THE AUSTRALIAN MTEF

ITS FEATURES AND ITS UNDERLYING SUPPORTING INSTITUTIONS/SYSTEMS

Presented by Pat McMahon

Budget Advisor,

Australian Department of Finance and Deregulation

Aims of the next two sessions are to:

1. Gain a better understanding what an MTEF is and the differences to the traditional approach;

2. Draw out the key institutions and systems necessary to support an MTEF; and

3. Examine practical examples of how an MTEF could be applied in some pilot agencies.

Three Features of an MTEF

1. Budgeting for more than one year - The forward years’ estimates represent a continuation of government policies;

2. The only adjustments allowed being i) price or cost changes beyond the control of managers, ii) government decisions, and iii) demand variations in demand driven programs; and

3. MTEF does not mean that appropriations are for multiple years. In Australia appropriations are for one year only.

Benefits of a “True” MTEF (A multi-year Budget)

MTEF not linked to Budget

MTEF linked to Budget

More useful to Cabinet for strategic allocation decisions

x

More accuracy in the estimates and more reliable fiscal settings

x

More certainty for line ministries to plan

x

Less work in building budgets (no more zero budgeting)

x

A "True" MTEF x

Feature 1. Budgeting for more than one year - 2008-09 Budget

Feature 2. Forward Estimates are linked to the Budget (no zero based budgeting each year)

Reconciliation of 2007-08 Budget, 2007-08 MYEFO, 2007 PEFO and

2008-09 Budget underlying cash balance estimates

a. Excludes the public debt net interest effect of policy measures.

b. Excludes expected Future Fund earnings.

Some examples of “other” variations (from Budget Paper No.1 2008-09)

• “a $318 million reduction in estimated expenses for Parenting Payment reflecting an increase in the number of people no longer eligible for the payment due to higher reported incomes”

• “a $178 million reduction in estimated expenses for Pharmaceuticals and Pharmaceutical Services driven by a lower than expected growth in usage of a range of drugs on the Pharmaceutical Benefits Scheme”

• “a $128 million reduction in estimated expenses for Family Tax Benefit driven by a decrease in customer numbers due to higher reported incomes”

Feature 3. Multi-year budgeting but annual appropriations!

Feature 3. Multi-year Budget and Annual Appropriations under an MTEF

Continuing Policy New Policy Process

MTEF – Current (already implemented)

Long Term Development Plan20 yrs

Medium Term Development Plan/Strategic Plan

5 yrs

Medium Term Development Plan - to be implemented

Government New Policy/Ministry New Policy

Changes to Continuing Policy from PBB

TO

ACHIEVE

4

Y

E

BUDGETReview of Continuing Policy using PBB

Activity Program Output Outcome

MTEF – Revised New State Budget Plan – 5 YearsContinuing Policy over 5 years

New Policy over 5 years

Total over 5 years

Continuing Policy New Policy Process

MTEF – Current (already implemented)

Government’s Agenda /Strategic Plan

4 yrs

Government’s Agenda/Plan yet tobe implemented

Government New Policy/Ministry New Policy

Changes to Continuing Policy from PBB

TO

ACHIEVE

Review of Continuing Policy using PBB

Activity Program Output Outcome

ONE YEAR’s APPROPRIATIONContinuing Policy In Budget year

New Policy in Budget year

Total Appropriation

RA

N

E

W

Five institutional “Building Blocks” underlying the Australian MTEF

A. Cabinet process that records decisions on a multi-year basis;

B. Parameters – Economic (e.g. prices) and program specific adjustments for factors beyond the control of governments;

C. Defining programs and operating cost frameworks (“running costs” vs “non running costs”) (relates strongly to the usefulness of PBB and aligns MTEF and PBB);

D. Costing system requiring Department of Finance agreement; and

E. Authoritative Financial Management Information System.

Building Block A. Example of a Budget Decision by Government

Humanitarian migration program — additional 500 places for Iraqis in 2008-09

Expense ($m) 2007-08 2008-09 2009-10 2010-11 2011-12

Department of Education, Employment

and Workplace Relations - 3.9 4.3 4.2 4.3

Department of Immigration and

Citizenship - 3.8 2.8 0.6 0.1

Department of Families, Housing,

Community Services and Indigenous

Affairs

- 1.4 2.2 2.2 2.3

Department of the Treasury - 0.8 0.8 0.8 0.9

Department of Health and Ageing - 0.4 0.9 0.9 0.9

Medicare Australia - .. .. .. ..

Total - 10.3 11.0 8.8 8.5

Related revenue ($m)

Australian Taxation Office - 1.0 1.1 1.2 1.3

Australian Customs Service - .. .. .. ..

Total - 1.0 1.1 1.2 1.3 SOURCE: BUDGET PAPER NO.2 2008-09

Building Block B. Parameters for economic and program specific variables

• Parameters are the economic or program specific variables over which managers & governments have no control which influence the price or cost of an output.

• Arrangements are required to generate and apply the parameter forecasts to forward estimates– It is very important that such adjustments occur in the

Forward Estimates otherwise the funding provided will not be sufficient to allow the delivery of programs as intended by the Government

Examples of some economic parameters from 2008-09 Budget Papers

Examples that highlight some program specific parameters (from 2008-09 Budget Papers)

• “a $207 million increase in estimated expenses for Medicare Services reflecting increases in demand for a range of medical services including services provided by general practitioners, pathology services and diagnostic imaging services” and

• “ a $240 million increase in estimated expenses for interest rate subsidies available under Exceptional Circumstances assistance, primarily due to a higher than expected take-up by eligible farmers.”

Generating the forecasts of economic parameters & program specific variablesEconomic parameters• Economic parameters are based on the forecasts of the Joint

Economic Forecasting Group.• The economic parameters are updated at regular intervals,

usually three or four times a year.

Program specific parameters• Models agreed between the Department of Finance and the line

ministries are usually used to generate the forward estimates of complex and large programs.

Building Block C. Aligning MTEF & PBB and setting a framework for “operating cost flexibility”

FUEL SUBSIDY

Inputs

Processes / activities

Outputs / programs

Outcomes

Departmental (running) costs

Salaries Program Management Subsidy Payment to oil refiners.

Affordable Fuel for Indonesian citizens

Goods and Services Program Management Property Expenses Program Management Office Expenditure Program Management

Administered costs (non - running ) costs

Subsidy

Subsidy Payment set by Government

Subsidy Payment to oil refiners

Affordable Fuel for Indonesian citizens

Building Block D. Accurate & independent costings

• The Government requires that agencies must agree their costings with the Department of Finance. Note:

– Department of Finance agreeing to the costs does not mean it supports the policy merits of the new policy proposal.

– By fully analysing the costings, the Department of Finance often improves its understanding of the policy and its merit.

Building Block E. A central budgeting system to control variations to the forward estimates

• The authoritative record of estimates is the central budgeting system managed by the Department of Finance.

• Changes cannot be made without authority i.e.

– Government decisions;– Economic parameters;– Program specific parameters; and– Other (rarely used, but could include changes due to accounting

standards etc)

Summary of what is an MTEF and how it differs to the traditional models

• Estimates of revenues and expenditures of policies agreed by the Government for future years

• linked to the Budget (i.e. no more zero based budgeting). Variations can only be for a few reasons, i.e. generally:– Government decisions

– Parameter adjustments

• MTEF can be readily linked to a multi-year national plan

Graphical Representation of a Budget process under an MTEF in Indonesia

C ontinuing P olic y New P olic y P roc es s

MT E F – C urrent (already implemented)

L ong T erm D evelopment P lan20 yrs

Medium T erm Development P lan/S trategic P lan

5 yrs

L ong Term Development P lan – to be implemented

Medium Term Development P lan - to be implemented

G overnment New P olicy/Minis try New P olicy

C hanges to C ontinuing P olicy from P B B

TO

ACHIEVE

National V is ion

PRESI

DENT ’S

VIS ION

R eview of C ontinuing P olic y us ing P B B

Activity P rogram Output Outcome

MTE F – R evis ed New S tate B udg et P lan – 5 Y earsC ontinuing P olicy over 5 years

New P olicy over 5 years

Total over 5 years

C ontinuing P olic y New P olic y P roc es s

MT E F – C urrent (already implemented)

L ong T erm D evelopment P lan20 yrs

Medium T erm Development P lan/S trategic P lan

5 yrs

L ong Term Development P lan – to be implemented

Medium Term Development P lan - to be implemented

G overnment New P olicy/Minis try New P olicy

C hanges to C ontinuing P olicy from P B B

TO

ACHIEVE

National V is ion

PRESI

DENT ’S

VIS ION

R eview of C ontinuing P olic y us ing P B B

Activity P rogram Output Outcome

MTE F – R evis ed New S tate B udg et P lan – 5 Y earsC ontinuing P olicy over 5 years

New P olicy over 5 years

Total over 5 years

Hypothetical example of “continuing” and “new policy” – Family PlanningFive year National Plan

• The National Plan states an aspirational target for Family Planning Services to cover 25 million families.

Existing 4 year Budget Plan

• Previous decisions allocated funds to cover only 10 million families.

Fiscal space allows for new spending on priorities not yet implemented

• Government calls for new policy submissions within limits available.

New Policy in the Budget

• Government allocates funds for an additional 5 million families. The new forward estimates provide funding for 15 million families.

Appropriation for Family Planning assistance to 15 million families.

NUMBER OF FAMILIES

2009 2010 2011 2012 2013

Planning Target 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000

MTEF - Existing Policy 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000

New Policy (Addition) 0 5,000,000 5,000,000 5,000,000 5,000,000

MTEF

0

5,000,000

10,000,000

15,000,000

20,000,000

2009 2010 2011 2012 2013

Num

ber

of F

amili

es

MTEF - Existing Policy Revised MTEF

Any Questions? Discussion!