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

2. 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

3. 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

4. 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

5. 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.)

6. 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)

7. 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

8. 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.

9. 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

10. 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?