Budgetary Processes and Public Expenditure Management Core Course

1. Budgetary Processes and Public Expenditure Management Core Course Promoting Allocative Efficiency (Strategic Prioritization) David Shand World Bank May 22, 2000

2. Addressing the “big issues” of public expenditure • Level 2 is always the hardest! • The “big issues” have major “political” elements • But a “technocratic” approach looking at objectives, alternatives, costs and benefits can assist in this political decision making.

3. Principles • Expenditures should be affordable in the medium term, be based on government priorities and on the effectiveness of public programs. The budget system should create conditions and incentives that facilitate reallocation from lesser to higher priorities and from less to more effective programs.

4. Affordability, • Expected Results • Relative Priority Basic Elements: • The capacity and willingness to reallocate • Priority-setting process in government • Information on program outcomes and effectiveness

5. Requirements • Willingness to think about why we are spending money on particular purposes and what we are actually getting for it. • Recognition that resources are limited and that therefore we need to think about alternatives and opportunity cost. • Objectives to be determined or specified. But are governments willing to be explicit? • Relevant information on costs, outputs, and outcomes? (Is all this information useful?)

6. Requirements (cont’d) • A linkage between the analysis/evaluation and the decision-making processes • A “hard” medium-term budget constraint • Ability and incentives to reallocate resources

7. Allocative Efficiency at What Level? • Between broad objectives - economic growth, poverty reduction, regional development • Between sectors - education versus health versus defense • Within sectors - • primary/secondary/tertiary/vocational education/university education • public health/primary care/hospitals/family planning • army/air force/navy

8. Allocative Efficiency at What Level? • Between programs - what is a “program”? • Within sub-sectors - spending on teachers, schools or textbooks? Quality versus quantity.

9. Some Prior Questions • Is this a function of government? Is the activity delivering a public or a private good? • Is it aligned with government objectives? • Or is it historical, dictated by interest groups (client capture), result of drift, inaction and lack of information? • Are there alternative mechanisms apart from direct government expenditure? e.g. regulating the private sector, providing government guarantees.

10. Some Prior Questions (cont’d) • Also a need to consider tax expenditures • Who legitimizes organizational/program objectives? Need for cabinet/ ministerial involvement? • New Zealand 2010. Attempting to link strategic and operational objectives (SRAs and KRAs)

11. Some Examples of Major Expenditure “re-allocations”? • Achieving “quality fiscal adjustment” • Reductions in civil service number and/or cost, wage and/or recruitment freezes • “Streamlining” of the public service (technical efficiency) • Across the board cuts in administrative costs • Procurement reforms • Reform/reduction in cost of public enterprises • Reductions in transfers to sub-national governments

12. Some Examples of Major Expenditure “re-allocations? (cont’d) • Reductions in capital works (which ones?) • Reduction or abolition of subsidy/assistance programs to industry, agriculture etc. • Redesign or re-targeting of social transfer programs - particularly public pension reforms • Reductions in defense expenditure To what extent are such reallocations based on any systematic consideration of priorities?

13. Problems in Strategic Prioritization • Lack of linkage between the plan and the budget - “promise in the plan what you can’t deliver in the budget” • Investment led priorities, rather that program priorities • Donor driven priorities • Priorities determined by other levels of government • Protected enclaves of government spending

14. Mechanisms which Promote Strategic Prioritization • Aggregate medium-term fiscal targets • Hard budget constraint - no “add ons” without corresponding reductions • Consideration of alternative mechanisms - does this have to involve public expenditure? • Sectoral strategies (strategic plans?) - costed over the medium-term

15. Mechanisms which Promote Strategic Prioritization (cont’d) • A medium-term expenditure framework (MTEF) • Arena within which policies compete and coordinate - cabinet, budget office and ministries’ internal budget preparation processes focus on strategic matters, not process or details.

16. Mechanisms which Promote Strategic Prioritization (cont’d) • Ex-ante and ex-post evaluation • Creating capacity and willingness to reprioritize and reallocate • Spending ministries having greater “ownership” of their budget • Encouraging ministers/ministries to reprioritize within budget envelopes