public financial management (pfmx) module 5 budgeting source: imf. ... module south africa’s ......

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Module

Macro-fiscal Forecasting and Medium Term Budget Frameworks

Public Financial Management (PFMx)5

Two Key Public Financial Management (PFM) Instruments

The Annual Timeframe is Essential

The Annual Timeframe but is not enough

Importance of a Medium-term Fiscal Perspective

• More strategic allocation of resources

• Effective planning across time

• Consequences of new and current policies

• Unexpected events

Key Reasons to adopt a Medium-term Perspective

Benefits of a Medium-term Perspective



• effective planning across time



Decisions Echo into the Future

New Policy:Lower the pension age from 65 to 64 years old.

Act to Avoid Future Consequences

Total cost of pensions ($):

t

Anticipating Fiscal Risks

60

70

80

90

100

110

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Spring2016

Spring2007

37%ofGDP

AdvancedEconomies:PublicDebt,2007-2016.(PercentofGDP)

Source:IMF.

Benefits of a Medium-term Perspective



• Effective planning across time



Examples of Constrained Spending Items

Wages of civil servants

Pension entitlements

Investment projects already started

Composition the US Budget

Social Security

Medicare

MedicareOther healthIncome Security Programs

Retirement paymentsVeterans programs

Others

Defense

Non-defenseDiscretionary

Source: US Congressional Budget Office

Two Key Public Financial Management (PFM) Instruments

Macro-Fiscal Forecasting

Defined as:

The estimation of high level macroeconomic and fiscal

indicators into the future.

Macroeconomic Indicators

MacroeconomicIndicators

Inflation

Employmentand

Unemployment

CommodityPrices

WorldGDPGrowth

ExchangeandInterestRates

GDPGrowth(real/nominal)

Fiscal Indicators

FiscalIndicators

GovernmentExpenditure

FiscalBalance

CyclicallyAdjustedFiscalBalance

PublicDebt

GovernmentRevenue

DebtService

Example of a Macroeconomic Forecast

Australia:Economicparameters.

Source:TheCommonwealthofAustralia.

Example of a Macroeconomic Forecast

Australia:RealGDPgrowth.


Example of a fiscal Forecast

Australia:Budgetandnetfinancialworth

Source:TheCommonwealthofAustralia.(e)– estimates;(p)– projections.

The Macro-fiscal Forecasting Process

Macroeconomic forecasts

Revenue forecasts

Determination of the

expenditure ceiling

Baseline expenditure projections

Estimation of the fiscal

space

Fiscal objectives and

rules

New policy choices

Elasticity



Revenue forecasts


expenditure ceiling



space


rules

New policy choices

Determining the Expenditure Ceiling



Revenue forecasts


expenditure ceiling



space


rules

New policy choices

Fiscal Space

Defined as:The room for new spending or the need for spending cuts.

Estimating:To assess fiscal space, you need an objective and a baseline.

+

-



Revenue forecasts


expenditure ceiling



space


rules

New policy choices

From Macro to Fiscal and back



Revenue forecasts


expenditure ceiling



space


rules

New policy choices

Accounting for Uncertainty

UnitedKingdom:RealGDPgrowthfanchart.

Source:UKOfficeforBudgetResponsibility

-2

-1

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Perc

enta

ge c

hang

e on

a y

ear e

arlie

r

Source: ONS, OBR

Macro-Fiscal Forecasts

Defined as:

The estimation of high level macroeconomic and fiscal

indicators into the future.A complex process due to:

1. Need for coordination

2. Macro-fiscal interactions

3. Uncertainty and fiscal risksMacroeconomicforecasts

Revenueforecasts

Determinationofthe

expenditureceiling

Baselineexpenditureprojections

Estimationofthefiscalspace

Fiscalobjectivesandrules

Newpolicychoices

Medium-Term Fiscal Framework (MTFF)

Defined as:

A set of institutional arrangements early in the budget process

for setting multi-year fiscal objectives.

Main Contents of an MTFF

Medium-Term Budget Framework (MTBF)

Defined as:

A set of institutional arrangements for prioritizing, presenting,

and managing revenue and expenditure in a multiyear

perspective.

Key Institutional Features of an MTBF

MTBFs Relative to Other PFM Instruments

ProjectionsforyearT+1


AnnualBudgetforyearT

FiscalStrategyandObjectives

Multi-yearFiscalTargets

Multi-yearSpendingPlans

MTFF

MTBF

DevelopmentPlans

Top-down versus Bottom-up


Australia:Programsby

expenses,2017-2018.

Previous forecast

Current forecast

New decisions

Economic and other variations


Australia: Reconciliation Table

Prerequisites

Source:IMF.

Accurate Macro-Fiscal Forecasts

RealGDPforecasterrors,2000-2015.(Percent)

Prerequisites

Credible Budgeting

Source:IMF.

Expenditureforecasterrors,2000-2015.(Percent)

Prerequisites

Key Design Choices

Level of Commitment

Binding Indicative

Level of Specificity

Aggregate Ceilings

Ministerial or program ceilings

Nature of Commitment

Fixed MTBF Rolling MTBF

Case for Binding Ceilings

Key Design Choices

Level of Commitment

Binding Indicative


Aggregate Ceilings




Case for Aggregate Ceilings

Key Design Choices

Level of Commitment

Binding Indicative


Aggregate Ceilings




Case for Fixed Ceilings

Example of Fixed Term, Binding Ministerial Ceilings

Case of the United Kingdom, Key Features:

Fixed ceilings are set every three or four years based on Comprehensive Expenditure Reviews

Has allowed large shifts in sectoral allocations over the medium term

Around half of budget is still allowed to vary

Approach requires large reserves

Summarizing Module 5

Key benefits of a medium-term perspective

Two key tools:

• Medium-Term Fiscal Framework and forecasting –Aggregate fiscal indicators

• Medium-Term Budget Framework –Detailed allocations and institutions

Prerequisites needed before moving to an MTBF

Range of design approaches for an MTBF


Module

France’s Medium-Term Budget Framework


Budget Reform in France

1992European Union Maastricht Treaty

2001

Public Finance Law

2008

Constitution: Multi-yearplanning

2012

Organic Law

1997European Union

Stability and Growth Pact

France’s Medium-term framework




DevelopmentPlans

Multi-yearFiscalTargets


MTFF:4-5years

MTBF:3years

StrategicPlanning:10years

T

T-1

T+1 T+2 T+3 T+4

T+1

T

Implementation year

Preparation year

Binding

Optional

Medium-Term Budget Framework in France


Module

South Africa’s Budget Process





DevelopmentPlans

FiscalObjectivesMulti-year

FiscalTargets


MTFF

MTBF

MTSF

South Africa’s Medium-term framework

Medium-term Expenditure Framework

Revenue Framework

Budget Calendar

Month Nationalbudgetprocess

June

July

August/September

September

October

October

November

November

Guidelinesissuedtoinstitutions;informationsessions

Budgetsubmissionsfrominstitutions

Budgethearing(MediumTermExpenditureCommittee)

RecommendationstoMinister’sCommitteeontheBudget

Medium-termBudgetPolicyStatement

Budgetallocationstodepartments

Ministerialcommentsonbudgetallocation

Cabinetapprovesdepartmentalallocations

February BudgettabledinLegislature

April/May Policydiscussions;Clustermeetings

MinistryofFinance/Treasury

NationalMinistries,Departments,andAgencies

Executive/Cabinet

Nationalpolicypriorities

Spendingplans

Provinces/LocalGovernments Clusters

Approval process

Minister’s Committee on the Budget

20

22

24

26

28

2004/05 2010/11 2016/17

Medium-term Fiscal Framework

Source:NationalTreasury,SouthAfrica.

20

30

40

50

2006/07 2012/13 2018/19 2024/25

DebtPercentageofGDP

MacrofiscalprojectionsBudgetRevenueandExpenditurePercentageofGDP

Budget Office Fiscal Framework

Source:NationalTreasury,SouthAfrica.

Medium-term Expenditure Framework

AggregateExpenditureceilings

Source:NationalTreasury,SouthAfrica.Note.Non-interestspendingfinancedfromtheNationalRevenueFund.

AggregateCeilings

ExpenditureCeiling RollingMTEF

Determining the Total Expenditure

Three-year Expenditure

Baseline

New MTEF

Exchange rate adjustments

Inflationadjustments

Public Wage bill adjustments

New Policies

MacroeconomicIndicators

FiscalIndicators

NewPolicies

ExpenditureEstimates


Module

United Kingdom's Medium-Term Budget Framework


United Kingdom – Fixed and Varying Expenditure

Annually Managed Expenditure (AME) £415bn (55% of total spending)

• Volatile or demand-led expenditure• Managed on an annual basis

Departmental Expenditure Limits (DEL)• £316bn (45% of total spending)• 90% current and 10% capital• 3-year fixed Departmental budgets

AME margin

Debt interest

Pensions

Other

EU contribution

Tax credits

BBC

Public corps

National Lottery

Social SecurityLocal Govt

Transport

Innovation, Univ. & Skills

Int'l Dev't

Defence

Housing & Communities

Others Reserves Children, Schools & Families

Scotland, Wales & N.I.

Local Govt

Work & Pensions

Home Office & Justice

Health

Source: HM Treasury, United Kingdom

Margins of the United Kingdom

0

2

4

6

8

10

12

14

16

18

20

£bn

2008-09 2009-10 2010-11

Budget BalanceMargin against Golden Rule

AME MarginMargin for forecast error

DEL ReserveCentral contingency reserve

DUPsReserve in dept’l budgets

Economic AssumptionsPrudent forecasts

Reserves and Margins in UK Public Finances(GBP billion)

Source: HM Treasury, United Kingdom

public financial management (pfmx) module 5 budgeting source: imf. ... module south africa’s ......

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