Transcript The UK’s fiscal watchdog: a view from the kennel

Introduction: Role of Budget
Institutions, Public Budgeting and
MTEFs
Richard Allen
I. Outline of Presentation
II. Why budget institutions matter
III. Fundamental stages of budgeting
IV. Four key budget principles
V. Different concepts/forms of MTEF
VI. Conclusions
Taking account of context and
institutions in METAC countries
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II. Why Budget Institutions Matter:
12 Budget Institutions and 9 Fiscal Indicators
Phase of Adjustment
Budget Institution
Fiscal Adjustment Indicator
a. Understanding
the Fiscal
Challenge
b. Developing a
Consolidation
Strategy
c. Implementing
through the
Budget Process
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II. Budget Institutions & Fiscal Performance:
Example - Macro Forecasting
Absolute GDP Forecast Error
(% of GDP)
3.0
% of GDP
2.5
•
Countries with stronger
institutions for fiscal reporting,
forecasting and risk management
saw smaller forecast errors
impacting their plans.
•
The establishment the UK Office
of Budget Responsibility in 2010
seems to have eliminated the
historical bias in the UK’s official
macro-economic forecast.
2.0
1.5
1.0
0.5
0.0
Strong Institutions
Medium Institutions
Weak Institutions
Source: Country Documents
Real GDP forecast minus WEO forecast
2.0
1.5
UK Case Study- Impact of Fiscal Council on Forecast Bias
(Diff. b/w Official and WEO Forecast for Real GDP Growth)
UK
Advanced G20 economies with no independent
macro forecast
UK fiscal council
established
1.0
0.5
0.0
-0.5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Country Documents
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II. Budget Institutions & Fiscal Performance:
Example - Implementation of Adjustment Plans
Absolute Deviation from Approved Budget
vs Strength of Implementing Institutions
(2010-2012)
80%
10%
70%
9%
Percent Total of Budgeted Expenditure
Share of Planned Adjustment Delivered.
Share of Planned Adjustment Delivered
vs Strength of Implementing Institutions
(2010-2012)
60%
50%
40%
30%
20%
8%
7%
6%
5%
4%
3%
2%
10%
1%
0%
Strong Institutions
Source: MAP
Medium Institutions
Weak Institutions
0%
Strong Institutions
Medium Institutions
Weak Institutions
Source: National documents
Having strong implementing institutions helped to ensure that budgets were
respected and planned adjustments were largely delivered.
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II. IMF G20 Board Paper: Key Findings
•
Most countries have made progress in strengthening their institutions
– Consolidation has been a catalyst for institutional reform in many countries
– Most progress in establishing fiscal councils, MTBF and fiscal rules
– Less progress in improving reporting, risk management, & expenditure controls
• Stronger institutions key component to successful adjustment
–
–
–
–
•
Countries with stronger institutions tended to consolidate sooner, faster, and more
Countries with stronger institutions seemed to protected public investment
Strong institutions tended to support better budget execution and delivery of plans
Countries with stronger institutions seemed to respond better to adverse shocks
Substantial institutional reforms are still required
– Better reporting, forecasting, and risk management needed to improve insight in
fiscal situation and reduce forecast errors
– Weaknesses in “implementation” institutions remain largely unaddressed
– Growing gap in institutional strength between advanced and emerging countries
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III. Fundamental Stages of Budgeting
Total
expenditure
• Reflection of ideology
• Sustainability
Sectoral
allocation
• Political priorities
• Relatively stable from year-to-year …
• … but can change over time
Budget
details
• Efficient delivery of public services
• Predominantly technical …
• … budget can be politically sensitive
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III. Fundamental Stages of Budgeting
1. Fiscal
policy
formulation
6. Control
and audit
2. Budget
preparation
5. Accounting
and reporting
3. Budget
approval
4. Budget
execution
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III. Fundamental Stages
Bottom-Up
3. Total
Expenditure
2. Sectoral
Allocation
1. Budget
Details
• Line ministry budgets are consolidated to obtain total expenditure
• If spending is too large, the negotiations are reopened, revenue
proposals initiated or the fiscal targets revised (or a combination)
• Line ministry proposals are prepared and submitted to the
ministry of finance
• Bilateral negotiations
• The cost for individual lines in the budget are assessed
• New initiatives are prepared
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III. Fundamental Stages
Top-Down
• Total expenditure is determined based on
1. Total
Expenditure
• macroeconomic situation
• Fiscal objectives or rules, e.g., fiscal balance or debt limit
• projected revenue
• Subject to decision on total expenditure in stage 1, a sectoral
allocation is decided and formalized through ceilings
2. Sectoral
Allocation
• 15-40 sectors
• no-policy-change assessment of existing policies
• allocation of fiscal space/distribution of savings requirements
• Subject to sectoral ceilings, the details of the
budget are prepared
3. Budget
Details
• reallocations within ceilings can (normally) be allowed
• proposals in addition to the ceilings are rejected
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III. Case Study
Top-down budgeting in Sweden
Time
Stages
January-March
Ministry of Finance updates macro forecasts and no-policy-change
assessment for the multi-year budget framework.
Mid-March
Ministry of Finance’s develops broad spending proposals for coming year
and following two years.
End March
Cabinet Budget Meeting with approval of total expenditure ceiling and
allocation to 27 Expenditure Areas for coming year and following two years
15 April
Government’s Spring Fiscal Policy Bill is sent to Parliament.
April-May
Spending ministries finalize allocations among individual appropriations
within their Expenditure Areas.
15 June
Parliament approves the Government’s Spring Fiscal Policy Bill.
June-August
Budget documentation prepared.
Early September
Cabinet agrees on the final budget proposal to be presented to Parliament.
20 September
Budget bill is presented to Parliament.
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IV. Four Fundamental Budget Principles
Unity
Universality
One budget and one
budget process
All revenue finances all
expenditure
Specificity
Annuality
All appropriations have a
distinct purpose
All appropriations have a
pre-defined end-date
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IV. Four Fundamental Budget Principles
Unity
Fragmented Budget
Comprehensive Budget
Legislature
• Budget is an instrument for
aggregate fiscal control
• Policies can be prioritized against
each other
EBF
.
.
EBF
.
Audit
Rev, Exp,
Borrowing
Fiscal rules
Budget
Audit
Rev, Exp,
Borrowing
Fiscal rules
Budget
Assump.
Priorities
Executive
Assump.
Priorities
Executive
EBF
Legislature
• Executive and legislative fiscal
control becomes more difficult
• Inefficient use of resources
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IV. Four Fundamental Budget Principles
Universality
Universal Budget
Subsidies
Non-tax
Entitlements
Tax revenue
Budget
Ear-Marked Budget
Fuel excise
Tax
revenue
Capital
5% to Defense
Subsidies
Admin.
Admin.
University fees
• Facilitates annual policy
prioritization
•Gives the government more options
when making savings
10% to Education
Budget
Borrowing
Borrowing
Road construction
Higher education
• Causes rigidities and obstacles for
reallocation and consolidation
•Leads to inefficiencies
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Earmarking and EBFs in the region are
widespread …
• Egypt – 2014 Constitution mandates
minimum level of spending on health,
education and research (4, 2 and 1% of
GDP)
• Iraq - portion of surplus funds in oil
revenue account are outside the budget
• Most METAC countries maintain special
accounts and special funds outside budget
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IV. Four Fundamental Budget Principles
Specificity
• Parliament and public should have
prior information about how the
government will spend the budget
• Unit of control
– Organization
– Program
– Economic category
• Level of detail
• Contingency arrangements and
margins
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IV. Four Fundamental Budget Principles
Specificity
Central Statistics Bureau—Fiscal year 1967/68
Remuneration to personnel
1
1. Salaries to employees
2. Contractual fees and reimbursements
General outlays for the Office
1. Health care
2
2. Travel and subsistence allowance
3. Office and general supplies
a) fuel, electricity and water
b) other office supplies
4. Printing and publication
5. Other expenditure items
a) maintenance of library
b) reimbursement to the Computer
Center for processing information
c) reimbursement to the Research
Institute for interviews
d) costs for renewal of some samples
for agricultural surveys
e) costs for collection of information
through other organs
Special surveys
Research Institute
Remunerations and personnel costs
1. Salaries to personnel in the Research
Institute, temporary projects, etc.
2. Remuneration to representatives
3. Pension costs
4. Employer’s fees to the general health
insurance
5. Reimbursement to the Central Statistics
Bureau for administrative costs:
remunerations
Office and general supplies
1. Health care
2. Travel and subsistence allowance
3. Recruitment of representatives
4. Office rental
5. Fuel, electricity and water
6. Other office supplies
7. Reimbursement to the Postal Service
for forwarding official mail
8. Reimbursement to the Central Statistics
Bureau for administrative costs
Revenues
1. Reimbursement for executed interviews
Net expenditure
Costs for 1965 year’s census of citizens and
households
Costs for 1966 year’s census of agricultural
farms
Central company register
Central Statistics Bureau—Fiscal year 2007
17 217 000
FINANCING
10 071 000
1.5 Central Statistics Bureau (frame appropriation)
At the disposal of the Central Statistics Bureau
17 100 000
117 000
110 000
66 000
473 184 th. kr
Customs Service—Fiscal year 2007
162 000
1 721 000
1 554 000
5. FINANCING
25 000
4 795 000
3:3 Customs Service (frame appropriation)
At the disposal of the Customs Service
1 800 000
1 472 992 th. kr
Conditions for appropriation 3:3
13 000
The cost for an official, nominated by the Ministry of Finance, stationed at Sweden’s permanent
representation at the EU in Brussels is covered by the appropriation.
50 000
2 150 000
1 000
4 385 000
2 700 000
1 100 000
500 000
40 000
45 000
1 985 000
8 000
50 000
150 000
50 000
30 000
1 679 000
14 000
4 000
6 369 000
6 369 000
1 000
2 300 000
170 000
915 000
1.
A maximum of 20 000 kronor of the appropriation item can be used for payment to authors of articles and
reviews in the Statistical Bulletin.
2.
A maximum of 48 000 of the appropriation item Travel and subsistence allowance can be used for foreign
travel.
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IV. Four Fundamental Budget Principles
Annuality
• Budget authorizations are for a discrete time
period—sunset clauses
– Cabinet/parliamentary control
– Repeated to justification spending programs
– One year is the norm
• Carry-overs
– Justified to allow a smooth transition between budget
years …
– … but can build up and create expenditure risks
• Multi-annual commitments
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V. MTFFs, MTBFs and MTPFs
• MTFF – top-down specification of aggregate
resource envelope and allocation of resources
across spending agencies
• MTBF - Bottom-up determination of spending
agency resource needs and reconciliation of
these with the overall resource envelope
• MTPF – Includes in addition to the MTBF an
emphasis on the measurement of the outcomes
and outputs of spending programs, and
measures of key performance indicators
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Country
Type
Year of Adoption
Afghanistan
MTFF
2005
Jordan
MTFF
2005
MTBF
2008
Iraq
MTFF
2006
Yemen
MTFF
2007
Lebanon
MTFF
2008
West Bank & Gaza
MTFF
2008
Syria
-
Sudan
Work in progress
-
Egypt
MTFF
2005
MTFF
1990
MTPF
2005
MTFF
2005
Turkey
MTFF & MTBF
2006
Malaysia
MTFF
2007
Indonesia
MTFF
2008
Other countries:
Korea
Morocco
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V. MTBFs: A Variety of Models
Unit of Multi-Year
Planning
Total Expenditure
Status of Multi-Year Expenditure Estimates
Binding
Indicative
Austria (post 2010)
Finland (post 2003)
Netherlands
Sweden
France (pre 2009)
Italy
Czech Republic
Economic Categories
Belgium
Germany
Hungary
Japan
Turkey
Ministries
France (post 2009)
United Kingdom
Austria (pre 2010)
Canada
Denmark
Slovakia
Finland (pre 2003)
Programs
Australia
New Zealand
None
Greece
Iceland
Ireland
Poland
Portugal
Spain
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V. MTBFs: Evolution over Time
Time
Frame
Control Regime
Coverage
Fixity
Unit of
Control
Basis of
Planning
% of
Gen Govt
Main Items
Excluded
Time
Horizon
Frequency
of Revision
Total GG
Primary
Spending
Nominal
Cash
87%
Debt Interest
3 Years
Annual
Total GG
Primary
Spending
Real
Cash
87%
Debt Interest
3 Years
Annual
1984-93
Total GG
Primary
Spending
Nominal
Cash
85%
Debt Interest
3 Years
Annual
1994-97
Control
Total
Total GG
Structural
Spending
3 Years
Triennial
1998-Now
Departmental
Expenditure
Limits
25 Individual
Ministerial
Budgets
3 Years
Bi/Triennial
Name
1967-80
1981-83
Planning
Total
Debt Interest
Nominal
Cash
83%
Working Age
Benefits
Debt Interest
Nominal
Accrual
60%
LG Own Exp.
Social Security
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V. MTEFs can lead to better fiscal
outcomes ……
A recent World Bank study provides:
• Empirical evidence that MTEFs improve fiscal disciple
• Also evidence that MTEFs are associated with gains in
allocational efficiency
• Case studies suggest that MTEFs are linked with
improved quality of PFM systems
• But some MTEFs are not well designed and
implemented, and benefits not achieved
• Essential preconditions must be met ….
Source. World Bank. 2013. Beyond the Annual Budget: Global
Experience with Medium-Term Expenditure Frameworks
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VI. Conclusion
1. Sound budget institutions are strongly correlated with improved fiscal
performance
2. Well-managed budget systems are based on a mixture of top-down and
bottom-up principles, but the latter predominate in developing countries
3. Countries should give attention to the four key principles of budget
design
4. A medium-term budget framework can improve fiscal discipline, but also
helps effective prioritization of policies and stability and predictability
5. Preconditions are demanding, and have to be addressed when
introducing medium-term budgeting
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