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.
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.
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