Strategic Budgeting: Do it Early and Don’t Mind the Gap

Are countries still interested in medium-term budget frameworks (MTBFs) in 2025, or are these tools hopelessly ambitious, and not able to address the turbulent economic challenges that countries face? Is there still space for a strategic focus of government interventions or is fire-fighting the main occupation of governments nowadays? 

MTBFs have long suffered from a lack of technical skills to prepare them and political interest in using them. The EU is not giving up on MTBFs however and has set minimum requirements for MTBFs of member countries to ensure sound fiscal governance. While the EU’s MTBF index for MTBF development in the EU has been hovering around 0.73 for some years (out of a maximum score of 1), the true potential of MTBFs is not being reaped by many EU countries. 

A crucial problem with MTBFs is that in many cases they tend to reflect the annual budget rather than shaping it. Instead of curtailing incrementalism they seem to reinforce it. In a 2023 study for the European Commission Diana Radu describes how more than half of MTBFs in the EU are adopted at the same time as the annual budget.[1] In effect these MTBFs are extrapolations of the annual budget and are not used as tools to link strategic and sectoral planning to the budget process.

MTBFs’ primary role is making the government’s fiscal sustainability efforts more concrete. In the annual budget preparation cycle, MTBFs are typically preceded by medium-term fiscal frameworks (MTFFs) that provide macro and fiscal projections, and fiscal targets. However, without concrete costing of and decision-making on expenditure programs over the medium-term (and decisions on necessary cutbacks and savings), MTFFs can be akin to fairy tales: nice to read but not linked to reality. The same can be said of MTBFs if they are just compiled by the Ministry of Finance without concrete Cabinet decision-making on outyear expenditure. This is the practice in many emerging market countries. The outyears of MTBFs are only indicative and the fight over expenditure is still an annual battle. 

MTBFs’ more elusive, and for economic development perhaps most important role, is that of strategic allocation. In principle the instrument can provide both the realism and medium-term perspective to implement the government’s strategic priorities in a gradual manner. However, it is important that governments do not wait till the end of the budget preparation cycle – typically in September or October - with discussion and decisions on strategic priorities in MTBF and annual budget. At that point, expenditure ceilings have already been used for guiding budget preparation (without strategic direction) and expenditure baselines and new initiatives have been agreed at the technical level between ministry of finance and line ministries.

Trying to impose strategic direction at the end of budget preparation is nigh impossible as many Prime Ministers have learned the hard way. Expenditure ceilings in budgeting are a double-edged sword; in practice they are as much a budget entitlement as a budget constraint. If set without strategic spending in mind the budget and the MTBF will show only incremental change.

To ensure the MTBF allows for strategic allocation, it is essential to build in a strategic decision-making phase in the MTBF before the detailed preparation of the annual budget starts, i.e., somewhere between late April and early June. It is crucial in this phase that governments develop and decide on a multi-year spending package that reflects national planning priorities and the government’s policy agenda. This spending package needs to be costed for the budget year and the outyears of the MTBF. Of course, many ministries of finance are not well-equipped or authorized to develop and cost such a spending package. Cooperation on this with the Prime Minister’s Office and key ministries is essential. 

Decisions on this “central” spending package need to inform the expenditure ceilings set for each line ministry in the budget circular. It is good practice to leave some fiscal space for negotiations on the baseline and on new initiatives that come up from line ministries independently. Of course, in the real world, fiscal space will always be in short supply. For this reason, a savings package also needs to be developed at this time to increase the fiscal space for new initiatives. This can be done through across-the-board cuts, so-called efficiency savings, or, much better, through targeted cutbacks of low priority spending. Savings packages should also be strategic, i.e. cutting out the dead wood in spending programs that are not effective or efficient, or aligned with government priorities. 

Ministries of finance are often reluctant to engage in such a strategic phase. It is a lot of extra work and it typically implies two rounds of Cabinet decision-making on the budget. Finance ministries often lack the policy skills and/or political guidance on what initiatives to include in the “central” package. There might also not be enough information for costing and assessment of effectiveness. Some countries solve this issue by having two budget circulars. One for strategic initiatives, one for the detailed preparation of the budget.

In any case when countries do introduce strategic decision-making, they typically issue the MTBF at the start of the detailed budget preparation phase. Does this set expenditure ceilings in stone? In some countries with stable, slow growing economies that might work, and the EU’s MTBF index rewards countries with hard expenditure ceilings at the line ministry or program level. However, in dynamic economies with variability in economic growth, inflation and revenue estimates, recalibration of the MTBF (and MTFF) might be needed for final budget decision-making. It should also be understood that strategic initiatives need to go through full budget review on costing and performance during detailed budget preparation and this might lead to amendment of the budget even for strategic initiatives. For these reasons, it should be considered normal practice to update the MTBF during final decision-making on the budget. A gap between initial and final MTBF allows for calibration for macro circumstances and taking on board the lessons from expenditure analysis. 

In sum, including a strategic phase in MTBF and budget is important for government effectiveness, be it for including infrastructure priorities, restructuring of key government sectors, adapting to climate change or introducing gender-supportive polices. However, it needs to be done early and as always in life an imperfect attempt is better than no action at all.