Public Sector Governance and Accountability Series: Budgeting and ...

128 Alta Fölscher
the 1980s, when the incoming government had to demonstrate to interest
groups that the existing policy mix would become unaffordable and result in
higher taxes over the medium term.
In their seminal work on budgeting institutions and expenditure
outcomes, Campos and Pradhan (1996) identified MTEFs as critical institutions
to operationalize incentive compatibility in budgeting systems. First,
by providing a resource-constrained expenditure framework, MTEFs enable
the ministry of finance to engineer a budget process that sequences resource
allocation decisions such that spending agencies are more likely to be aware
of the real resource constraint, thus reducing tragedy of the commons problems.
Second, by providing ex ante clear ceilings and resource allocation
criteria to spending agencies, MTEFs shift the burden of calculation to where
there is better information. Because the budget process happens within a
predetermined medium-term indicative resource framework (linked to
macroeconomic policy considerations), the burden on spending agencies to
cushion themselves against uncertainty is reduced while there is transparency
about the level of likely additional resources. Third, an MTEF
approach to budgeting provides a medium-term planning horizon and
should include a system for comparing the medium-term costs of competing
policies. When the expenditure framework is comprehensive—in other
words, when it includes all claims on public funds—it facilitates a more
comprehensive approach to budgeting.
Narrowly defined, an MTEF is a comprehensive, governmentwide
spending plan that links policy priorities to expenditure allocations within
a fiscal framework—linked to macroeconomic and revenue forecasts—usually
over a three-year forward planning horizon. Successful MTEFs denote
more than just a set of multiyear spending plans: they should be the outcome
of an approach to budgeting that requires early policy prioritization, a better
evaluation of competing policies and programs, and a deliberate matching
of current and medium-term plans with available resources through a
disciplined process. MTEFs have been proposed as an essential element of
modern budgeting practice. In reality, they have often not delivered.
Reasons for their failure include insufficient attention to the preconditions
and the complementary reforms necessary for their successful introduction.
Reforms are often too narrowly focused on financial planning and technical
tools, such as detailed, activity-based costing. Although the technical MTEF
toolkit provides important building blocks of functional systems, their
effect is likely to be limited if not backed by a proper process that is based
on an assessment of macroeconomic performance and creates buy-in to
tradeoffs, including political buy-in. An effective MTEF system is as much