Multi-Year Budgeting: International Practices

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Table of Contents

Research questions
Relevance of the research questions
Background
Theoretical framework
Research strategy
Previous research studies
Conclusion
Recommendations
Works Cited

Title of the article for analysis: Multi-Year Budgeting: A Review of International Practices and Lessons for Developing and Transitional Economies
Authors: Jameson Boex, Jorge Martinez-Vazquez, and Robert McNab
Journal: Public Budgeting & Finance
Volume: 20
Issue: 2
Year of publication: 2000

Research questions

The article assesses the application of multi-year budgeting by different governments and it is based on two main research questions, which include:

Does the adoption of a multi-year budget approach assist transitional and developing economies in improving their budgeting systems
Does the introduction of a multi-year framework affect the realization of sound fiscal policies negatively?

Relevance of the research questions

The research questions considered in the research focused on the application of the multi-year budgeting concept across the developed and the less developed countries. Moreover, the questions enable the researchers to consider the available empirical evidence to illustrate the application of multi-year budgeting.

Background

Several member countries of the Organization for Economic Cooperation and Development (OECD) have implemented considerable reforms in their budgeting process, as evidenced by a number of aspects. First, the most developed countries have decentralized the budgeting process by delegating the budgeting role to individual spending departments. Consequently, the departments have the discretion in making decisions on the allocation of funds depending on the departmental spending limits. Secondly, Boex, Martinez-Vazquez, and McNab emphasize that countries are progressively adopting result-oriented budgeting techniques (93). The decision to adopt this approach is prompted by the need to augment the efficiency in allocating public resources. Thus, budgetary allocation is made based on departmental performance (Boex, Martinez-Vazquez, and McNab 92).

Another notable change in the countries’ efforts to ensure efficient allocation of public resources involves the adoption of a strategic approach, which involves a multi-year budgeting framework. Under the multi-year approach, a country’s annual budgeting process takes into account a number of multi-year features such as multi-year estimates on the revenue and expenditure, which is commonly referred to as multi-year financial plan.

The countries’ decision to adopt the multi-year budgeting approach is based on the associated benefits. Under the multi-year budgeting approach, it is important for governments to state policy goals and priorities overtly and consistently. Moreover, the multi-year budgeting approach ensures that the government adheres to the fiscal strategy, hence enhancing the likelihood of attaining the fiscal targets. In addition to the above issues, the multi-year budgeting approach fosters the concept of budgeting within governments by ensuring that they engage in continuous discussion on issues related to annual budget such as the medium-term fiscal strategy.

The multi-year budgeting approach constitutes a fundamental element in restoring credibility of the budgeting process. The significance of multi-year budgeting approach is also spurred by the fact that it promotes cooperation between diverse government agencies during the budgeting process.

Despite the significance of the multi-year budgeting in the contemporary governance environment, Boex, Martinez-Vazquez, and McNab argue that a number of drawbacks characterize the approach (92). Budgets developed through the multi-year approach might make the fiscal policies inflexible. Additionally, the approach might lead to over-optimism in the budgeting process, hence leading to the adoption of untenable public spending programs (Boex, Martinez-Vazquez, and McNab 93).

Theoretical framework

Multi-year budgeting in most transitional and less developed countries [TLDCs] is based on the concept of medium term planning, which ranks amongst the best practices in a country’s budgeting process. Under the medium-term planning framework, governments ensure that the national policies, the planning process, and budgeting processes are based on a medium-term perspective. In most cases, medium-term planning usually covers a period of 3 to 5 years.

In their budgeting process, governments are expected to incorporate the changes that emanate from the macro-economic conditions such as long-term needs and spending policies. A country’s budgeting process should be information-oriented. Moreover, the medium-term expenditure framework ensures that governments’ expenditures are based on policy priorities and they are aligned with the budget realities. Consequently, the framework underscores the importance of gathering the relevant fiscal and macro-economic aspects during the planning and budgeting process. Through this approach, governments and their agents are in a position to make rational budgeting decisions.

The medium-term planning approach is critical in strengthening fiscal discipline in governments’ budgeting processes. Furthermore, the medium-term planning approach enhances budgetary predictability in different line ministries. Different TLDCs such as Tanzania and Kenya are experimenting multi-year budget approach. However, most of these countries are implementing the medium-term planning approach in collaboration with the World Bank and the International Monetary Fund. According to Boex, Martinez-Vazquez, and McNab, TLDCs experience considerable challenges in their revenue mobilization process due to unrealistic forecasts and lack of a clearly defined expenditure programs to be adopted in allocating the available government resources (93).

Despite the efforts undertaken by the TLDCs in improving their budgeting process by adopting the medium-term planning concept, the respective governments experience considerable challenges in implementing the multi-year budgeting concept. Boex, Martinez-Vazquez, and McNab emphasize that the medium-term planning approach adopted by most TLDCs “tend to incorporate unrealistic expectations regarding medium-term economic growth and future revenue collections” (93).

Research strategy

The researchers have adopted the literature survey strategy, which has been implemented by undertaking a critical information analysis. By using this strategy, the authors have illustrated a broad perspective regarding the issue under investigation. Moreover, the literature review strategy has enabled the authors to develop insight on the existing gaps regarding the subject matter that have formed the basis of the study. For example, identifying the research gaps has enabled the authors to outline the necessary modifications that governments should consider in applying the multi-year budgeting concept.

In applying the literature survey strategy, the authors have selected credible literature on the subject. Some of the literature materials considered include books, reports, journals, and studies conducted by credible private and government institutions. Some of the literature considered includes journals and published reports by organizations such as Organization of Economic Cooperation and Development. Thus, the choice of literature has remarkably improved the credibility and relevance of the study findings to different stakeholders such practitioners, governments, and scholars. Moreover, the adoption of the literature survey strategy has enabled the authors to use the available empirical evidence with reference to the subject matter.

Previous research studies

Review on application of multi-year budgeting by different governments

In an effort to entrench the significance of multi-year budgeting approach in enhancing governments’ effectiveness in planning and allocating resources, the article has presented an overview of how some developed countries have incorporated the approach. Some of the “OECD countries that have adopted this approach include Germany, the United Kingdom, Austria, New Zealand ,and Australia” (Boex, Martinez-Vazquez, and McNab 94). The objective of the review is to provide insight on how TLDCs can integrate the multi-year budgeting approach successfully.

The Austrian government has implemented the multi-year budgeting approach successfully. However, the government has extensively simplified the multi-year budgeting approach in an effort to improve the outcome of its annual budgeting process. Some of the elements that the Austrian government has taken into consideration in applying the multi-year budgeting approach entail estimating multi-year revenue and expenditure estimates. “Organization for Economic Cooperation and Development” argues that the budgetary estimates reflect the country’s fiscal flows in accordance with the countries spending and taxation policies, which highlights the informative nature of the approach (56).

Unlike the simple approach adopted by the Austrian government, Boex, Martinez-Vazquez, and McNab affirm that Germany has adopted a fully-fledged medium-term financial plan (93). This approach has enabled the German government to develop a comprehensive understanding of the benefits associated with multi-year budgeting. The United Kingdom’s decision to integrate the multi-year budgeting approach is to enhance budgetary discipline, expenditure efficiency, and policy rationalization. According to Boex, Martinez-Vazquez, and McNab, multi-year budgeting plays a fundamental role in enhancing the budgeting process (97). This assertion arises from the view that the multi-year estimates promote stability and continuity within the budgeting process.

The significance of the multi-year budgeting concept is also enhanced by the fact that it enables governments to recognize future funding requirements and constraints. One of the notable aspects in the UK’s application of the multi-budgeting concept is that it mainly emphasizes the expenditure component. The different line departments in the “UK are responsible for determining program priorities in the country” (Boex, Martinez-Vazquez and McNab 99). However, the departments must adhere to the set departmental budgets. Budgeting in Australia was previously centralized and it was the responsibility of the Department of Finance. However, the responsibility has been delegated to different departments. Moreover, the Australian government has adopted the medium-term strategic objectives.

In an effort to enhance its budgeting process, New Zealand has undertaken a number of reforms in its Public Finance Act, hence leading to the adoption of the multi-year budgeting approach. The reforms on the Public Finance Act have played a fundamental role in entrenching fiscal discipline in the budgeting process such as accountability and transparency. The reforms have enhanced the country’s effectiveness in detecting possible divergence from the predetermined fiscal objectives in addition to minimizing fiscal deficits. Through the multi-year budgeting process, New Zealand has responded to economic changes.

The US has also adopted the multi-year budgeting process. The government takes into account different elements such as budgeting on capital projects. Moreover, the US government ensures that revenue estimates and expenditure are forecasted optimally in order to support the government in formulating future policy decisions. By enacting the 1990 Budget Enforcement Act, the US government has remarkably improved its budgetary process by setting clear expenditure limits in an effort to attain a balanced federal budget.

The Act has also clearly distinguished between direct and discretionary spending in order to entrench overall budget spending limits. In addition to the above aspects, Boex, Martinez-Vazquez, and McNab affirm that the “US government also ensures that proposed government policies are within the projected expenditure limits for future years” (103). Besides, “medium-term expenditure estimates are contained in the president’s budget proposal that reflect the cost in future years of ongoing and proposed government programs and policies” (Boex, Martinez-Vazquez and McNab 103).

Reflection and future research

For a considerable period, budget preparation amongst different TLDCs has been based on an informal and ad hoc approach. According to Shand, the budget preparation process presents a major challenge to different governments due to the different forces involved in the planning process (64). Furthermore, budgets are subject to change due to different factors such as economic changes. Another major challenge encountered in the governments’ budgeting process entails failure of the budget estimates to reflect the policy objectives and strategic benchmarks.

The concept of multi-year budgeting has considerably improved the effectiveness and efficiency with which governments undertake their budgeting process. First, the approach has made the governments’ future budgeting process reliable, as they are not forced to restart the budgeting process from scratch after the end of the fiscal year. On the contrary, multi-year budgeting ensures that governments make reliable projections on future government revenues and expenditures.

Despite the extensive research studies conducted on the concept of multi-year budgeting, the studies are not exhaustive in resolving the issues encountered in governments’ budgeting processes. However, the study’s findings are valuable in the governments’ fiscal policy formulation processes. The application of the multi-year budgeting approach also plays a remarkable role in enhancing the developed and the TLDCs in their quest to entrench fiscal discipline in planning revenue expenditure. Moreover, multi-year budgeting eliminates the shortsightedness associated with budgeting for a short period such as one year. Through the multi-year budgeting approach, the time span within which the budgeting process is undertaken is extended to 3 or 5 years. Consequently, governments can project future expenditure estimates (Shand 64).

Transitional and LDCs are characterized by diverse budgetary challenges such as underfunding, unpredictable budgetary flows, and debt burdens. However, effective implementation of multi-year budgeting can assist TLDCs to alleviate these perennial fiscal problems. In a bid to achieve this goal, it is imperative for TLDCs to consider a number of aspects. First, the process of formulating the multi-year budget should be separated from being a political process (Martinez-Vazquez and Boex 9). Despite the commitment by different TLDCs governments in implementing multi-year budgeting, most efforts undertaken have not reached their fruition due to making the budgeting process politically inclined. Boex, Martinez-Vazquez, and McNab affirm that many “politicians tend to promote overly optimistic revenue estimates in order to accommodate higher expenditures in the current budget years” (109).

Vlaicu et al. argue that the objective of multi-year budgets is to overcome the fiscal inefficiencies associated with public finance planning (82). However, this goal can only be attained if the stakeholders charged with the responsibility of formulating government budgets integrate the concept of medium term planning effectively. In a bid to optimize on the benefits associated with multi-year budgeting, it is imperative for governments within TLDCs to implement medium-term planning effectively. However, governments should research on the core aspects that would enhance the effectiveness of the medium-term planning frameworks. This aspect will ensure that resource allocation takes into account three main elements, which include fiscal discipline, sectorial stability, and technical efficiency. The element of resource availability will ensure that government spending is limited to the available resource while the concept of sectorial stability will ensure effective prediction on how to make budgetary allocations across different sectors. Conversely, the element of technical efficiency will ensure that public goods are delivered effectively.

In order to improve their effectiveness in applying multi-year budgeting, TLDCs governments should integrate three main components of the MTFs, which include the Medium-Term Budgetary Framework [MTBF], Medium-Term Fiscal Framework [MTFF], and Medium-Term Performance Framework [MTPF]. MTBF will ensure optimal budgetary spending across different government agencies, programs, and sectors while MTFF will determine the aggregate resource envelop. On the other hand, MTPF will enable governments to be effective in setting performance targets for different sectors.

In the course of implementing multi-year budgeting, it is essential for governments to consider the most effective approach to adopt in order to ensure adequate public involvement in the formulation of public policies on different aspects related to public expenditure. Thus, the process of formulating fiscal policies should ensure adequate political consensus.

Conclusion

The application of multi-year budgeting process in planning government revenue and expenditure has intensified remarkably across the developed, transitional, and LDCs over the recent past. The prominence of multi-year budgeting has been promoted by the view that it aids in eliminating the shortsightedness associated with perennial budgeting. Through multi-year budgeting, the governments’ capacity to project the future government revenue and expenditure is remarkably improved through medium planning. The current year expenditure forms the basis of future expenditures. Moreover, multi-year budgeting plays a significant role in eliminating imbalances that might affect attainment of the set fiscal policies.

Some of the developed countries such as the OECD countries have made remarkable progress in implementing multi-year budgeting process. However, both the developed and the TLDCs have not fully exploited the benefits associated with multi-year budgeting. For example, the application of multi-year budgeting varies across different countries, which underscores the fact that multi-year budgeting is subject to a country’s revenue and expenditure needs. For example, Germany has adopted an integrated multi-year financial plan. However, this approach is characterized by a high degree of complexity and administrative challenges, thus limiting its effectiveness. Another major challenge limiting application of multi-year budgeting especially in the TLDCs entails the consideration of the budgeting process as a political approach during the budgeting process.

Recommendations

Multi-year budgeting is a critical element that governments should consider in order to enhance optimal resource utilization. However, the article highlights a number of elements that governments must take into account in order to exploit the benefits associated with multi-year budgeting. Some of the core issues that should be considered in making reforms include:

In their quest to apply multi-year budgeting process, it is imperative for governments to ensure that fiscal policy objectives are fully reflected in the budgeting process. This aspect will aid in enhancing prioritization of the most fundamental aspects in the process of planning resource allocation and government expenditures.
In order to enhance accountability and transparency in the allocation and utilization of national resources, governments should decentralize the budgeting process by delegating the budgetary role to the various government departments, agencies, and programs.
Despite the fact that political consensus is a fundamental element in multi-year budgeting, it is imperative for governments to ensure that politics are minimized

A high level of social involvement should be advocated in order to ensure the prioritization of government expenditures. Moreover, the government agencies charged with the responsibility of implementing the budgeting process should focus on finance and economic principles such as capital budgeting. This aspect will aid in enhancing the relevance of the budgeting process.

Works Cited

Boex, Jameson, Jorge Martinez-Vazquez, and Robert McNab. “Multi-year budgeting; a review of international practices and lessons for developing and transitional economies.” Public Budgeting and Finance 20.2(2000): 91-112. Print.

Martinez-Vazquez, Jorge, and Jameson Boex. Russia’s transition to a new Federalism, Washington: World Bank, 2001. Print.

Organization for Economic Cooperation and Development: Public management profiles of central and eastern European countries. Paris: OECD, 1999. Print.

Shand, David. “Budgetary reforms in OECD member countries.” Journal of Public Budgeting, Accounting, and Financial Management 10.1 (1998): 63-88. Print.

Vlaicu, Razvan, Marijn Verhoeven, Francesco Grigoli, and Zachary Mills. “Multi-year budgets and fiscal performance; panel data evidence.” Journal of Public Economics 111.6 (2014): 79-95. Print.

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