June 8, 2012Doug Hadden
Part 4: Sustainable Planning
Value of medium-term budget planning
Doug Hadden, VP Products
This is Part 4 of 6 parts detailing the content in my Financial Management Institute of Canada lunch presentation What can we learn about Sustainability from Developing Nation Governments?
“Alphabet soup” of Government of Canada planning
We often accuse the American government of having an incomprehensible list of acronyms. An “alphabet soup”. We’re falling behind in the acronym arms race in the Government of Canada. Consider the following set of planning and regulatory concepts:
- Strategic and Operating Review (SOR)
- Administrative Services Review (ASR)
- Federal Accountability Act (FAA)
- Financial Administration Act (FAA)
- Management Accountability Framework (MAF)
- Management Resources and Results Structure (MRRS)
- Program Activity Architecture (PAA)
The state-of-the-art of budget planning in the Federal Government includes strategic tools like MAF, MRRS and PAA that attempt to connect objectives with programs and performance. There is standard bottom-up budgeting to maintain existing programs. And, there are different review methods to cut expenditures: reviews looking for efficiencies, reviews to reconsider strategic priorities, reviews to cut costs. It’s difficult to “connect the dots” among these frameworks, structures, architectures and reviews. Even more difficult to connect government objectives with policy, budgets and outcomes across these frameworks, structures, architectures and reviews.
Sustainable planning in developing countries
“Medium term” planning is considered the best practice in developing countries. This is typically a rolling 3 year budget plan. This might sound a bit like the return to the 5 year plans used for central planning, primarily in Communist countries. Medium term planning uses rolling plans rather than separate 5 year discrete plans that operate in series.
The outcomes from government programs often take more than a fiscal year to accrue. Single year budget planning is too short a horizon to affect change. Results can be evaluated and programs adjusted to meet objectives. Medium term planning also takes into account multiple year commitments such as capital expenditures and subsequent recurrent costs. This introduces financial sustainability calculations into budget plans. Developing nations may receive grants for capital expenditures but may not have the operating budget to sustain those capital assets. Long-term financial implications become better understood to policy-makers.
Medium Term Expenditure Frameworks (MTEF) aligns economic realities with revenue and expenditures.
Peaks and valleys of government spending
The Government of Canada has fiscal space. We have a good credit rating and reputation for good fiscal management. The government debt to GDP ratio is manageable. Yet, it wasn’t that long ago that the Wall Street Journal referred to the Canadian dollar as the “peso of the north”.
Political realities often encourage short-term thinking. The focus on inputs: the amount spent in a particular riding or Province rather than long-term performance thinking. This short-term thinking can also result in creating financially unsustainable programs.
Short-term thinking often means not considering the real lifetime costs of major government initiatives. The current debate in Canada over the F-35 acquisition by the Royal Canadian Air Force has resulted in the fall of a government for “contempt of Parliament”. The press continues to torment the government about alleged underestimated budget miscalculation or deliberately misleading the House of Commons.
The emergence of a crisis such as the recent financial market melt-down can also introduce short-term cuts that cannot be sustained. For example, cuts to some programs may result in not meeting legal minimum levels of citizen services. So, spending increases in subsequent years. Cuts to other programs may result in high initial costs to dispose of property or for civil service severance.
Long-term financial sustainability is better achieved when fiscal sustainability is built into the process.
“Medium term” alphabet soup
There is no lack of acronyms for medium planning. Medium Term Expenditure Frameworks (MTEF) can consist of MTMF, MTFF, MTBF, MTSS and MTPF. Governments apply some of these methods. The methods used typically depend on the government context, for example, countries with lower capacity will typically not use MTPFs. The methods are adapted for the country context – these are frameworks.
Frameworks link the economic realities (MTMF) to revenue and expenditure realities (MTFF) to budget planning (MTBF) to achieve objectives in multiple programs and sectors (MTSS) in the most effective ways (MTPF).
The advantages of this approach in a developed country like Canada include:
- Improved long-term planning
- Aligning government objectives and sector strategies across departments and agencies
- Exposing the impact of economic impact to revenue and results during the fiscal year and during planning
- Performance feedback loops that also show impact of economic changes on results
- Integration of economic factors in planning and performance factors directly into the Chart of Accounts
The big advantage of the MTEF approach is to integrate strategy and review into day-to-day management and periodic planning. The alignment of performance to economics will enable the Government of Canada to model the effects of any major economic change to performance results. To service delivery. The decision of where to cut expenditures with the least negative impact and optimizing positive impact becomes less of a mystery. And, less of a complex management exercise. That is easier to communicate to citizens.