MTEFs - Classification, Developments, Objectives and Impact Assessment

8/2/2019 MTEFs - Classification, Developments, Objectives and Impact Assessment

1/18

PUBLIC FINANCE

MTEFsClassification, Developments, Objectivesand Impact AssessmentRichard Hemming, Duke UniversityMay 1, 2012


2/18

Forward estimates and medium-term budgeting inindustrial countries

MTEFs and PRSPs in 1990s, especially in Africa Part of the World Bank PFM toolkit Donor support

World Bank and ODI reviews in early 2000s MTEFs have disappointed because:

They ignore initial conditions Weak budget systems Limited institutional capacity

There is not enough political support or agencybuy in No systematic investigation since, although many

diagnoses of why MTEFs do not deliver New World Bank study exploits continued expansion of

MTEFs and more years of experience

MTEF History


3/18

Hierarchy of frameworks defined by highest stage achieved,assuming lower stage(s) is(are) in place

Medium-Term Fiscal Framework (MTFF)

Resource envelope

Agency ceilings

Top down, input based

Medium-Term Budget Framework (MTBF)

National and sector strategies, forward estimates

Reconciliation with MTFF, agency/program ceilings

Top down and bottom up, primarily input based

Medium-Term Performance Framework (MTPF)

Systematic use of quantitative performanceinformation

Output/outcome based

Funding linked to results

MTEF Classification


4/18

Database describing MTEF status of 181countries inevery year over the period 1990-2008

This alone is a major contribution of the study

Classification is based on key indicators and views of

PFM experts Countries are classified 0=no MTEF, 1=MTFF,

2=MTBF, 3=MTPF

Identify new MTEFs by stages, transitions betweenstages, and (only a few) reversals

Pilot MTBFs are recorded as MTFFs (but there is someanalysis of pilots)

Externally imposed multi-year fiscal frameworks (e.g.,those underpinning IMF programs) are not recorded atMTFFs

Country Classification


5/18

MTEF Adoption

-20

0

20

40

60

80

100

120

140

1990 1991-93 1994-96 1997-99 2000-02 2003-05 2006-08

NumberofCountrieswithMTEFs

(line=cumulativ

e,bar=new)

MTEF MTFF MTBF MTPF

MTEF MTFF MTBF MTPF

There were 11 MTEFs in 1990, with 1 MTBF(Denmark) and 1 MTPF (Australia. By 2008 therewere 132 MTEFs with 71 MTFFs, 42 MTBFs and 19MTPFs


6/18

MTEF Adoption, Country Groups

0 0 0 0

33

63

42

29

37

53

39

33

2511

16

43

1611

9

7

46

0

2

4

6

8

10

12

14

16

Advanced

Economies

East Asia &

Pacific

Europe &

Central Asia

Latin America

& Caribbean

Middle East

& North

Africa

South Asia Sub-Saharan

AfricaNumbe

rofCountriesinGroup(perce

ntagesofcountriesinregio

displayedat

top)

MTFF MTBF MTPF


7/18

Addresses shortcomings of annual budgetingshort-sightedness, conservatism (budget rigidities),parochialism (competition for incremental resources)

Multi-year planning takes future costs and benefitsinto account

Strategic, forward-looking approach provides abasis for establishing and shifting priorities

Collaborative approach to achieving agreedobjectives rather than pursuit of narrow self-interest

Quality of budgeting improves

Contributes to high-level PFM objectives MTFF => + fiscal discipline

MTBF => + allocative efficiency

MTPF => + technical efficiency

MTEF Payoff

Testablehypotheses


8/18

Event studies summarize what happened around thetime of MTEF implementation

Compare averages across countries before andafter MTEF implementation date

Econometric analysis attempts to explain the impact ofMTEFs, controlling for other determinants of fiscaldiscipline and efficiency

Cannot measure everything that may be relevant

Nonetheless, some results are very robust

But econometric results are empirical regularities,not universal truths

Case studies can provide additional insight into theimpact of MTEFs, especially insofar as qualitative, non-measurable influences are concerned

Analytical Approaches


9/18

Fiscal discipline(1) fiscal balance (MTEF shouldimprove the fiscal balance, with MTFF having thelargest effect)

Allocative efficiency(2) total expenditure volatility, (3)

health expenditure share, (4) health expenditurevolatility (MTEF should reduce (2), increase (3) andreduce (4), with MTBF having the largest effect)

Technical efficiency(5) cost effectiveness of healthexpenditure (MTEF should increase (5) with MTPFhaving the largest effect)

Data constraints are significant

Data coverage, central vs. general government

Expenditure composition, limitations of GFS

Expenditure outcomes, health and education

Measuring Fiscal Performance


10/18

MTEF implementation date normalized at year t

Compare three years before and after MTEFimplementationcountry and period averages,confidence intervals

Data for a maximum of 72 countries, 40 MTFFs, 20MTBFs and 12 MTPFs

Proper interpretationx is higher or y improves afterMTEF implementation, not x is higher or y improves

due to MTEF implementation (causation), and not even

a higher x or improvement in y are related to MTEFimplementation (correlation)

However, event study findings are supported by

econometric results

Event Studies


11/18

-5

-4

-3

-2

-1

0

1

2

3

4

t-3 t-2 t-1 t t+1 t+2 t+3

FiscalBalance

(72 obs)

mtef

95% conf. interval

-0.38

-3.09

23

24

25

26

27

28

29

t-3 t-2 t-1 t t+1 t+2 t+3

Expenditure

(72 obs)

mtef95% conf. interval

25.2

26.020

21

22

23

24

25

2627

28

29

t-3 t-2 t-1 t t+1 t+2 t+3

Revenue

(72 obs)

mtef

95% conf. interval

22.9

24.8

MTEFs, Fiscal Balance, Expenditureand Revenue

-6

-5

-4

-3

-2

-1

0

1

2

t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5

FiscalBalance

(53 obs)


-1.56

-3.13


12/18

-5

-4

-3

-2

-1

0

1

2

3

FiscalBalance

MTFFs and Fiscal Balance (40 obs)

mtff

95% conf. interval

-3.06

-0.81

-8

-6

-4

-2

0

2

4

FiscalBalance

MTBFs and Fiscal Balance (20 obs)

mtbf95% conf. interval

-4.46

-1.22

-6

-4

-2

0

2

4

6

FiscalBalance

MTPFs and Fiscal Balance (12 obs)

mtpf95% conf. interval

-0.90

2.46


13/18

Change in fiscal balance = +2.7 percent of GDP

Expenditure contribution = -0.8 percent of GDP

Revenue contribution = +1.9 percent of GDP

What does this say about MTEFs?

Their impact is dominated by other policy changes, suchas tax reform

Need to focus on expenditure, and especially the abilityto implement planned expenditure.

They discipline the use of additional revenue, ensuring

that it is used for deficit reduction rather than additionalspending

Other policy changes do matter, but effects arecomplementary

Composition of Fiscal Improvement


14/18

MTEFs and Efficiency

01

2

3

4

5

6

7

8

9

10

t-3 t-2 t-1 t t+1 t+2 t+3Tot

alExpenditureVolatility

Total Expenditure Volatility (72 obs)


6.1

4.7

78

9

10

11

12

13

14

15

t-3 t-2 t-1 t t+1 t+2 t+3

H

ealthExpenditureShare

Health Expenditure Share (72 obs)

mtef

95% conf. interval

11.0

11.6

0

2

4

6

8

10

12

t-3 t-2 t-1 t t+1 t+2 t+3

HealthExpenditureVolatility

Health Expenditure Volatility (67 obs)

8.0

7.2

83

84

85

86

87

88

89

90

91

9293

94

t-3 t-2 t-1 t t+1 t+2 t+3Cost

EffectivenessofHealthExpend

iture

Cost Effectiveness of

Health Expenditure (41 obs)

90.2

89.9


15/18

What can we say about correlation and causality? General model

Fiscal performance = f (MTEF status, control variables) Control variables derived from empirical literature on

determinants of fiscal performance

Serious econometric issues have to be addressed Reverse causalityIs MTEF implementation aresponse to fiscal performance? Response:Instrumental variables

Omitted variablesIs something else going on thataffects fiscal performance (and possibly MTEFimplementation)? Response: Country and time fixed

effects Conditioning variables influence the link between MTEF

and fiscal balances Separate regressions for MTFF, MTBF and MTPF

adoption (which are 0,1 variables)

Econometric Analysis and Results


16/18

MTEFs have a strong, positive effect on the fiscal balance;the effect gets stronger with move from MTFF to MTBF toMTPF (MTPF has too large an effect) Significant control variablesoil(+), conflict(-), aid(-) Significant conditioning variableOECD(+) for MTPF

only

MTEFs have a significant positive effect on totalexpenditure volatility, the health expenditure share andhealth expenditure volatility; the effect gets stronger withmove from MTFF to MTBF to MTPF (except MTPFs haveno additional effect on health expenditure volatility) Marginal effect of MTBF over MTFF is surprisingly small

Significant control variablesoil, aid, inflation (all + forvolatility (because they are volatile?) Only MTPFs have a significant impact on the cost

effectiveness of health expenditure Significant control variableinflation(+)

Econometric Results


17/18

MTEFs and PEFA Scores


18/18

Empirical work bolsters the case for MTEFs, but theystill have to be well designed (coverage, timeframe,disaggregation, status of ceilings and forwardestimates, use of margins, institutional responsibilities)

What are the broader requirements for effectiveMTEFs?

Commitment to new approach to budgeting

Organizational adaptability and technical capacity

Appropriate macro-fiscal policies and institutions

Sound budget systems and properly sequencedreforms

These things have been identified in previous studies

Review of Bank experience and case studies can thrownew light on these requirements

Moving Beyond the Data

MTEFs - Classification, Developments, Objectives and Impact Assessment

Documents

Transcript of MTEFs - Classification, Developments, Objectives and Impact Assessment