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Medium-term Expenditure Frameworks (MTEF) by Ronnie Downes

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Presentation by Ronnie Downes 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

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Medium-term Expenditure Frameworks (MTEF) by Ronnie Downes

  1. 1. Medium-Term Expenditure Frameworks (MTEF): from Theory to Application Ronnie Downes, OECD Deputy Head, Budgeting & Public Expenditures, OECD MENA-SBO, Abu Dhabi 10-11 December 2014
  2. 2. Why an MTEF? • bridge between budget (short-term) and planning (medium-term) • injects “resource realism” into national planning • injects “fiscal realism” into national planning • requires “performance and results” focus into annual budgeting • requires “strategic medium-term” focus in annual budgeting • promotes planning and (re-)prioritisation 1
  3. 3. Budgeting within fiscal objectives OECD Principles of Budgetary Governance Quality, integrity & independent audit Performance, Evaluation & VFM Comprehensive budget accounting Effective budget execution Alignment with medium-term strategic plans and priorities Performance, evaluation & VFM Transparency, openness & accessibility Participative, Inclusive & Realistic Debate Fiscal Risks & Sustainability Capital budgeting framework
  4. 4. Year 0 Year 1 Year 2 Year 3 Savings on existing programmes Fiscal space for new programmes Expenditure ceilings MTEF Projections Policy and Contingency reserve Cost of existing programs and new initiatives MTEF – a Generic Model
  5. 5. Issues in Designing an MTEF • How many years does it cover? – Usual practice is 3-5 years • Is it based on current or constant prices? – Usual practice is to update the baseline for price changes • Does it have a contingency reserve? – The reserve accommodates unforeseen events or policy changes • How much spending detail does it include? – Typically, allocations by major organization units or sectors • Are allocations for future years guaranteed? – No. Government prepares an annual budget in each future year covered by MTEF 4
  6. 6. Country example: Netherlands • Expenditure limits agreed by each incoming government • Objectives, Performance targets, Resources: all agreed at the same time • Expenditure ceilings remain unchanged over the lifetime of the government – Completely separate from revenues – “fixed” rather than “rolling” expenditure ceilings – Good for fiscal discipline, planning – Bad for flexibility, reallocation of resources 5
  7. 7. Country example: UK • “Spending Review” usually every 2 or 3 years • Fixed ceilings – Originally linked to “Public Service Agreements” (performance targets) – since discontinued • Process is internal / not transparent • Weakness: 3-year ceilings “locked in” upward spending (2007 Spending Review) • Strength: new agreements help to “lock in” and secure the savings required under the austerity programme 6
  8. 8. Country example: Austria • 3-year rolling expenditure ceilings • New year (year 4) agreed every year • Unspent funds can be “carried over” until the following year – Removes the “end year rush” to spend money – Risk? Build-up of large, unspent reserves • Part of overall reformed fiscal framework – MTEF; Performance; Accruals budgeting 7
  9. 9. How to make MTEF effective? • If MTEF is not used for budgeting, it is useless – Many countries have an MTEF but do not base budget decisions on it • MTEF must become the government’s budget process – Some countries have an annual budget and a separate MTEF • MTEF should be used by political leaders to set fiscal policy and spending priorities – If MTEF is treated as a technical exercise, politicians will not pay attention to it • MTEF should focus budgeting on policy choices – If budgeting is used to control the details of spending, MTEF will not be of much value • MTEF should be a rolling process: Last year’s decisions should be the starting point – If the budget disregards medium-term decisions, MTEF will not be effective 8

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