1. Budget Formulation: good practices
Bill Dorotinsky
PREM
PREM-FM Budget Execution and Financial Accountability Course
January 2005

2. Outline Why formulation in an execution course?
Three PEM System Objectives
Process Issues
Quality Issues
Budget office roles
New Resources
References

3. Why budget formulation in a budget execution course?
Other half of an integrated system
Problems emerging in execution may have origin in formulation
You cannot implement well a badly formulated budget
Some execution and formulation processes and reforms interdependent
Cannot formulate well without actual expenditure data as starting point
To properly diagnose and reform execution requires some understanding of formulation

4. 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

5. 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

6. 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
Two stage process

7. 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

8. 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

9. 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

10. 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)

11. New Resources World Bank – IMF Budget Law Database Currently
Currently
41 country budget laws, 3 draft budget laws,
10 fiscal responsibility laws, and
15 other public finance laws on-line
Users can and should contribute

12. New Resources (2)
World Bank – OECD Budget Practices and Procedures database
44 developed and developing countries
Covers formulation, execution, basic structure, budget documents, performance management, intergovernmental fiscal relations, special issues (e.g. HR)

13. Example
Source: World Bank – OECD budget procedures database at

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