Managing Public Budget to Facilitate Economic Growth and Reduce Poverty

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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.

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Good public resource management...

• involves
• Getting budgetary allocations right
• Building build well-functioning institutions
  for budget execution, monitoring evaluation.

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The tool for improving public budget
management...

• is a framework that helps in
• assessing budgetary performance and
• strengthening budgetary management.

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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...

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• 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...

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• Second,
• How was the level of government revenues
  determined?
• What kind of a tax structure exists in the
  country?

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• Third,
• How was the deficit figure chosen?
• What assumptions underlie the analysis of its
  sustainability?

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

• Public spending level needs to be consistent
  with the countrys 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.

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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?

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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.

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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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Education subsidy per capita by decile,
Indonesia 1989
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Distribution of health care subsidies, Indonesia
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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
outcomesWhat 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
1989
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20 of basic education
1990
76
1991
90
160 of preventive health
1992
107
Average
85
0
60
120
Farm subsidy, millions of dollars
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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.

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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.

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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.