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The Architecture of Medium Term
Frameworks and
the Construction of Expenditure Ceilings
Part I
From Economic Planning
To the Medium Term Fiscal Framework
- Principles, Definitions and Architecture -
Jean-Marc Lepain
Public Financial Management Advisor
Ministry of Finance, Brunei Darussalam
May 3rd , 2017
Purpose of the seminar
1. To understand the general principals of macro-fiscal
planning
2. To understand the linkage between economic planning
and budgeting through medium term frameworks
3. To present the methodology for the construction of the
expenditure ceilings namely; the medium term fiscal
framework, and the ministries’ ceilings
2
Outline of the Seminar
Cession I: From Economic Planning to the Medium Term Fiscal
Framework: Principles, Definitions and Architecture
1. Principles for linking economic planning with budgeting
2. General overview of economic and fiscal planning
Cession II: From the Medium Term Fiscal to Ministries’ Ceilings –
Methodology and Design
1. Medium Term Expenditure Ceilings: Purpose and Concepts
2. Methodology and Design
3. Methodological Issues with Medium Term Expenditure Ceilings
4. Disaggregation of Ministries’ ceilings
5. Expenditure Ceilings in the Context of a Fiscal Adjustment
Conclusions
3
1. Principles for linking economic
planning with budgeting through fiscal
planning
Three types of planning
• Economic planning (Economic Policy)
• Fiscal planning (Fiscal Policy)
• Budget planning (Budget Policy)
5
What is macro-fiscal planning?
Definition: Macro-fiscal Planning is a technic to link economic
planning with budgeting to ensure that the budget is policy driven
Pre-requisites for macro-fiscal planning:
• A medium term development strategy and a medium term economic
plan
• Costed sectors’ (ministries) strategies
• Programme-based budgeting
Desirable:
• A Ministries’ Medium Term Expenditure Framework (MTEF) for each
sector is consolidated in a national MTEF
6
Fiscal Planning Methodology
• Fiscal Planning is a set of institutional, procedural and regulatory
arrangements for prioritizing, managing and presenting revenue and
expenditure in a multi year perspective in line with medium term
economic and social priorities and objectives.
7
A top-down medium term
resource envelope
Consistent with macro
stability and broad policy
priorities
Bottom-up cost estimate
of policy. The current and
medium term cost of
existing national (sector)
programmes & activities
Reconciling costs with
resources
A decision-making process
that reconciles these costs
and new policy ideas with
available resources
8
The Fundamental Stages of Fiscal Planning
Defining Economic
Objectives
Identifying the Fiscal
Constraints
Determining the
Expenditure Ceiling
Assessing Fiscal
Space
• The number of objectives should be limited
• Should reflect long term goals
• Short term objectives should be in line with long term
objectives
Allocating Recurrent
& Investment
Ceilings
• Fiscal constrains are medium Term
• They depend on Government fiscal objectives…
• …but a fiscal adjustment is unavoidable
• Fiscal space is shrinking
• Additional fiscal space can be created only by policy
changes
• Integration of the two budget remains an issue
• There is a significant amount of ongoing projects
• Investment policy and its relation to fiscal policy needs
clarification
• The level of the expenditure ceiling depends on
the principles set by fiscal policy
• Medium term sustainability is the main
consideration
Fiscal Planning and Vision 2035
• Vision 2035 is not easily translated into economic objectives that can
be directly linked to the budget.
• Vision 2035 defines overall objectives which are not specific to one
ministry and not directly captured by programme-based budgeting
• Vision 2035 rest on implicit economic objectives which should be
made explicit by fiscal planning
• Vision 2035 has its own KPIs which are monitored separately but there
is no Government-wide Monitoring and Evaluation System
• Linking planning and budgeting is always a difficult task. It requires a
dedicated tool distinct from fiscal policy models.
9
Vision 2035 six strategic development thrusts
• Educated and highly skilled population
• High quality of life
• Conductive Business Environment
• Productive and progressive economy based on knowledge and
innovation
• Good governance and government modernisation
• High quality and sustainable development
10
Implicit objectives
• Economic diversification
• Sustainable growth of the oil and gas sector through Direct Foreign
Investment and development of the sector service economy;
• Pro-growth policy of the non-oil & gas sector
• Investment in national sovereign funds to generate future revenues
• Social equity in rent distribution favouring low income families
11
10th National Development Plan
• Reflect a growth policy mostly driven my Government’s investments
• Not policy based but project based
• Highly fragmented
• Fiscal envelope of BND 6.5 billion over 5 years to finance 682 projects
• It is left to the ministries to integrate the NDS in their sector plans
• Issues with costing
• Issues with timeline and prioritisation
• The return on investment has not been calculated
12
The Fundamental Stages of Fiscal Planning and
Budgeting
• Reflection of political choices and
vision of society
• Sustainability
• Total
expenditure
• Based on political priorities
• Relatively stable from year-to-year…
• … but can change over time
• Sectoral
allocation
• Efficient delivery of public services
• Predominantly technical …
• … budget can be politically sensitive
• Budget
details
13
Fundamental Stage: Top-Down
1. Total Expenditure
• budgets are consolidated to obtain total expenditure
• If spending is too large, the negotiations are reopened, revenue proposals
are initiated or the fiscal targets are revised (or a combination)
2. Sectoral Allocation
• Line ministry proposals are prepared and submitted to the ministry of
finance
• Bilateral negotiations
3. Budget details
• The cost for individual lines in the budget are assessed
• New initiatives are prepared
14
Fundamental Stages: Top-Down
1. Total Expenditure is determined based on:
• macroeconomic situation
• balance objective
• projected revenue
2. Sectoral Allocation
• Subject to the decision on total expenditure in stage 1, a sectoral allocation is decided and
formalized through ceilings
• No-policy-change assessment of existing policies
• allocation of fiscal space/distribution of savings requirements
3. Budget Details
• Subject to sectoral ceilings, the details of the budget are prepared
• Reallocations within ceilings can (normally) be allowed
• Proposals in addition to the ceilings are rejected
15
2. General Overview of Economic
and Macro-Fiscal Planning
17
Vision 2035
5 Year Plan
Medium Term
Macro-Economic Outlook
Medium Term Fiscal
Framework
Ministries’ Sector Plans
Budget
Medium Term Budget
Framework
Medium Term Performance
Framework
Fiscal Outlook
Economic Planning and Macro-Fiscal Planning
The Challenges of Macro-Fiscal Planning
• Preserving macro-economic stability
• Ensuring that economic plans are realistic and affordable
• Linking economic planning with budgeting
• Ensuring fiscal medium and long term sustainability by identifying a
sustainable path
• Ensuring the right balance between operating expenditure (recurrent
budget) and investment (capital budget)
18
The Medium Term Fiscal Framework
• The MTFF is the synthesis of the Government’s fiscal policy
• It reflects aggregate fiscal disciplines
• It puts the focus on the Surplus/Deficit and on the financing of the
fiscal gap;
• It defines the affordability of the country development strategy
19
MTEF Main Ceilings
1. Recurrent expenditure ceiling
1.1. Wage ceiling
1.2. Non-wage ceiling
2. Investment ceiling
20
MTFF Main Issues
• Realism of revenue forecasts
• Realism of outer year ceilings (hard vs. soft ceilings)
• Enforcement of the overall ceiling and aggregate fiscal discipline
• Unplanned expenditures and arrears
• Lack of integration of recurrent and investment budgets
• Cost overrun of large investment projects
• Off-budget expenditure and undisclosed expenditures
• Para-fiscal activities
• Integration of sub-national budgets
• Contingent liabilities
21
Fiscal Planning and Fiscal Policy
Fiscal Planning:
• How much fiscal space is available?
• How much fiscal deficit can I afford this year?
• What will be the impact of my fiscal policy on the economy?
• Is there a medium term sustainable path for the budget?
Fiscal Policy is the art of defining:
1. Medium and long term fiscal targets
2. Fiscal rules that will ensure the targets are met
22
The Medium Term Budget Framework
Definition: The MTBF is the tool used to disaggregate the MTFF ceilings
into ministry ceilings over a period of three years.
• The MTBF is a tool to allocate fiscal space between ministries and to
identify sector savings.
• Outer year ceilings can be hard or soft
• Revision of outer year ceilings must be limited
• Budget discussion must always start with the ceilings of year n+1
23
Budget Planning
• Must reflect the needs of the different ministries
• How the needs are identified
• How the needs are costed ? Is the costing realistic?
• Are the needs affordable?
• Must be policy driven
• Does the Expenditure Division knows enough of the ministries’ policies and
can justify them?
• Are the policies efficient and delivering results? (Performance Budgeting)?
• How do policies link to economic priorities?
• How can the budget reflect the priorities while proposing savings?
• Must exert the challenging function of the Expenditure Division
24
Specific issues to Programme-Based Budgeting
in Brunei Darussalam
• The number of ministries is small and programmes are very
large
• Issues with PFM Reform sequencing:
• Budget credibility remains an issue leaving no additional fiscal space for
programmes;
• Programmes have been established with no adjustment of policy to generate
savings;
• Programme and performance budgeting are implemented at the same time
• Dual budgeting with budget integration still in progress
• Some Ministries do not have a single budget but a budget by Business Unit
• Programmes are not yet the means of delivering policies and
the problem of integrating programmes in the ministries’
administrative structure has not been solved.
• The legal regulatory framework is not in place, therefore
ministries have not received the promised flexibility.
• Budget execution remain unchanged
• Role of programme managers not defined yet
25
The Challenges of Performance Based
Budgeting in Brunei
• The objectives of PBB are not clarified yet (promoting more efficient
policies, identifying savings, introducing more flexibility, introducing
more accountability, using KPIs for budget allocation)
• KPIs still need revision
• Budget credibility is not established yet, and undermines
performance and accountability
• Programmes are not the means of delivering policies yet and the
problem of integrating programmes in the ministries’ administrative
structure has not been solved.
• The legal regulatory framework is not in place, therefore ministries
have not received the promised flexibility.
• The Expenditure Division needs to adjust its structure and develop its
capacity for budget analysis
26
27
Medium Term Budget
Framework
Budget
National Medium Term
Expenditure Framework
Ministry MTEF
Ministry MTEF
Medium Term
Performance
Framework
The Future of Macro-Fiscal Planning
Ministry MTEF
THANKS

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The construction of expenditure ceilings part i v2 ed

  • 1. 1 The Architecture of Medium Term Frameworks and the Construction of Expenditure Ceilings Part I From Economic Planning To the Medium Term Fiscal Framework - Principles, Definitions and Architecture - Jean-Marc Lepain Public Financial Management Advisor Ministry of Finance, Brunei Darussalam May 3rd , 2017
  • 2. Purpose of the seminar 1. To understand the general principals of macro-fiscal planning 2. To understand the linkage between economic planning and budgeting through medium term frameworks 3. To present the methodology for the construction of the expenditure ceilings namely; the medium term fiscal framework, and the ministries’ ceilings 2
  • 3. Outline of the Seminar Cession I: From Economic Planning to the Medium Term Fiscal Framework: Principles, Definitions and Architecture 1. Principles for linking economic planning with budgeting 2. General overview of economic and fiscal planning Cession II: From the Medium Term Fiscal to Ministries’ Ceilings – Methodology and Design 1. Medium Term Expenditure Ceilings: Purpose and Concepts 2. Methodology and Design 3. Methodological Issues with Medium Term Expenditure Ceilings 4. Disaggregation of Ministries’ ceilings 5. Expenditure Ceilings in the Context of a Fiscal Adjustment Conclusions 3
  • 4. 1. Principles for linking economic planning with budgeting through fiscal planning
  • 5. Three types of planning • Economic planning (Economic Policy) • Fiscal planning (Fiscal Policy) • Budget planning (Budget Policy) 5
  • 6. What is macro-fiscal planning? Definition: Macro-fiscal Planning is a technic to link economic planning with budgeting to ensure that the budget is policy driven Pre-requisites for macro-fiscal planning: • A medium term development strategy and a medium term economic plan • Costed sectors’ (ministries) strategies • Programme-based budgeting Desirable: • A Ministries’ Medium Term Expenditure Framework (MTEF) for each sector is consolidated in a national MTEF 6
  • 7. Fiscal Planning Methodology • Fiscal Planning is a set of institutional, procedural and regulatory arrangements for prioritizing, managing and presenting revenue and expenditure in a multi year perspective in line with medium term economic and social priorities and objectives. 7 A top-down medium term resource envelope Consistent with macro stability and broad policy priorities Bottom-up cost estimate of policy. The current and medium term cost of existing national (sector) programmes & activities Reconciling costs with resources A decision-making process that reconciles these costs and new policy ideas with available resources
  • 8. 8 The Fundamental Stages of Fiscal Planning Defining Economic Objectives Identifying the Fiscal Constraints Determining the Expenditure Ceiling Assessing Fiscal Space • The number of objectives should be limited • Should reflect long term goals • Short term objectives should be in line with long term objectives Allocating Recurrent & Investment Ceilings • Fiscal constrains are medium Term • They depend on Government fiscal objectives… • …but a fiscal adjustment is unavoidable • Fiscal space is shrinking • Additional fiscal space can be created only by policy changes • Integration of the two budget remains an issue • There is a significant amount of ongoing projects • Investment policy and its relation to fiscal policy needs clarification • The level of the expenditure ceiling depends on the principles set by fiscal policy • Medium term sustainability is the main consideration
  • 9. Fiscal Planning and Vision 2035 • Vision 2035 is not easily translated into economic objectives that can be directly linked to the budget. • Vision 2035 defines overall objectives which are not specific to one ministry and not directly captured by programme-based budgeting • Vision 2035 rest on implicit economic objectives which should be made explicit by fiscal planning • Vision 2035 has its own KPIs which are monitored separately but there is no Government-wide Monitoring and Evaluation System • Linking planning and budgeting is always a difficult task. It requires a dedicated tool distinct from fiscal policy models. 9
  • 10. Vision 2035 six strategic development thrusts • Educated and highly skilled population • High quality of life • Conductive Business Environment • Productive and progressive economy based on knowledge and innovation • Good governance and government modernisation • High quality and sustainable development 10
  • 11. Implicit objectives • Economic diversification • Sustainable growth of the oil and gas sector through Direct Foreign Investment and development of the sector service economy; • Pro-growth policy of the non-oil & gas sector • Investment in national sovereign funds to generate future revenues • Social equity in rent distribution favouring low income families 11
  • 12. 10th National Development Plan • Reflect a growth policy mostly driven my Government’s investments • Not policy based but project based • Highly fragmented • Fiscal envelope of BND 6.5 billion over 5 years to finance 682 projects • It is left to the ministries to integrate the NDS in their sector plans • Issues with costing • Issues with timeline and prioritisation • The return on investment has not been calculated 12
  • 13. The Fundamental Stages of Fiscal Planning and Budgeting • Reflection of political choices and vision of society • Sustainability • Total expenditure • Based on political priorities • Relatively stable from year-to-year… • … but can change over time • Sectoral allocation • Efficient delivery of public services • Predominantly technical … • … budget can be politically sensitive • Budget details 13
  • 14. Fundamental Stage: Top-Down 1. Total Expenditure • budgets are consolidated to obtain total expenditure • If spending is too large, the negotiations are reopened, revenue proposals are initiated or the fiscal targets are revised (or a combination) 2. Sectoral Allocation • Line ministry proposals are prepared and submitted to the ministry of finance • Bilateral negotiations 3. Budget details • The cost for individual lines in the budget are assessed • New initiatives are prepared 14
  • 15. Fundamental Stages: Top-Down 1. Total Expenditure is determined based on: • macroeconomic situation • balance objective • projected revenue 2. Sectoral Allocation • Subject to the decision on total expenditure in stage 1, a sectoral allocation is decided and formalized through ceilings • No-policy-change assessment of existing policies • allocation of fiscal space/distribution of savings requirements 3. Budget Details • Subject to sectoral ceilings, the details of the budget are prepared • Reallocations within ceilings can (normally) be allowed • Proposals in addition to the ceilings are rejected 15
  • 16. 2. General Overview of Economic and Macro-Fiscal Planning
  • 17. 17 Vision 2035 5 Year Plan Medium Term Macro-Economic Outlook Medium Term Fiscal Framework Ministries’ Sector Plans Budget Medium Term Budget Framework Medium Term Performance Framework Fiscal Outlook Economic Planning and Macro-Fiscal Planning
  • 18. The Challenges of Macro-Fiscal Planning • Preserving macro-economic stability • Ensuring that economic plans are realistic and affordable • Linking economic planning with budgeting • Ensuring fiscal medium and long term sustainability by identifying a sustainable path • Ensuring the right balance between operating expenditure (recurrent budget) and investment (capital budget) 18
  • 19. The Medium Term Fiscal Framework • The MTFF is the synthesis of the Government’s fiscal policy • It reflects aggregate fiscal disciplines • It puts the focus on the Surplus/Deficit and on the financing of the fiscal gap; • It defines the affordability of the country development strategy 19
  • 20. MTEF Main Ceilings 1. Recurrent expenditure ceiling 1.1. Wage ceiling 1.2. Non-wage ceiling 2. Investment ceiling 20
  • 21. MTFF Main Issues • Realism of revenue forecasts • Realism of outer year ceilings (hard vs. soft ceilings) • Enforcement of the overall ceiling and aggregate fiscal discipline • Unplanned expenditures and arrears • Lack of integration of recurrent and investment budgets • Cost overrun of large investment projects • Off-budget expenditure and undisclosed expenditures • Para-fiscal activities • Integration of sub-national budgets • Contingent liabilities 21
  • 22. Fiscal Planning and Fiscal Policy Fiscal Planning: • How much fiscal space is available? • How much fiscal deficit can I afford this year? • What will be the impact of my fiscal policy on the economy? • Is there a medium term sustainable path for the budget? Fiscal Policy is the art of defining: 1. Medium and long term fiscal targets 2. Fiscal rules that will ensure the targets are met 22
  • 23. The Medium Term Budget Framework Definition: The MTBF is the tool used to disaggregate the MTFF ceilings into ministry ceilings over a period of three years. • The MTBF is a tool to allocate fiscal space between ministries and to identify sector savings. • Outer year ceilings can be hard or soft • Revision of outer year ceilings must be limited • Budget discussion must always start with the ceilings of year n+1 23
  • 24. Budget Planning • Must reflect the needs of the different ministries • How the needs are identified • How the needs are costed ? Is the costing realistic? • Are the needs affordable? • Must be policy driven • Does the Expenditure Division knows enough of the ministries’ policies and can justify them? • Are the policies efficient and delivering results? (Performance Budgeting)? • How do policies link to economic priorities? • How can the budget reflect the priorities while proposing savings? • Must exert the challenging function of the Expenditure Division 24
  • 25. Specific issues to Programme-Based Budgeting in Brunei Darussalam • The number of ministries is small and programmes are very large • Issues with PFM Reform sequencing: • Budget credibility remains an issue leaving no additional fiscal space for programmes; • Programmes have been established with no adjustment of policy to generate savings; • Programme and performance budgeting are implemented at the same time • Dual budgeting with budget integration still in progress • Some Ministries do not have a single budget but a budget by Business Unit • Programmes are not yet the means of delivering policies and the problem of integrating programmes in the ministries’ administrative structure has not been solved. • The legal regulatory framework is not in place, therefore ministries have not received the promised flexibility. • Budget execution remain unchanged • Role of programme managers not defined yet 25
  • 26. The Challenges of Performance Based Budgeting in Brunei • The objectives of PBB are not clarified yet (promoting more efficient policies, identifying savings, introducing more flexibility, introducing more accountability, using KPIs for budget allocation) • KPIs still need revision • Budget credibility is not established yet, and undermines performance and accountability • Programmes are not the means of delivering policies yet and the problem of integrating programmes in the ministries’ administrative structure has not been solved. • The legal regulatory framework is not in place, therefore ministries have not received the promised flexibility. • The Expenditure Division needs to adjust its structure and develop its capacity for budget analysis 26
  • 27. 27 Medium Term Budget Framework Budget National Medium Term Expenditure Framework Ministry MTEF Ministry MTEF Medium Term Performance Framework The Future of Macro-Fiscal Planning Ministry MTEF