Towards Better Public Expenditure Management: Experience Across Asia

Posted by Suhas Joshi  and Greg Smith

Despite heavy snowfall, government officials from mostly warm countries landed in Seoul for a high-level conference on how to improve public expenditure management (PEM) in the region. The event convened member nations of the Public Expenditure Management Network in Asia (PEMNA). The network, launched in June 2012 in Bangkok, provides opportunities for practitioners across the region to share knowledge and experiences in implementing PEM reforms. PEMNA is modeled on the PEMPAL network that has been operating successfully in central and eastern Europe for several years.

PEMNA comprises two communities of practice (CoPs). The budget CoP is managed by the World Bank, and the Treasury CoP by the IMF. PEMNA’s Steering Committee provides strategic oversight and governance. The Korea Institute of Public Finance (KIPF), a research and training institute associated with the Korean Ministry of Strategy and Finance, provides the secretariat for PEMNA and the two CoPs, and is supported in its work by development partners including the World Bank, AusAID, the IMF, and the OECD.

The demand-driven nature of the network allows members to focus dialogue on solving practical implementation issues.  By sharing common experiences and benchmarking performance with peers, members are able to deepen their understanding of the reform process. Across the budget and treasury areas members recognize that they cannot rely on theory alone and that the cross-fertilization of ideas is essential for the successful design and implementation of reform.

MTEF: Better Than Sliced Bread?

Posted by Richard Allen

Richard Hemming is a co-author of the World Bank’s recently published Beyond the Annual Budget: Global Experience with Medium-Term Expenditure Frameworks. In this conversation with Richard Allen, he talks about the book, the analytical work carried out, and the policy implications.

RA: You are one of the authors of this book. What was your specific role in preparing it?

RH: The team that worked on the book was large. Jim Brumby was the team leader and I was the lead consultant. We were the only people involved in all aspects of the work for the duration of the project. My main roles were to provide guidance on the overall approaches to the book’s analysis, to contribute to some of the analysis, to coordinate the drafting of the book, and to write a significant part of it. The only two areas in which I was not extensively involved were the detailed econometric analysis, for which we put together a really accomplished team, and the assessment of Bank advice on MTEFs. Overall, the book should be viewed very much as a team effort.

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.  

Budget Institutions Supporting Fiscal Consolidation

Posted by David Nummy

 
Countries around the world are struggling to devise the policies that will best address the challenges resulting from the financial crisis. In a book to be issued by the Fiscal Affairs Department of the International Monetary Fund, the case is made that key budget institutions will be necessary to both devise and execute those policies.

Previewing the book that will be issued later this year, Marco Cangiano kicked off the International Consortium on Governmental Financial Management (ICGFM) fall season by presenting on Budget Institutions for the 21^st Century at the monthly DC Forum held at the Carnegie Endowment for Peace in Washington, DC on September 7, 2011. Mr. Cangiano, an Assistant Director of the IMF Fiscal Affairs Department, outlined ten budget institutions that will be key to countries around the world in addressing the challenges of dealing with the post-financial crisis environment in the three typical phases of a fiscal consolidation (but the same would apply in designing a stimulus package): understanding the fiscal challenge; developing a strategy; and implementation of the strategy though the budget process.

Forward Estimates: Rocking or Rolling?

 

Posted by Kris Kauffmann

In my view, it is now well established that using rolling forward estimates is a central element to the successful implementation of any Medium Term Expenditure Framework approach. By establishing the future costs of existing policies, for say 2-3 years after the budget, this provides a foundation for future budget planning processes, where the focus shifts to the costs verses benefits of changing those existing policies and their established costs. Multi-year estimates also support longer term macro fiscal as well as managerial planning. In recalling Australia’s MTEF reforms and describing the impact of rolling forward estimates, a senior official is quoted as telling the World Bank that “If you had to pick out the one thing that we have done above all others, this reform would be the most dramatic change.”

Yet we often see in developing and emerging market countries that while government may have adopted what appears to be forward estimates in their budget processes, they have not been able to achieve the dramatic changes in budgeting described above. It is a characteristic of these countries that the forward estimates, while published in the previous budget, are not accepted as being highly relevant for future budget processes.

Kazakhstan Hosts a Regional Workshop on Macro-Fiscal Forecasting and Medium-Term Budgeting

Posted by John Zohrab, FAD regional PFM advisor for Central Asia

 
The IMF’s Fiscal Affairs Department (FAD) and the Kazakhstan Ministry of Economic Development and Trade (MEDT) recently jointly hosted a regional workshop on macro-fiscal forecasting and medium-term budgeting issues. It was co-financed by the Government of Japan, through its technical assistance program Safeguarding Financial Resources in Central Asian Countries (JSA Program), and the MEDT.

The workshop took place in Almaty May 26-27, 2011. Representatives from Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Russia, Tajikistan, Turkmenistan and Uzbekistan participated in the workshop. They were mainly department and division chiefs from ministries of finance, ministries of economy, and economic research institutes under the ministries.

Conference on Fiscal Consolidation and Budget Institutions in South Asian Countries

Posted by Tej Prakash

 
 
The IMF’s Fiscal Affairs Department (FAD) and the Indian National Institute of Public Finance and Policy (NIPFP) recently hosted a joint conference on fiscal consolidation and strengthening of budget institutions in South Asian countries. The main “institutions” discussed were fiscal responsibility frameworks, fiscal councils, and medium term budget frameworks.

The conference took place in New Delhi from April 21-22, 2011. Apart from senior budget officials and policy makers from the central and state governments of India, representatives from Bangladesh, Sri Lanka, Nepal, Bhutan, Afghanistan and Maldives participated in the conference.

Earmarking in Central American Countries

Posted by Juan-Ramon Ruiz

 
Earmarking is a very common PFM practice in Latin American countries. In Central America it has caused extensive problems for the management of public resources. Earmarking is the practice of assigning revenue, generally through statute or constitutional clauses, from specific taxes or general revenue, to specific government activities or areas. Earmarks are often defined as fixed percentages of general revenues or GDP. In Central America earmarks are used to finance areas like education, road maintenance and sports, but also to assign resources to autonomous entities, such as the judiciary, universities and local governments. The base used to determine earmarks in these countries is usually linked to internal revenues, or the amount collected from certain taxes, as the Value Added Tax,  taxes derived from petroleum, sin taxes (on alcohol and tobacco), or gaming taxes. The table below presents an overview of important earmarks in a number of Central American countries, including the share of the budget which is determined by earmarks.   

Now that’s Fiscal Policy, Mate!

Posted by Jason Harris[1]

Australia has one of the strongest fiscal positions in the developed world, with the budget projected to return to surplus in 2012, and net debt projected to peak at 6% of GDP. [2] The relative consensus between the main political parties on the long-standing medium-term fiscal strategy has played a key role in delivering these outcomes. The strong starting position ahead of the global fiscal crisis has given Australia the flexibility to engage in relatively aggressive stimulus policies, without endangering long-term sustainability.

A New PEFA Drill-down Diagnostic Emerges

Posted by Holger van Eden and Duncan Last

The World Bank recently published a diagnostic framework for assessing public investment management systems. The diagnostic can be seen as a “drill-down” exercise building on the PEFA (Public Expenditure and Financial Accountability) framework, which has become the main PFM diagnostic in the developing world. While PEFA gives a general overview of the strengths and weaknesses of the PFM system of countries, it often provides insufficient guidance for the design of concrete TA reform programs. Such limitations are evident, for example, in the procurement area which is covered in the PEFA by just one indicator. It is also true for many other parts of the PFM system such as MTEF, treasury management, and internal audit, where further work is required, post-PEFA, to identify specific shortcomings in the existing sub-system that need to be corrected. Of course, the PEFA was always intended as broad diagnostic. The question is should further in-depth diagnostics be developed on the basis of indicator systems or not. Indicators always give only a partial impression of processes and institutions, and can be quite cost intensive to monitor in a consistent way across countries. As one drills down into institutional architecture differences between countries are usually magnified. Descriptive analysis could perhaps provide a richer basis for reform planning and be more focused on the country in question. On the other hand indicator systems have obvious benefits for cross-country analysis, and identifying good practice approaches.

Budget Reforms in Uganda: From Vision to Reality - A Personal Account

Posted by Florence Kuteesa[1]

When the Ugandan ministries of Finance (MoF) and Planning and Economic Development (MPED) were merged in 1998, a new department, Budget Policy and Evaluation, was created within the Budget Directorate. The department was mandated to coordinate the budget preparation process, and also introduce output-oriented budgeting within a medium-term perspective. I was appointed as the head and charged with the onerous tasks of establishing the new department and coordinating the desired reforms. Coming from the former MPED and with limited knowledge of the operations of the MoF, I was initially skeptical about the assignment. However, I chose to take “the bull by the horns” and enthusiastically took up the assignment.

I started from a humble beginning with a team of eight reform-minded staff, deployed from both ministries. This “dream team” (as it was later called) was comprised of individuals who had extensive technical competence and exposure in budget matters. The team was therefore eager to deal with the numerous challenges, including: inadequate coordination of budget processes within MoF and line ministries, and overly lengthy line-item based budget discussions. More often than not these processes complicated the decision-making process.

Sustainability Reporting: Can the Triple Bottom Line Thrive in the Public Sector?

Posted by Dimitar Vlahov

It’s common knowledge that today’s global economy is facing multiple challenges and imbalances. From the recent financial crisis, to concerns about distribution of wealth, to the ever-more-dangerous clashes between economy and environment, there are many reasons to pause and examine the whole system. Some experts have suggested that a large chunk of this ill condition can be attributed to the same cause – the problem of bad performance measurement. Businesses and governments alike, the argument goes, have been employing short-sighted measures of success that do not account for all medium- and long-term consequences of their organizations’ activities. Therefore, they need to expand their reporting to include social and environmental indicators of performance, and not just financial ones. With a better warning system, many of the present-day issues could be mitigated or avoided altogether. This post serves as a basic introduction to this approach and its main applications to date.

Prioritizing PFM Reforms: A Robust and Functioning Accounting and Reporting System is a Prerequisite

Posted by Sanjay Vani, Lead Financial Management Specialist, World Bank

Much has been written about prioritizing and sequencing PFM Reforms, including Allen Schick’s often-quoted 1998 article, Why Most Developing Countries Should Not Try New Zealand's Reforms.  While working on the OECD-DAC Report on the Use of Country Systems in PFM a year or two ago, I was struck by how much more we know about what does not work than about what does work. For example, almost all PFM professionals would agree that introducing a medium-term budget formulation or performance budgeting in an environment of poor budget execution is not likely to be effective; and attempting performance audit without agreed performance benchmarks and proper systems to record and track performance is equally unlikely to be effective.

Here I would like to develop a hypothesis that, I am convinced, deserves serious attention from the community of PFM professionals. The hypothesis is this:  NO significant PFM reforms are likely to succeed unless a robust and functioning accounting and reporting system is in place.  In other words, a robust and functioning accounting and reporting system is a prerequisite to other PFM reforms.

Maintain Fiscal Support, but Devise Credible Exit Strategies, Says the IMF's Fiscal Monitor

Posted by Michel Lazare.

On November 3, 2009, the IMF published the second issue of its Cross-Country Fiscal Monitor.

This Fiscal Monitor stresses that while, fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014.

To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade.

This is not a trivial amount of fiscal consolidation to say the least. The FIscal Monitor, however, considers that this could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

Most PFM experts would probably agree that such a sizable fiscal consolidation over such a long period also requires a sound PFM system and pretty solid fiscal institutions.

Performance-Based Budgeting in France: An Evaluation by Parliament

Posted by Franck Bessette.

 
  
  
In France, the parliament was the initiator and driver of performance-based budgeting, introduced by the organic by-law of  August 1, 2001 (the so-called Loi Organique sur les Finances Publiques -- LOLF) [for more details, see in particular this previous blogpost by Bill Dorotinsky  and its embedded PowerPoint presentation by Phillipe Debrose] and fully applied from January 1, 2006. This was a managerial “big bang” which reorganized completely the budget structure and public accounting (accrual based accounting was introduced), defined new players (program managers), new chains of decision, and for every program a series of objectives and indicators.

After three years of complete implementation, the Economic and Finance Committee of the National Assembly (Assemblée Nationale) has evaluated this performance-driven budgetary reform and made recommendations to further improve implementation. A general report followed by annexes for individual programs was recently published [click here for a copy of the report ]

Incorporating Budget Programs in the Government Accounting System - The case of Namibia

Posted by Dimitar Radev [1].

Many countries do not fully benefit from all the possibilities of program budgeting in terms of budget credibility, expenditure control and public resource allocations. One common reason is that while they prepare the budget based on programs, they do not organize their accounting and expenditure control systems on a program basis. There is little value for these countries in further developing program budgeting if spending cannot be accounted for, reported, and controlled according to programs.

Namibia presents a good example of how such an issue can be successfully addressed.

Medium-term Expenditure Frameworks for Central America

Posted by Teresa Dabán

Since late 2007, the Council of Ministers of Central America, Panama and Dominican Republic (COSEFIN) is supporting the adoption of Medium-term Expenditure Frameworks (MTEF) in the region. To that end, COSEFIN established in early 2008 a regional Working Group on MTEFs issues. The Working Group is composed of high-ranking officials from the budget and planning areas and has been granted autonomy in developing its strategy and work agenda. Since its inception, and with the assistance of the Fiscal Affairs Department of the IMF, the Working Group has made important progress. The chief achievemens include: (i) identification of the main challenges for the adoption of MTEFs in the region; (ii) delineation of country-specific strategies for implementing an MTEF; and (iii) outlining of a regional strategy to increase awareness of the benefits of MTEF and monitoring their implementation in the region. 

La mise en œuvre des CDMT au Niger

Par Ian Lienert.

Les pays à faible revenu doivent-ils adopter des CDMT ? Répondons à cette question par une métaphore : le train a déjà quitté la gare. Il ne s’agit plus de savoir s’il convient d’adopter des CDMT, mais plutôt de préciser les mesures que les dirigeants et les gouvernements des pays en développement devraient prendre pour améliorer ceux qui sont déjà en place.

Le 26 mars 2009, le Ministère de l’Économie et des finances (MEF) du Niger a accueilli à Niamey un séminaire sur les cadres de dépenses à moyen terme (CDMT). Plus de 70 responsables de divers ministères ont pris part à cette rencontre qui avait pour principaux objectifs : 1) de partager les expériences internationales en matière de CDMT ; 2) d’informer les participants de la situation au Niger, avec notamment la préparation des trois « CDMT sectoriels » pour l’éducation, la santé et le développement rural ; et 3) débattre des modalités qui permettront à l’administration et au gouvernement de faire avancer le processus des CDMT au Niger.

Implementing MTEFs in Niger

Posted by Ian Lienert.

Should low-income countries adopt MTEFs? The answer to this question is that “the train has already left the station”. The question is no longer whether MTEFs should be adopted, but rather how officials and governments of developing countries should take further steps to improve the operation of existing MTEFs.

Lessons from Successful Fiscal Consolidations

posted by Richard Hughes

With budget discussions in advanced countries focused on how much and how quickly governments can stimulate their ailing economies, there has been little talk of the long (or even medium) term in fiscal circles lately.  But when the dust eventually settles on this period of unprecedented economic turmoil, these countries will find themselves facing the same demographic pressures that dominated the fiscal agenda before the crisis – and many will be doing so from a much weaker fiscal position.

So the fiscal policy debate will eventually return to the subject of fiscal consolidation and how to go about returning the public finances to a position of long-term sustainability.  Fortunately this time around, countries seeking guidance on how to deliver a successful and durable fiscal consolidation can look to a number of rigorous studies on the subject that came out shortly before the onset of the current crisis.  Two of the more exhaustive examinations were the OECD’s 2007 Fiscal Consolidation: Lessons from Past Experience which became a chapter in their June 2007 Economic Outlook and the European Commission’s Lessons from Successful Fiscal Consolidations which formed a section of their 2007 Public Finances in EMU report.  This posting provides a summary of their findings.

Should Budgetary Revenue Projections be Deliberately Pessimistic?

Posted by Ian Lienert

When budget revenue projections are conservative, governments receive pleasant surprises – they benefit from more tax and nontax revenues than planned, which allows debt to be reduced faster than planned or, alternatively, expenditure to be higher. In contrast, if budget revenue projections are too optimistic, it is difficult to cut back expenditure, at least in the short-term. This can result in public debt increasing to a level higher than desirable, assuming market deficit-financing is available. In countries where debt market financing is unavailable, there is likely to be an undesirable build-up of payment arrears.

An IMF Occasional Paper published in 2007 examined the budget forecasting experience in eleven OECD countries. It found that in 8 of the 11 countries, revenues were underestimated during the late 1990s and early 2000s. Canada was the country that most strongly underestimated tax and nontax revenues. The countries for which revenue projections erred on the optimistic side during the observation period were France, Germany and the United States. It may be concluded that OECD countries leant towards revenue projection conservatism during this period.

In chapter IV of Occasional Paper No. 258, an IMF staff team first examined the institutional arrangements for budget forecasting processes in Australia, Canada, France, Germany, Italy, Netherlands, New Zealand, Sweden, Switzerland, United Kingdom and United States. The study then analyzed forecast errors -- forecasts minus outcomes -- for various macroeconomic and fiscal variables. The statistical analysis was generally conducted for a nine year period, from 1995 to 2003.

Concerning institutional aspects, the study noted that, whereas budget projections are prepared by the Ministry of Finance (or the equivalent) in all countries, the degree to which the forecasting process is formalized varies. Some countries prepare stylized forecasts with some cross-checks with sectoral and revenue experts (e.g., Sweden, Switzerland). Others use detailed model-driven processes maintained by technical experts (e.g., Australia, France and the United States). Some countries reassess their fiscal forecasts after consulting with the private sector (e.g., Australia, Canada). In the United States, the Congressional Budget Office (CBO) plays a similar role – it provides a view independent from that of the “ministry of finance” 1/. In the case of the CBO, there is a mandate to prepare 10-year projections of major fiscal variables based on current legislated policies. A few other countries have established congressional or parliamentary budget offices (see, for example, the blog of July 21, 2008, on the recent establishment of such an office in Canada; http://blog-pfm.imf.org/pfmblog/2008/07/canada-creates.html ).

With regard to revenue forecasting, Canada stands out as the country with the most consistent and largest underestimation of budget revenues. Canada’s GDP forecasts were deliberately conservative during 1995-2003: actual economic growth was on average ½ percentage point higher than that assumed in budget projections. Inflation (the GDP deflator) was also underestimated, by 0.2 percentage points. All tax and nontax revenue components were underestimated (the forecasting records of four different taxes were analyzed).

Statistical tests were conducted to detect whether, during the small sample period, there were systematic tendencies to underestimate nominal GDP, total revenues and nontax revenues during the 1990s and early 2000s. This analysis revealed that Canada, New Zealand, Sweden, and the United Kingdom all exhibited a consistent bias in either the macro forecasts or for aggregate fiscal revenues. In all countries, errors in output projections tend to explain a substantial share of revenue errors. Canada stood out as the country where a number of small, unidirectional forecast errors led to the overall bias towards conservatism in revenue projections.

For full results, see the “Budget Forecasting” chapter in IMF Occasional Study 258 Northern Star: Canada’s Path to Economic Prosperity, published in 2007 and available for purchase – see http://http://blog-pfm.imf.org/pfmblog/2008/07/canada-creates.html. The chapter is based on a more comprehensive study, IMF Working Paper/05/66, How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries? prepared by Martin Mühleisen, Stephan Danninger, David Hauner, Kornélia Krajnyák, and Bennett Sutton in March 2005 (see http://www.imf.org/external/pubs/cat/longres.cfm?sk=18080.0). The preparation and publication of these studies were strongly supported by Canadian officials.

Blog comments on the study

The research is solidly-based and includes a battery of statistical tests for errors in macroeconomic and fiscal variables; it also discusses the interaction between forecast variaiable. Although the study is now beginning to become a little dated, it indicates that the majority of selected OECD countries leaned towards pessimism in their budgetary revenue projections. However, it is difficult to generalize this conclusion for the 11 countries examined. The reasons are:

• Limited time series and lack of strong results. The sample period is less than 10 years. Also, statistically significant results that indicate a forecasting bias towards conservatism were obtained for a few countries only.

• Buoyant economic growth in sample period. The late 1990s and early 2000s was characterized by a period a buoyant economic growth. This resulted in both growth and budget revenues being higher than assumed. If the time series were to be updated to include the worldwide weakening of economic growth in 2008, for example, the results would mostly change somewhat.

• Data caveats. The study acknowledges the various data caveats needed for postmortems of forecasting errors. Both “budget projections” and “actual” outcomes can be revised, depending on each country’s budget and statistical reporting processes. These impinge on the empirical analysis. For example, supplementary budgets that are substantially different from initial budgets adopted by parliament can materially affect the entire analysis.

• Country specific factors play an important role in these results—but these can be changed over time. OECD countries periodically review their projection methods, including ways of assuring forecast quality (the study examines relevant issues).

• For example, the “prudence factor” and budget contingency reserves affected the results for Canada. During 1994 to 1998, prudence was explicitly incorporated into the Canadian forecasts by deliberately adopting budget forecast assumptions that were more pessimistic than private sector forecasters. During these years, the Department of Finance based budget projections on lower economic growth and higher interest rate assumptions than the average of private sector forecasters (on which Canada relies more heavily than other countries). This practice was helpful for contributing to the reduction in public debt, which had built up to worrisomely high levels in the early 1990s.

• Is revenue forecasting pessimism desirable? The results for Canada suggest that GDP and revenue forecast pessimism is desirable when a strong fiscal adjustment and reduction in debt is necessary. However, Canada stopped deliberately making conservative model-based forecasts after the worst of the fiscal crisis of the early 1990s was over. Clearly there are limits to which a strong ministry of finance can continue deliberate revenue projection pessimism, especially given that, in annual budget negotiations, spending ministries are likely to be more aggressive in obtaining the available “fiscal space” to maximize their budget revenues. Also, in countries where legislatures have considerable scope for changing the executive’s draft annual budget – strong amendment powers – parliament/Congress may increase budget expenditures if it suspects that the executive has deliberately been pessimistic in its revenue projections. When these tradeoffs occur, there may be a case for the ministry of finance to prepare realistic, rather than pessimistic, GDP and/or revenue projections. Clearly the case for realistic forecasts is stronger in countries whose fiscal and public debt positions are sufficiently comfortable.

1/ The “ministry of finance” function in the United States is performed by an Office of Management Budget (for spending projections) and a Department of Treasury (for revenue and debt projections). These two executive departments are complemented by a Council of Economic Advisors – the trio agrees on macroeconomic projections and forecast assumptions.

2/This is the reason why Japan was excluded from the sample. In the late 1990s, Japanese fiscal policy was implemented largely through supplementary budgets, whose projections differed significantly from those in initial budgets (because of intentional policy changes). In view of Japan’s fiscal policy responses during the Asian crisis (in particular), it would be very difficult to compare Japan’s forecast errors with those of the other countries, where supplementary budgets were admittedly adopted, but had a lesser budgetary impact.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

Strengthening Political Economy Analysis to Address the Resource Curse

Posted by Teresa Dabán

photo by Ellie Sandercock (CC)

The chances of resource-rich countries to avoid the resource curse hinge on the existence of sound institutions. While several initiatives have emerged to promote the transparency and sound management of natural resource revenues (NRR)— including IMF’s Resource Revenue Transparency Guide and the EITI, there is still a need to develop an overall framework for the assessment of NRR-related political economy and governance challenges. Against this background, the Bank has launched a project to develop a framework to assess and promote good governance in each of the stages of the “value chain” of NRR, from their extraction to their use, and incorporate political economy issues in the dialogue with resource-rich client countries. To refine such a framework, and concretize the timeframe for its implementation, the Bank held a workshop on October 16, 2008. The workshop revealed that the adoption of the usually proposed mechanisms to mitigate NRR-related governance challenges raises complex issues.

A Step Toward Multiyear Budgeting in Central America, the Dominican Republic, and Panama

by Teresa Dabán

In early August 2008, Central American countries held the First Meeting of the Working Group (WG) on Medium-Term Expenditure Frameworks (MTEFs). Discussions focused on the benefits, challenges, and strategies for the adoption of an MTEF in the region. The WG saw the desirability of adopting such frameworks, in a gradual and country-specific way, and decided to prepare a regional paper to outline a strategy for their adoption. The Fund and donors are actively supporting the Central American region in this effort.

Whither Medium-term Expenditure Frameworks (MTEFs)?

By Richard Hughes and Richard Allen

On Thursday, 2 October 2008 the IMF’s Fiscal Affairs Department hosted a half-day seminar on Medium-term Expenditure Frameworks: Lessons from Success and Failure in Advanced and Developing Countries.  The seminar was the first in a series that FAD will be hosting on the subject.  It was chaired by Marco Cangiano (IMF, Fiscal Affairs Department) and divided into three sessions (Download mtef_seminar_agenda.doc ):

1. A presentation by Richard Hughes (IMF, Fiscal Affairs Department) the lessons from his experience with MTEFs in advanced countries (Download rhughes_mtef.PPT);
2. A presentation by Dr. Salvatore Schiavo-Campo (World Bank) on the lessons from experience with MTEFs in developing countries (Download rsc_mtef_presentation.doc) ; and
3. A panel discussion on how to make MTEFs more credible.

This posting provides a summary of the presentations and discussion.

Implementing MTEFs in Countries with Different Legacy Systems

Posted by Ian Lienert

On September 24, the PFM blog drew attention the important role that forward estimates play in developing medium-term expenditure frameworks (MTEFs). Specific reference was made to the proceedings of CABRI’s annual seminar in December 2007, under the title: "Are We Asking the Right Questions? Embedding a Medium-Term Perspective in Budgeting" (Download cabri 2007.pdf). Three papers in the same publication examine the influence of legacy systems on MTEFs in African countries.

Two papers examine the PFM legacies in francophone and anglophone African countries—for Burkina Faso and Kenya respectively. A third paper, authored by myself, contrasts the role of legacy systems on MTEFs in French and British-influenced countries. The paper concludes that while it is necessary to pay attention to inherited institutional and organizational arrangements for PFM, there are other, more fundamental, constraints that thwart the effectiveness of the MTEFs that have been introduced in Africa.

Forward Estimates: the Most Fundamental Tool of Medium-Term Budgeting

Posted by Marc Robinson

CABRI has just published the proceedings (Download cabri 2007.pdf) of a seminar on medium-term budgeting held in Ghana last December, under the title Are We Asking the Right Questions? Embedding a Medium-Term Perspective in Budgeting (Download cabri_2007_ch1.pdf) . It’s an interesting read.

I was particularly struck by comments in the overview paper—by Alta Fölscher from South Africa—on the fundamental importance of good forward estimates for successful medium-term budgeting. Alta stresses that a fundamental obstacle to the success of MT budgeting in African countries has been that:

the quality of forward estimates is poor. They consist far too frequently of the proposed budget for the first year of a multi-year framework, followed by inflation adjusted projections of cost for the outer year ...they pay little attention to, for example, the likely phasing of policy implementation, changes in demand that will effect spending unevenly or the impact of once-off capital spending on the base-year estimates. ...A key aspect of embedding a medium-term perspective therefore is deciding what the rules are for rolling over and adjusting and determining the forward estimates.

She is spot on – as I’m sure that anyone who has looked at a representative sample of MTEFs from around the world can attest.

Hype and Reality: "The" Medium-term Expenditure Framework in Developing Countries

Posted By Salvatore Schiavo-Campo, LL.D., Ph.D.

A recent paper by Salvatore Schiavo-Campo, presented at the East-West Center and Korea Development Institute Conference on “Sustainability and Efficiency in Managing Public Expenditures”, Download MTEFpaperFinal.doc assesses MTEF implementation in developing countries over the last decade. After tracing the conceptual roots of multiyear expenditure programming to the “High Development Economics” of the 1950s and 1960s and to the more recent antecedents—particularly Australia’s “forward estimates”—the paper notes that very few of the prerequisites for effective MTEF implementation are present in developing countries. The evidence is now conclusive that pushing the MTEF as fashionable “cutting edge”, “state of the art” “best practice”--in disregard of institutional considerations and capacity limits--has produced fiscal Potemkin Villages and mountains of red tape with no improvement in macroeconomic balances, financial control and predictability, or efficiency of allocation and use of public funds.

A scorecard of the last decade does suggest three positive impacts of attempts at MTEF introduction: awareness of the need to look beyond the immediate budget issues; some encouragement of intra-governmental coordination; and greater orientation toward the results of spending rather than solely the process. It also carried three negative impacts: little or no local ownership; damaging distraction from basic PFM problems; and heavy strain on limited budgeting capacity.

However, a suitable medium-term fiscal and expenditure perspective remains essential to frame annual budget preparation. Thus, and related to the disregard of institutional capacity, the core of the problem so far has been the failure to make distinctions between different MTEF variants. Unbundling the MTEF leads the paper to advance operational recommendations on which variant is suitable to different country circumstances, and specifically what gradual steps can be taken to produce, in time, a robust medium-term programmatic frame for sound budgeting.

Medium-Term Expenditure Ceilings: are they an Essential Part of Medium-Term Budgeting?

Posted by Marc Robinson

We often hear it said that medium-term expenditure ceilings for ministries or sectors are an essential part of good medium-term budgeting. Spending ministries, it is said, know what budget funding they will receive not only this year, but next year and the year after. The funding certainty this will give them will improve their planning and management, thereby boosting service delivery. Such increased funding certainty, the line runs, is the #1 objective of medium-term budgeting.

This is, with respect, wrong. Multi-year funding certainty for spending ministries is something which only the most advanced countries can aspire to. And while reduced funding uncertainty is a goal of medium-term budgeting, it is not the most fundamental goal.

The Road Less Travelled to an MTEF

Posted by Ismail Manik, consultant, World Bank Institute*

The case of Tajikistan is illustrative of a not too ambitious yet well-sequenced attempt at introducing a Medium-Term Expenditure Framework (MTEF). The Ministry of Finance started initial work on an MTEF in 2000 but the effort did not have a major impact on improving budget planning. The rating from a recent PEFA assessment for the indicator PI-12, ‘Multi-year perspective in fiscal planning, expenditure policy, and budgeting’, is a D+. Another major problem was the fragmentation of the budget; for example the Ministry of Education and the Ministry of Health controls only around 9 and 10 percent of their sectoral budgets,** respectively.

A PER performed in 2007 provides a realistic assessment;

"The full introduction of the MTEF will take many years, and will need to be accompanied by complementary reforms to public financial management, such as strengthening of treasury systems, auditing, monitoring and evaluation and payroll management. One of the important findings of the World Bank study on the implications of weak PEM capacity for the PRSP approach, is that PEM reform should be undertaken in a holistic manner: improving one link in the PEM system will not generate better budget outcomes if other links in the system are unreformed and remain weak (Andrews and Moon, 2003).*** The Government will need assistance to implement the MTEF, and complementary PFM reforms, from donors; in particular, it will need technical assistance for the MOF and the line ministries in the pilot sectors."

France’s Announces Details of its First Multi-Year Budget

Posted by Richard Hughes

Last month saw French Budget Minister Eric Woerth confirm his government’s plan to press ahead with the biggest reform to French fiscal policy-making since the adoption of the LOLF (Loi Organique Relative aux Lois de Finances) in 2001 - the introduction of the country’s first multi-year budget (budget pluriannuel).

Speaking at the opening of the National Assembly’s Budget Orientation Debate on the 15th of July, Woerth announced that the government will be introducing a new “expenditure planning law” (loi de programmation) that will set out in detail the French government’s spending plans for the year 2009, 2010 and 2011. Following some initial questions about its constitutionality, the legal path for this multi-year expenditure planning law was subsequently cleared as part of a series of revisions to France’s 1958 Constitution ratified by both houses of Parliament on 23 July. The stage is therefore set for the publication of France’s first multi-year budget in the autumn.

Welcome to the New "MTEF Blog"

Posted by Michel Lazare

The new "MTEF Blog" has started posting about "Public Expenditure Management, Medium-Term Expenditure Frameworks and All Things Fiscal" on August 1, 2008. Not surprisingly, the first posts published were about what is an MTEF and discussed MTEF implementation in a few countries, including in Laos. From there, the MTEF Blog broadened the scope of its posts to cover many other fiscal issues: accountability, fiscal rules, the Government Fiscal Statistics for Mauritius (and the IMF ROSC data module for Mauritius), a (of course, rather old) video interview with Milton Friedman, etc. This is by and large consistent with the objective set for itself by MTEF Blog in its August 1 post: "This blog is an aggregation point and a discussion forum for latest research on public expenditure management and multi-year budgeting practices. "

PFM blogs particularly likes the rich list of PFM relevant links in th eright column of MTEF Blog.

MTEF Blog is published by "MAI." Regrettably, the MTEF Blog's profile does not provide information on who MAI is.

PFM Blogs welcomes the arrival of MTEF Blog among the still relatively short list of blogs focusing on public financial management and wishes full success to its author.

The Good, the Bad and the Ugly of MTEFs?

Posted by Ismail Manik, consultant, World Bank Institute

An interesting recent working paper by Clay G. Wescott, of the Asia Pacific Governance Institute, has a good review of country experiences with MTEF implementations. The working paper is a background paper to the World Bank’s Independent Evaluation Group’s report ‘Public Sector Reform: What Works and Why?’ 

PFM Reforms in Developing Countries

Lessons from Ghana, Tanzania and Uganda

Posted by Bill Dorotinsky

In trying to learn what public financial management (PFM) reforms work, it is important to challenge conventional wisdom and look afresh at what has been tried, and its relative success. Model reforms need to be compared with actual experience, and lessons learned based on evidence need to be drawn and fed back into the reform processes. A 2005 working paper "Public Financial Management Reforms in Developing Countries: Lessons from Ghana, Tanzania and Uganda" by Andy Wynne does just that, looking at medium-term expenditure framework (MTEF) and integrated financial management information system (IFMIS) reforms in the three African countries cited. The working paper was published in December 2005 by The African Capacity Building Foundation.*

Ghana Aims for Firm Fiscal Discipline Before Oil Flows

Posted by Richard Allen and Jacques Bouhga-Hagbe

Today, we published a short article in the IMF Survey Magazine titled “Ghana Aims for Firm Fiscal Discipline Before Oil Flows.” This was based on a recent FAD technical assistance mission to Ghana. Here is a summary of the key points; the full text of the article is accessible by clicking here.

Ghana's authorities are contemplating far-reaching reforms designed to further strengthen fiscal discipline and transparency and make effective use of prospective oil and gas revenues.

A Review of Capital Budgeting Practices

Posted by Davina Jacobs

In general, government capital budgets have multiple roles: as instruments of fiscal policy, to improve the net worth of government, and—particularly in the area of economic infrastructure—as vehicles for economic development. This is usually achieved through greater reliance on debt or external aid than on such conventional sources of financing as taxation. Governments have introduced capital budgets to serve all these objectives, singly or collectively, depending on the context. In some cases, more attention has been paid to capital budgets as a way to reduce deficits caused by an excess of recurrent expenditures versus revenues.

Notwithstanding the seeming virtues of capital budgets, opinions continue to be divided, as they have been during the past seven decades, about their utility in governments. In the present context, in which some more advanced countries have budgetary surpluses and use them to reduce levels of public debt, there is little incentive to revive the debate about the need for capital budgets. In the developing world, however, where many governments operate on the edge of financial instability, the debate about capital budgets and their equivalents continues.

Previous blog postings by Bill Dorotinsky on March, 3, 2008 focused on the capital budgeting process itself, while another post on February 20, 2008 discussed capital budgeting in the context of the over-all PFM system, and addressed defining capital and measuring some aspects of efficiency and effectiveness. This post summarizes the recent IMF Working Paper by Davina Jacobs on “A Review of Capital Budgeting Practices”

Download a_review_of_capital_budgeting_practices1.pdf

The text of the working paper is also available by clicking on this link.

From Diagnosis to Action: Sequencing and Politics in PFM Reform

World Bank PFM Reform Workshop

Posted by Sanjay Vani

On March 21, 2008, the World Bank hosted a workshop on sequencing of PFM reform, focusing on case studies and experiences from practitioners. The workshop was intended to evoke debate among practitioners on sequencing and prioritization in PFM reforms and the importance of political economy in PFM reforms. The topics selected for this workshop did not easily lend themselves to one simple universal approach and divergent views were expected. It was not the intention to provide a “toolkit” or “best practice” learning to the participants but to provide an opportunity to participate and contribute in the evolving debate at the workshop thereby generally enriching the discussion on important topics confronting PFM professionals.

Each session was moderated by an experienced PFM professional comprising three speakers each having a strong personality and a strong views on the subject so as to present two divergent views on the same topic, which led to lively debate amongst the practitioners. The agenda for the workshop can be downloaded here  Download pfm_workshop_march_08_final.doc

Consistent with the unfiltered views of the workshop, the materials are provided here without attempting to summarize the points, letting each presentation speak for itself.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

Strengthening the MTEF Process in Mongolia

Posted by Mr. Batjargal , Director General of Fiscal Policies and Coordination Department, Mongolian Ministry of Finance

(supported by M. Napodano and S. Erdermchimeg)

In the post below, Mr. Batjargal, head of the Mongolian Budget Office presents his views on the objectives, benefits, and progress to date, of Mongolia’s move towards a performance oriented budget system, framed within medium term sectoral expenditure ceilings.

Mongolia’s Medium Term Expenditure Framework (MTEF) is anchored to the public sector performance framework established in 2003; since 2007 the link between budget and policies is being strengthened. Following New Zealand's best practice, the Government of Mongolia (GoM) introduced a performance management system in 2003 as part of the public administration reform. Portfolio ministries and their dependent agencies prepare rolling three-year Strategic Business Plans. The plans show main output targets and activities by program area for the coming three-year period. A shortcoming of the approach  was that the plans are not consolidated into comprehensive Portfolio MTEF statements, resulting in a weak link between budget and policies objectives at the sector level. The Ministry of Finance (MoF) has in recent years prepared an MTEF under a three-year horizon but it is mainly input based. No hard budget constraints were imposed by issuing MTEF ceilings to portfolio ministries. Since 2007 these shortcomings are being removed through the gradual introduction of new MTEF/budget procedures that promote a more integrated planning and budgeting process. The MoF has issued a revised calendar for the MTEF preparation and launched a training program to support portfolio ministries implement the new procedures. The training program is based on lessons learned during a pilot to introduce performance-based budgeting in three ministries: the Ministry of Education, Culture and Science, the Ministry of Social Welfare and Labor, and the Ministry of Food and Agriculture.

Performance, the Upper Level in Management as Part of an MTEF

"Our work will be judged on the access and quality of education services" – "performance is not only about more resources, it s is about their effective use"

Posted by Mr Genc Pollo, Albania Minister of Education and Science

Since the introduction of an MTEF in Albania, the Ministry of Education and Science (MoECS) has linked budget resources to its policy priorities through a three-year, rolling programme review process.

France’s Révision Générale des Politiques Publiques (RGPP)

Posted by François Michel

President Sarkozy’s Révision Générale des Politiques Publiques (RGPP) (General Review of Public Policies) undoubtedly marks France’s most comprehensive, structured and spelled out effort to modernize its public management and deliver the structural reforms needed for a long-lasting fiscal adjustment. The objective of the year-old initiative is not so much to yield short-term budgetary savings than it is to review underlying government policies, coverage of activities by the public sector, and delivery modes of public services.

United Kingdom Concludes Its Fifth Multi-Annual Spending Round

2007 Comprehensive Spending Review

Posted By Richard Hughes

In October of last year, the UK Treasury published the conclusions of its latest multi-annual expenditure planning exercise.  The 2007 Comprehensive Spending Review (CSR07) set out how the UK Government plans to spend its £600bn (US$1.2 trillion) annual budget over the years 2008-09, 2009-10 and 2010-11 and the key outcomes it is looking to buy with taxpayers’ money over the period. 

While the UK’s fiscal and budgetary architecture has been stable for over a decade and biennial Spending Reviews have become a routine feature of the British political calendar, there were are number of noteworthy developments and innovations in this fifth multi-year spending round.  In particular, CSR07:

• took place within a more challenging macro-fiscal context than previous spending rounds and was a test of the capacity of the UK’s Spending Review process to deliver an expenditure-based fiscal consolidation;
• saw a major expansion in the length, breadth and depth of budgetary certainty that the UK system provides to frontline managers; and
• included a major streamlining of the UK’s performance management regime for public services.

Developing Debt Management Capacity

IMF/World Bank Debt management initiatives for Low Income Countries

Posted by Brian Olden

In May 2007, a  Joint IMF/World Bank Board paper on strengthening debt management practices was approved by the Boards of the two institutions.  This paper attempted to identified the key lessons learned by country authorities government in trying to develop their debt management capacity following the financial crises of the 1990’s. More importantly, the paper attempted to identify how these lessons could be leveraged to assist lower income countries (LIC’s) to develop their debt management capacity.

The Role of Fiscal Transparency in Sustaining Stability and Growth in Latin America

Posted by Taryn Parry

How can Latin America reduce its vulnerability to financial crises and global slowdowns?

The answer I developed in a recent IMF working paper is for these governments to focus on their full adherence to the IMF Code of Fiscal Transparency. Although there has been a strong rebound in growth in Latin America since the recession early in this decade, the pace of expansion has lagged behind other emerging market countries, and concerns have been raised about their ability to avoid future crises. Fiscal priorities for the region include avoiding procyclical fiscal policies, continuing to reduce public debt, improving the quality of the tax system, and promoting a better business environment. Fiscal transparency can play a critical role in meeting these challenges and remedying weaknesses in fiscal management practices that have been associated with past financial crises.

David Walker (GAO): Long-Term Fiscal outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future

Posted by Michel Lazare

Further to our January 29, 2008 post on "David Walker (GAO head): The USA is Living beyond its Means -- Difference between Accrual and Cash," here is below the summary of David Walker's testimony before the Committee on the Budget of the U.S. Senate: "Long-Term Fiscal Outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future."

(link to the full text of David Walker's testimony: Download gao08411t_longterm_fiscal_outlook.pdf )."

The Dutch Fiscal Framework: Unique, or Transferable to Other Countries?

Posted by Frits Bos, CPB Netherlands Bureau for Economic Policy Analysis

The Netherlands has a well developed and successful  medium term fiscal and budgetary framework that has helped stabilize government finances and has helped constrain the growth of the public sector. The Dutch framework is based on real expenditure ceilings and a sustainable deficit target over the medium term. Expenditure envelopes are fully planned in for the duration of government on the basis of a four-year “Coalition Agreement” between the political parties in government. Expenditure growth paths were based, until recently, on cautious assumption about the structural growth rate of the economy. To what extent is the Dutch framework, which has a number of specific institutional features, transferable to other countries? What are the strengths and weaknesses of the framework. Frits Bos, of the CPB (the Netherlands Bureau for Economic Policy Analysis), discusses below the main features of the Dutch system. A recent paper published by Mr. Bos presents  the historical development, the procedures and the specific rules of the Dutch fiscal and budgetary framework

David Walker (GAO head): The USA is Living beyond its Means -- Difference between Accrual and Cash

Posted by Michel Lazare

The YouTube video below is a presentation on long-term fiscal issues in the US made by David M. Walker, the US Comptroller General and head of the U.S. Government Accountability Office (GAO).