The Analysis of Government Expenditures: An Introduction to Methods & Tools

(L5)

David Webber

METAC Budgeting Workshop

Dead Sea, Jordan, October 12-15, 2015

“Expenditure Analysis”

Two main types:

1. Pre-approval appraisal of new spending programs (Recurrent Budget) and projects (Development Budget)

2. Periodic, or ad hoc, review of existing (on-going) spending programs – usually core spending activities of line ministries

Role of the Budget Officer in Managing Expenditure Analysis

1. As normal, analyse new budget proposals during budget preparation cycle.

2. Design and manage a program of on-going expenditure reviews each year:

• Identify expenditures that should be reviewed• Propose list to Director and DG for approval• Advise/consult with line ministry• Manage (conduct, participate or oversee) review work• Present results of reviews and recommendations to DG (for possible

inclusion in next budget preparation cycle)

Technical Capacity of Budget Officer

Budget officers must be able to:

• Understand and assess any spending proposal analysis submitted by line ministries

• Conduct a brief analysis for GBD of any spending proposal, with or without help from line ministry

• Commission a detailed analysis by experts (set ToR, explain findings to DG, propose changes to design, etc.)

• Participate in expert teams for detailed studies – especially the “economic analysis” components

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General Scope of Analysis

Required amount of time/effort for analysis is determined by:

• Size / cost (EGP, JD, etc.) of the proposal – 1st year + on-going cost

• Capacity, skills & reputation of line ministry

• Amount of time available for analysis – within current budget cycle?

• Size of risk for Government : financial risk, political risk

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5 Key Objectives of Analysis

Budget officers need to determine:

1. Does the proposed spending conform to government’s present economic policies & objectives?

2. Is the proposed spending the best way to achieve these policy objectives – what is the “intervention logic” ?

3. Does the proposed spending involve an efficient use of resources (both financial and non-financial resources)?

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5 Key Objectives (Contd.)

Budget officers need to determine:

4. Are there clear & strong linkages between:

Inputs >>> Outputs >>> Results

5. Are the costs correctly estimated and affordable for the Budget (within medium term budget framework)?

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Managing An Expenditure Analysis

Discussions with BD will usually identify two principal methods for managing expenditure analysis and reviews:

1. “Basic Analysis” – a short analysis (usually by the Budget Officer) of a new spending proposal or a problem area in current spending of one or more line ministries.

2. “Researched Analysis” – a detailed study (usually by team appointed by BD and line ministry) of a major spending program or proposed capital investment project

All expenditure analyses should follow a structured process, but a Basic Analysis will be much simpler and shorter than a Researched Analysis.

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Focus for Expenditure Analysis

Basic Analysis

• INPUTS: utility costs; vehicle use; staff travel; salary levels;

• ACTIVITIES: staff training; building maintenance; public information services

• SMALL PROGRAMS: passport services; adult literacy; midwifery services

Researched Analysis

• LARGE PROGRAMS: hospital drug/medical supplies; disease control; social benefits

• SUB-SECTORS: health centers; secondary education; courts system

• SECTORS: education; railways

• MAJOR CAPITAL PROJECTS

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David Webber METAC Adviser 10

The Analytical Process

1.Define

expenditure policy

“Problem”

2.Consider

Output(s) & Timing

3.Define an

appropriateMethodology

4.Undertake Research

& Analysis5.

Consider all possible

Interventions6.

Prepare initial

Findings7.

Make Internal

Presentation

8.Review, revise, prepare

Final Report &Recommendations

9.Present Report

(for High Level Consideration) (to DG, Minister, Cabinet etc.)

Have the budget issues or needs been correctly specified: raise cost-effectiveness, reduce waste, meet new social need, improve behavior, etc.?

What is needed by BD: an internal paper for DG/Cabinet, sector workshop, budget guideline, new procedures, publication n, draft law, etc.? by when?

What is the best technique for analyzing this expenditure policy issue: a financial audit? a comparative analysis (by dept., region, country)?, a cost-effectiveness study, cost-benefit analysis, etc.?

Assemble as much relevant info & data as possible (within available timeframe), from budget docs, local organizations, other countries, int’l sources, etc.

Such as: budget instruction, new budget program, new law/regulation, (e.g. procurement), structural re-organization, deleted function, private sector incentives, etc.

What conclusions (not recommendations yet) come out of the analysis so far? What remains uncertain?

Peer review, brainstorming recommendations (within BD plus other relevant MoF and LM staff)

10.Assign

Implementation Responsibilities

(within BD, line ministries, etc,)

A Structured Approach to Managing Expenditure Analysis (“Basic” & “Researched”)A Structured Approach to Managing Expenditure Analysis (“Basic” & “Researched”)

Analysis Using “Program Budgeting”

First Question: Is the spending activity (whether recurrent or development) part of an existing Budget Program in that ministry, or should it be considered as a “New Spending” activity?

1. If it is part of an existing budget program:• do the objectives fit within the overall program objectives?• is the cost within the amount likely to be available for that budget

program over the next few years?

2. If it is “new spending”:• does the proposal involve creating a new budget program?• are the objectives of that new budget program within the ministry’s

present mandate?• is there sufficient financial space for a new program in that line ministry’s

budget?11

Single Budget Allocation vs. “Cross-cutting” Expenditure Studies

1. Single ministry/agency budget allocation:

- work conducted by one Budget officer- consultation with one line ministry/department/agency

Benefits: efficient, quick, recommendations readily applicable

2. Cross-cutting policy/activity: (usually 3+ ministries)- several budget officers collaborating- several ministries involved/affected

Benefits: helpful to many (all?) ministries, bigger potential impact on budget spending/savings

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Basic Analysis: Methods of Analysis

Applying the tools of basic analysis through:

1. Desk study – collating information; literature review

2. Field work – questioning stakeholders; gathering primary data

3. Benchmarking comparisons – local; regional; international

4. Key Performance Indicator (KPI) assessment - and, if necessary, expanding the KPI framework for better future assessments

5. Cost-Benefit Analysis (CBA) or Cost-Effectiveness Analysis (CEA) techniques – where some explicit quantification of net benefits and/or ranking of expenditure priority is needed.

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Basic Analysis: Tools of Analysis

Measuring and assessing:

1. the “Rationale” for the expenditure

2. the “Efficiency” of output/service delivery

3. the “Effectiveness” of the expenditure

4. the “Impact” of the expenditure

5. the “Continued Relevance” of the expenditure

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1. Assessing “Rationale”

Two key concepts:

1. “Intervention Logic”

- is the expenditure necessary?- is government the best provider of this service / asset?

2. “Program Logic”

- are the objectives of the spending activity clear?- are these objectives consistent with government policy?- are the objectives consistent with ministry’s role/function- are the responsibilities clearly defined and accepted?- are the inputs, outputs and results (impacts) aligned?

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Program Logic - Alignment

Inputs >>> Outputs >>> Results

Salaries Services Immediate:Operating costs Goods (direct) benefitsMinor capital Regulations

Long term: (socio-economic) impacts

Efficiency Effectiveness

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Program Logic: ExampleOperation of Lower Courts

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Inputs >>> Outputs >>> Results Salaries of judges Proceedings held Immediate:Salaries court staff Decisions made Problem resolved; Courtroom operations Justice servedCourt equipmentWitness costs Long term impacts:Etc. Rule of law prevails;

Business confidence;Property & other rights are respected / protected

Efficiency Effectiveness

Cost of cases Timeliness of processSpeed of hearings Quality / consistency of judgments

Clarity / enforcement of decisions

2. Analysing Efficiency

How are resources (inputs) transformed into outputs?

1. Measureable in terms of:

- unit of output per $ (EGP, JD, etc.) of inputs- time required to produce output

2. Relative concept (i.e. needs to be compared with)

- previous years- baseline period/cost- performance of other departments, ministries, provinces, jurisdictions

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Identifying Efficiency & Economy

Efficiency• What are the outputs?• Are they adequately

defined?• How many are produced?• How long does it take?• What are the backlogs?• How complete are the

outputs?• Are there complaints?

Economy• Are the best input prices

obtained?• Could these prices be

improved?• Is the quality of inputs

sufficient / consistent?• How do these inputs

compare with others of same kind?

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3. Analysing Effectiveness

Is the spending activity achieving the expected results? (This may be a matter for careful judgements.)

1. Have Output and Result indicators been specified for the spending activity/program?

2. What results have been achieved so far in terms of these (or some other) indicators?

3. Are these results consistent with expectations, or is their a gap?

4. What is the current level of satisfaction with results – amongst users/customers, providers, politicians?

5. Could the same/better results be achieved in a different (cheaper) way?

6. Has a baseline been established for measuring effectiveness over time? (Should that be done now as part of this review?)

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Measuring Effectiveness at an Early Stage

Many ministries argue that it is “too early” to measure the effectiveness of the spending activity. If so, look at:

• rationale of the project• robustness of the program logic• assess strengths, weaknesses, opportunities, threats (SWOT)• performance of personnel delivering the outputs• existence of positive and negative factors around the activity that

may affect results (e.g. adequacy of funding, political support, experience of providers, etc.)

In summary, what are the prospects for success (effectiveness)?

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4. Analysing Impact

• What are the expected medium & longer term effects (benefits) of the expenditure for the target group?

• Are there specific socio-economic indicators attached to this spending?

• How is the behaviour of beneficiaries changing over time – in a positive or negative way?

• Is there evidence of any unintended side effects from the spending?

• Are there any proxy indicators for longer term benefits?

(e.g. a proxy indicator for improved children’s health – from an immunisation program - may be attendance rates at local schools)

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5. Analysing Continuing Relevance

Involves assessing whether the program Rationale is still valid.

• Is the expenditure still justified? Should the objectives be revised?

• Are the same, or similar, services now being provided by anyone else?

• Is the program design (delivery mechanisms) for these outputs still the best option?

• Should the rationale be kept under review (perhaps re-tested in 2 years when better data is available?)

• Are other countries / jurisdictions approaching the problem in a different (better) way?

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Expenditure Analysis Output: Structure of the Report

A 2-10 page report (BD template?):

1. Reason for the analysis/review (the “problem”)

2. Brief outline of methodology; plus list of people & organisations consulted

3. Rationale - intervention is logical (not logical)- structure (program logic) is sound (not sound)- weaknesses in specification objectives, KPIs- duration of operation (measurability of results)

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Expenditure Analysis Output: Structure of the Report (Contd.)

4. Efficiency of delivery: high/low/etc. (use benchmarks)

5. Effectiveness: high/low/uncertain (clarify who benefits)

6. Impact: contribution to economic and social development is clear and significant (not clear and not significant)

7. Relevance: continue / discontinue / modify the expenditure activity in future budgets

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Conclusion

• Budget funds are nearly always insufficient – so just recommending more spending is not usually helpful

• Good expenditure analysis and review opens up information and creates policy options

• Hard decisions are still hard – but decision-makers are better informed and equipped

That’s all Budget Analysts can do: Good luck! 26

Recommended Reading

1. World Bank: Tools for Institutional, Political and Social Analysis of Policy Reform, (Chapters 3 & 9).

2. UK (HM) Treasury: The Spending Review Framework

3. Government of Ireland (MoF): Value for Money Reviews Guidance Manual (Chapter 5)

4. United Kingdom: The Green Book – Appraisal and Evaluation in Central Government

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