Government’s
budget is a reflection of its policy intent. Through the budget, the
government pronounces how it intends to foster job creation, stabilise
the economy, bring down prices and facilitate investments. Now that the
preparation of Federal Budget 2014-15 is progressing, I want to take
this opportunity to explain our budget-making mechanism, broad-level
medium-term priorities, and what will be the newer ways of working to
enhance public sector efficiency going-forward.
The
Federal Government is in the process of innovating new methods and
processes to improve the system of public budgeting. Since government
budget plays a key role in economic stability and growth and affects
citizens and businesses, it is important that efforts should be focused
on establishing a modern system of budgeting.
The
Ministry of Finance has embarked upon important reforms that are aimed
at improving fiscal discipline, focusing budget allocations towards
emerging government priorities (for example, energy, public security,
unemployment etc.), and introducing a system that focuses on achievement
of results.
Living within the available means or
controlling government’s budget deficit is an important economic
consideration. If government expenses are more than its revenues, then
it borrows money from banking system to finance these expenses.
Borrowing beyond a certain limit can discourage private businesses from
investments, which is an activity that creates jobs in the economy. Too
much borrowing can also result in increased money supply that leads to
rise in prices of commodities–called inflation. This in turn leads to
increase in interest rates, which is also a discouraging factor for the
businesses to grow. As public debts increase they impose a high cost. In
2012-13, the Federal Government paid 63% of net revenues (revenues
available after transfer to provinces) as interest. High budget deficits
also have an impact on sustainability of foreign reserves. Hence, a
well thought out and sustainable budget policy is fundamental to a good
budgeting system.
Many countries in the world have
reformed their budgeting systems to meet the growing challenges of
sustainability of debts, improved efficiency in allocations due to
growing needs for austerity, and focus on performance for improving
lives of the citizens and facilitating businesses. These reforms are
necessary to avoid bankruptcy situation that for example recently arose
in Greece.
Two important steps are required for making the
budget sustainable. First is the adoption of fiscal rules –providing a
legal backing of an upper limit of public debts. Second is the adoption
of a Medium Term Budgetary Framework. The current government plans to
halve the fiscal deficit, which reached 8 of GDP in 2012-13 (had it been
unchecked, it would have been 8.8% of GDP) to 4% by June 2017. To
achieve this important target the Ministry of Finance is strengthening
the Medium-Term Budgetary Framework. This system requires preparation of
a medium-term (3-5 years) macroeconomic framework (forecasts of GDP
growth, investment, reserves, etc.), and a fiscal framework (i.e.
forecasts of revenues, expenditures and borrowings). These forecasts and
sectoral policies (e.g. investments in energy sector) are presented to
the Cabinet in shape of a 3-years ‘Budget Strategy Paper’. Each year the
Budget Strategy Paper is tabled in the cabinet that debates
allocations, policy priorities, future investment needs, fiscal space,
and issues such as economic stability.
The Budget Strategy
Paper is guided by our medium-term macroeconomic goals. By June 2017,
the government intends to achieve around 7% of annual GDP growth, reduce
budget deficit to 4% of GDP, increase revenues to close to 15% of GDP
and investments to 20% of GDP, and keep inflation in single-digits. When
the government took over in June 2013, the GDP growth was 3.6%, budget
deficit was about to reach 8.8% of GDP, revenues were 13% of GDP, and
investments fell to historic low of 14% of GDP.
Determination
of goals allows us to closely monitor our performance and make
adjustments where required. I am happy to state that we are gradually
progressing on our macroeconomic stabilisation plan and July-February
performance suggests that tax revenues have increased by around 18% as
compared to last year, and we have been successful in containing budget
deficit to 3.1% of GDP as compared to 4.1% last year. Inflationary
pressures that increased in the first quarter of 2013-14 have reduced in
the second quarter and we are hopeful that the inflation will remain
between 8% and 9% for the year. While it is relatively early to state
that economic growth has entered into the next gear, there are positive
signs emerging on different fronts.
The Budget Strategy
Paper forms the foundation of the government’s budget. The medium-term
perspective allows the government to set targets. Questions such as how
the government will achieve this target, what policies will be adopted
and what are the risks, are analysed to ensure that the targets remain
achievable. The Budget Strategy Paper is also shared with the
Parliamentary Standing Committees, political parties, and businesses to
allow debate on the policies and forecasts. This makes the system more
participatory, and transparent. Recommendation of citizens on
government’s taxation and expenditure policies are currently collected
at the budgetary stage but going-forward, we want to create a process
through which there is a mechanism that ensures a formal participation.
Based
on the forecasts detailed in the Budget Strategy Paper, each ministry
is given 3-years expenditure ceilings. These are the total amounts
within which ministries prepare their detailed budgets. To this date, we
have forwarded 2014-17 budget ceilings, in two-envelops – one for
current budgets and the other for public investments required for
improving quality and access of public services, to all ministries. The
ministries are being encouraged to cut down on wasteful expenditure and
divert funds to high priority areas. Better public services, improved
infrastructure, strengthened regulatory environment, availability of
energy for businesses to enhance production, and human development are
the selected priorities of the present government. We intend to
ring-fence social protection expenditure so that the needy and the poor
do not feel burdened by our drive for austerity. We are, therefore,
working with federal ministries to ensure that our policies are
adequately reflected in the budget 2014-15.
Another
important factor is increased focus on achievement of results. In the
traditional budgeting system, ministries would primarily focus on pays
and procurements. This system lacked focus on performance or results
that affect citizens and businesses in an economy.
To
modernise this method, the government has introduced ‘Output-based
budgeting’ system. In this new method of budgeting, the ministries
provide goals, policies (in shape of outputs – services to be delivered,
and outcomes – affect of those services on target population) and
performance indicators and targets. The method requires ministries to
specify the outputs that they would deliver to the public services. The
main aim of introducing this method is to improve comprehensiveness of
the budget, introduce a system of performance monitoring, and hold
officers accountable for the use of public funds. Each year, the
government also tables ‘Federal Medium-Term Budget Estimates for Service
Delivery’ in Parliament together with other budget books at the time of
budget presentation in May / June. This book presents the amounts and
the intended purpose (government services e.g. public service delivery,
facilitation to the markets, regulations, etc.) in shape of policies and
performance details.
Budget forecasts, Budget Strategy
Paper and Output Based budgeting are the beginning of a modern system of
budgeting. However, more needs to be done to make the system even more
transparent, comprehensive and accountable. While the country ratings in
openness and transparency (as undertaken through Open Budget Index – an
index compiled by non-government organisation for more than 100
countries around the world) have improved from 38 to 58, and ratings
assessed through Public Expenditure and Financial Accountability system
have gradually increased, the current government intends to roll-out
further complementary reforms to make the system even more robust.
Firstly,
a system of performance monitoring is being introduced. The moneys
spent and the performance achieved against that budgeted / planned is an
important step towards measuring performance and introducing a system
of accountability for results. Secondly, to improve service delivery a
system of delegation of authority is being discussed. In this system,
the central controls on budgets and plans will be gradually
decentralised and line managers will be given more autonomy and
authority to deliver better services to citizens. This will require
enhancements in capabilities of planning, budgeting and monitoring at
the ministerial level. Thirdly, a public finance administration bill is
being drafted to enhance management of public moneys. Fourthly,
computerisation of output-based budgeting has started and linkages with
the national accounting and budgeting system (called Pifra) are under
way. In addition, results based management – where plans, budgets,
audits and monitoring systems are aligned with achievement of results –
is being planned for introduction.
Embedding new budgeting
systems is an institutional reform, which requires structural changes
in the way the government works. These changes, therefore, require time
and resources for implementation. The current government is, however,
determined to make the system conform to the modern systems of planning,
budgeting and monitoring to make it transparent, participatory, and
policy-focused. At the same time, the government is making efforts to
implement its medium-term macroeconomic policy, and I would encourage
our businesses to take advantage of our open policies and contribute in
job creation for the prosperity of our people.
