Ho, Ho, Ho……..Strategic Budgeting is here!
Posted by Martin Bowen
Straight from the North Pole a new, promising approach to budget planning is discussed by CARTAC advisor Martin Bowen that could help countries with limited resources and capacities get a grip on their public finances using elements of more advanced and complex reforms usually only seen in advanced economies.
Caribbean countries have been hit particularly hard by the downturn in US economic activity following the global recession. The resulting decline in revenues has seen a dramatic deterioration in the fiscal balances of many of these countries leading to significant increases in borrowing and debt. Countries have recognised that the level of their fiscal deficits and borrowing is not sustainable in the longer term and that correcting fiscal imbalances requires strong measures both on the revenue and expenditure side. In support, the IMF’s regional technical assistance (TA) centre in the Caribbean (CARTAC) has been providing extensive TA to member countries across a range of PFM areas including macroeconomic analysis, revenue forecasting, budget planning and preparation and treasury management.
In particular, over the last two years, CARTAC has assisted a number of countries to develop and implement revised budget planning processes that support both strengthened fiscal discipline and better value for money from the increasingly scarce budget resources available. The approach to reform has focused on getting the basics right first. Traditional approaches to budget reform – multiyear budgeting, output based and accrual budgeting – have been particularly difficult to implement in developing countries and the development landscape is littered with failed reform strategies. This post suggests that a major reason for this failure is that, too often, development partners have attempted to transplant developed countries’ sophisticated budget management processes and systems into countries with very limited resources and within unrealistic timeframes.
Even in developed countries with access to significant resources, such systems have taken many years to implement, and not always successfully. Indeed, some developed countries themselves see the challenge and complexity of say, implementing accrual budgeting as too great, preferring instead to adopt a modified accrual methodology. So to expect small developing and middle-income countries to implement such systems seems to be overly ambitious and more often than not doomed to failure. Where implementation fails, the effect can be to set back process reform many years.
This is not to say the design principles that underpin these sophisticated processes and systems are not important for improving budget management. Clearly they are. But with many CARTAC member countries having as few as two or three officials responsible for preparing the annual budget (and rarely more than five or six), the challenge for CARTAC advisors has been to design and implement budget process reform that adheres to the principles of good budget practice – strengthened fiscal discipline, allocation of resources to strategic priorities and operational efficiency of government programmes and services - but to do so in a way that is both consistent with the resource capacities of the local authorities and is sustainable over the longer term.
Approach and Methodology
CARTAC has responded to this challenge by designing a simple and pragmatic ‘Strategic Budgeting’ model that meets the key criteria of good budget practices outlined above but that is also achievable in the context of the local and technical assistance resources available.
The model involves the implementation of a simplified results-based medium-term budget planning framework to underpin annual budget preparation. The key elements of are:
- anchoring the budget process within a realistic medium-term fiscal framework (MTFF);
- the application of a rolling three-year budget and forward estimates as the basis of an affordable fiscal framework; and
- the development of a simple program budgeting structure for preparing, evaluating and approving budget spending requests (and savings options) designed to encourage a greater focus on the objectives, priorities, results and value for money of public spending.
Rolling Forward Estimates
Under the rolling forward estimates approach, MDAs prepare estimates of expenditure for the budget and two forward years based on current approved programmes and policies only. Any adjustments to the estimates must be approved by the government (i.e., cabinet) prior to the submission of the draft estimates to parliament.
Once approved, the estimates establish ‘hard’ budget and forward estimates ceilings for each MDA. The forward estimates ceilings ‘roll forward’ to become the baseline for the following year’s budget (and forward estimates). Again, any adjustments to the ‘rolled forward’ ceilings must be approved by cabinet. The aim is to assist the government to prepare a budget that meets, as far as possible, its key policy priorities, but to do so in a manner that is consistent with a responsible and affordable fiscal framework.
The ‘rolling’ forward estimates approach also involves the introduction of a number of rules to reinforce the fiscal discipline that underpins this approach including:
- all new spending request must be supported with detailed information on the costs, objectives, need, urgency and planned results of the additional spending;
- MDAs are expected to manage their work program in accordance with their approved hard budget ceiling;
- With-in year ‘supplementary estimates’ will not be approved unless such expenditure is considered both urgent and unforeseen, and supported with full offsetting savings;
- MDAs are expected to respond to cost pressures on any one line item by reallocating funds from other line items without recourse to additional funding, thereby eliminating the opportunity for incremental adjustments to be agreed between line Ministries and the Ministry of Finance (MOF), another behaviour that leads to ‘budget creep’.
In addition to the regular budget call for spending, the model requires all MDAs (and it is critical that there are no exceptions to ensure that the process is effective) to identify potential savings equivalent to a pre-determined percentage (determined by cabinet) of their baseline estimates. This process requires MDAs to examine all aspects of their operations with savings options expected to be found from (i) identifying efficiency measures that produce real and verifiable savings and (ii) abolishing and/or reducing low priority or poor performing programmes.
The aim is to provide the cabinet with a ‘menu’ of savings options from which it can choose (based on its social and economic policies) to meet its fiscal objectives, including, if required, to fund new high priority spending proposals. Developing savings options in this way is intended to avoid recourse to across the board savings, the consequences of which are well known, and place responsibility for deciding which programmes and services should be reduced or abolished back with cabinet.
The model also involves the design and implementation of a simple results-based budgeting methodology which requires MDAs to present their budget in a ‘program’ format with each program having, inter alia, a defined objective and specified performance indicators of outputs and outcome. The additional reporting requirements of the proposed methodology are not intended to be onerous. Program structures generally broadly align with existing organisational structures and/or key functions. Program objectives and planned results should align with relevant national strategic goals and sector strategies where these have been developed. (Where these have not been developed, the program budget can be used to support the development of such documents.)
While the approach has been deliberately designed to be simple, it presents essential information on the objectives, strategies and results of government activities and services that will inform decision making and scrutiny. It is important to note that budget execution will continue to be along economic/line item categories of expenditure.
Supporting Budget Instructions
Revised budget call circulars will need to be prepared (with TA) to support the new processes including template forms and instructions for the presentation of draft estimates in a program format, new spending requests, savings options and proposed new revenue measures. In addition, a number of analytical tools have been developed to assist budget analysis and the presentation of information to ministers and parliament including a Budget Ceiling Reconciliation Table that tracks changes in the budget from one budget (and the forward estimates) to the next, a Budget Scorecard that monitors and highlights the fiscal implications of each budget decision approved by cabinet during the annual budget cycle and after the annual budget has been approved, and a simple outline for a cabinet briefing note summarising the MTFF.
Sequencing of the Reforms
The TA for implementing the ‘strategic budgeting’ model is built around three short (usually one-week) missions to the country in question in the first year, with subsequent TA determined based on the results and needs of the country. The first mission involves a review of existing processes and procedures culminating in the presentation of draft findings and recommendations to senior MoF officials, followed within two weeks by more a detailed draft report.
Following the agreement and/or amendment by the authorities to the draft recommendations, a second mission is conducted in which the detailed budget circulars, forms and instructions are prepared and/or refined. At this stage initial awareness raising through seminars on the new processes are conducted with MDA permanent secretaries, and other key financial actors.
Following the distribution of the first budget call circular, a third mission is undertaken in which one-on-one workshops are conducted with MDAs. The purpose of the workshops is to explain the concept and requirements of the rolling forward estimates approach, including importance of adherence to budget and forward year ceilings, as well as provide technical support to MDAs to develop draft program/performance structures including program objectives, strategies and performance indicators. These are linked back to country development plans and sector strategies (where available). Bearing in mind the need to build longer-term sustainability, the workshops are co-facilitated by MOF budget analysts.
It is generally recommended that the implementation of the reforms be conducted over several budget cycles. Sequencing varies from country to country depending on the existing processes and capacities. Typically however, implementation commences (or runs in parallel with) a review of the budget classification/chart of accounts, followed by the development of baseline three year budget and forward estimates, the development of a simple program performance structure (usually aligned with existing organisational and functional structures) that establishes program objectives priorities and performance indicators aligned to existing national goals or sector strategies where available and, lastly, monitoring and reporting program results against the key performance indicators. Where capacity exists, the preparation of three-year budget estimates can be undertaken concurrently with the development of the program budget structure.
Progress to Date
The concept of ‘strategic budgeting’ was first introduced to CARTAC countries in 2008/09. The first TA was provided to Grenada in 2010. In 2011, a further nine countries received TA on this methodology. Of these 10 countries, five are now in the process of implementation and the remaining countries have indicated their intention to adopt the new processes from their next budget cycle.
A recent CARTAC conference indicated there was broad acceptance and support for the strategy outlined above. Feedback from our local partners highlights the simplicity and practicality of the approach and the ability to implement the recommendations immediately with existing resources and minimal TA.
From a donor perspective the approach has the benefit of both being low-cost and sustainable. It does not require extensive long-term in-country support and can be adapted to existing financial management systems or manual budget preparation systems. As it is based on the key principles of effective budget management, scope, comprehensiveness and sophistication can be broadened as countries gain experience and greater analytical resources.
The model is intended to strengthen fiscal discipline (by utilising hard budget constraints, and forward year expenditure ceilings) as well improving the link between policy priorities and budget allocations. Its increased focus on (key) results is intended to strengthen accountability and value for money of government programs and services. It has also improved transparency and accountability by providing ministers, cabinet, parliament and the public with key information and analysis to inform budget decision making and scrutiny, and encourages sustainable medium term fiscal policy setting.
However, the approach is not a ‘magic bullet’. It requires ownership at both the technical and political level, which of course is true of any PFM reform. After all, the budget is, at the end of the day, an intensely political process. The current environment requires governments to make difficult policy (and political) choices if they are to regain fiscal sustainability. Strategic budgeting is intended to provide the basic tools that can help them achieve that goal.