Presentation by Peter Thurlow at the 7th annual meeting of the MENA Senior Budget Officials held on 10-11 December 2014. Find more information at http://www.oecd.org/gov/budgeting

1. Medium-Term Perspectives on Fiscal Policy and Budgeting 7th OECD MENA SBO
Abu Dhabi, 10th December, 2014

2. Introduction
•What this presentation is, and is not.
•Two somewhat separable elements to Medium-Term Perspective
A.Macroeconomic Perspective
B.Allocative Perspective
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3. Macroeconomic Perspective
•Objectives (outcomes)
a)Economic Stability
b)Fiscal Sustainability
•Needs Medium-Term Fiscal Framework (output)
–Key elements:
•Revenue Projection
•Fiscal Rule(s) – Spending Ceilings
•Impact of Fiscal Policy
•Risk analysis
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Stable Spending Conservative Spending

4. But this is not enough!
•Policy preparation and discussion is good but, it must be implemented.
•Need policy decision and enforcement
•Need processes to support decision and enforcement
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5. Fiscal Policy Checklists
•MTFF Checklist:
–Model: is it closed, consistent, reasonable?
–Are revenue projections reasonable?
–Do ceilings conform to stability and sustainability? Are fiscal rules used, if so, what are they?
–Are the macroeconomic impacts clear?
–Are risks considered?
•Process Checklist:
–Are the Budget Ceilings set by Fiscal Policy?
–Is actual spending close to Budget Ceilings?
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6. Note on Oil-based Economies
•A sharp drop in oil prices leads to:
–Short-Term Perspective
•balance Budgets – massive spending cuts – recessions
–Medium-Term Perspective
•minor, gradual spending cuts – massive deficits -- stability
–Need for buffers to fund deficits
•during good times, save, build net asset position
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7. Oil-based Economies
•The Real Issue:
–During good times spending climbs too high
•This is when the medium-term perspective and risk analysis are extremely important
–When the price crash comes, it comes fast, but spending cannot change quickly
–High spending levels creates great vulnerability to price crashes
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8. Allocative Perspective
•Start with MTFF (context)
•Next step develop MTEF
•Requires Cabinet/Presidential Support
1.Baselines
2.Fiscal Space Estimation
3.Fiscal Space Allocation
4.Hand-off to Budget
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9. A Note on Terms
•MTFF (Medium-Term Fiscal Framework)
–Macroeconomic focus
–Derives aggregate expenditure ceilings
•MTBF (Medium-Term Budget Framework)
–Adds funding allocations
•MTEF (Medium-Term Expenditure Framework)
–Adds funding allocations within a performance/program framework
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10. Baselines
•Baseline spending is that which is required to extend the same level of service in future years.
–Needs to account for growing, aging population.
1.Recurrent Baseline estimation
a)Based on historical data, and if possible outputs/programs
b)To be discussed/negotiated with entities
c)Ideally to be agreed, and annually updated
2.Capital Baseline estimation
a)Assess state of ongoing projects
b)Determine annual funding requirements
3.A Reserve can be added
a)If the reserve is too big, this can undermine Budgeting
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11. Fiscal Space Estimation
•Sum all Baseline estimates for each year
•Subtract sum of Baselines from Spending Ceilings in each year, the result is Fiscal Space
–If Fiscal Space is Positive – funds to be allocated to new projects
–If Fiscal Space is Negative – Baselines must be cut back
•Spending Review is a good way to cut baselines
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12. Allocation of Fiscal Space
•Cabinet level indication of priorities
•Analytic requirements for all projects over some threshold. Move toward Cost/Benefit Analysis.
•Process:
–Central unit sets analytic requirements, and parameters.
–Entities submit analysis for approval.
–Central unit reviews analysis, submits list of approved projects to Cabinet for final approval.
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13. Hand-off to Budget
•Budget is the implementation vehicle
•What if the Budget is done on a line-item basis?
–Budget takes MTBF/MTEF guidance on entity-level budgets, translates into line items, with flexibility
–Budget still must adhere to aggregate ceiling
•Should encourage Budget evolution toward Performance/Program budgeting
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14. Benefits of Medium-Term Perspective
•Stable economic growth.
•Fiscal sustainability.
•Confidence in:
–Stable funding for entities over medium-term,
–Value for money,
–Best projects selected.
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