Sunday, August 31, 2008

Obama supports zero-based budgeting?

Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime: by closing corporate loopholes and tax havens that don't help America grow.

But I will also go through the federal budget line by line, eliminating programs that no longer work and making the ones we do need work better and cost less, because we cannot meet 21st-century challenges with a 20th-century bureaucracy.

-Barack Obama's Speech at the Democratic National Convention

Related;
Arnold Kling's Campaign Season Pledge;

1. That no politician will end America's consumption of foreign oil. Ever.

2. That no politician will figure out a way to bring the bottom half of America's children up to the level where they can benefit from a college education.

3. That no politician will figure out a way to make American health care--meaning virtually unlimited access to specialists and technology--affordable for everyone.

4. That no politician will alter the trends in technology and family structure that are driving the distribution of income and wealth.

5. That no politician will produce a sustainable fiscal outlook without trimming future Social Security and Medicare benefits. (I might have ended the previous sentence simply by putting a period after "outlook")

6. That no politician needs to create jobs. There is always too much work to be done. The problem is never to create jobs. The problem is for individuals to adapt their abilities to ever-changing job opportunities.

7. That no politician will be able to articulate an economic difference between moving labor or goods from country X to country Y and moving labor or goods from Maryland to Virginia.

Are we losing or winning the 'War on Poverty'?




World Bank Updates Poverty Estimates for the Developing World;
New poverty estimates published by the World Bank reveal that 1.4 billion people in the developing world (one in four) were living on less than US$1.25 a day in 2005, down from 1.9 billion (one in two) in 1981.

The new numbers show that poverty has been more widespread across the developing world over the past 25 years than previously estimated, but also that there has been strong—if regionally uneven—progress toward reducing overall poverty....

“However, the sobering news—that poverty is more pervasive than we thought—means that we must redouble our efforts, especially in Sub-Saharan Africa,” said Justin Lin, Chief Economist of the World Bank and Senior Vice President, Development Economics....

Poverty in East Asia—the world’s poorest region in 1981—has fallen from nearly 80 percent of the population living on less than $1.25 a day in 1981 to 18 percent in 2005 (about 330 million), largely owing to dramatic progress in poverty reduction in China.

Friday, August 29, 2008

What Sherlock Holmes can teach us about PEM

You tell me- a podcast for the weekend.

One of the most enduring and beloved literary characters in the world is that of an anti-social, cocaine taking eccentric who also happens to be a genius at deduction: Sherlock Holmes.

Assorted

US Budget Watch

In Germany, Bribery Doesn’t Always Mean Corruption

Taking the Wheel in Nepal, Maoists Face a Rocky Road

Accra High-Level Forum on Aid Effectiveness

Thursday, August 28, 2008

Budget speech writers should read this

I just read the text. It’s a solid attack on Republican economic management, hitting many of the same themes as the Clintons did this week (and reminiscent of Clinton’s 1992 speech — which is high praise.)
- Paul Krugman

Obama advisers talk

Goolsbee, Furman Say McCain's Plan Would Expand Deficit


Related;
More on Obamanomics

Wednesday, August 27, 2008

US learns Privatizations


As many as six bidders are expected to ante up more than $2 billion for Chicago's Midway Airport. In contrast to public facilities in the United States much of the infrastructure in Great Britain, including its airports and railways, has been privatized.

Tuesday, August 26, 2008

Francois Michel should blog more often

Reading for the Day- Extending Research on Corruption to Specific Features of PFM Systems

Now Something Different


Reinventing Knowledge: From Alexandria to the Internet

Jordan: Technical Assistance, 2000–2008


Fiscal

  • May 2000 Framework for managing nontreasury accounts
  • September 2000 Oil pricing mechanism
  • January–June 2002 Pension reform
  • January–September 2002 GST reform
  • November 2002 Macrofiscal capacity and treasury single account
  • February, October 2003 Revenue administration reform
  • June, August, December 2003 Peripatetic advisor on single treasury account
  • February, June, October 2004 Peripatetic advisor on revenue administration reform
  • February, May 2004 Public expenditure management
  • August 2004–June 2005 Resident expert in macrofiscal management
  • February 2005 Distributional effects of replacing oil subsidies
  • February–March 2005 Revenue administration reform
  • April 2005 Fiscal ROSC
  • February, May 2006 Public financial management
  • April–August 2006 Expert visits on revenue administration reform
  • October–November 2006 Revenue administration inspection visit
  • March–April, July, December 2007Revenue administration reform (METAC)


Monetary and Financial
  • January–February, April–May 2001, International reserve management
  • April–May 2008, Debt management strategy

Statistical
  • July 2000 National accounts statistics
  • January–February 2002 Report on the Observation of Standards and Codes—Data module
  • December 2003 Follow-up on Report on the Observation of Standards and Codes—Data module
  • Oct. 2003–Jan. 2004, Mar–May 2004 Balance of payments statistics
  • April–May 2004 Government finance statistics
  • December 2006 National accounts statistics
  • October–November 2006 SDDS Assessment mission
  • July 2007 Follow-up on SDDS/Government Finance Statistics
Other
  • March 2008 Financial programming workshop


Source: Jordan: 2008 Article IV Consultation - Staff Report

For Discussion: IMF has done a relatively better job at capacity development than other IFIs, especially the peripatetic model has been quiet effective. Discuss.

Related; IMF to Enhance Impact of Its Technical Assistance
In the IMF's FY2008 alone, close to 200 "person-years" (or about 52,000 working days) of assistance was delivered to IMF member countries

Wanted- MTEF Experts

I'm preparing a list of MTEF experts in the IFIs -IMF, World Bank,IADB, OECD and ADB.

Please provide the names of those who think are the REAL EXPERTS on MTEF in the comments.

An MTFF for Suriname

The mission welcomed the authorities’ interest in establishing a medium-term fiscal framework (MTFF) and encouraged them to move as fast as feasible on this front.

Staff proposed that fiscal discipline over the medium term be anchored on a debt target of no more than 20–25 percent of GDP when revenues are at trend. This would allow some room for debt to temporarily rise when commodity revenues were unusually low, without threatening sustainability. The authorities found this ceiling somewhat restrictive, and preferred a ceiling of some 30 percent.

Staff indicated that an MTFF should also include a target for the non-mineral balance. The authorities explained that setting a formal target for this would require changing legislation, which could take time. They will consider the staff’s recommendation to appendix). Staff also indicated that it would be advisable to supplement the MTFF by a ceiling on expenditure growth, especially since the debt ceiling is non-binding and formal adoption of a target for the non-mineral balance may take time.

A well-managed natural resource fund (NRF) could help safeguard surpluses and accumulate financial assets as future mining projects come on stream. Staff stressed that an NRF should be fully integrated into the budget, with no independent spending authority. The authorities agreed that, since new large mining projects are not expected to come on stream in the near term, priority should be given to establishing an MTFF. Staff also pointed to the need to settle external arrears before starting asset accumulation in an NRF, and supported plans to normalize relations with creditors.

The mission urged better assessment of fiscal risks
. Available public debt statistics cover only debt contracted or guaranteed by the central government. In addition, some state-owned enterprises are legally allowed to borrow without government guarantee, and reporting on their operations is incomplete. The mission recommended improving monitoring mechanisms and reporting their operations in budget documents. The authorities noted that cases of public enterprises borrowing with no government guarantee had been very rare, and that for external loans, creditors consistently asked for a government guarantee even for financially sound enterprises. They explained that a ministry of finance unit was already charged with monitoring public enterprises, although they were not yet in a position to comprehensively report these entities’ operations in budget documents.


Source:Suriname: 2008 Article IV Consultation - Staff Report


Related;
Suriname - Key Indicators

Governance in Suriname- IADB

Some IADB Projects in Suriname
Program for the Modernization of the Surinamese Tax Administration
Public Financial Management Assessment

Support for the Public Sector Investment System

Design of Pension Reform


Strengthening of Public Sector Management
-USD 6,250,000
Road Map for Public Sector Reform
Institutional Strengthening of Debt Management
Advisory Services to the Central Bank of Suriname

Monday, August 25, 2008

How would an MTEF be like in Middle Ages

Even restricting the application of the principle of opportunity cost to just one facet, such as castle building in the High Middle Ages, involves many difficulties. Taxation, budgeting, and spending in the Middle Ages can only be described as haphazard, or at least they appear so because of the paucity of records.

It would be very interesting to know the sums spent by medieval monarchs on fortifications in their countries. It is known that cities gave enormous sums for building walls and ramparts, and for digging moats. Unfortunately there is a total lack of information about costs for this period.


This quotation, from a standard work on the military history of the age, reveals some frustration of the study of the period. Fortunately, progress has been made, and even as debate regarding the exact numbers will continue, a number of deductions can be made about the labor and capital cost necessary to construct medieval fortifications. About the overall cost there is little dispute. Medieval rulers had the greatest difficulties in paying for their wars, and powerful monarchs had no less trouble despite initially starting with more. “All were driven to desperate expedients to make ends meet.” Worse, possession of more power and territory gave one more to defend. Castles and troops were both necessary, and this led to every conceivable way being devised to raise money. “Since the time of Cicero and Tacitus to the fifteenth century and beyond, authors often asserted that the tranquility of nations was impossible without armies, armies without soldiers’ wages, or wages without tribute.”

The result of the search for funds has been described as “less a system of taxation than a system of plunder,” and this was no metaphor. In England, for example, goods were sometimes seized from merchants and only released after “tax” was paid. And it was never enough. Despite the most vigorous tax collections England had ever known, Edward I (r. 1272–1307) constantly outran his financial resources. Between 1294 and 1297 wars with Scotland, France, and Wales required such heavy war levies that laity and clergy alike rebelled, leading to a major constitutional crisis. This was not the result of mere royal greed; bad policy is another matter. In Edward’s last years, the Wardrobe, as the department that paid the army’s bills was called, rarely had a thousand pounds at any given moment, while earlier in his reign it had been able to send its paymasters sums as large as £5,000 at once.

Credit was no permanent solution. Since the twelfth century credit had been steadily expanding across Europe. Tempted, Edward I took two steps: he borrowed, usually from Italian bankers, and he did not repay them, at least not completely. His first bankers, the Riccardi, failed to collect some £18,924; the Frescobaldi firm was shorted some £25,000. It did little good. At his death, Edward I left a debt of some £200,000, almost four times the entire annual royal revenue. Justly, some of this could be attributed to the policies of a king who not only made war constantly but pursued policies almost guaranteed to lead to further wars. Unsurprisingly, periods of peace led to dramatic improvements in the condition of the treasury. But there was more to the matter than the behavior of an overly, and overtly, aggressive king. Far more interesting about Edward I is that, despite running repeated campaigns in France, Wales, and Scotland, he nevertheless chose to plow fortunes into the building of castles


Source: Castles, Battles, and Bombs: How Economics Explains Military History
Jurgen Brauer and Hubert van Tuyll

Recommended;
INTEGRATING DEFENSE INTO PUBLIC EXPENDITURE WORK

Thanks for the appreciation-hoisted from comment

Dear MAI,

Its an excellent idea to start a blog on MTEF. I am also working on MTEFs at the Sub-national level.Congratulations on being recognized by IMF_PFM.
In India MAI would mean mother, hope this becomes mother of PFM.

Regards,

KL
India

Reading List for Economic Policy Makers

Argentina: An Economic Chronicle. How one of the richest countries in the world lost its wealth
by Vito Tanzi

Decline to Fall: The Making of British Macro-economic Policy and the 1976 IMF Crisis

by Douglas Wass

Government and the governed (BBC Reith lectures)
by Douglas Wass

Exchange Rate Analysis in Support of IMF Surveillance, IMF
(not yet avaialble)

In an Uncertain World: Tough Choices from Wall Street to Washington
by Robert E. Rubin

Development Challenges in the 1990s: Leading Policymakers Speak from Experience

By Timothy Besley, Roberto Zagha, World Bank Operations Evaluation Dept

Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World
by John B. Taylor

Reflections of a Political Economist: Selected Articles on Government Policies and Political Processes
By William A. Niskanen

Send us your suggestions.

Do qualifications of a finance minister matter?

Maybe not. The following is the qualification of Trevor Andrew Manuel, South Africa's Finance Minister.

* Matriculated from Harold Cressy High School, Cape Town
* National Diploma in Civil and Structural Engineering, from the Peninsula Technikon
* Executive Management Programme from Stanford National University, Singapore

The Poverty of Corrupt Nations

Tackling corruption

The factors influencing poverty in the developing world are varied and complex. Geographic location, conflicts, climate, the "resource curse," and weak governance are some of the main drivers. Improving governance and tackling corruption could be key to improving living standards in poor countries over the next decade. Similarly, enlarging the set of tools available to finance entrepreneurial enterprise has huge potential—along the lines advanced by thinkers such as Hernando de Soto and his proposals for unlocking "trapped capital," and by risk-takers such as Muhammad Yunus and the Grameen Bank in delivering more customer-friendly microcredit.

Public and private investment in developing countries, however, will be inhibited by the size and scope of "big ticket" corruption. By big ticket corruption, I mean the theft perpetrated by some senior elected and unelected officials in developing economies, as opposed to the petty bribery that occurs in some of the more junior levels of these bureaucracies to "facilitate" and expedite various administrative processes.

The African Union itself estimates that approximately $148 billion is lost each year in Africa to corruption. Transparency International has estimated that the 10 most corrupt contemporary leaders have embezzled in the range of $32 billion and $58 billion from the citizens. How many hospitals, schools, and roads would that have bought?

Roy Cullen, Member of Parliament, House of Commons, Canada, and author of the book, The Poverty of Corrupt Nations,

From IMF's F&D September 2008

Related;
What makes effective anti-corruption systems?

Saturday, August 23, 2008

A Short Primer on Macroeconomics

Read Ben Bernanke's Fed: The Federal Reserve After Greenspan by Ethan Harris

Related;
A Term at the Fed: An Insider's View
by Laurence H. Meyer

Interview with Ethan Harris

You Ain't Seen Nothing Yet


'We suffer from a fiscal cancer'- David Walker, former Comptroller General of US

Joe Biden on Budget & Economy

Q: Would it be a priority of your administration to balance the federal budget every year?

A: You don't have to make a choice of balancing the budget and/or leading with the priorities that most of us feel strongly about, from health care, to education, to the environment. And I'll just put it in real stark terms: It's about priorities. Just by eliminating the war, & eliminating the $200 billion in tax cuts that goes to the top 1%, if you add it all up, [with $350B in cuts to military special programs], that would allow me to do everything I want to do -- my priorities on education, health care and the environment -- and still bring down the deficit by $150 billion. So, the Republicans are trying to sucker us into this, "You either have to balance the budget and do nothing to make people's lives better, or you're going to balloon the deficit." They have ballooned the deficit with their bad priorities.


via Tyler Cowen

What is EITI?

A brief introduction to the initiative from Peter Eigen;


Extractive Industries Transparency Initiative

Related;

Peter Eigen tells his story of starting Transparency International, a coalition of business, government, and citizen organizations in more than 85 countries that exposes and fights corruption.

How Government Accountants almost killed one of the greatest innovations in Macroeconomics

Leontief believed that the economy could be broken down into sectors, like farming, steel manufacturing, retailing, and so forth. Each sector uses material and services from other sectors to produce material or a service, which it supplies to those other sectors. This interrelationship can be described in the form of a mathematical matrix. It is often called an “input-output analysis.” When he first began investigating this model at the end of World War II, Leontief went to the Bureau of Labor Statistics to help gather the data he needed. To assist him, the bureau assigned a young analyst who was working there at the time, Jerome Cornfield.

Leontief could break the economy down into a few broad sectors, such as putting all manufacturing in one sector, or he could subdivide the sectors into more specific ones. The mathematical theory of input-output analysis requires that the matrix that describes the economy have a unique inverse. That meant that the matrix, once assembled, had to be subjected to a mathematical procedure called “inverting the matrix.” At that time, before the widespread availability of computers, inverting a matrix was a difficult and tedious procedure on a calculator. When I was in graduate school, each of us had to invert a matrix- I suspect as a kind of rite of passage “for the good of our souls.” I remember trying to invert 5 x 5 matrix and taking several days, most of which I spent locating my mistakes and redoing what I had done wrong.

Leontief’s initial set of sectors led to a 12 x 12 matrix, and Jerry Cornfield proceeded to invert that 12 x 12 matrix to see if there was a unique solution. It took him about a week, and the end result was the conclusion that the number of sectors had to be expanded. So, with trepidation, Cornfield and Leontief began subdividing the sectors until they ended with the simplest matrix they thought would be feasible, a 24 x 24 matrix. They both knew this was beyond capacity of a single human being. Cornfield estimated that it would take him several hundred years of seven-day work weeks to invert a 24 x 24 matrix.

During World War II, Harvard University had developed one of the first, very primitive computers. It used mechanical relay switches and would often jam. There was no longer any war work for it, and Harvard was looking for applications for its monstrous machine. Cornfield and Leontief decided to send their 24 x 24 matrix to Harvard where its Mark I computer would go through the tedious calculations and compute the inverse. When they sought to pay for this project, the process was stopped by the accounting office of the Bureau of Labor Statistics. The government had a policy at the time; it would pay for goods but not for services. The theory was that the government had all kinds of experts working for it. If something had to be done, there should be someone in government who could do it.

They explained to the government accountant that, while this was theoretically something that a person could do, no one would be able to live long enough to do it. The accountant was sympathetic, but he could not see a way around the regulation. Cornfield then made a suggestion. As a result, the bureau issues a purchase order for capital goods. What capital goods? The invoice called for the bureau from Harvard “one matrix, inverted.”


Source: The Lady Tasting Tea: How Statistics Revolutionized Science In The Twentieth Century, By David Salsburg, pp.177-78

Thanks for the plug

IMF's PFM blog noticed our blog recently- thanks to Michel Lazare.

Sunday, August 17, 2008

The Federal Surplus with Milton Friedman- Yr 2000

Assorted Technical Assistance- ADB

Nepal: Knowledge Transfer for Public Procurement

Bhutan- Strengthening the Debt Management Capacity of the Department of Aid and Debt Management-Undisbursed $6,672;
  • A debt policy. The TA final report produced a “borrowing policy and strategy.” It includes a framework for government borrowing, recommended borrowing ceiling and parameters, an on-lend policy, and guidelines on the use of guarantees. Despite the delivered output, it took additional Government efforts to finalize the debt policy, which was drafted independently by the Government after the TA completion. Nonetheless, the exposure from the consultants’ preparation of the “borrowing policy and strategy” was helpful to the DADM staff in finalizing the debt policy. In 2008, the debt policy is in the process of being mainstreamed into the decision-making process. This TA output was therefore relevant but not sufficient, as well as less effective.
A loan procedures and regulations manual. A brief loan manual was prepared under the TA. The manual described government borrowing cycle and the responsible agency functions. MOF used such information to produce the Standards Operating Procedures (SOP). SOP is in use and effective. However, this TA component did not contribute to the more comprehensive “Aid and Debt Management Manual” because of government reorganization that separated aid and debt management functions. Therefore, the Government was unable to produce a combined manual. Under such a circumstance, this TA output was still relevant, effective, and sustainable.
  • A complete and consolidated database on all loans and grants. Procurement and installation of the database were the largest TA component. In early 2006, the CS-DRMS for loan and grant recording was procured. Significant efforts were made by ADB to reduce the price for a non-Commonwealth member. As a result, the system procured was cost effective and suitable in the Bhutanese context. The system has been essential for the country’s debt policy management and formulation. This TA output was highly relevant, highly effective, and most likely sustainable.

  • Strengthened debt management capacity of public debt management staff. Continuous ADB TA support from 2003 to DADM delivered concrete results in strengthened debt management capacity. Six DADM staff members have been trained and are now proficient in using the CS-DRMS. All six are still with DMD, and the developed capacity is retained. Because of the complex nature of the software system, DMD staff requires continuous support to use the new database. This TA output was highly relevant, highly effective, efficient, and most likely sustainable.
  • Timely feedback provided in the form of descriptive and analytical reports to other user departments of the Government and aid agencies. The information generated by CS-DRMS provides descriptive and analytical reports to line ministries. Such reports helped MOF formulate critical decisions in macroeconomic management and development planning. This TA output was highly relevant, effective, efficient, and sustainable.

Major Lessons
The TA completion was delayed because the TA design did not foresee the extended time required for software procurement and launch. The selection of a suitable system, especially fitting the Bhutanese context was time consuming. The Government conducted exhaustive reviews, including country site visits, and extensive negotiation of the price. Database conversation from original Excel sheets to the CS-DRMS also took longer time than originally planned. The extensive time on software procurement and launch therefore affected some remaining TA outputs. These issues need to be taken into consideration for the subsequent TA design and implementation.


Capacity Building for Fiscal Reforms in Sikkim
- Undisbursed-$183,889;
Overall Assessment and Rating: The TA was successful in introducing VAT in the State, and designing a fiscal consolidation program in conjunction with capacity building trainings in several areas (see the previous section). The consulting firm was selected under the Quality and Cost Based Selection Process (QCBS) at a significantly lower cost than anticipated during TA processing. Thus, the objective of the TA was accomplished without utilizing the entire amount of the original TA budget. The proposed overall rating of the TA is successful

Major Lessons
: Sustaining the capacity building effort in a small state like Sikkim is a difficult challenge. The follow-up actions are often not pursued after the period of assistance. In such a situation, designs of the capacity building initiatives become very crucial. The capacity building process needs to be completed within the TA period so that the desired sector outputs could be achieved without immediate follow-up actions. For example, the VAT manual and the VAT rules were designed under the TA, and adequate training was provided to the concerned staff. In other words, the desired output was not exposed to exogenous risks in terms of Government’s commitment for training.

Thursday, August 14, 2008

Mauritius Government Finance Statistics- Data Quality

ROSC- Data Module for Mauritius was recently posted by the IMF. The recommendations on government finance statistics are well worth a look;

  • Legally/officially assign the responsibility to compile GFS for the general government to the CSO.
  • Strengthen and increase staff resources for work on GFS
  • Inform the users of the internal approval processes of the data
  • Prepare a detailed migration path and obtain official approval for implementing GFSM 2001.
  • Continue work on improving the timeliness of source data by obtaining an agreement on the timely provision of data from all major source data providers.
  • Improve the timeliness of the general government operations data.
  • Regularly check for consistency between GFS and monetary data and prepare a reconciliation table.
  • Explain the revision policy in the GFS publication
  • Prepare and disseminate advance release calendars for central government operations and outstanding central government debt.


On the capacity side;

The CSO has four staff positions dedicated to the compilation of annual GFS for the general government sector and in cooperation with the MOFED the functional classification of budgetary central government expenditure on a quarterly basis. These staff also are assigned to compile quarterly general government statistics for the national accounts. Resources are limited; in particular staff resources are constrained taking into account the current migration from the methodology described in the GFSM 1986 to the methodology described in the Government Finance Statistics Manual, 2001 (GFSM 2001). While computer resources seem adequate at the moment, any additional demands could over-extend these resources.

On-the-job and external training have been available to the MOFED and CSO staff. Formal internal training has not been provided. Some staff have attended external training on the GFSM 1986 and on the GFSM 2001.

Significant progress to automate government finance compilation procedures has been achieved recently through the implementation of the Treasury Accounting System (TAS) used by the Accountant-General to follow the cash flows of the budgetary central government. However, this process needs to be extended to other areas of the general government. Data for non-budgetary central government and local governments are input manually. A new chart of accounts, based on the GFSM2001, is currently being prepared and is expected to be implemented as from the financial year 2008/09.

Monday, August 11, 2008

Is Gruber's book the best introductory textbook

Public Finance and Public Policy, the new textbook by Jonathan Gruber, is not only the best public finance textbooks I've ever read it is one of the best textbooks I've read in any field...

Gruber covers all the major programs - education, social security, unemployment insurance, Medicaid and Medicare, the tax system etc. - and in each case he carefully explains the institutional details and then he evaulates the empirical evidence focusing on the most telling pieces of evidence (rather than trying to cover everything that has ever been written as in a review paper).

Gruber is so good on the empirical research that this book would be a useful supplement to an applied econometrics class. Just flipping through it and reading the boxed Empirical Evidence sections gives a good feel for what the cutting edge questions and techniques are in empirical research.

-Alex Tabarrok

The Education of Bill Clinton

Economists and traders say the prospects for increased government borrowing needed for either McCain or Obama to enact their proposals will again lead investors to shun Treasuries and push up interest rates. Ten-year yields are forecast to reach 4.63 percent by the end of 2009, according to a Bloomberg survey of 68 economists...

Leon Panetta, Clinton's first budget director, says that ``if we continue to run these large deficits, not only bond traders but the securities markets are suddenly going to awaken with concern about whether or not the administration is doing anything to discipline the budget.''

If that happens, Panetta says, ``it's just a matter of time before they start to put pressure on a new administration.''

Clinton's experience shows what such pressure can do to a president's agenda. Promises of spending on education, public works and a middle-class tax cut fell by the wayside as advisers led by Robert Rubin, who later became Treasury secretary, convinced the new president the best thing he could do for the economy was to show investors his resolve on fiscal discipline.

``You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f**** bond traders?'' Clinton raged at aides, according to journalist Bob Woodward's book, ``The Agenda.''

Clinton's deficit-reduction policies resulted in a sustained economic boom that generated budget surpluses from his last four budgets and helped pull 10-year yields, which topped 8 percent in 1994, below 5 percent by the late 1990s.

Just as Bush benefited from the achievements of the Clinton years, gaining room to pursue his initial tax-cut agenda, either McCain or Obama will likely be under immediate pressure to fix the problems left over from Bush.

``Government borrowing is annoyingly high,'' says Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group, Inc., which has $145 billion under management. ``In the long term, we're looking at rising yields,'' says Gundlach, 48, who has managed bond funds for more than 20 years.

-Bond Vigilantes Who Gave Bush a Pass May Ambush Obama or McCain

Thursday, August 7, 2008

Technology meets Government Accountability


The Government Accountability Project of the Mercatus Center at George Mason University

Assorted

Seminar on financial management information systems

IMF to prepare Guidelines for Fiscal Risk Disclosure and Management

Fiscal Policy Taining for USAID staff and host-country partners

There's no substitute for integrity of public officials

Quote of the Day;

Even when developed to the ultimate stage of perfection, governmental accounting cannot become a guaranty of good government. At best, it can never be more than a valuable tool for promotion of sound financial management. It does not offer a panacea for all the ills that beset representative government; nor will it fully overcome the influence of disinterested, uninformed citizens. It cannot be substituted for honesty and moral integrity on the part of public officials; it cannot eliminate the demands of selfish interests, whether in the form of individual citizens, corporations, or the pressure groups which always abound to influence government at all levels.

-(Mikesell, 1956: 10), (cited in Wescott, 2008)

Explainer on Budgeting during the Presidential transition


Budgeting During Transition

IMF on UK's fiscal rules


IMF calls on UK government to adhere to its fiscal rules;
The second issue that I would like to highlight concerns the appropriate macroeconomic policy response to these more difficult economic circumstances. Two key elements of the U.K.'s policy framework, namely, maintaining public net debt below 40 percent of GDP, and an inflation target of 2 percent, are likely to be breached for extended periods.

Despite the challenges, our view is that these are not the right circumstances in which to loosen the targets on either the budget or inflation sides. Such steps would unnecessarily complicate the management of the immediate threats to stability and growth.

That said, a balance does have to be struck between the need to respect the framework objectives by avoiding an excessively sharp policy adjustment to achieve that aim.

Accordingly, for fiscal policy, our recommendation is that concrete adjustment plans should be devised to bring debt back under the 40 percent ceiling in a reasonable time frame. In that regard, we welcome the already announced fiscal adjustment of 0.5 percent of GDP in each 2009 and 2010. But this adjustment should be regarded as a starting point and as a minimum. More should be done on that front over the next few years. Frontloading the adjustment and elevating the status of nominal expenditure ceilings would send a strong signal of the government's commitment.


More from the Staff Report;

The rules-based fiscal framework aims to improve credibility and transparency

The framework comprises two rules, together with periodically issued medium-term spending objectives:
• A sustainable investment rule. For the current cycle, this is expressed as a commitment to maintain net public debt below 40 percent of GDP and, since 2003, to observe this limit in every year.
• A golden rule, measured by the cumulative current balance since the beginning of the cycle, as a percent of GDP.
• Compliance with the two rules is supported by comprehensive spending reviews which set departmental spending limits three years ahead.

Like inflation-targeting, this is a framework of constrained discretion

Although medium-term sustainability is emphasized, discretion is considerable in several dimensions—annual budget balances can swing substantially, revenue and expenditure ratios are unanchored as long as they move together, the headroom to be maintained against the rules and the treatment of debt stock adjustments are undefined, and the authorities largely self assess compliance. And public debt remains low compared to other EU advanced economies, even though its continued rise in recent years goes counter to the reductions achieved by most of these countries.

However, some use of this discretion has created difficulties

In particular, despite output close to potential over the entire decade, headroom under the debt rule has been steadily eroded (see Annex 4). Expenditure has tended to exceed the multi-year projections, even when the latter anticipated significant increases. Recent revisions to external data underscore the toll the associated high deficits—in the context of buoyant private demand—took on the external balance. And in light of the uncertainties surrounding the cyclical position of the economy, the authorities have not yet established an end point for the cycle that began in 1997, complicating assessment of adherence to the fiscal rules.

The debt rule should be maintained, but other adjustments to the rules to constrain discretion may be appropriate
The net debt ceiling underpins the medium-term and sustainability focus of the current framework, which reflects aging and other factors (Figure 7). In this light, any softening of the ceiling—even a reversion to casting it “over the cycle”—would be inappropriate, especially at the current juncture because of elevated inflation expectations, current account developments, terms of trade losses, and the difficulty of establishing the credibility of a higher ceiling or an alternative framework.

Indeed, a stronger medium-term fiscal path than that implied by the authorities’ plan would support the necessary shift from domestic to external demand and help secure headroom under this cap to accommodate stabilizers in future. Further, any leeway arising from prospective upward revisions to official estimates of GDP, such as those expected from revised estimates for financial sector value added, would best be applied to headroom under the debt ceiling, not to a relaxation of the recommended fiscal stance. If, however, the ceiling is breached in coming years, as appears likely, prompt announcement of plans to bring it back under the ceiling on a sustained basis and create the necessary buffers over the medium term to allow automatic stabilizers to operate will be critical.

The status of the spending guidelines should be raised

The net debt rule needs the support of other elements of the fiscal framework. In that regard, nominal spending caps are simple and transparent, facilitate multi-year expenditure planning, constrain upward expenditure drift directly, allow automatic stabilizers to operate on the revenue side, and strengthen fiscal resistance to inflation. Binding three-year global current expenditure ceilings could be set on a rolling basis—building on the system of three year departmental expenditure limits as well as steps towards multi-year public service nominal pay awards—so that each new budget would introduce a further year, with limited scope for revision.

Cyclically-sensitive items such as unemployment benefits could be excluded if a contingency reserve to accommodate cyclical spending proves infeasible. Concern to secure investment spending could be reflected in adoption of a multi-year floor on investment. Medium-term policy on the revenue ratio would be implicit in the expenditure and debt targets. Adherence to the golden rule could still be monitored—much as nominal spending relative to target is now—but it would no longer play a primary role in the fiscal framework. Such a shift in emphasis would also reflect the success of broader policy frameworks, which have underpinned reduced economic volatility thereby diminishing the need to define fiscal or other rules “across the cycle.”





Related from News & Blogs;
IMF Slashes U.K. Economic Forecasts on `Grim' Outlook
Fiscal rules: a political question

Accounting rules for public duty and private failure
A prudent policy rethink is needed
Treasury to reform Brown’s fiscal rules

Last post for Brown’s fiscal non-rules
A conceptually attractive rule might look like the permanent balance rule advocated by Clemens Grafe and myself (see (in increasing order of illegibility) “How to reform the Stability and Growth Pact”", “Ten Commandments for a Fiscal Rule in the E(M)U” and “Patching up the Pact; Some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union”.)


A basic backgrounder: Fiscal policy: principles and practice

Tuesday, August 5, 2008

Report Forum for Next Week

Next week we will be discussing the report Public Sector Reforms - What works and Why? and its background paper.

Here's a backgrounder on the report.

Related Multimedia;
IEG Public Sector Reform: What Works and Why? ;
Francis Fukuyama, renowned author and external advisory group member for the report, presented his concerns regarding the public service reform project. Fukuyama highlighted four issues, including the use of CPIA scores, quantitative analysis, report results, and the demand for good governance. Concerning the projects results, Fukuyama presented a theory on ineffective reforms, proposing that no amount of time will result in change because public sector dysfunctions are deeply rooted in political and social structures.

Finally, Robert Klitgaard, author and President of Clairmont Graduate University, explained that more public service reform data and theory were needed. Klitgaard said that in order to eliminate corruption, the gap between “what the state says and what it does must be closed”. He then explained that the Bank has its own challenges regarding its credibility and perceptions and recommended working more with professional organizations, the eradication of internal violations and the continuation of supply-side work. Moving forward, Klitgaard asked the audience whether it’s time for the World Bank to step-back or step-up even further concerning the fight against corruption.

Quote of the Day

We might hope to see the finances of the Union as clear and intelligible as a merchant’s book, so that every member of Congress, and every man of any mind in the Union, should be able to comprehend them, to investigate abuses, and consequently to control them.’

-Thomas Jefferson writing to his Secretary of the Treasury in 1802, cited in Walker 2004:10.

(cited in Carlos Santiso 2005)

For Discussion- MTEF in Laos

From the previous 4 posts whose advice was the most practical and realistic? Did the Loa government get value for money from the ADB technical assistance?

Links;
MTEF commitment from Loas Government
MTEF Advice for Laos- IMF

MTEF Advice for Laos- World Bank
MTEF Advice for Laos- Asian Development Bank

MTEF commitment from Loas Government

The Loas government's commitment in 2004;

A strict Medium-Term Expenditure Framework (MTEF) will preside over revenue and expenditure management, and define the country’s financial possibilities. A well-mastered MTEF is also a guarantee for strengthened macro-economic management and thus poverty eradication.


From the Joint Assessment of PRSP;
More work is needed in developing a medium-term expenditure framework (MTEF). In particular, the MTEF needs to be extended to cover recurrent expenditures and linked to the budget process—if it is to become an effective policy tool, as forward expenditure estimates now focus exclusively on the public investment plan. Another priority is to strengthen the information on public expenditure allocations—for both economic and functional expenditure classifications—as this is crucial if the government is to effectively align available resources with its developmental priorities. Work is also needed on the expenditure policy analysis including costing of key policy objectives. Preliminary work is currently underway in this area, but is unlikely to be ready for the first annual report. Subsequent updates of the NGPES should also make use of planned expenditure tracking surveys, as well as data from existing surveys, such as the household survey, to examine the links between poverty and expenditure.

MTEF Advice for Laos- IMF

IMF recommended last year;
Developing a fully-fledged medium-term fiscal framework (MTF) that explicitly takes into account the level and nature of resource revenues and use it to frame the annual budgets. The MTF should include a specific quantitative path of fiscal consolidation at the level of both the overall and non-resource balances, and make adequate provisions for contingencies. Until the BoL develops further its set of monetary management tools, the MTF should continue to envisage an annual reduction in the domestic financing requirements to help control demand pressures….

The uncertainty surrounding resource revenues in general, and the finite nature of mineral revenues in particular, also argue in favor of a prudent use of such resources. It also underscores the need for making spending decisions on the basis of a medium term fiscal framework to take account of intergenerational considerations.


In another report;

Developing an integrated medium-term fiscal framework. The authorities agree that expenditure decisions need to be made in a multiyear context. Such a framework should account not only for the volatile nature and uncertainties associated with resource revenues, but should align expenditures to the priorities of the National Socio-economic Development Plan (NSEDP). It is important that future budgets include this type of framework.

MTEF Advice for Laos- World Bank

From Public Expenditure Review, 2007;

In the longer term, an MTEF will be an important tool for planning and budgeting in Lao PDR. The country’s short-term budgeting horizon is a deficiency, and the progress that has been achieved so far is valuable, both as capacity building and as an end in itself. However, moving beyond the current very simple MTEF would be premature at this stage and might divert attention from more pressing and fundamental problems associated with the annual budget cycle.


Elsewhere in the report;

Deficiencies in the budget nomenclature, which remains overly detailed, does not include a functional classification. The nomenclature also muddles administrative and economic classifications in a way that is not compatible with the IMF’s internationally recognized “Government Finance Statistics” (GFS) classifications.

The short-term horizon also is an issue. A Medium-term Expenditure Framework (MTEF) was included in the NGPES, but it was more of an aggregate fiscal framework than an expenditure framework and did not include expenditure breakdowns by ministry, province, centralAoca1 level, sector, or sub-sector.



Related;
CFAA 2002- Summary Report, Detailed Report

Public Expenditure Review 1997, Volume 1, Volume 2

MTEF Advice for Laos- Asian Development Bank

In early 2005, ADB provided technical assistance in developing a MTEF for the Lao PDR. According to an assessment of the TA;

The TA provided the Government with the general MTFF and MTEF models, together with detailed explanatory notes on the basic concepts and workings of the models. The Excel-based spreadsheet MTEF has also been converted into a database model (in Access software), which is a simpler, more standardized, and better tool for data management of large cumulative annual data. A strategy and manual for implementation of a government-wide MTEF was likewise submitted to the MOF.

The MTEF is an analytical tool that would assist the Government in budget preparation. The methodology used for developing MTEF has been the baseline/forward estimates approach. It means that as a first step, government expenditures are projected over the medium term (typically 3 years) on the basis of existing expenditure levels. The projection is adjusted for projected inflation and pay increases, projections of the numbers of beneficiaries of public services9 and commitments for future spending that have already been made by the Government.

As a second step, and at the start of a new budget preparation cycle, ministries and agencies can request the MOF for additional funding in order to reduce underfunding of existing policies or to fund new policies. Such requests have to be fully justified. If approved, the baseline/forward estimates are adjusted accordingly. The MTEF is a moving process: every year, the MTEF is rolled forward 1-year and reprioritized.

Indicative MTEFs for the education and health subsectors (that is, primary education and expansion of rural health infrastructure) were developed and presented to the Government. The basis of the MTEFs is the cost of implementing sector programs (at the subsector level) over the medium term according to existing government policies at existing service levels (i.e., the baseline). The MTEF and the procedures for updating and revising it are firmly anchored in the budget preparation process and the overall spending ceiling (derived from MTFF), which lays out the parameters for budget preparation….

TA 4627 also developed a budget preparation model that included a revised budget calendar, revised content of the budget circular, and new budget request templates.

More importantly, the TA provided useful advice on the revisions to the draft Budget Law, the draft Implementation Decree, the budget nomenclature system and chart of accounts, and budget preparation procedures...

The outputs generated by TA 4627 were effectively used to inform the Lao PDR’s fiscal planning and budget policies. Institutional measures were also recommended to ensure more effective capacity for managing the MTFF and MTEF. In particular, the TA continued capability development that includes appreciation and applied skills in basic macroeconomics (and basic economics in general) and in basic principles of public expenditure management. Similarly, the need for interagency coordination with respect to the macroeconomic framework was identified, and it was suggested that this could be developed through the establishment of a formal committee process.

Given the gains achieved by TA 4627, a follow-through TA amounting to $1.1 million funded under the Asian Development Bank’s TA Special Fund will be initiated in 2008 for a more extended implementation of the models developed under the TA across line


Further according to ADB;

Overall Assessment and Rating: The TA was highly successful in providing the methodological foundation for the MTFF and MTEF aimed at strengthening LAO PDR's budget management processes, (and the subsequent adoption of the MTEF). This was viewed as a positive response to the weaknesses in expenditure planning. The flexibility in TA implementation enabled having the budget basics in place to facilitate future implementation of an MTEF as a basic tool for fiscal planning. TA’s efforts culminated in encapsulating MTEF in the Implementing Decree of the Budget Law, the legal framework for the strategic management of the Budget. The TA also contributed to the drafting of the associated implementing decree and the study of policy options to reform the fiscal transfers system.

Major Lessons
: One of the key lessons learned in the implementation approach and progress in Lao regarding the introduction of MTEF is to be flexible and respond to government’s requirements during implementation. The pace of implementation of a project needs to take into account the institutional environment. In Lao PDR, the institutional environment mitigates against a rapid pace of project implementation. Basic skills building should ideally precede implementation of projects such as this one, and an assessment of existing institutions and their capacity is a crucial first step. In the absence of an experienced national fiscal management specialist, a full-time international consultant should be on site. To conclude, the potential for implementing planning and budgeting reforms is there, but the implementation process is likely to remain slow and must take into account progress in reforms in other elements of public finance management, institutional constraints and the need for basic skills development.

What's a MTEF?


A medium-term expenditure framework (MTEF) consists of a top-down estimate of aggregate resources available for public expenditure consistent with macro-economic stability; bottom-up estimates of the cost of carrying out policies, both existing and new; and a framework that reconciles these costs with aggregate resources. It is called “medium-term” because it provides data on a prospective basis, for the budget year (n+1) and for following years (n+2 and n+3). MTEF is a rolling process repeated every year and aims at reducing the imbalance between what is affordable and what is demanded by line ministries. MTEF does this by bringing together policy-making, planning, and budgeting early in the budgeting cycle, with adjustments taking place through policy changes. It involves building domestic macro-economic and sector modeling capacity. Also, even if the whole of the Government’s budgeting system is not working well, each sector is better off managing itself with a medium-term perspective. A well implemented MTEF should: (i) link the Government’s priorities with a budget within a sustainable spending envelope; (ii) highlight the tradeoffs between the competing objectives of the Government; (iii) links budgets with the policy choices made; and (iv) improve outcomes by increasing transparency, accountability, and the predictability of funding.

Friday, August 1, 2008

Welcome to MTEF Blog


This blog is an aggregation point and a discussion forum for latest research on public expenditure management and multi-year budgeting practices.