Making Budget Reform Matter for the Poverty Reduction Linking PRSPs and Budgets Bill Dorotinsky Public Sector Governance Washington, D.C. April 27, 2006

Challenge Reflecting PRSP policies in the budget Fund allocation follows policies Funds spent as intended Services to poor increase Poverty reduced Seemingly straightforward challenge Identical to broader challenge of incorporating policies in budgets

Institutional Hurdles Assumes budget is policy instrument Assumes institutions in place to develop, cost policy MTEF Separate processes for PRSP may not advance integration Assumes sector ministries also prefer PRSP policy, as well as MoF and Government And that budget is executed as planned

MTEF Experience Challenging reform Frequently too much attempted at once Short-run results have been mixed Sometimes itself a separate process Takes more time than expected to build institutions, change incentives, and incorporate political officials into process But there are smaller steps that can be taken

Unbundling MTEFs Multi-year Feature PEM Objective Intended Effect Requires Product 1. Macroeconomic forecast Macrofiscal discipline Provides strategic framework for setting fiscal and monetary policy, and allows proactive fiscal adjustment to changing economic trends. Forecasting model, capacity, multi-year macro variable time series, or access to multiple non-governmental forecasts Macroeconomic Forecast paper, a key topic for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4 2. Multi-year revenue, debt sustainability analysis and debt policy, yielding expenditure envelope Sets upward bound for expenditures, limiting deficits, inflation, and currency depreciations; supports sustainable fiscal policy, and realistic expenditure planning within the expenditure envelope; supports focus on adequate revenue mobilization. Forecasting models. Stronger if relationships between macro growth, income distribution, and revenues understood and modeled. Debt sustainability analysis/model, or hard rule on debt/deficit limits. Revenue and Tax Policy Paper Debt Sustainability Analysis and Policy Paper (Both key topics for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4.)

Unbundling MTEFs (2) Multi-year Feature PEM Objective Intended Effect Requires Product 3. Multi-year forecast of spending under current policy or current level of services, by ministry or program Macrofiscal discipline, Allocational efficiency (sector) Broad indicator of future cost of current spending trends, identification of potential risk areas, and proactive, measured, more rational fiscal adjustment. Baseline for evaluating policy spending choices. MoF provided inflators for pay, non-pay, and clear guidance for projecting costs. Can be automated. Can be budget year only, but more effective over several years. Expenditure trends paper, a key topic for a fiscal policy paper that draws together products from Item 1, 2, 3, and 4. 4. Multi-year ceilings for sector ministries Allocational efficiency (sector), Macrofiscal discipline, Operational efficiency Enabling more realistic planning, appropriate policies; incentive for reviewing existing programs for effectiveness, reallocations within sectors. At center, explicit trade-offs between sectors. More credible if reflecting policy choices, which requires some explicit policy directions on reallocation. More effective in changing behavior if approved by cabinet or parliament. Sector ceilings table, as part of fiscal policy paper (which draws together the Papers and forecasts produced in Items 1, 2, 3 and 4)

Unbundling MTEFs (3) Multi-year Feature PEM Objective Intended Effect Requires Product 5. Multi-year sector strategy Allocational efficiency (sector), Operational efficiency, Macrofiscal discipline Sector strategic plan links outputs/outcomes with inputs in multi-year framework. Effective only if prepared within multi-year sectoral resource ceiling. Sector ministry strategic planning capacity, on program outputs/outcomes information, and relationship to activities and inputs. Sectoral plans, starting with sector ceiling, the spells out objectives, outcome targets, current outcome trends, and actions to be taken, including priority programs, capital and current spending, etc. 6. Multi-year cost estimates of new policies or programs (recurrent), or expansion of existing programs, prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Identifies multi-year implications of new initiatives relative to their objectives, and assessment of whether they can be financed from within existing sectoral ceilings or even within aggregate spending ceilings, and if they are financially sustainable over time. Requires guidance/training for spending ministry staff, and spending ministry staff capacity; MoF provision of common inflators for use by ministries (pay rates, non-pay, capital costs). Budget tables

Unbundling MTEFs (4) Multi-year Feature PEM Objective Intended Effect Requires Product 7. Multi-year estimates of cost of existing policies, programs, subprograms, or activities prepared by sector ministries Operational efficiency, Allocational efficiency (sector), Macrofiscal discipline Sensitizes sector ministry to cost drivers, affordability of existing policy or programs, attention to different means of attaining objectives, unit cost. Can begin at program, and later move to subprogram and activity costing. Requires trained staff at spending ministries, agencies; MoF guidance and common inflators (pay rates, non-pay, capital costs). Budget tables 8. Multi-year estimates of cost of new projects (capital), or expansion of existing projects, prepared by sector ministries Many capital budget processes already include such estimates, including the recurrent cost implications of new capital projects. Trained staff at spending ministries, guidance on costing, understanding of project design and work flow.

MTEF Sequencing Start with macro (1,2,4) With sector ceilings (4), can select some sectors for strategy and costing (5) And within sector ministry, can focus on some programs, and some aspects of policy (new recurrent, new capital, existing current and capital) Program and performance reforms can follow later

Incentives: The Greater Challenge Beyond the technical is the incentive issue Why would Government choose to reflect pro-poor policies in budget? Are PRSP priorities really Government priorities? If not, how to change incentives? What other policies would be displaced? What interest groups would be affected? What country conditions existed that enabled better reflections of PRSP policies in the budget?