Public Expenditure Management: Budget Formulation Bill Dorotinsky, PREM public sector group PEAM Course March 21, 2005

Outline What is Public Expenditure Management? Applications What institutions matter? Process: Expenditure Management Cycle Functions Organizations, Systems Three- objectives Applications Rules Roles Information Performance Measurement

Expenditure Management Cycle Planning system Medium term plans, e.g. three year rolling plans Annual budgets Development, recurrent and revenue Fund release procedure, e.g... warranting Accounting for revenue and expenditure Public expenditure review Institutions Reports and financial statements Audit system Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event Accountability Financial management system boundaries Formulation covers ‘expenditure review’ insofar as this is a step in preparation of future plans, and goes through to “annual budgets..” -- need for good budget -- Brazil roads, congress, MoF -- linking budget to cash management -- dc grants management Execution covers from ‘liquidity management’ through to PER’s, insofar as PER’s are part of the ex poste accountability system. Half of cycle (2) Hardware and software do not solve problems in human systems. Must know source of problem, and seriously assess whether computerization will solve the core problem. (DC Example) Underlying all of this is good recording of transactions and reporting! Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

Scenario 1 You are the minister of a line ministry The half-life of a minister is 18 months Your predecessor lost their position for proposing sector restructuring based on a foreign advisor recommendation The fiscal year begins January 1 The MoF issues a budget circular June 15, asking for budget submissions by August 1 The circular includes inflation estimates and forms The Ministry of Planning issues a July 15 call for capital budget submissions by August 15 The circular includes forms You are not sure of your current on-board employment, and ‘current’ fiscal information is incomplete and 45 days late On what basis do you prepare your budget request? What is your budget bid strategy?

Scenario 2 The Cabinet has convened to consider the budget The aggregate bids exceed likely recurrent revenue by 19 percent, and capital resources by 157 percent The MoF has provided a table summarizing bids, and showing estimated total recurrent and capital resources The MoF has noted a fall in customs revenue, and donor funds are shifting to other geographic priorities, suggesting budget reductions are needed The prior government fell from not meeting public expectations for greater capital investment and better services On what basis should Cabinet make budget choices?

Common PEM problems Weak links between policy, resource limits, and budgets failure to achieve strategic objectives abstract planning, unrelated to ways and means Annual focus leads to suboptimal choices Digging a hole; inability to climb out Complacency today, unaware of crisis tomorrow Separation between capital and recurrent budgets Lower than expected returns to capital Non-comprehensive budget Using other means to support favored programs Revenues not captured in budget Taking piecemeal decisions without reference to over-all effect Rigid budget Trying to solve conflict of goals, objectives through direct control rather than dialogue, consensus --- exacerbates the principle agent problem, rather than addressing it head-on and resolving. Labor productivity: span of control;

Common Reforms MTEF Performance Budgeting New Public Management Separate policy and administration Accrual accounting ‘Fragmentation’ Procurement, Debt Deconcentration, decentralization Administrative & Civil Service

Process Issues “Due process” Coherence Civil society participation Fair hearing for proposals, requests within government Coherence Budget process is planning process Planning within resource constraints Indicative ceilings for budget offered early in the process ‘hard budget constraint’ Changing incentives Comprehensiveness Capital, all revenues and expenses Civil society participation ‘decentralized’ impact analysis Legislative stage In executive via white papers

Process (continued) Proper decision sequence for coherent process Macrofiscal, revenues, expenditures Sectoral Administrative/program/project Accountability: Link resources with management responsibility Schedule Budget calendar issued Sufficient time for sound proposals Ministries Budget office analysis Legislative review Two stage process

Quality Issues (improving process outcome) Multi-year perspective Setting multi-year policy objectives Conservative economic, revenue forecast Likely versus ‘hoped for’ Benchmarked against non-governmental forecasts Realistic expenditure forecast Provision for recurring ‘unanticipated’ events Contingency reserves – with clear rules for use Indicative ceilings linked to second-year of prior budget forecast (policy) Requests reconciled to prior year actuals, current year estimates Two aggregate forecasts (advanced) Proposed policy Current services/policy Capital and recurrent

Quality (continued) Budget ownership Early, frequent engagement of policy officials on structured decisions Fiscal policy paper to kick-off process Distinguish policy from recurrent revenue Proposed revenue sources versus historical trends No spending allowed against proposed unless they materialize (grants, tax revenue) Communication Clear signals of direction, markets and agencies Prepare public for change – sustainable adjustment

Quality (continued) Budget Information Decision papers Prior year actual, current year estimate, budget year +2, Staffing, Outputs Classification: economic, administrative, functional, program Requests distinguish between on-going, new spending; mandatory, discretionary Decision papers Basis for Minister of Finance, Gov’t decision Pulls together academic, audit, performance, evaluation of prior years financial performance, other information

Core elements of an MTEF Changing rules to promote different outcomes Multi-year fiscal framework Setting broad policy priorities (sectors) Multi-year Budget Framework sector ceilings, sector budgets prepared under constraints Strategy, policy and objectives under constraints Multi-year expenditure framework Costing programs, policies within sectors Delivering resources as budgeted