Budget Formulation: good practices Bill Dorotinsky PREM PREM-FM Budget Management Course

Outline Three PEM System Objectives Process Issues Quality Issues Capital Budgeting Budget office roles Additional Slides Information for budget decisions References

Three Objectives of Public Expenditure Management Systems Macrofiscal discipline and stability Avoid public finance crises Support economic growth and stability Strategic allocation of resources Match government policy with programs, objectives Technical efficiency Getting the most from each dollar spent

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

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

Capital budgeting: good practice Investment office Central guidance Cost-benefit, rate of return Clear assumptions (e.g. life-span and maintenance) Recurrent costs Quality control, managed database of approved projects Monitoring physical, financial progress Ex poste evaluation of actual costs Line ministry Project proposal preparation Supporting sector strategy Identify project manager Project preparation, management training

Budget office roles Budget offices (center, ministry) Manage process Vett assumptions in requests Probe for efficiencies, alternative means Independent source of advice on sector strategies, policy (advanced)

Additional Slides

Information to Factor in to Budget Papers Prior Year Spending Did the Agency stay within its budget, and why not? Did the agency spend all of its funds, and why not? Was there one-time funding included in last years budget that should not be included again this year? Current Year Spending Is the agency staying within its allotments, and why not? Is the agency spending at a rate which will lead to over-spending, and what measures must be taken now to correct? Policy Performance Did the agency fulfill the policy directives for the prior year? Are they doing so for the current year? Audit Results Were there internal or external audits of the agency or its programs and activities last year or this year? What are the implications for funding? Did the agency make any corrections recommended in the audits?

Information (continued) Program Evaluations Were there any program evaluations of the agency or Ministry completed since the last budget cycle? What were the results, and what are the implications for funding? Other studies Were there any academic or private researcher papers or studies published that have implications for funding, program structure, etc.? Performance Assessment Did productivity increase or decrease from the last budget cycle? Did the activity or program attain planned outputs for the prior year? Why or why not? Did average costs per output increase or decrease, and why? What did the agency accomplish over the past year? Is it achieving its objectives orfulfilling its mission? What is the outcome of the activity?

Selected References Public Expenditure Handbook, World Bank, 1998. Managing Government Expenditure, S. Schiavo-Campo and D. Tommasi, Asian Development Bank , 1999. (on-line) Managing Public Expenditures: A Reference Book for Transition Countries. Richard Allen and D. Tommasi, editors. Organization for Economic Cooperation and Development (2001)