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2013/SFOM11/016 Session: 5.1

Treasury and Budget Reform

Purpose: Information Submitted by: World Bank

11th Senior Finance Officials’ MeetingManado, Indonesia

22-23 May 2013

Treasury and Budget Reform

APEC Finance and Central Banks Deputies’ Meetings

Manado, Indonesia

May 23, 2013

Theo Thomas Senior Public Sector Specialist

Outline

1. Introduction to

Policy-based Spending Reviews

2. Application of Policy-

based Spending Reviews

• What would a Policy-based Spending Review involve?

• What is the institutional framework and underlying institutional issues in the key spending areas?

• What are Policy-based Spending Reviews?

• How do they fit in

with the budget cycle and other processes for monitoring and evaluating public spending?

3. Impact of Spending Review

Sections

Key Questions

• Reprioritization and fiscal space (spending on the right interventions)

• Improving technical efficiency (the quality of implementation and effectiveness of the intervention) within key spending areas?

Crisis has strengthened focus on budget evaluation

Program reviews

Review consistency in design, execution and reporting Based on logical framework Often performed internally within line ministries

Spending reviews Assess consistency of portfolio of programs within and across sectors Set ex-ante (multi-year)

budget / resource ceilings Coordinated at the center, but strong partnership with departments/programs themselves

Impact evaluations Assess program effectiveness on basis of impact measures Methodology includes extensive data collection, sophisticated evaluation techniques (CBA, CEA) Often performed by experts - consulting firms, universities etc.

Summary measures incorporate a wide range of performance information into one or more overall performance ratings for the program, e.g. US PART, Korea, Thailand

Value-for money /efficiency reviews – consider the scope for efficiency savings across public expenditure . Often centrally driven, but may use ‘independent’ resources, while supreme audit agency also considers on a case-by-case basis

Spending Review: a specific type of evaluation

• Spending review is an institutionalized process for the review of baseline expenditure

• Looking not only at effectiveness and efficiency under current funding levels, but the consequence for outputs and outcomes under alternative funding levels

• Identification of savings options is an essential part of the spending review process…although process might identify options for increased as well as reduced funding

• Spending review is a process that is explicitly intended to feed into budgetary decisions

• Spending review is necessarily a process that is directed and managed—at the bureaucratic level—by the central agencies that play a key role in budget preparation (e.g. MOF, Prime Ministers’ Dept)

Source: Adapted from Robinson, M, 2012, Spending reviews in OECD Countries, World Bank

Emphasis depends on the dominant fiscal objective

Source: Typology and implementation of spending reviews, OECD SBO Discussion Paper, 27-October 2011

Often multiple techniques are used

Spending review objective is often to realize expenditure reductions through more specific / efficient savings.

But approach is often combined with

Across-the-board cuts: application of a standard percentage reduction to all spending ministry budgets on a one-off basis (e.g., cutting all ministry budgets for the coming year)

Productivity dividend: efficiency dividend, a small percentage (e.g. 2 percent to each ministry’s operating budget), based on the justification that ministries should in general be able to improve efficiency by at least that rate annually

Basic purpose of a spending review is to improve the quality of public services (including savings)

• Focus on the objectives of programs, their relevance to current government priorities, the outcomes being achieved and at what cost

• Are necessarily about changing programs and thus require that choices are made

• All spending ministries are typically expected to develop an agenda of spending reviews and undertake some review activity regularly

• Are most effective if target programs where there is reason to believe that cost effectiveness can be substantially increased and savings realized

• No mechanistic link between performance and resource allocation within spending review

Processes focus on existing expenditures and consider breadth and depth (selective)

Institution / Program Policy-based Spending Reviews

New Initiatives

Baseline review or

comprehensive

Exp

end

iture

‘New Initiatives’ Approach focuses only on new policy – not on existing spending Often need two track focus on existing expenditures • Policy-based Spending reviews could look “intensely” at the past performance

of a policy, institution, or sector , i.e. examine in detail • Baseline review is across the board monitoring of past performance - but “light”

Spending Reviews: sequence of activities Analysis of Expenditure by Program/Objective

Breakdown of expenditure by program, historic costs, current expenditure and forecast trends (i.e. baseline)

Identify Areas of Highest Priority/Return

Identify relationship with government priorities and scope for improving value for money in programs or processes

Reprioritization of Expenditure

Revise forward estimates based on savings/new money and revised performance framework (indicators etc.)

Delivery Planning and Implementation

Actions required to refocus expenditure on objectives identified and remove obstacles

Requires cross government coordination, analysis and data is important – an intensive process • Although the center of Government usually leads the process,

the line ministries have the better information

• Good analysis, policy design, and policy implementation requires extensive data (good IFMIS and analytic tools, e.g. DEA)

• Data should cover all public entities, including central and local governments and other public sector institutions. Includes

Data on detailed cost and functional expenditure components;

Requires performance information for programs

Data needs to be collected in a timely fashion.

Reprioritization and fiscal space under the Spending

Review Process……. UK demonstrated capacity to achieve major shifts in expenditure

Large shift in priorities toward health, education and transport: share in total public expenditure increased from 28 percent in 1997-98 to 34 percent by 2007-08 Since 2008 - helping to manage significant budget cuts, while protecting heath and ODA budgets

Australian Expenditure Review Committee (ERC) targeted expenditure cuts at low-priority programs to create fiscal space in 1980s and 1990s

Softened the pain of expenditure cuts, but also made fiscal consolidation more sustainable More efficient than across the Board cuts

Many crisis hit countries are following suit (e.g. Greece 2008)

• All direct program spending reviewed - 25% each year

• Treasury Board and its Secretariat set terms of reference:

Comprehensiveness – assessment of mandate, departmental objectives, program effectiveness, efficiency and alignment to government priorities

Reallocation proposals – options for program reductions or eliminations to reallocate to government priorities and support overall spending control

Reinvestment proposals – options to better support government priorities

• Departments review the relevance and performance of their spending, identify lowest performing/priority 5% of programs, seek outside expert advice and report to the Treasury Board

• Privy Council Office identifies review departments every year and assesses, with Treasury Board and the Department of Finance, the departmental proposals

Canada’s Strategic reviews are program-based and results-informed

• Scope: discretionary or mandatory expenditures; sectors reviewed; level of government

• Level of review: all of government; sector programs; organizations; horizontal policies

• Institutional arrangements – who leads

• Time frame/Periodicity: fixed period or rolling basis

• Resulting savings options: in terms of staff or funding; in absolute or percentage terms (claimed or realized?)

• 2011 OECD Performance Budgeting Survey to review

spending reviews Comparison of country experiences

Significant variation in design of spending reviews

THANK YOU