An Investigation into the Impact of the Medium-Term Expenditure Framework on Budgetary Outcomes Jim Brumby World Bank

Aim of the Research Medium Term Expenditure Frameworks (MTEFs) are fiscal instruments aimed at enhancing fiscal performance. This study analyzes the impact of MTEFs on several dimensions of fiscal performance: Fiscal discipline, that indicates how well spending relates to revenues. Allocative efficiency, that measures the extent to which resources flow toward the most needed public projects. Technical efficiency, that shows the extent of waste of resources allocated to a given project.

Types of MTEFs Different types of MTEFs can be distinguished: MT fiscal frameworks (MTFFs) provide a macro-fiscal basis for budget formulation. It is likely to impact fiscal discipline more than efficiency. MT budget frameworks (MTBFs) in addition specify spending agency expenditure ceilings based on top-down resource availability and bottom-up resource needs. This is likely to impact most on allocative efficiency. MT performance frameworks (MTPFs) in addition focus on spending program inputs, outputs and outcomes. This would impact most on technical efficiency.

Global MTEF Adoption Lines show totals numbers in place, bars show adoptions.

Stylized Facts – Event Study MTEFs Fiscal Discipline Allocative Efficiency The graphs show the data from all countries that have adopted an MTEF in their different types (going from an MTFF to an MTBF is also counted as MTEF adoption). The time of introduction is put at t. The black line shows fiscal discipline (measured as the overall fiscal balance of the central government) and allocative efficiency (measured as the volatility in health spending as ratio of overall government spending) before the introduction of the MTEF (periods t-3 to t-1) and after introduction (t+1 to t+3). The red dotted lines show the 95 percent confidence interval. The blue dotted lines show the average for all the years before and after the introduction (time t). For fiscal discipline, this graph suggests that there is a clear improvement in the fiscal balance after MTEF introduction. The average fiscal balance of the central government was -3.1 percent of GDP before the MTEF introduction and -0.4 percent of GDP after. For allocative efficiency, the pattern is not so clear, but still suggestive of improvement after MTEF introduction. The measure of allocative efficiency is the deviations from the trend value in health spending as a percent of overall government spending, which is a proxy for health spending volatility. One would expect the introduction of MTEF to initially lead to a re-allocation among sectors, with health spending being a likely beneficiary. So, in the short term, health spending volatility may go up. Then, over the longer term, a more stable path of health spending would suggest better allocative efficiency. The chart shows that immediately after the MTEF introduction (in time t) there is not a clear change in health spending volatility, but in the longer term volatility drops, as expected (from an index of 94.2 before the MTEF introduction to 86.6 in the period after).

Stylized Facts – Event Study MTEFs Fiscal Discipline Allocative Efficiency The graphs show the data from all countries that have adopted an MTEF in their different types (going from an MTFF to an MTBF is also counted as MTEF adoption). The time of introduction is put at t. The black line shows fiscal discipline (measured as the overall fiscal balance of the central government) and allocative efficiency (measured as the volatility in health spending as ratio of overall government spending) before the introduction of the MTEF (periods t-3 to t-1) and after introduction (t+1 to t+3). The red dotted lines show the 95 percent confidence interval. The blue dotted lines show the average for all the years before and after the introduction (time t). For fiscal discipline, this graph suggests that there is a clear improvement in the fiscal balance after MTEF introduction. The average fiscal balance of the central government was -3.1 percent of GDP before the MTEF introduction and -0.4 percent of GDP after. For allocative efficiency, the pattern is not so clear, but still suggestive of improvement after MTEF introduction. The measure of allocative efficiency is the deviations from the trend value in health spending as a percent of overall government spending, which is a proxy for health spending volatility. One would expect the introduction of MTEF to initially lead to a re-allocation among sectors, with health spending being a likely beneficiary. So, in the short term, health spending volatility may go up. Then, over the longer term, a more stable path of health spending would suggest better allocative efficiency. The chart shows that immediately after the MTEF introduction (in time t) there is not a clear change in health spending volatility, but in the longer term volatility drops, as expected (from an index of 50.3 before the MTEF introduction to 48.9 in the period after).

Econometric Results - Summary Table   fiscal discipline – overall balance as share of GDP allocative efficiency – health spending volatility (- effect means improvement) allocative efficiency - health spending as a share of overall government spending technical efficiency – health spending ‘s effect on life expectancy technical efficiency – health spending’s effect on child mortality (1) (2) (3) (4) (5) MTFF 0.845** -2.660*** 0.352*** 0.105 0.0778 (0.419) (0.911) (0.136) (0.125) (0.289) MTBF 0.986* -2.948*** 0.429** 0.0725 -0.751** (0.524) (0.966) (0.176) (0.173) (0.333) MTPF 2.816*** -2.191 1.038*** 0.513*** 0.107 (0.959) (1.554) (0.376) (0.186) (0.411) Notes: Robust standard errors clustered by country are in parentheses, *** p<0.01, ** p<0.05, * p<0.1. The results reported are based on the AB System GMM estimations with year effects and IV. All the specifications include a set of regressors and the constant term. The results are interpreted in the next slide. Regressions were run using different estimators; we present here the theoretically most powerful specification which resolves endogeneity issues (through instrumentalization and lagged variables) and model specification issues (through using panel data with country and year effects). Among the regressors were inflation, GDP growth, trade openness, population, OECD aid flows, and dummies for IMF program, conflicts, oil exporters, and HIPC Initiative.

Key Messages MTEFs improve fiscal discipline measured as overall fiscal balance. The effect is significant and increasing as the country moves from an MTFF to an MTPF.   MTEFs improve allocative efficiency measured as the volatility of health expenditures to total expenditures. As expected, the effect is larger as the country goes from an MTFF to an MTBF. While the volatility drops with after the introduction of the MTEFs, the spending in health increases consistent with expectations. Results can vary with the estimator used, but always positive when significant. Results on technical efficiency measured as health spending’s impact on output of the health sector—whether life expectancy or infant mortality—are mixed. If we use life expectancy as a measure of service delivery, results show a positive effect of the MTPF, but no effect from the introduction of other frameworks (as expected). But when considering child mortality, the only significant coefficients are negative and relative to MTBF. We ran various types of regressions using different estimators and other changes in the model to ensure our results were robust. We note here the major results from the robustness analysis (e.g., in the third bullet). We are currently revisiting the technical efficiency results—there are numerous technical challenges here that we are working through.