MTEF Lessons of Experience: Lessons from the U.S. and Africa Bill Dorotinsky The World Bank Seoul, Republic of Korea March 16, 2004

U.S. Background Presidential system of government Strong legislature with ultimate spending authority Full federal system – subnational not covered Formal medium-term estimates required from 1970 onward, mainly for macrofiscal reasons Started with relatively high capacity Started with good classification, accounting systems Program budgets Reforms about improving PFM system and budget process, not ‘MTEF’ as separate exercise

Stage 1: macrofiscal envelopes Sound technically but opportunities for political involvement taught hard lessons Technical and policy consensus mechanism important (troika) Policy key driver of outcomes, set at political level (NEC) Weaker macrofiscal outcomes tolerated in large system with easy access to capital markets

Stage 2: top-down sector ceilings Relatively weaker top-down in executive Functional classification used, but weakly Executive for broad analytical view Legislature for hard ceilings ex ante But high correlation between ministry and sector/function makes that less important Out-years less important until fiscal rules adopted

Stage 3: linking policies, resources and means within sector Strong linkages between law, resources, policies In executive and legislature High capacity at spending ministries, agencies, and legislature But weaker executive top-down ceilings limit intra-sector trade-offs pressure to review existing programs Under hard fiscal rules, more pressure for trade-offs in executive --- and in the legislature Mostly in discretionary spending And for NEW mandatory spending

Stage 4 and 5: aligning top-down and bottom-up, at technical and policy levels Weaker sector ceilings early in process make this more important Ministry-budget office conflict Appeals process critical Generally, high budget office discretion to enforce policy decisions from stage 1, 2

Broad Lessons Budget process evolved over many decades, and still evolving (including medium-term aspects) Sound macrofiscal estimation critical Hard sector ceilings early-on yield more benefits for sectoral allocation Formal intra-executive consensus mechanism important (technical level and policy level) Legislature must also have formal internal process for managing its role in process Perhaps less critical where legislature has limited role Comprehensive budget important Capital and recurrent; planning and development Mandatory and discretionary Transparency helps reinforce good behavior

Ghana Background Parliamentary system, limited legislative role High political instability over decades lead to crisis Unitary state, but subnational not directly addressed in MTEF Poor country, with little margin for error Relatively limited technical capacity Weak accounting, classification MTEF approached more as technical reform, less emphasis on policy dimensions bundled with other large reforms (program budgets, IFMIS) intended to address macrofiscal, allocative, and technical efficiency

Ghana: over-all assessment Stage 1: macrofiscal Weak technical capacity, high political involvement Weak basis for fiscal policy and budgets Stage 2 Weak stage 1 and low capacity limited effectiveness Wage bill determined outside of budget process Stage 3 Low capacity, non-comprehensive budgets undermined Stage 4 and 5 weak, more perfunctory Lessons: initial conditions matter attempting too much at once will undermine reform implementation needed broader policy and technical consensus

South Africa Background Parliamentary system, limited legislative involvement, but high capacity, transparency and accountability Unitary state, subnational involved Middle income country Political stability Relatively high capacity, but generally limited to center (versus ministries, provinces, municipalities) Decent national FMIS, but limited at subnational MTEF focus on allocation and technical efficiency First MTEF failed

South Africa: overall assessment Stage 1 macrofiscal Treasury dominates, technical and policy Prudent policies pursued Stage 2 sectoral allocation Cabinet subcommittee reviewed, cabinet approved Program budgets help Stages 3-5 Collegial approach from beginning make this less contentious, raise issues early

Uganda Background Parliamentary system Unitary state Low-income Recent general political stability Strong leadership from president directly Limited capacity, but effective use of expatriate skills and focus on building-capacity Reasonable accounting, fmis

Uganda overall assessment Stage 1 Broad civil society consensus building Cabinet level approval Generally prudent, as political officials understand economic impact Stage 2-5 Broad consensus within and outside government makes process easier Lessons: Strong leadership from top can overcome capacity limits Transparency and consensus ease later stages of process, and afford many opportunities for accountability Prudent macrofiscal important