Managing Public Budget to Facilitate Economic Growth and Reduce Poverty

Public Expenditure Analysis & Management Staff Training Course

May 22--24, 2001

Washington, DC

Vinaya Swaroop, DECRG/PRMPS

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Two issues on my agenda...

How the public sector in general & public budget in particular can...

Help create an enabling environment to

facilitate private-sector led growth;

Help the poor.

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The public sector can facilitate economic growth & help the poor...

…but a necessary condition is that there be a

well-functioning budget system of...

• Planning,

• Policy;

• Execution, monitoring & evaluation.

44

Good public resource management...

…involves:

Getting budgetary allocations right;

Building build well-functioning institutions

for budget execution, monitoring &

evaluation.

55

The tool for improving public budget management...

…is a framework that helps in

assessing budgetary performance; and

strengthening budgetary management.

L e ve l (size ) o f S p e nd ing

[A g gre g a te F isca l D isc ip lin e ]

Eva lua tio n o f p ub lic re so urces a llo ca tio n

(w ith in a nd a cro ss se cto rs)

C o m p os it ion o f S p e nd ing[S tra te g ic P r io rity S e tt in g ]

1 . Pe rfo rman ce-ba sed bu dg eting2 . Pe rfo rma n ce -ba sed re wa rds3 . C lie n t surve ys4 . R etention o f u se r fees

E ffic ie n tP u b lic S e rvice D e live ry

(R eformin g Incetive s thro ug h...)

M a na g ing P u b lic E xpe n d itu re s : A F ram ew o rk

I. Level (Size) of Public Spending, Revenue & Deficit Issues

...Questions that any analysis of the level of

public expenditures should ask cover three

key areas...

First,

How comprehensive is the public budget?

Are contingent liabilities, off-budgeted

items, local spending, and so forth, included?

The concept of the “Consolidated General

Government”...

Second,

• How was the level of government revenues

determined?

• What kind of a tax structure exists in the

country?

Third,

How was the deficit figure chosen?

What assumptions underlie the analysis of its

sustainability?

I. Level (Size) of Public Spending & Deficit Issues (contd.)

Public spending level needs to be consistent with

the country’s long-run financing ability;

Persistently large deficits pose threats to stability

& growth of the economy;

Experience suggests deficit reduction usually

requires a cut in public spending.

I. Level (Size) of Public Spending & Deficit Issues (contd.)

A deficit reduction strategy should analyze the

following questions...

How is the deficit measured?

What is the composition of deficit financing?

What is the sustainable amount of fiscal deficits?

II. Resource Allocation ExerciseHow to?

A couple of points to remember…

Budgetary allocation process is foremost a

political decision;

In practice, there is no “optimal” allocation of the

public budget.

II. Resource Allocation Exercise

The technical part should be based on…

What is the rationale for government intervention?

Market failure (public goods, externalities)

Redistribution

What is the appropriate instrument?

What is the fiscal cost?

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D ecision Tree fo r Eva luating Pub lic P rogram s

1. Sugar & sh oe productio n2. G eneral fe rtilizer subsid y3. G eneral c urative hosp ital serv ices ?4. tertiary education ? ?

N o ra tio n a le

G overnm ent Building M aintenanc eCom m unity Developm e nt P rogram s

O u tso u rc ing

Clinic al H ealthSchool V ouchers

S u b s idy

Consum er, W ork ers, Environm en tSecuritie s and E xchang e

E lectric ity & T ele com m unication s

R e g u la tion

W h a t a re th e f is ca l co s ts?(tradeoffs based on costs )

Prim ary E ducatio nSafety Nets

Security (internal & external)Basic Health Educatio n

P u b lic p ro v is ion

W h a t is th e rig h t in s tru m e n t ?

T h e re is a ra tio n a le

W h at is the ra tiona le fo r pu b lic in te rvention?M a rke t fa ilu re (e x te rn a lit ie s , p ub lic g o o d)

R e d is trib u tion

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Education subsidy per capita by decile, Indonesia 1989

0

200

400

600

800

1000

1200P

oore

st 2 3 4 5 6 7 8 9

Ric

hes

t

Primary

Secondary

Tertiary

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Distribution of health care subsidies, Indonesia

0

20

40

60

80

100

120

140

160

180

200

Poore

st 2 3 4 5 6 7 8 9

Riches

t

Hospital inpatient

Hospital outpatient

Health center

Health sub-center

Who Benefits from Health Subsidy?Share of Total Subsidy to Health in

Bulgaria (1995), Ghana (1992) and Vietnam (1993)

0

5

10

15

20

25

30

35

1 (poorest)

2 3 4 5 (richest)

Shar

e of T

otal

Hea

lth S

ubsid

y

BulgariaGhanaVietnam

Share of Total Subsidy to Primary and Tertiary Education by

Population Quintile, Cote d'Ivoire (1995)

0

10

20

30

40

50

60

70

80

1 (poorest)

2 3 4 5 (richest)

Quintile

Shar

e of P

rimar

y an

d Te

rtiar

y Ed

ucat

ion

Subs

idy

Primary

Tertiary

2020

These incidence studies indicate that in most developing countries...

A few items in the public budget --

generally associated with helping the poor,

e.g., primary education, basic health

services, basic sanitation services -- can

help the poor if the allocated budget is

executed properly.

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Budgetary policy designed to help the poor may be only a necessary condition...

...Good budgetary management is very

important for effectively delivering services to

the poor…

A recent Public Expenditure Tracking Survey

in Uganda showed that on average less than

30% of public funds earmarked for primary

school reach their intended destinations. The

remainder are lost or diverted.

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Linking public spending with desirable outcomes…What is the evidence?

A generally accepted notion -- Efficacy of

public spending is improved if budget

institutions work well.

Research has shown that public health

spending has no demonstrable effect on

health indicators (e.g., infant mortality). A

conjecture: Mismanagement of funds!

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Fiscal Cost Comparison: An Example from Morocco

Farm subsidy, millions of dollars

160%

of preventive health

1989

1990

1991

1992

Average

0 60 120

67

76

90

107

85

20% of basic

education

III. Efficient Delivery of Public Services

A key requirement is to reform the incentives in the

public sector…

• Merit based recruitment and promotion in the

public sector;

• Performance-based budgeting and rewards;

• Assessment of public service delivery through

client surveys.

III. Efficient Delivery of Public Services (contd.)

Experience suggests...

Several countries--developed and developing--

have initiated such reforms (New Zealand and

Malaysia);

But such reforms take time, and the success is

based upon initial conditions in the country

including existing capacity and political readiness.

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Several issues relating to improving budgetary management...

Better planning of budget policy;

Successful budget execution;

Monitoring issues including better account

preparation and benefit evaluations; and

Oversight mechanisms including external

audit.

Improving Budgetary Management...

…by linking policy, planning and

budgeting through a medium-term

expenditure (MTEF)...

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What is a MTEF?

A tool for linking policy, planning & budgeting

over a medium-term ( 3 years) at the

Government-wide level;

It consists of a top-down resource envelope & a

bottom-up estimation of the current & medium-

term costs of existing policies;

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What is a MTEF?

Matching of the two in the context of the

annual budget process; and

Involves rolling over this exercise every year

by incorporating policy changes.

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What can it do?

If successfully applied, it can

Improve macroeconomic balance by developing a

multi-year resource framework (expenditure &

revenue);

Assist in improving resource allocation between &

across sectors;

Improve predictability of funding for line ministries.

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What it does not do?

MTEF is about budget planning given policy

choices;

It does not tell you about what public spending is

buying (i.e., the link between inputs & outputs); and

It is not about accountability (i.e., how are

resources being spend).

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A Checklist on MTEF...

Can the country do a reasonable 3-year projections of

expenditures & revenue?

Is the bottom-up exercise of 3-year cost projections

(capital & recurrent; programs & subprograms)

feasible?

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A Checklist on MTEF...

If the capacity does not exist, what would be a sequenced

process of building it?

What country preparations are needed before a MTEF

could be successfully adopted?

Last but not least: A MTEF will not solve all the service

delivery problems.