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

Budget Preparation and Approval 237
budget year is probably most appropriate for framing the preparation of the
coming budget.
Clearly, the feasibility of a multiyear perspective is greater when revenues
are predictable and the mechanisms for controlling expenditure are well
developed. These conditions are not fully met in many developing countries,
precisely where a clear sense of policy direction is a must for sustainable
development and where budget managers have a special need for predictability
and flexibility. Nevertheless, some sort of medium-term forecast
of revenues and expenditures remains essential to frame the annual budget
preparation process.
Specifically, the annual budget must reflect three paramount multiannual
considerations:
1. The future recurrent costs of capital expenditures (which constitute the
largest single category of public expenditure in most African countries).
2. The funding needs of entitlement programs (for example, pensions and
transfer payments), where expenditure levels may change even though
basic policy remains the same. This consideration is relevant for industrial
countries, with large social security and public health obligations, but
much less so in Africa.
3. Contingencies that may result in future spending requirements (for
example, government loan guarantees; see chapter 2 by Schiavo-Campo
for a discussion of contingent liabilities).
A medium-term outlook is especially necessary because the discretionary
portion of the annual budget is small. At the time the budget is formulated,
most of the expenditures are already committed. Salaries of civil
servants, debt-service payments, pensions, and the like cannot be changed in
the short term, and other costs can be adjusted only marginally. In developing
countries, the available financial margin of maneuver is typically no more
than 5 percent of total annual expenditure. As a result, any real adjustment of
expenditure priorities, if it is to be successful, has to take place over a time
span of several years. For instance, should the government wish to substantially
expand access to technical education, the expenditure implications of
such a policy are substantial and stretch over several years, and the policy can
hardly be implemented through a blinkered focus on each annual budget.
Multiyear spending projections are also necessary to demonstrate to the
administration and the public the direction of change and to allow the private
sector time to adjust, in the interest of the economy as a whole. Moreover, in
the absence of a medium-term framework, adjustments in expenditure to