Transcript Budget Analysis for Expenditure Rationalization

Budget Analysis
for Expenditure
Rationalization
Public Finance Analysis and Management
Course
World Bank, May 1-5, 2006
Marijn Verhoeven
Expenditure Policy Division
Fiscal Affairs Department, IMF
Overview
• Why expenditure rationalization?
• The analytical tool box for
expenditure rationalization:
– A word about data
– Measuring efficiency
• We found the problems—now
what? (very briefly!)
Why expenditure
rationalization?
• To achieve macroeconomic stability
and fiscal sustainability
• To create fiscal space
• To increase allocative efficiency by
cutting back or reforming
government activities
• To enhance X-efficiency by
achieving the same outputs with
less inputs
Why expenditure
rationalization? (cont’d)
Macroeconomic
stability and fiscal
sustainability
Fiscal space
Allocative efficiency
X efficiency
Why expenditure
rationalization? (cont’d)
Figure 5: Fiscal Space
Increase of
Grant Aid in
% GDP
5
4
3
2
Improved
Expend.
Efficiency
in % GDP
1
0
New
Borrowing in
% GDP
Improved
Revenue
Effort in %
GDP
The analytical toolbox for
expenditure rationalization
•
•
•
•
Tends to be based on descriptive
statistics
Cross-country comparisons and
rules-of-thumb are important
Analysis often incorporates
institutional elements
Comparatively little use of
advanced quantitative techniques
A word about data
• Expenditure analysis is typically
data driven
• But data are problematic
• There are many competing sources
of spending data, each with their
strengths and weaknesses
• Let us look at the example of data
on wage spending
Facts and figures:
measuring wage spending
• The wage bill is measured:
– As a share of GDP and total spending to
compare across countries
– As a share of domestic revenue to assess
sustainability
– At the sectoral level, compare to nonwage
spending to assess efficiency
• Source is IMF Government
Finance Statistics or national
data
Table 1. Central Government Wages and Salaries, 1990-2001
Sample Size
Central government wages and
salaries in percent of GDP
Central government wages and
salaries in percent of central
government expenditure
Africa
Francophone Africa
Non-Francophone Africa
Asia
South Asia
11
6
5
10
3
8.4
6.3
10.9
5.3
4.6
28.3
27.7
29.0
20.0
15.1
Europe and Central Asia
Central and Eastern Europe
Latin America & the Caribbean
Caribbean countries
Middle East and North Africa
21
12
16
3
6
3.9
5.1
5.6
8.6
9.1
12.6
14.4
25.0
31.1
30.4
European Union
15
5.4
13.3
Low-Income Countries
Middle-Income Countries
High-Income Countries
19
42
30
5.7
6.0
5.9
22.6
22.1
15.6
Memorandum items:
PRGF-Supported Programs 1/
OECD General Government 2/
28
21
4.8
11.4
19.9
Country Group
Sources: Government Financial Statistics database (IMF); International Financial Statistics database (IMF); World
Economic Outlook database (IMF); and IMF Staff.
1/ Data refers to 2001 outturn.
2/ OECD, 2000, "Summary of the Public Sector Pay and Employment Data Analysis and Future Direction for HRM Data Collection."
Data refers to 1997 total compensation cost, which includes the wage bill and employer contributions to social insurance.
Lies and statistics:
mismeasuring wage spending?
• Not all compensation may be captured in
wages and salaries: transfers (pension benefits
and subventions for education), other goods
and services (in-kind benefits and contractual
workers), and capital spending (donor-financed
projects) may hide substantial wage spending.
In Nicaragua, out of actual wage spending of
8.6 percent in 2005, less than 4 percent is
recorded as wages and salaries.
• When government is decentralized, central
government wage spending is biased
downward. But reliable data for general
government are rare for low-income countries.
Facts and figures:
measuring employment
• Employment is measured by:
– Share of government (or public sector)
employment relative to total population, and
total/private employment to compare across
countries.
– The distribution of employment over sectors.
– At the sectoral level, the mix of workers with
various skills.
• Source is World Bank civil service
database.
– But coverage and accuracy of data is a big
problem.
Table 2. Government Employment in the 1990s 1/
Number of countries
General government
employment as
percent of
population
Number of countries
General government
employment as
percent of total
employment
Asia
11
2.6
3
17.2
Eastern Europe and Central Asia
17
6.9
15
42.3
Latin America and the Caribbean
9
3.0
10
20.4
Middle East and North Africa
8
3.9
4
50.3
Sub-Saharan Africa
20
2.0
8
28.4
OECD 2/
21
7.7
15
21.0
Sources: Schiavo-Campo, Salvatore, Giulio de Tommaso and Amitabha Mukherjee (1997), An International Statistical Survey of
Government Employment and Wages, Policy Research Paper 1806 (Washington: The World Bank); Hammouya, Messaoud (1999),
Statistics on Public Sector Employment, Methodology, Structure and Trends (Geneva: International Labor Office); and OECD (2001),
Highlights of Public Sector Pay and Employment Trends (Paris: OECD).
1/ Latest data for 1990s, except for the share of general government employment in population, which is for the early 1990s.
Facts and figures:
measuring compensation
• Measures for compensation include:
– Wage comparisons with the private sector (average
or adjusted for skill level) to assess whether
government workers are overpaid. A rule of thumb
for the discount in public sector wages is 10-30
percent (but treat with caution!).
– Compare government wages with GDP per capita
provides information on adequacy of government
pay in view of living standards (again, be cautious!).
If a household survey is available, a more detailed
assessment can be made.
– The compression ratio compares the highest with
the lowest government salary scale. This is used to
assess adequacy of wages for the highly skilled. A
rule of thumb is that the ratio should be no lower
than 12 (yet again, be cautious!).
• Data source is often national.
Efficiency: the issue
Source: World Bank (2004) World Development Report 2004.
Spending refers to total annual public spending per child of primary school
age, in 1995 US dollars.
How should we think about the
efficiency of public spending?
• The measurement of efficiency
generally requires the following:
– (i) information on inputs and associated
costs;
– (ii) an estimation of output or benefit; and
– (iii) a comparison of (i) and (ii)
• Key question:
– Could the same level of output be achieved
with less input?
– Equivalently, could more output be
generated with the same level of input?
How should we think about the
efficiency of public spending?
(cont’d)
• What is the mix of public programs that
best meets government objectives?
– Where to invest the marginal dollar across
sectors
• For example, can education goals be reached by
investing the marginal dollar in other sectors?
– Where to invest the marginal dollar within
sectors
• Primary versus secondary education
• Primary health care versus secondary health care
How should we think about the
efficiency of public spending?
(cont’d)
• Given allocative decisions, is output
maximized with given inputs?
– Common problems:
• Inappropriate student/teacher ratios
• Shortage of medicine or nurses relative to
doctors
• Shortage of textbooks
• Waste, leakage of funds
• Labor and utility costs crowding out
maintenance and capital spending
Measuring efficiency
• Review the basics of public spending
– Functional classification
• Primary, secondary, tertiary of education
• Primary, secondary, tertiary and higher care (or
preventive versus curative care)
• Inputs, programs, types of intervention
– Education: Teachers, textbooks
– Health: Aeral spraying, information and education
campaign, etc.
– Economic classification
• Wage versus non-wage
• Recurrent versus capital (investment) spending
– Central and local government budgets, other
Ministries
– Planned versus actual, nominal versus real
– [Share of private, NGO, and donor spending]
Measuring efficiency
(cont’d)
• Benchmarking: simple diagnostics
– Some useful descriptive statistics
• Budget data
• Unit costs
• Ratios of teachers, students, non-teaching staff
• Distribution of teachers among levels of
qualifications; percentage meeting basic
government standards
• Actual maintenance budget versus engineering
estimates for routine maintenance
• Enrollment rates, repetition rates, dropout rates
• Absenteeism, informal payments, etc.
Measuring efficiency
(cont’d)
• Benchmarking: simple diagnostics
– Comparisons
•
•
•
•
Sub-national units, clinics, schools
Private versus public schools
Private versus public health facilities
Comparator countries
– Cross-country information on output
• UNESCO education indicators
• Program for International Student Assessment (PISA)
• WHO Indicators of Health System Attainment
• Trends in International Mathematics and Science Study
(TIMSS)
• Progress in International Reading Literacy Study (PIRLS).
The International Survey of Adults (ISA)
Measuring efficiency
(cont’d)
• Benchmarking: “Efficiency Frontier” Analysis
– Basic idea: measuring distance from the
efficiency frontier
– Regression analysis
• Corrected ordinary least squares (COLS)
– Evans et al (2000), WHO (2000): Efficiency of national
health systems
• Alternative: Greene (2005): Stochastic frontier analysis
– Free disposal hull analysis (FDH)
• Gupta and Verhoeven (2004) (Chapter 11): Efficiency
of health and education spending in 85 countries,
1984-95
– Data envelopment analysis (DEA)
• Herrera and Pang (2005): Efficiency of health and
education spending in 140 countries, 1996-2002
Efficiency Frontier Analysis:
A Brief Overview
Output
D
C
A
Residual
E
B
Input
A Regression Approach
Efficiency Frontier Analysis:
A Brief Overview
Output
D
C
A
E
B
Input
Corrected Ordinary Least Squares
(COLS)
Efficiency Frontier Analysis:
A Brief Overview
Output
D
C
A
E
B
Input
FDH Approach
Efficiency Frontier Analysis:
A Brief Overview
Output
D
C
A
E
B
Input
DEA Approach
Measuring efficiency
(cont’d)
• Randomized evaluations of educational reform
programs, based on
– Random selection of schools for the reform
• Colombian voucher, Angrist and others (2002)
– Randomized phase-in of programs
• Argentina: Decentralization took place across all provinces,
but at different periods and intensities, Galliani and
Schargrodsky (2002)
• Public Expenditure Tracking Survey
– Traces the flow of resources through the bureaucracy from
the central government down to the service facility
• Comparing originally allocated funds with funds that actually
arrive at the facility
• Amount of time required for fund to arrive
• Reinikka and Svensson (2001): Uganda in the 1990s,
significant leakage existed
Example of efficiency
analysis using DEA
• On-going research on the efficiency of
spending in EU New Member States
• In the context of an Article IV mission to
Slovenia, we made a presentation to the
authorities on preliminary results,
focusing on Slovenia
• We presented findings for education,
health, and social protection—I am
focusing here only on social protection
Social spending does not
efficiently reduce the risk of
poverty
Reduction in percent at-risk-of-poverty
18
POL 1.00
HRV 0.84
CZE 0.53
10
EU15 0.61
LVA 0.73
LTU 0.62
EST 0.72
SVK 0.43
SVN 0.34
HUN 0.39
ROM 0.46
BGR 1.00
2
0
5
10
15
20
Social benefits (as a share of GDP)
25
30
Social benefits could be better
targeted
Market Income and Pensions
Average
Share of
Income
Income
('000 tolar)
(percent)
First quintile
Second quintile
Third quintile
Fourth quintile
Fifth quintile
Overall
1,135
2,315
3,201
4,241
6,547
3,485
7
13
18
24
37
100
After Social Transfers
Average
Share of
Share of
Income
Transfers
Income
('000 tolar) (percent)
(percent)
1,376
2,585
3,411
4,384
6,715
3,692
23
26
20
14
16
100
• Social benefits are either poorly targeted or
too small in magnitude to significantly lower
income inequality.
7
14
18
24
36
100
What are we missing?
• Regarding the mix of public programs
– Complexity of policy objectives
• Incomplete models/data
• Measuring outputs and outcomes
• Trade-off between quality and quantity
– Feedbacks and externalities
• Proper measurement of
complementarities
• Lagged effects
• Externalities: Lower risk of epidemics
due to vaccination; healthy, informed
electorate
– Private versus public provision
Policy reforms for
increasing the efficiency
of public spending
• Expenditure Reform
– Input mix, personnel policy (e.g., hiring
freeze, reduction in support staff, etc.)
– Broad reallocation of expenditure (primary
versus secondary education or health)
• Management Reform
– Decentralization
– Community-managed schools, district health
management
• Financing Reform
– Voucher system
– [User fees]