Medium-Term Expenditure Scenario Analysis

USING BOOSTS

Why? Objectives of medium-term analysis

How? Setting a macro-framework Selecting a unit of analysis Designing scenarios and options

Limitations and constraints

Outline

Why?Medium-Term Analysis Using BOOSTs

BOOSTs provide detailed historical expenditure information

Can be extrapolated to assess expenditure allocation options over the medium-term

Objectives of Medium-Term Analysis using BOOSTs

Analysis using BOOSTs provides powerful tool to illustrate: How sector or ministry-level expenditure can adjust to

macroeconomic trends and shocks Impacts of expenditure decisions on fiscal aggregates Trade-offs and conflicts between expenditure in

different priorities and sectors Trade-offs and conflicts between expenditure

decisions and macro-fiscal policy objectives

Objectives of Medium-Term Analysis using BOOSTs

Country with growing debt repayment obligations Policy targets to:

Increase expenditure in “priority sectors” of health and education

Reduce the share of expenditure on the wage bill BOOST analysis used to show how policy targets

could be achieved within sustainable aggregate limits and while meeting repayment obligations

Example 1:

FY12 FY13 FY14 FY15 FY16 FY170%20%40%60%80%

100%

Priority EconomicLaw & Order Other

FY12 FY13 FY14 FY15 FY16 FY170%10%20%30%40%50%60%

Actual Wage Ratio

Tax Revenue Grows by about 3 percent per year in real terms (slightly above GDP growth), as per DSA baseline

Budget Support Remains at the level projected for FY13 (about 23 mill ion TOP), as per DSA baseline

Sector Wage Expenditure Non-Wage Expenditure

Priority

Economic

Law & Order

Other

Nominal spending grows by about 4¼ percent per year; Real spending falls by about 2½ percent per yearNominal spending grows by about 3¼ percent per year; Real spending falls by about 3½ percent per year

Nominal spending grows by 3 percent per year;Real spending falls by about 3¾ percent per year

Nominal spending grows by 10 percent per year;Real spending grows by about 3¼ percent per year

Output: share of expenditure by sector

Output: share of expenditure on wage bill

Example 2:

Country with deteriorating revenue effort, SOE subsidies imposing severe fiscal costs

Policy target of maintaining the real value of Sovereign Wealth fund

BOOST analysis used to demonstrate the need for revenue and SOE reforms if policy objectives were to be achieved without large cuts in expenditure in priority ministries

Fiscal Aggregate Outcomes Macroeconomic Based on IMF projections, medium-term real growth GDP of 2% and inflation of around 2.5%.

Revenue No growth in revenue in nominal terms. No budget support. Project grants remain at trend levels.

Financing Commercial debt is maintained at current levels.

Output: Expenditure and Fund Balance trends

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

05

1015202530354045

Priority Health Education Infrastructure Environment

Real

exp

endi

ture

(200

6 AU

D

mill

ion)

How?Medium-Term Analysis Using BOOSTs

Setting a macro framework

“Anchor” can be chosen according to objective of analysis

Fix aggregate expenditure Used to demonstrate tradeoffs within

sustainable expenditure limits Flexible aggregate expenditure

Used to demonstrate short-term impacts of expenditure decisions on cash reserves/debt levels

Fixed aggregate expenditure Copy aggregate expenditure limits from appropriate

scenario of IMF/World Bank Debt Sustainability Analysis over projection period

Divide expenditure types (ministries, sectors, inputs) into: Those determined by input assumptions that you control Residual expenditures that will be forced to adjust to

accommodate change in manually-determined expenditure types

Setting a macro framework

Taken from DSA

Calculated based on input assumption

Set to adjust automatically to keep deficit equal to DSA level –share of non-priority expenditure maintained

Input expenditure trajectories in drop-down menus

Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline

NominalTotal Expenditure (DSA) 1,954 2,003 2,053 2,104 2,157 2,211 2,266 2,323 GDP (DSA) 8,011 8,212 8,417 8,865 8,905 9,064 9,291 9,523

InputMinistry of Health Wages 5% real growth 211.03 221.58 232.66 244.30 256.51 269.34 282.80 296.94

Other 5% real growth 316.55 332.38 348.99 366.44 384.77 404.00 424.20 445.41Ministry of Education Wages 5% real growth 180.55 189.58 199.06 209.01 219.46 230.43 241.95 254.05

Other 5% real growth 229.79 241.28 253.34 266.01 279.31 293.28 307.94 323.34Ministry of Infrastructure Wages 5% real growth 93.79 98.48 103.41 108.58 114.00 119.71 125.69 131.97

Other 5% real growth 218.85 229.79 241.28 253.34 266.01 279.31 293.28 307.94

Ministry of Foreign Affairs Wages Zero real growth 54.71 55.81 56.92 58.06 59.22 60.41 61.61 62.85Other Adjust 82.07 76.92 71.27 65.09 58.34 50.99 43.01 34.34

Ministry of Internal Affairs Wages Zero real growth 82.65 84.31 85.99 87.71 89.47 91.26 93.08 94.94Other Adjust 93.21 87.36 80.95 73.93 66.26 57.92 48.84 39.00

Ministry of Environment Wages Zero real growth 54.71 55.81 56.92 58.06 59.22 60.41 61.61 62.85Other Adjust 23.45 21.98 20.36 18.60 16.67 14.57 12.29 9.81

Ministry of Commerce Wages Zero real growth 64.48 65.77 67.09 68.43 69.80 71.19 72.62 74.07Other Adjust 52.76 49.45 45.82 41.85 37.51 32.78 27.65 22.08

Ministry of Justice Wages Zero real growth 111.38 113.61 115.88 118.20 120.56 122.97 125.43 127.94Other Adjust 84.02 78.75 72.97 66.64 59.73 52.21 44.03 35.16

Flexible aggregate expenditure All expenditure lines are manually determined Adjustments reflected in change in the

deficit/surplus

Setting a macro framework

Taken from DSA

Manually input based on policy assumptions

Adjusts to reflect aggregate impact of sector/ministry expenditure decisions

All expenditure dynamics input from drop-down menu

Expenditure can be presented in the most useful disaggregation for the policy purpose using BOOST data for current year baseline

BOOSTs allow high level of disaggregation when analyzing expenditure

Appropriate level at which to model expenditure choices will depend on policy issues Sectors – implications of achieving sector expenditure

targets Ministries – implications of ministry expenditure targets Inputs – implications of public sector wage settlements Sub-national governments – implications of

decentralization initiatives Etc.

Selecting unit of analysis

Expenditure categories taken from BOOST

Level of disaggregation appropriate to complexity of analysis

Sector, Ministry, Division, Input, sub-national government unit, etc.

Based on policy options under consideration Based on policy decisions already made to

understand implications Examples:

Fixed rates of expenditure growth by sector Sector or ministry expenditure levels

established in plans or policy commitments Changes in spending to achieve target

expenditure ratios

Selecting Input Assumptions

5% Growth 2013 2014 2015 2016 2017 2018 2019 2020Ministry of Health Wages 211.032 221.5836 232.6628 244.2959 256.5107 269.3363 282.8031 296.9432

Other 316.548 332.3754 348.9942 366.4439 384.7661 404.0044 424.2046 445.4148Ministry of Education Wages 180.5496 189.5771 199.0559 209.0087 219.4592 230.4321 241.9537 254.0514

Other 229.7904 241.2799 253.3439 266.0111 279.3117 293.2773 307.9411 323.3382Ministry of Infrastructure Wages 93.792 98.4816 103.4057 108.576 114.0048 119.705 125.6903 131.9748

Other 218.848 229.7904 241.2799 253.3439 266.0111 279.3117 293.2773 307.9411Ministry of Foreign Affairs Wages 54.712 57.4476 60.31998 63.33598 66.50278 69.82792 73.31931 76.98528

Other 82.068 86.1714 90.47997 95.00397 99.75417 104.7419 109.979 115.4779Ministry of Internal Affairs Wages 82.6542 86.78691 91.12626 95.68257 100.4667 105.49 110.7645 116.3028

Other 93.2058 97.86609 102.7594 107.8974 113.2922 118.9568 124.9047 131.1499Ministry of Environment Wages 54.712 57.4476 60.31998 63.33598 66.50278 69.82792 73.31931 76.98528

Other 23.448 24.6204 25.85142 27.14399 28.50119 29.92625 31.42256 32.99369Ministry of Commerce Wages 64.482 67.7061 71.09141 74.64598 78.37827 82.29719 86.41205 90.73265

Other 52.758 55.3959 58.1657 61.07398 64.12768 67.33406 70.70077 74.2358Ministry of Justice Wages 111.378 116.9469 122.7942 128.934 135.3807 142.1497 149.2572 156.72

Other 84.022 88.2231 92.63426 97.26597 102.1293 107.2357 112.5975 118.2274

Drop-down menus linked to scenario sheets are an easy way to update assumptions and examine the implications of different policy targets

Running scenarios

BOOST analysis can: Help communicate incompatibilities and

required trade-offs between competing commitments and priorities

Identify the need for trade-offs within an overall resource constraint

Show macro-fiscal impacts of expenditure policy decisions

Illustrate required sector expenditure adjustments within a given macro framework

Government considering ambitious program of expenditure in priority sectors identified in the national plan Real expenditure growth of 5% per annum for health,

education and infrastructure Government has implemented a hiring freeze, but

agreed with the public sector union to inflation indexing of wages and no layoffs

Under the terms of an IMF program, there is no scope for additional borrowing

Running scenarios

Input appropriate spending trends

InputMinistry of Health Wages 5% real growth 211.03 221.58 232.66 244.30 256.51 269.34 282.80 296.94

Other 5% real growth 316.55 332.38 348.99 366.44 384.77 404.00 424.20 445.41Ministry of Education Wages 5% real growth 180.55 189.58 199.06 209.01 219.46 230.43 241.95 254.05

Other 5% real growth 229.79 241.28 253.34 266.01 279.31 293.28 307.94 323.34Ministry of Infrastructure Wages 5% real growth 93.79 98.48 103.41 108.58 114.00 119.71 125.69 131.97

Other 5% real growth 218.85 229.79 241.28 253.34 266.01 279.31 293.28 307.94

Ministry of Foreign Affairs Wages Zero real growth 54.71 55.81 56.92 58.06 59.22 60.41 61.61 62.85Other Adjust 82.07 76.92 71.27 65.09 58.34 50.99 43.01 34.34

Ministry of Internal Affairs Wages Zero real growth 82.65 84.31 85.99 87.71 89.47 91.26 93.08 94.94Other Adjust 93.21 87.36 80.95 73.93 66.26 57.92 48.84 39.00

Ministry of Environment Wages Zero real growth 54.71 55.81 56.92 58.06 59.22 60.41 61.61 62.85Other Adjust 23.45 21.98 20.36 18.60 16.67 14.57 12.29 9.81

Ministry of Commerce Wages Zero real growth 64.48 65.77 67.09 68.43 69.80 71.19 72.62 74.07Other Adjust 52.76 49.45 45.82 41.85 37.51 32.78 27.65 22.08

Ministry of Justice Wages Zero real growth 111.38 113.61 115.88 118.20 120.56 122.97 125.43 127.94Other Adjust 84.02 78.75 72.97 66.64 59.73 52.21 44.03 35.16

Change in Surplus/Deficit from DSA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Because no additional borrowing, use “fixed aggregate expenditure, setting deficit as DSA levels

Running Scenarios

Expenditure growth can be absorbed by reductions in other sectors

But, because of fixed real wages, required unfeasible compression of non-wage

expenditure

2013 2014 2015 2016 2017 2018 2019 20200.00

500.00

1000.00

1500.00

2000.00

2500.00

Total Health Total EducationTotal Infrastructure Total Others

2013 2014 2015 2016 2017 2018 2019 20200%

10%20%30%40%50%60%70%80%

Health EducationInfrastructure Others

Government facing economic shock, with expected decline in real revenue

Committed to maintaining real expenditure on core public services, but has established nominal expenditure freeze in other areas

Wishes to assess debt implications

Running scenarios

2013 2014 2015 2016 2017 2018 2019 2020NominalTotal Expenditure 1,954 1,856 1,745 1,815 1,869 1,925 1,983 2,042 GDP (DSA) Input 8011.4 8211.685 8416.977 8865 8905 9064.164 9290.768 9523.037Ministry of Health Wages Zero real growth 211.03 215.25 219.56 223.95 228.43 233.00 237.66 242.41

Other Zero real growth 316.55 322.88 329.34 335.92 342.64 349.49 356.48 363.61Ministry of Education Wages Zero real growth 180.55 184.16 187.84 191.60 195.43 199.34 203.33 207.39

Other Zero real growth 229.79 234.39 239.07 243.86 248.73 253.71 258.78 263.96Ministry of Infrastructure Wages Zero real growth 93.79 95.67 97.58 99.53 101.52 103.55 105.63 107.74

Other Zero real growth 218.85 223.22 227.69 232.24 236.89 241.63 246.46 251.39Ministry of Foreign Affairs Wages Zero nominal growth 54.71 54.71 54.71 54.71 54.71 54.71 54.71 54.71

Other Zero nominal growth 82.07 82.07 82.07 82.07 82.07 82.07 82.07 82.07Ministry of Internal Affairs Wages Zero nominal growth 82.65 82.65 82.65 82.65 82.65 82.65 82.65 82.65

Other Zero nominal growth 93.21 93.21 93.21 93.21 93.21 93.21 93.21 93.21Ministry of Environment Wages Zero nominal growth 54.71 54.71 54.71 54.71 54.71 54.71 54.71 54.71

Other Zero nominal growth 23.45 23.45 23.45 23.45 23.45 23.45 23.45 23.45Ministry of Commerce Wages Zero nominal growth 64.48 64.48 64.48 64.48 64.48 64.48 64.48 64.48

Other Zero nominal growth 52.76 52.76 52.76 52.76 52.76 52.76 52.76 52.76Ministry of Justice Wages Zero nominal growth 111.38 111.38 111.38 111.38 111.38 111.38 111.38 111.38

Other Zero nominal growth 84.02 84.02 84.02 84.02 84.02 84.02 84.02 84.02

Input appropriate spending trends

Running scenarios

Growth in budget share for priority sectors

Short-term growth in deficit

2013 2014 2015 2016 2017 2018 2019 20200%

10%20%30%40%50%60%70%80%90%

100%

Health EducationInfrastructure Others

2013 2014 2015 2016 2017 2018 2019 2020

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

-300

-250

-200

-150

-100

-50

0

Deficit Percent GDP

Surp

les/

Defic

it (%

GDP

- Lin

e)

Surp

lus/

Defic

it (m

illio

ns -

Bar)

Limitations and constraints

Complement to, rather than substitute for, DSA BOOST analysis relies on a macro framework

taken from a DSA BOOST does not provide data on economic

growth, revenue, inflation, which needs to underpin all analysis

BOOST data not sufficient for modeling debt dynamics

Static analysis - No mechanism for tracing interactions between expenditure decisions and growth or revenue

Limitations and constraints