This document discusses the methodology for constructing medium-term expenditure ceilings and allocating budgets to ministries in Brunei. It begins by explaining the purpose of medium-term ceilings, which is to link fiscal and sectoral policies, prioritize spending, and conduct fiscal adjustments in an orderly manner. It then covers the methodology, including setting aggregate and sectoral fiscal targets, disaggregating budgets to ministries, and addressing issues like time horizons, coverage, and managing uncertainty. The document concludes by emphasizing the importance of understanding baselines versus ceilings and the demands this system places on both ministries and the Ministry of Finance.

1. 1
The Construction of Expenditure Ceilings
and the architecture of Medium Term
Frameworks
Part II
From the Medium Term Fiscal Framework
to Ministries’ Ceilings
- Methodology and Design -
Jean-Marc Lepain
Public Financial Management Advisor
Ministry of Finance, Brunei Darussalam
May 1st , 2017

2. Cession II Agenda
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
2

3. I. Medium Term Expenditure
Ceilings: Purpose and Concepts

4. Before: Incremental allocation of fiscal space
• Mainly based on historical trends
• Open the door to political bargaining
• No policy driven
• Results in wastage
4

5. Medium-term Fiscal
Framework
Principles of fiscal management
Numerical fiscal rule
Disclosure requirements
Multi-year macroeconomic forecast
Multi-year fiscal forecast
Medium-term fiscal target
Multi-year expenditure ceiling
Multi-year spending allocations
Planning margin
Detailed expenditure outturn
Reconciliation of change from Budget
Explanation of discrepancies
Instrument Content
Medium-term Budget
Framework
Final Accounts
Objective
Foundation for
fiscal objectives
State multi-
year fiscal
policy targets
Set multi-year
spending plans
Report actual
expenditure
Detailed expenditure appropriations
Other budgetary controls
Reconciliation of changes from MTBF
Fiscal Rule or
Responsibility Law
Annual Budget
Authorize
annual
expenditure
Medium Term Expenditure Ceilings: Purpose and Concepts

6. Medium Term Expenditure Ceilings: Purpose and Concepts
• Linking fiscal policy with sector policy
• To move away from incremental changes based on historical trends
• To prioritize sectors
• Conducting fiscal adjustment in an orderly manner
•Ceilings versus Estimates:
• Spending commitments can (and often do) exceed estimates
• Unrealistic budgeting can lead to unmet commitments or a build up of arrears
•Baseline expenditures:
• No-policy-change basis
• Measuring impact of new policies
• Understanding of the cost of government policies over the:
• budget year
• medium-term
• long-term
6

7. What ceilings do
What ceilings Do How They Do It Who Benefits
1. Reinforce aggregate
fiscal discipline
✓presenting deferred effects of
today’s decisions
✓imposing restrictions on future
budgets
Finance Ministers
Taxpayers
Future Generations
2. Facilitate a more
strategic allocation of
expenditure
✓early reaction to future adverse
developments
✓abstracting from annual legal and
administrative constraints
✓provide an additional dimension in
policy making
Prime Ministers
Line Ministers
Parliamentarians
3. Encourage more
efficient inter-temporal
planning
providing greater transparency and
certainty to budget holders about their
likely future resources
Line Ministries
Agencies
Local Governments
7

8. Medium Term Expenditure Ceilings: Purpose
and Concepts
•Strong understanding of baseline expenditure estimates
becomes very important when thinking about the medium-term.
•Elements that are static year to year become fluid over the
medium and long term
•Population characteristics change
•Behavioural responses
•Greater policy discretion and flexibility of programme allocation
•Medium-term Forecasts provide policy certainty and guidance
to all players
•Present the full cost of policies over time
•Allows for early adjustments for unsustainable policy commitments
•Expenditures policy become more independent from revenue
policy
8

9. II. Methodology and Design

10. Methodology and Design: Why move to sector
ceilings ?
• To ensure that budget requests are realistic and fit a fiscal
envelope;
• To allocate additional fiscal space based on strategic
priorities;
• To ensure that the budget is fully aligned with fiscal
objectives;
• To shift the responsibility of detailed allocations to line-
ministries.
10

11. Methodology and Design: Examples of ceilings
and fiscal objectives
• Macro-fiscal objectives
• Revenue/GDP
• Debt / GDP
• Sector objectives
• Education = 7% of GDP or 22% of budget;
• Teacher salaries increase by 5% a year in real term
• Health = 5% of GDP
• Expenditure structure objectives
• Wages bill no more than 45% of budget
• Education operational expenditure = 25% of wages
• Road maintenance = 8% of the value of the road network
• Investment budget = 22% total budget
11

12. Methodology and Design: Education Budget /
Total Budget
12
Education
18%
Education
22%
Education
20%
Year 1 Year 3
Year 2

13. Methodology and Design: Budget ceiling and
ministries’ objectives
• What does it take to increase the share of education by 2% a
year?
• What are the priorities of the education sector?
• How should I allocate additional revenue?
• How do I use the fiscal space available?
• What is the role of the other fiscal constrains? (salaries,
investment, other sectors’ priorities)
13

14. Methodology and Design: Coverage
• Central Government: Ministries and agencies
• General Government: Central Government + Social Security (Pension
Fund) + extra-budgetary funds
• Sub-national Government
14

15. 15
Examples of different designs
COUNTRY
COVERAGE
SPECIFITY
TIME
HORIZON
Years
DISCIPLINE
Soc Sec
Debt
Interest
Local
Gov’t
% of CG
spending
Fixed
or Flexible
Frequency
of Update
AGGREGATE EXPENDITURE CEILINGS
Sweden Yes No T’fers 96%
Total Spending
27 Policy Areas
3 3 -4 fixed
3rd-4th year
added each year
Finland Some No No 78%
Total Spending
13 Ministries
4 4 fixed Every 4 years
Netherlands Yes No T’fers 80%
4 Sectors
26 Ministries
4 4 fixed Every 4 years
FIXED MINISTERIAL PLANS
United
Kingdom
No No T’fers 59% 25 Depts 3 3 fixed Every 3 years
France No Yes No 39% 35 Missions 3 2 fixed + 1 Flexible Every 2 years

16. Issues in Medium Term Ministries’ Ceilings
1. Design: time horizon
2. Aggregation / desegregation
3. Comprehensiveness and coverage
4. Inflation Adjustment
5. Managing uncertainty
16

17. Design issues
• How much of my budget do I allocate by ceiling?
• Do I include intergovernmental transfers?
• How do I deal with special purpose funds ?
• How do I deal with entitlement?
17

18. III. Methodological Issues with Medium
Term Expenditure Ceilings

19. Medium Term Expenditure Ceilings Issues:
Time horizon
•Objectives of multi-year budgeting
• To introduce more certainty about the availability of
funds
•Time horizon for multiyear ceiling:
•Political commitment is the key
•Usually: 3 years
•However, fiscal adjustment might require a longer
time horizon that could be explicit or non-explicit
•Soft ceilings versus hard ceilings
19

20. Medium Term Expenditure Ceilings: Coverage and
Comprehensiveness
• Defining the scope of the budget: central versus general government
• Which items to be restricted by the expenditure ceiling?
• Completeness, with clearly motivated and unambiguously defined
exceptions; but a high number of exceptions make monitoring complex
• Simplicity and transparency is important

21. Aggregation vs. Disaggregation
• Aggregate ceilings is what textbooks recommend.
• Benefit of aggregation: managerial flexibility
• Obstacle to aggregation: laws regulating civil service
employment, procurement law, PFM laws and regulation
21

22. Medium Term Expenditure Ceilings: Inflation
Adjustments
• Based on the country Consumer Price Index (CPI), there has
been no inflation in Brunei (Last CPI = -0.2%)
• In practice, some sectors are facing price increase, especially for
imported goods.
• Budgets should be adjusted for price increase, meaning that the
cost of delivering a service or the cost of an investment must be
disaggregated and price changes must be taken into
consideration.
22

23. Medium Term Expenditure Ceilings Issues:
Managing Uncertainty
• Uncertainty grows with the time horizon: policies cannot be frozen, there
are price fluctuations, unforeseen events, macro-economic trends are not
fully predictable, planning is never perfect
• Buffers should be created to manage unforeseen events
• Flexibility should exist in programme allocation allowing the re-prioritisation of
expenditure
• How much and what type of flexibility? Depends on the construction of the
ceiling:
• A comprehensive ceiling needs some mechanisms for dealing with an
unfavourable development
• Nominal ceilings require more flexibility than real ceilings in order to
absorb unforeseen increases in inflation.
• The uncertainty in forecasts increases with the time horizon,
• The further in advance the expenditure ceiling is established, the larger
the expected variations in expenditure that must be accommodated.
• Uncertainty in medium-term expenditure development requires that
planned expenditure generally be set at a lower level than the expenditure
ceiling to ensure that the outcome complies with the ceiling
23

24. IV. Disaggregation of Ministries’
Ceilings

25. Ceiling disaggregation: From base-line to new
measure costing
Step 1. Assessing the base-line using programmes
Step 2: Identifying potential saving
Step 3: Identifying fiscal space for new measures
Step 4: Disaggregating the fiscal space between recurrent and
investment budget.
Step 5: Assess the cost of new proposed measures
Step 6: Ranks the new measures by level of priority and likely impact
Step 7: The Ministry allocates the fiscal space
Step 8: MoF reviews the proposed budget and validates
25

26. Ceiling disaggregation: Issues with baseline
• Baseline means no change of policy but should include changes
already decided but not implemented and cost increase in policies
being rolled out.
• Baseline numbers are subject to cost variation
• Measuring the baseline should identify existing commitments and the
impact of the commitment on the baseline.
26

27. Ceiling disaggregation: Issues with disaggregation of
recurrent and investment budget
• The impact of investment budget on the recurrent budget must be
measured
• The investment ceiling depends on the cost of maintenance.
• Priority should be given to maintenance over investment (asset
protection)
27

28. V. Expenditure Ceilings in a Fiscal
Adjustment Context

29. What is a fiscal adjustment?
Fiscal adjustments can be conducted independently or simultaneously
for two main reasons:
(a) To reprioritise sector spending in line with Government’s priorities
(b) To reduce budget deficit through a reduction of Government’s
expenditure and/or an increase in tax revenue.
29

30. The impact of fiscal adjustment of ministries’
ceilings
• Traditional budget cuts show rapidly their limit
• A fiscal adjustment implies:
(a) A change of sector policies,
(b) A reprioritization of expenditures
(c) New ways of delivering public services at reduced cost
(d) Dealing with “dead wood”
Conducting a fiscal adjustment requires considerable budget analysis in
each sector (ministry).
30

31. Questions for ministry ceilings
• Has the Ministry set its priorities right?
• Does the split between recurrent and investment budget reflects a
realistic approach?
oIs the investment done to the detriment of the recurrent budget?
oIs the cost of maintenance affordable?
oIs there a return on investment and how much?
• How does the programme/investment ranks in the Ministry’s order of
priorities?
• Can some services/investment be considered as a luxury?
• Is there an alternative way to deliver the same service at a lower cost?
31

32. Conclusions
1. Crucial to understand the difference between ceilings and baselines
2. Puts a lot of demands on both line-ministries and MoF
3. Ceilings can be designed in a number of different ways
4. Not (only) a technical exercise: top management commitment and political
support is the key
32

33. THANKS