Medium Term Expenditure Framework

in the

Federal Republic of Germany

16 March 2004

Principles for MTEF

• Historical development

• Need for MTEF

• Object of MTEF and planning period

Historical development

Budget Reform 1969:

• Revision of Budget Provisions (Art. 109 an 115 GG) in the constitution

• Law on Budget Principles• Länder Budget Code• Federal Budget Code (BHO)

Budget Reform 1969

• Requirements for macroeconomic equilibrium (Art. 109 GG)

• Borrowing may not exceed expenditure for investment (Art.155 GG)

• Introduction of MTEF for Federation and Länder

• Setting up of Financial Planning Council

Budget Reform 1969

• Standardised Budget System– classification by object– classification by function

• Federation and Länder can compare their budgets

• MTEF: useful tool to avoid excessive demands

Budget classificationby object

• 4 Personnel expenditure

– 42 Payments and incidental services

• 422 Payments and incidental services for civil servants and judges

• 425 Payments for employees

Budget classificationby function

• 3 Health, environment, sport and recreation

– 31 Institutions and Measures of Health Care

• 311 Health Authorities

• 312 Hospitals and Sanatoriums

Need for medium termfinancial planning

• Anticipate developments in public finance

• Identify financial impact of reform projects etc.

• Assess the scope for fiscal policy in future years

• Identify undesirable trends and counteract

Object of financial planning

• Financial Planning = Process

• Financial Plan = Product

• Detailed planning: all revenue and expenditure titles

• Comprehensive planning: developments, risks, reserves

Object of financial planning

• Macroeconomic orientation

– Medium-term projection of aggregate economic development

– e.g. Labour market expenditure– Tax revenue (Working Party on Tax

Revenue)

Planning period

Rolling Plan:

• Current fiscal year 2004

• Draft budget next year 2005

• Three planning years 2006-2008

Participants

• Federal Ministry of Finance– Overall control of the budget– Update/re-evaluation of budget

titles– Setting-up of financial plan– Negotiations of estimates with

other departments

• Working Party on Tax Estimates– Estimation of future tax revenue– Twice a year; may estimates for

financial plan– Including all economic experts in

Germany

Participants

Participants

• Financial Planning Council– FMF, finance ministers of the

Länder, associations at local level, representative of the Bundesbank

– Agreements on future spending policy / spending ceilings

Procedure of medium-term financial planning

• Update / re-evaluation of all individual budget titles

• Aggregation and analysis of financial plan measures?

• Negotiation of draft budget and financial plan with departments

• Alignment with macroeconomic data / tax revenue estimates

Benchmark figures

Financial Plan

Macroeconomic projection

MTEF-coordinationFederation and Länder

• European Monetary Union:– Annual deficit < 3% GDP– Total indebtedness < 60% GDP

• Federation and Länder are autonomous in their fiscal adminstration

MTEF-coordinationFederation and Länder

• National Stability Pact (51 HGrG)

– Discussion of budgetary developments

– Recommendations for fiscal discipline

• Agreements on future spending policy / expenditure ceilings

Budget preparationprocedure

December 2003:

• Circular to the departments for the preparation of the budget (2005) and the financial plan (2004-2008)

Budget preparationprocedure

January / February 2004:• Preparation of the estimates of

the budget and the financial plan

• Re-evaluation and planning of the budget titles

• Fixing of macroeconomic benchmark data

Budget preparationprocedure

March / April 2004

• Departmental bids sent to FMF;

• Start of negotiations FMF/departments at technical level for the draft budget (2005) and the financial plan (2004-2008)

Budget preparationprocedure

May 2004:

• Medium-term projection of economic development and medium-term tax revenue estimate;

• Financial Planning Council

Budget preparationprocedure

June / July 2004:

• Start of budget negotiations at ministerial level

• Cabinet resolution on draft budget and financial plan

Budget preparationprocedure

August 2004

• Draft budget sent to Bundestag (BT) and Bundesrat (BR) for deliberation and financial plan for information