ministry of finance of russia karen vartapetov ministry of finance russian federation fiscal space...

Ministry of Finance of Russia

Karen Vartapetov

Ministry of Finance Russian Federation

FISCAL SPACE – REVIEWING, ASSESSING AND PRIORITISING GOVERNMENT EXPENDITURE

14-15 MAY 2008

The case for fiscal space in performance budgeting and medium-term

expenditure framework in Russia


Fiscal space of the Russian federal budgetFiscal space is substantial =

Budget surplus (3-4% GDP) + Oil-and-gas reserve funds (10-12% GDP) vs.

Federal budget expenditures (16-17% GDP)

Sustainable measures to increase fiscal space:• Raising revenues (space for better tax administration)• Rationalizing expenditures (a significant room for better allocation and efficiency

gains, program-based budgeting)• Borrowing (a valid measure, but the current strategy is to reduce the debt burden)• External grants (in essence, the inflow of oil-and-gas export revenues represents an

external grant of the unsustainable nature. Hence, Reserve and National Welfare Funds)


Two ways of delivering better public management

• ‘Imposing order’ – strengthening of external control

• Optimal decentralization – providing incentives for managers to deliver agreed outcomes


Performance budgeting enables an efficient use of fiscal space

Decentralization of public finance management in Russia

• Fiscal decentralization - devolution of revenue and expenditure decision-making authority to subnational governments

• Administrative decentralization (‘agencification’)- granting financial management autonomy to accountable government agencies

• Service delivery decentralization – separation of policy-making and service provision (‘steering rather that rowing’)


Russia’s case: Budget Reform Matrix3 waves of public finance decentralization

Fiscal

decentralization 2001-2004

Administrative decentralization

2005-2008

Service delivery decentralization

2008-2010

Budget administrators

Different-tier governments

Ministries and agencies

Public service providers

Responsibilities (functions)

Laws on delineation expenditures

Administrative reforms

Alternative service delivery

Resources Stable and unified tax-sharing rates

3-year expenditure framework

Per-capita financing, performance contracts

Institutional incentives

Competition for voters and investment

Competition for budget resources

Competition for consumers

Fiscal discipline

(sanctions)

Externally imposed management

Evaluation of financial

management

Public service standards, contracts

Transition from soft to hard budget constrains


Expenditure

Inputs

Activities

Output

Outcome

Traditional input budgeting

Output budgeting

Outcome budgeting

Cost efficiency

Tec

hnic

al

effi

cien

cy

Intermediate outcome

Effectiveness

Eff

icie

ncy

Models for performance budgeting


The planned trajectory of the Russian budget reform

Input-based short-term Input-based short-term budgetingbudgeting (1991 - 2000) (1991 - 2000)

establishment of budget procedures and regulation (Budget Code)

Cash-basis budget

Federal Treasury

fiscal dicsipline and expenditure control

Intergovernmental equalization transfers

Results-based medium-Results-based medium-term budgeting (from term budgeting (from 2008)2008)

Long-term budget stability and sustainability

Revenue and expenditure delineations between government tiers

Meduim-term budget planning

Performance budgeting

International standards in public accounting and reporting

2001-2008


Russia’s case: performance budgeting toolsDocument Key issues

Long-term economic program National goals, Outcomes Ministries’ and agencies’ performance

reports Policy goals, Intermediate outcomes

Long-term expenditure (earmarked) programs

Policy outcomes, Intermediate outcomes, resources

Ministries’ and agencies’ internal expenditure (earmarked) programs

Intermediate outcomes, Outputs, Resources

Register of existing expenditures A basis for formulating new policy proposals

Annual budget allocation justifications Outputs, Resources Explanatory note for budget projections

and estimates National outcomes,

Outputs, Resources (summary) Rewarding grants for top-reformers (annual evaluation of progress in

performance budgeting) Incentives for improvement


4.Federal Government Long-term Economic Program (public, approved by Parliament)

3. Ministries’ performance reports (public, approved by Government)

Traditional budget documents

(submitted to MoF)Expenditure

Inputs

Activities

Output

Outcome

Russia’s case: Performance budgeting tools


1. Expenditure programs2. Budget allocation justifications (available to the public, assessed by MoF)3. Register of existing expenditures

Lump sums to

top-performers


Performance Budgeting and the budget process

Macroeconomic Planning

Budget Preparation

Budget implementation

Accounting and Reporting

Control

Revenue policy

Debt policy

Internal audit

Performanceaudit

Outcomeplanning

Outcomereporting

Medium-termplanning

Management accounting

Budget programs

Delegation and accountability


Transition to multi-year budgeting

Model Federal budget Regional budgets

Local budgets

1. Annual budget an a separate 3-year financial plan (prepared by the MoF for analytical purposes)

2000-2005 2000-2007

2. Annual budget is a part of a government-approved 3-year financial plan

2005-2007 Some regional governments

3. Three-year budget From 2008 From 2008 - choose between 2 and 3


Medium-term expenditure framework: comparing a medium term financial plan to a 3-year federal budget

IndicatorsMedium-term financial plan

Three-year budget

Basic indicators of the budget and budget policy Yes Yes

Separation of existing expenditures and new expenditure proposals

Constrained Yes

Planning of performance results Constrained Yes

Long-term contracts with service providers Constrained Yes

Possibility to re-allocate funds among years Yes Yes

Pre-conditions for temporarily even allocation of budget funds

Yes Yes

Predictability of intergovernmental grants Yes Yes


14

2 following yearsCurrent fiscal year

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

ADJUSTMENT

PLANNING

Rolling three-year budget

Current fiscal year 2 following years

Current fiscal year 2 following years

ADJUSTMENT

PLANNING


Sequencing in budget planning

Before 2008 After 2008

(revised Budget Code)

Step 1 Economic forecasting

(revenue, debt strategy) Economic forecasting

(revenue, debt strategy)

Step 2 New expenditure proposals Estimation of existing expenditures (register)

Step 3 Estimation of total expenditures (existing and new expenditures)

Estimation of the room for new policy proposals

Step 4 Adjustment (correction of revenue and expenditure estimations)

Decisions on new expenditure programs


New policy proposals

(5-10%)

• new legislations• new programs

Approval

Inclusion in the budget

Separate planning of existing and proposed expenditures

Exiting expenditures

(90-95%)

• Social transfers• Debt service• Public services• Capital programs


Performance-budgeting and fiscal space

Zero-based BudgetingAll existing expenditure programs are revised every budget period(politically sensitive; lock-in expenditures )

Incrementalist ApproachOnly new policy proposals are considered (5-10% of total expenditures)VS

1. Allocative efficiency gains

2. Technical efficiency gains

Ministries’ efficiency gains do not usually exceed the inflation rate


Composition of federal expenditures, 2008

Capital expenditure;

0,2%

Other commitments;

1,9%

Debt service; 2,5%

International commitments;

1,6%

Intergovernmental fiscal grants;

15,3%

Social tranfers ; 49,3%

Legislative and juditial powers ;

1,0%

Public services; 28,0%


2014 20152011 2012

Separate planning of existing and new expenditures

Public sector pay & fringe benefits, military pay and allowance

2008 2009 20102007 2013

Reg

iste

r of

exi

stin

g ex

pend

itur

es

Room for new policy proposals

Expenditure limits

Existing expenditures

Pensions and benefits (Public liabilities)

3-year budget

State Arms program (till 2015)

Long-term earmarked expenditure programs

Investment objects


Program for socioeconomic development for 12 years

Macroeconomic forecast for

3 years

Medium-term expenditure framework from 2008

3-year budget

New and existing ‘expenditure justifications’

Ministerial strategic plans (performance

reports)

Annual budget policy

statement for 3 years

Fiscal framework

Strategic priorities

Debt, revenue and

intergovernmental fiscal relations

strategies

Sectoral strategies

Ministries have to support their

expenditure bids with performance

information


Russia’s budget reform in the international context

• Ukraine

• Australia

• New Zealand, Great Britain, Nederland, Sweden

• USA•

Medium-term Budgeting

Performance Budgeting

•

RussiaRussia (200 (20077))

• Russia (2003)

•

• Bulgaria

•

RussiaRussia (200 (2009-20109-2010))

Vietnam 2007

France 2007

• Czech Republic

• Poland• Kazakhstan


PB is instrumental in a specific institutional context

In the last budget cycle Russia’s federal budget expenditures were increased by some 30% without

any efficiency assessment or effectiveness consideration

You can’t budget for results if you don’t manage for results.

Yet the latter requires human skills and institutional arrangements (accountability, transparency, political

commitment )


Expenditure

Inputs

Activities

Output

Outcome

Traditional input budgeting

Output budgeting

Outcome budgeting

Cost efficiency

Tec

hnic

al

effi

cien

cy


Effectiveness

Eff

icie

ncy

Models for performance budgeting

Russia 2008


PB is not the easiest way to create fiscal space

ALLAN SCHICK’S PRINCIPLES OF BUDGET REFORM SEQUENCING:

• Foster an environment that supports and demands performance before introduction of performance and outcome budgeting

• Control inputs before seeking to control outputs • Budget for work to be done before budgeting for results to be achieved • Enforce formal contracts in the private sector before introducing

performance contracts in the public sector• Introduce effective financial auditing before moving to performance

auditing • Adopt and implement predictable budgets before insisting that managers

efficiently use the resources entrusted to them


The question is:Whether to implement Performance Budgeting while basic institutional arrangements are not in place and

fiscal space is excessive?The Russian answer: “Probably, yes”

1. Performance information contributes to better accountability and transparency.

2. The change in fiscal behavior is a long-term process. The accumulation of performance information is time-consuming. The sooner you start the better

3. Take as many steps forward as possible as there always be a few steps back

4. If you don’t sort out fiscal rules you might not be able to use fiscal space when it is really needed


Questions for consideration

1) Does performance budgeting present an efficient tool for enhancing fiscal space?

2) In what ways is performance information used in the budget process in your economy?

3) Do the basic pre-conditions (say, control of inputs) have to delivered before introducing performance budgeting?

ministry of finance of russia karen vartapetov ministry of finance russian federation fiscal space...

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