1. 1 Public Expenditure Management and the Medium-Term Fiscal Framework Workshop on Bhutan Public Expenditure Management August 16-20, 2004 Christian Eigen-Zucchi The World Bank

2. 2 What is an MTFF? Typically consists of integrated macroeconomic and revenue projections, and a policy commitment to a set of strategic fiscal policy goals. An MTFF is a first step of an MTEF in moving the budget process from a needs basis to an availability basis – determines the aggregate resource envelope.

3. 3 Going Back to the Three Objectives of Public Expenditure Management Systems… Macro-fiscal discipline and stability Avoid public finance crises or the need for major adjustments Support economic growth and macroeconomic stability Strategic allocation of resources Match government policy with programs, objectives (allocative efficiency). Technical efficiency Getting the most from each ngultrum spent

4. 4 Macroeconomic Projections In order to develop sound revenue forecasts, some key macroeconomic variables need to be projected GDP growth Inflation Power sales Tourist arrivals Others?

5. 5

6. 6 A Robust Multi-year Projection of Revenues Base revenue projections on the forecasts of key macroeconomic variables. Build from the bottom up. Seek coherence across agencies. Refine and improve methodology over time.

7. 7

8. 8 Commitment to Fiscal Path Choose fiscal targets deemed consistent with: Desired macroeconomic path (inflation, external accounts, available finance). Overall strategic policy goals (such as size of government as a share of GDP, pillar of 9FYP of fostering private sector led growth).

9. 9

10. 10 Commitment is Essential The key to the credibility of the targets is the extent to which expenditure adjustments would be made to compensate for any revenue shortfalls. If no adjustments would be made, then the targets are purely notional, and not likely to be met. If serious spending adjustments would be demanded of the line ministries in the event of a revenue short-fall, then the targets become meaningful (AP example).

11. 11 Step 1. Macroeconomic and public sector envelopes Macroeconomic Estimates Revenue Estimates Expenditure Estimates (current services) Fiscal Policy Expenditure Estimates (current law, normatives) Affordable/sustainable Fiscal Envelope Monetary and Fiscal Policy Debt and Deficits Aid flows All in multi-year context

12. 12 The MTFF process gives… A more predictable resource envelop over a medium-term horizon. For example, the overall balance target, say a deficit equivalent to 5% of GDP, combined with a revenue forecast equal to 35% of GDP, yields an aggregate fiscal envelop for spending of 40% of GDP. A commitment from the Government to follow a sustainable fiscal policy. Key step in moving budgeting from a needs to an availability basis.

13. 13 Capacity is a Significant Issue Technical Staff skills policy analysis, macro forecasting, budget examination Policy Capacity to enforce hard budget constraints Commitment to a continuous process of improvement