic policy and means
Policy assessment and reconciliation
Revised Requests, Unresolved Issues
Policy official dialogue Modify baselines Finalize decisions
Budget Proposal 18
An Example Current Year (n)
2004
2005
2006
Plan for Future Years n+1
n+2
n+3
FY2005: o Total ceiling fixed o Finalize ‘x’ sect. ceilings and annual budget FY2006: o Total ceiling fixed o Finalize ‘x’ sect. ceilings and annual budget FY2007: o Total ceiling fixed o Finalize ‘x’ sect. ceilings and annual budget
FY2006: o Total ceiling fixed o Adjust ‘x’ sect. ceilings using budget margin FY2007: o Total ceiling fixed o Adjust ‘x’ sect. ceiling using budget margin FY2008: o Total ceiling fixed o Adjust ‘x’ sect. ceilings using budget margin
FY2007: o Total ceiling fixed o Set ‘x’ sect. ceilings + budget margin FY2008: o Total ceiling fixed o Set ‘x’ sect. ceilings + budget margin FY2009: o Total ceiling fixed o Set ‘x’ sect. ceilings + budget margin 19
