Medium-Term Expenditure Scenario Analysis USING BOOSTS

Outline Why? How? Limitations and constraints Objectives of medium-term analysis How? Setting a macro-framework Selecting a unit of analysis Designing scenarios and options Limitations and constraints

Why? Medium-Term Analysis Using BOOSTs

Objectives of Medium-Term Analysis using BOOSTs BOOSTs provide detailed historical expenditure information Can be extrapolated to assess expenditure allocation options over the medium-term

Objectives of Medium-Term Analysis using BOOSTs Analysis using BOOSTs provides powerful tool to illustrate: How sector or ministry-level expenditure can adjust to macroeconomic trends and shocks Impacts of expenditure decisions on fiscal aggregates Trade-offs and conflicts between expenditure in different priorities and sectors Trade-offs and conflicts between expenditure decisions and macro-fiscal policy objectives

Example 1: Country with growing debt repayment obligations Policy targets to: Increase expenditure in “priority sectors” of health and education Reduce the share of expenditure on the wage bill BOOST analysis used to show how policy targets could be achieved within sustainable aggregate limits and while meeting repayment obligations

Output: share of expenditure by sector Output: share of expenditure on wage bill

Example 2: Country with deteriorating revenue effort, SOE subsidies imposing severe fiscal costs Policy target of maintaining the real value of Sovereign Wealth fund BOOST analysis used to demonstrate the need for revenue and SOE reforms if policy objectives were to be achieved without large cuts in expenditure in priority ministries

Output: Expenditure and Fund Balance trends Fiscal Aggregate Outcomes Macroeconomic Based on IMF projections, medium-term real growth GDP of 2% and inflation of around 2.5%. Revenue No growth in revenue in nominal terms. No budget support. Project grants remain at trend levels. Financing Commercial debt is maintained at current levels. Output: Expenditure and Fund Balance trends

How? Medium-Term Analysis Using BOOSTs

Setting a macro framework “Anchor” can be chosen according to objective of analysis Fix aggregate expenditure Used to demonstrate tradeoffs within sustainable expenditure limits Flexible aggregate expenditure Used to demonstrate short-term impacts of expenditure decisions on cash reserves/debt levels

Setting a macro framework Fixed aggregate expenditure Copy aggregate expenditure limits from appropriate scenario of IMF/World Bank Debt Sustainability Analysis over projection period Divide expenditure types (ministries, sectors, inputs) into: Those determined by input assumptions that you control Residual expenditures that will be forced to adjust to accommodate change in manually-determined expenditure types

Calculated based on input assumption Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline Input expenditure trajectories in drop-down menus Taken from DSA Calculated based on input assumption Set to adjust automatically to keep deficit equal to DSA level –share of non-priority expenditure maintained

Setting a macro framework Flexible aggregate expenditure All expenditure lines are manually determined Adjustments reflected in change in the deficit/surplus

Manually input based on policy assumptions Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline All expenditure dynamics input from drop-down menu Taken from DSA Manually input based on policy assumptions Adjusts to reflect aggregate impact of sector/ministry expenditure decisions

Selecting unit of analysis BOOSTs allow high level of disaggregation when analyzing expenditure Appropriate level at which to model expenditure choices will depend on policy issues Sectors – implications of achieving sector expenditure targets Ministries – implications of ministry expenditure targets Inputs – implications of public sector wage settlements Sub-national governments – implications of decentralization initiatives Etc.

Expenditure categories taken from BOOST Level of disaggregation appropriate to complexity of analysis Sector, Ministry, Division, Input, sub-national government unit, etc.

Selecting Input Assumptions Based on policy options under consideration Based on policy decisions already made to understand implications Examples: Fixed rates of expenditure growth by sector Sector or ministry expenditure levels established in plans or policy commitments Changes in spending to achieve target expenditure ratios

Drop-down menus linked to scenario sheets are an easy way to update assumptions and examine the implications of different policy targets

Running scenarios BOOST analysis can: Help communicate incompatibilities and required trade-offs between competing commitments and priorities Identify the need for trade-offs within an overall resource constraint Show macro-fiscal impacts of expenditure policy decisions Illustrate required sector expenditure adjustments within a given macro framework

Running scenarios Government considering ambitious program of expenditure in priority sectors identified in the national plan Real expenditure growth of 5% per annum for health, education and infrastructure Government has implemented a hiring freeze, but agreed with the public sector union to inflation indexing of wages and no layoffs Under the terms of an IMF program, there is no scope for additional borrowing

Input appropriate spending trends Because no additional borrowing, use “fixed aggregate expenditure, setting deficit as DSA levels

Expenditure growth can be absorbed by reductions in other sectors Running Scenarios Expenditure growth can be absorbed by reductions in other sectors But, because of fixed real wages, required unfeasible compression of non-wage expenditure

Running scenarios Government facing economic shock, with expected decline in real revenue Committed to maintaining real expenditure on core public services, but has established nominal expenditure freeze in other areas Wishes to assess debt implications

Input appropriate spending trends

Running scenarios Short-term growth in deficit Growth in budget share for priority sectors Short-term growth in deficit

Limitations and constraints

Limitations and constraints Complement to, rather than substitute for, DSA BOOST analysis relies on a macro framework taken from a DSA BOOST does not provide data on economic growth, revenue, inflation, which needs to underpin all analysis BOOST data not sufficient for modeling debt dynamics Static analysis - No mechanism for tracing interactions between expenditure decisions and growth or revenue