1. Unit 2– PFM domains and sequencing of reforms Module 2.1. Expenditure Classification, budget Preparation and the MTEF Budget classification and programme 1

2. Day 1: Approaches to PFM reform Day 2 : PFM sub-systems and prioritization amongst them Day 3: Change management – Reform sequencing issues – Case study Course outline 2

3. Day 2: Objectives of the modules This module examines a few (non exhaustive) key sub-systems of PFM o For each sub-system, we look at:  The level of development regarding the « foundations »  The links between the foundations and the PEFA  The developments beyond the foundations Concerning the last point, it analyses in particular the program/performance budget issues that are explained in a separate module. 3

4. Day 2: Sub-systems of PFM and sequencing of reforms Module 2.1. Expenditure Classification, budget Preparation and the MTEF Module 2.2. Expenditure and accounting cycle Module 2.3. Program/Performance budget Module 2.4. External control, legislative and regulatory framework and IT (information technology) issues 4 4

5. Module 2.1. Outline Expenditure classification Budget preparation Going beyond the foundations: MTEF PEFA indicators regarding budgetisation 5

6. Expenditure classification A regulatory framework in order to: Formulate policies Analyse the budget Make international comparisons Determine budgetary authorisation –Budget expertise unit or appropriation (eg. Chapter or programme) Day-to-day management 6 6

7. The foundations: Traditional classification (1) Aims at enabling day-to-day management and ensure monitoring of inputs and budgetary aggregates Guarantees the foundations (or essential functions) At crossroads between an administrative classification (ministries, departments, etc.) and and economic classification (line item/object) Eg. Expenditure of the primary education department in gas Economic classification must be in line with the GFS guidelines Relates to the grade C un the PEFA framework (PI n°5)

8. May be imperfect in fulfilling its role and/or make it more difficult to analyse the budget and automatic processing Economic classification does not differentiate between economic nature and goal ( eg. Hospital vehicles) Economic classification is not in line with GFS Administrative classification depends on the nature od the expenditure ( eg. Detailed goods and services expenditure of the direction and aggregated expenditure for each ministry)  This last imperfection make sit difficult to establish a programmatic classification, as it usually requires a table allowing to pass from administrative structure to programme structure 8 The foundations: Traditional classification (2)

9. Going beyond the foundations A first step towards analysing public policy: classifying public administrations according to their function 3 levels Level 1 : 10 divisions (easy) Level 2 : 69 groups (more difficult) Level 3 : 109 classes More advanced, for analysis of public policy and performance: programmatic classification (cf. module 2.3) 9

10. Analysing the budget Crossing functional and economic classifications together 10

11. Module 2.1. Outline Expenditure classification Budget preparation Going beyond the foundations: MTEF PEFA indicators regarding budgetisation 11

12. The importance of budget preparation The budget Main instrument of implementation of public policies Voted by legislative authority –It is a milestone in the construction of a democratic system The preparation phase is essential, as difficult choices must not be delegated to the execution phase 12

13. The Foundations: ensure the credibility of the budget Budgetary and macroeconomic framing A budgetisation process that eases strategic decision- making and leaves enough time for ministries to carry out internal decisions “two stage” budgetisation Budget preparation schedule that is clear and thoroughly abided to 13

14. The macroeconomic context For global budgetary discipline and determining the totals: establish the macroeconomic context, including a provisional GFOT (Government Financial operations Table) Define the global totals and the budgetary goals (eg. Deficit) Examine the sustainability of the budgetary policy 14

15. The GFOT 15

16. A preparation schedule for a disciplined budget - Example 16

17. Module 2.1. Outline Expenditure classification Budget preparation Going beyond the foundations: MTEF PEFA indicators regarding budgetisation 17

18. Going beyond the basics: the MTEF It is important to keep a pluriannual perspective in mind in order to help maintain global budgetary discipline and plan ahead any policy changes that may require time to be carried out Hence the benefit of a Medium Term Expenditure Framework (MTEF), often defined as follows: Rolling pluriannual expenditure programme; Established on a yearly basis; In line with the budget the first year, in line with the GFOT the following years. 18

19. 19 Plans/stratgies, meduim term frameworks and budget Cost estimation

20. 20 MT/LT plans and/or strategies Long term plans: spatial and infrastructural planning, human resources planning, etc. Medium term plans/strategies: (5-year plans, PRSP) Costs of the plans and strategies actions must be estimated The estimation must be realistic, although it may contain variations, and shed light on eventual financing gaps

21. 21 The different Medium term frameworks Financial framework and putting plans and strategies into operation Global framework: provisional GFOT GFOT expenditure allocation by destination: MTEF Resource allocation across ministries and sectors: global MTEF –For each ministry/sector and broad purpose of the expense Resource allocation within ministries /sectors: sectorial MTEF –May sometimes be classified by expense purpose –T of the time, it is classified by programme, or even by programme ad activity. 21

22. 22 Global MTEF Resource allocation across sectors, budgetary framework Provisional MTEF Establishes the budgetary aggregates Ministry MTEF Resource allocation within sector (with a variable degree of detail) 22

23. 23 Global budgetary discipline: (GFOT) Resource allocation in line with the objectives: prepare and carry out the strategies. (global sectorial MTEF) Budgetary margin is insufficient to plan policy changes Operational performance (ministry MTEF) : If the processes are disciplined, provide flexibility to managers Eventually, provide a framework for performance monitoring Medium term frameworks and PFM objectives 23

24. Global MTEF  Forecast of expenditure for each ministry or sector, in line with the GFOT Must contain detailed technical forecasts  Framework for the preparation of the budget Is part of a document on policy orientation, approved by policy-makers The spending ceilings of ministries are often derived from the global MTEF. Sometimes it may be included in a budget review issued half-way through the period and presented to Parliament. 24

25. Ministerial/sectorial MTEF Variable objectives, roles and presentation Different links with regard to the budget: o 1. Ministerial MTEF is the ministry’s budget covering over 3 to 4 years, but only in the first year are payments authorised o 2. Sectorial MTEF is a document separated from the budget –Different ways of integrating it in the budgetary process are possible Different functions o Resource allocation-only o Resource allocation and result-oriented budgetisation (cf. section on programme budget) 25

26. The scope of « sectorial » MTEF The budget is prepared and carried out by the ministries responsible enacting public policies o A budgetisation-oriented MTEF must be organised per ministry. o Scope of ministerial MTEF: budget of the ministry, and eventually budget of its autonomous branches This does not rule out issuing documents on transversal politic o These documents must identify the responsibilities of the ministries o Such documents will generally precede the MTEF procedure 26

27. 27 The MTEF procedure The MTEF procedure aims it encouraging financial arbitrage and discipline The MTEF is part of a budgetisation process that occurs over two different stages The MTEF is prepared assuming hypotheses of prudent revenue management New programmes and public policy changes (+/-) are analysed The (final, published) MTEF only includes programmes that have been agreed upon and that are financeable The political sphere must be implicated in the process 27

28. 28 MTEF process Reference scheme 28

29. 29 Preparation of spending ceilings by the ministry 29

30. MTEF applied in DC : deceptions (1) IMF – World Bank: "developing comprehensive medium-term expenditure frameworks can be effective when circumstances and capacities permit. Otherwise, it can be a great consumer of time and resources and might distract attention from the immediate needs for improving the annual budget and budget execution processes. …in a number of African countries, the MTEF was introduced prematurely, and is turning out to be merely a paper exercise ". IMF — World Bank "Global Monitoring Report 2006" page 146. 30

31. European Commission : However, it does not make sense to demand a "sector MTEF" prematurely. The development of a sector MTEF is a gradual process that should focus first on building sound bases, such as a credible annual budget, mechanisms to ensure that all expenditure programmes are prioritised within the existing resource envelope, agreed national and sectoral policies and the definition of aggregate fiscal objectives. Support to sector programmes. Guidelines no2. July. 2007. Page 22. http://ec.europa.eu/development/icenter/repository/Support -to--Sector-programmes_short_27072007_en.pdf http://ec.europa.eu/development/icenter/repository/Support -to--Sector-programmes_short_27072007_en.pdf 31 MTEF applied in DC : deceptions (2)

32. A few critiques Weak link with the budgetary process Sectorial MTEF not financeable, little credibility No rolling program. Every year the process starts anew The MTEF predictions do not appear in the Budget Heavy and demanding MTEF exercises by activity/output often initiated then abandoned (eg. Ghana in 2000) Time-consuming, inefficient 32 MTEF applied in DC : deceptions (3)

33. Developing a MTEF with limited failure probabilities Harmonise the Budget and MTEF preparation procedures A sectorial MTEF must be framed Bide by the logical process order in developing medium term frameworks: 1. provisional GFOT; 2. global MTEF; 3. sectorial MTEF Assign sectorial MTEFs by ministry, in order to limit the diffusion of responsibility Political sphere must me included in key stages of the process Avoid excess detail and complex nomenclatures 33

34. Module 2.1. Outline Expenditure classification Budget preparation Going beyond the foundations: MTEF PEFA indicators regarding budgetisation 34

35. PEFA indicators PI-11. Orderliness and participation in the annual budget process PI-12. Multi-year perspective in fiscal planning, expenditure policy and budgeting 35

36. PI-11. Orderliness and participation in the annual budget process Dimensions to be assessed: (i) Existence of and adherence to a fixed budget calendar : B: exists, but some delays are often experienced in its implementation. The calendar allows reasonable time (at least four weeks from receipt of the budget circular) (ii) Clarity/comprehensiveness of and political involvement in the guidance on the preparation of budget submissi ons : B: Exists (iii) Timely budget approval by the legislature : B: The legislature approves the budget before the start of the fiscal year, but a delay of up to two months has happened in one of the last three years 36

37. PI-12. Multi-year perspective in fiscal planning, expenditure policy and budgeting Dimensions to be assessed (i) Multi-year fiscal forecasts and functional allocations o Score C: Forecasts of fiscal aggregates are prepared for at least two years on a rolling annual basis (ii) Scope and frequency of debt sustainability analysis o Score B: DSA for external and domestic debt is undertaken at least once during the last three years (iii) Existence of costed sector strategies o Score D (iv) Linkages between investment budgets and forward expenditure estimates Score C: Many investment decisions have weak links to sector strategies and their recurrent cost implications are included in forward budget estimates only in a few (but major) cases. 37

38. Key messages Budgetary classification must include: o An economic classification (line item/object) in line with SFP norms o An administrative classification that allows to identify the locus of responsibility in the budget implementation process A budget preparation schedule must allow ministries sufficient time to prepare their budget after they have been notified of the spending ceilings decided upon at the political level. Implementing an MTEF enable to reinforce the link between policies and budget, although only under a certain number of conditions are : o Preparation of the MTEF is integrated in the budget preparation procedure o The MTEF is examined on the political level o Ministerial MTEFs are enclosed within a global MTEF 38