Transcript Public sector spending on Wages and & Salaries

BOSNIA AND HERZEGOVINA
Public Expenditure Reforms in BIH:
Moving from Aid Dependency
to Fiscal Self-Reliance
World Bank
March 4, 2003
Outline of the Presentation
• The case for expenditure rationalization
• Salient features of public expenditure
in BIH from four points of analysis:
What? Where? Who? How?
• Some suggested priorities for reforms
Macroeconomic achievements
 Robust post-conflict economic growth performance
(25% p.a.between 1996-2002)
 Anchors of macroeconomic stability: the currency
board and recent fiscal stabilization…
 … resulting in low inflation and confidence in the
domestic currency
 Some progress in structural and administrative
reforms: financial sector, tax administration,
expenditure management
Outstanding macroeconomic challenges
 Although still positive, economic growth has been
rapidly fading
 Export performance remains subdued, resulting in an
important current account gap (about 20 % of GDP)
 Employment growth remains subdued
 Pace of structural reforms directly aimed at
stimulating supply responses of the economy has been
uneven and altogether slow (privatization, business
environment, public sector and corporate governance,
rule of law)
The macroeconomic case for fiscal
adjustment
25
in % of GDP
Total Investments
20
15
10
National
Savings
Foreign Savings
5
0
1999
2002
2005
2008
Is public spending too high in BIH?
Current size of public expenditure is beyond sustainability:
 Realistic (and desirable) resource availability
 Transition to private-sector led growth
 Comparison with size of Government in
other transition economies (above 55% in BIH
vs. 35%-40% in most first-tier accession
countries and below 30% in OECD)
Recurrent accumulation of arrears (esp. at the
local level) suggests that current size is not
affordable
Constraints to expenditure rationalization
Additional pressures on public finances are likely in the
period ahead:
 Unpredictability of the decline of aid flows
 Need to alleviate tax burden on the
economy
 New expenditure pressure points: institution/
capacity-building, possible adjustment costs after
public sector downsizing, public investment
needs,…
Fiscal risk: contingent liabilities, quasi-fiscal
operations, deferred deficits (esp. at the local
level)
 Rigidities in expenditure and complex
intergovernmental arrangements
Salient Features of Public Expenditures:
1. On what are resources spent?
Economic Composition of General Government Finances, 2000
Transition
CEE Avg.
BiH
FBiH
RS
Total Revenue and Grants
Tax revenue
Non-tax revenue
38.2
32.9
4.8
54.4
39.5
7.8
54.5
40.3
8.0
51.7
36.9
6.5
Total Expenditure
Current Expenditure
Goods and services
W ages and salaries
Other G&S
Subsidies
Current transfers
Interest
Capital Expenditure
o/w domestic financing
Net Lending and unallocated
41.4
37.0
13.9
7.1
6.9
2.7
16.3
3.6
4.3
..
60.7
48.1
28.1
19.6
8.5
1.3
16.6
2.1
11.6
4.0
1.0
61.6
48.7
28.5
21.0
7.5
1.1
17.2
1.9
12.2
4.2
0.7
55.2
43.6
23.8
14.5
9.3
1.8
15.1
2.9
9.9
3.3
1.7
Source: W orld Bank Live Database and W orld Bank Country Studies.
Public sector spending on Wages and & Salaries (W&S) is
disproportionately high in BiH
Public Sector Spending in Wages and Salaries
40
25
20
30
15
20
10
10
5
Czech Rep
Albania
Slovakia
Bulgaria
Romania
Hungary
Poland
Macedonia
Slovenia
Croatia
RS
FBiH
BiH
0
Avg.
0
Sources: Official data & staff estimates for BiH; WB data sources.
as % of total Pub Sec Spending (Left axis)
as % of GDP (Right axis)
Source: Official data & staff estimates for BiH; WB data sources.
Tensions in recurrent spending
Wages and salaries crowd out spending on operations and
maintenance:
 Ratio of wage to non-wage spending is high in
BIH, particularly in the FBIH:
3
2.5
2
1.5
1
0.5
0
RS
FBIH
CEE
Salient Features of Public Expenditures:
2. Where do the resources go?
Functional Composition of General Government Expenditures, 2000
Average
Transition Avg. EU BiH FBiH
RS
CEE
In % of GDP
General Public Services
Defense
Public Order & Safety
Education
Health
Social Security & Welfare
Housing & Community Amenities
Recreational, Cultural & Religion
Fuel & Energy
Agriculture, Forestry and Fishing
Mining & Mineral Resources
Transportation & Communication
Research Affairs
Other Economic Affairs & Services
Other Expenditures (excl. interest payments)
Total Expenditure
o.w. Social Spending
o.w. Public Order, Safety and Defense
Note: Exludes municipal spending.
2.1
1.9
2.0
3.3
4.4
14.2
1.1
0.5
0.2
1.1
0.3
2.0
0.0
1.0
4.0
37.9
21.8
3.9
2.1 2.8
2.1 4.4
1.0 4.4
2.9 6.4
2.0 7.7
13.1 22.5
0.7 0.8
0.4 0.5
0.2 0.1
0.9 0.6
0.3 0.2
1.2 1.5
0.0
1.3 0.9
7.9 2.3
35.7 55.0
18.0 36.6
3.1 8.8
1.9
4.7
4.3
7.3
8.4
22.6
0.9
0.6
0.0
0.4
0.3
1.3
4.2
4.5
4.3
4.0
5.8
20.5
0.5
0.3
0.2
1.2
0.0
2.1
1.0
0.5
2.1
2.1
55.8 50.3
38.3 30.3
9.0
8.8
Defense expenditure remains large
 Spending on defense is above average,
although recent demobilization should bring it
down by about 1-1.5% of GDP
 Within the defense sector, the weight of W&S
is particularly disproportionate (between 70%
and 80%, NATO average: 40%)
Further rationalization of spending and
improvements in reporting and financial
discipline
 Spending on public order and safety
appears equally large. Urgent need to
undertake sectoral expenditure review.
Social Transfers
 BIH has, on aggregate, an extensive transfer
program with one of the most generous benefit
system for war veterans in Europe (3-4% of
GDP): urgent need to tightly define entitlements
The short-term agenda for pensions: maintain
financial stability while improving collection
performance
 Outside veteran benefits and social security,
social protection benefits are very low
 As a consequence, the transfer system
appears to be regressive with the most needy
being left out or insufficiently targeted
Social expenditures
 Education spending is high and inefficient:
High unit costs and low student-teacher ratios
(esp. vocational, tertiary);
 Fragmented provision of higher education
 Input-based financing carries wrong incentives
 Low allocative efficiency: poverty incidence
among vocational training graduates, low
enrollment in general secondary
 Wide disparities in per pupil spending leads to
access inequality of education
 Complex intergovernmental assignments
disrupt service provision at the local level
Social expenditures (cont.)
 Health care financing remains fragile:
First wave of reforms successful in establishing relatively
stable, although very fragile, health insurance funds;
pooling of catastrophic risk in the Federation
 Fundamental problem of mismatch between entitlements
and collected resources remains acute leading to high (and
regressive) out-of-pocket financing and unregulated private
sector delivery
 High burden on payroll taxation characterized by poor
enforcement of collection , numerous exemptions, and
unreliable financing for disadvantaged groups (pensioners,
unemployed, self-employed, refugees, IDPs)
 Network of providers is marked by fragmentation,
overlap, mismatch between services provided and needs,
and soft budget constraints
 System bias against preventive and primary health
care
Salient Features of Public Expenditures:
3. Who spends the resources?
State (BIH
Institutions)
100%
RS Central
80%
RS EBFs
Federation Central
60%
Federation EBFs
40%
20%
Federation Cantons
Brcko
Municipalities
0%
Key issues in fiscal decentralization
 Define the role of the State (including its
revenue base) in the context of institution
building, economies of scale, and regulatory
harmonization
 Revenue and expenditure assignments:
putting order in the “house” with the equitable
delivery of quality public services as the
ultimate objective
Vertical / horizontal policy coordination
Salient Features of Public Expenditures:
4. How are the resources managed?
 Strategic programming and budget preparation:
episodic initiatives remain to be institutionalized
 Budget execution and reporting: progress on
treasury system, FMIS, recording, accounting
 Public procurement needs major reform
Internal controls & audits: redefine their role in the
expenditure cycle
 Supreme audit institutions and external oversight:
promising first steps but lack of follow-up
 Rules of transparency and integrity yet to be
enforced
Conclusion: the triple challenge
of expenditure reform
1. Rationalization of total public expenditure as
to decrease its share in the economy: no other
alternative to accommodate financially
sustainable, private sector-led growth
2. Increased efficiency and equity of expenditure so
that it can have an impact even within the hard
budget constraint
3. Transparency and good governance in the
management of public resources with a view to
raise its efficiency but also to regain trust of
taxpayers, beneficiaries, financiers, entrepreneurs
and investors
Some suggested priorities for reforms
 Strategically manage expenditure rationalization
rather than be subjected to it  critical need to
complete strategic budgeting process (PRSP/MTEF)
 Institutionalize fiscal policy coordination:
State/Entities, Entities/Sub-entity
 Address the issue of civil service reform and
wage bill containment
 Further rationalize excessive spending
(defense, veteran benefits)
Some suggested priorities for reforms
In core public services, restructure expenditure
to realize efficiency gains under an assumption of
overall spending freeze
 Intensify policy debate on intergovernmental
fiscal relations
 Limit and manage fiscal risk: eliminate soft
spots in the budget constraint, strictly adhere to
financial stability principles for extra-budgetary
funds,…
 Establish track record in strengthening fiduciary
framework (e.g. public procurement) and
governance (e.g conflicts of interest, anticorruption)