In what is officially being described as an attempt to link its policy objectives with its future spending plans, the Punjab government will switch over to medium-term budgetary framework (MTBF) mode for estimating its budget from the fiscal 2005-06.
With the implementation of MTBF, Punjab becomes the first province in the country to adopt a multi-year (or three years in case of Punjab) approach to budgeting. Even Islamabad is implementing MTBF to the extent of only two pilot ministries, that is, the ministry of health and the ministry of population welfare.
By preparing its next budget in the MTBF mode, Punjab is going to embark upon a long and tedious journey in the direction of performance budgeting and performance auditing.
The preparation of the provincial budget in the MTBF mode is expected to improve over time the effectiveness and efficiency of the public spending on the development projects targeted to alleviate poverty by allocating greater resources to the social sectors and ensuring their constant flow for the medium term.
Officials say, MTBF is an important tool for moving towards the policy objectives and goals of reducing poverty, improving governance, developing human capital, creating jobs, improving law and order, etc as enshrined in the Vision 2020 enunciated by provincial Chief Minister Pervaiz Elahi last year at the time of presentation of the budget 2004-05 and the Poverty Reduction Strategy Paper (PRSP) of the province.
From the next financial year, the provincial budgets would define the government's quantifiable, medium-term objectives in a rolling three-year plan, the term used to indicate a budgetary cycle where a year is added at the end as each initial year passes.
The new system of budgeting is quintessentially different from the existing one which is for one fiscal year and is "incremental in nature" because it bases the future current and development expenditure projections on the previous estimates, and does not necessarily focus on service delivery and measurable outcomes.
The multi-year approach to budgeting lays greater emphasis on goal-oriented, strategic planning for the years to come, forcing the government to set priorities and goals as well as spell out plans to achieve them.
Moreover, the new budgeting mode focuses more on the outcomes of the government interventions in various poverty-related areas rather than on allocations and spendings, and contributes greatly to improvement in governance.
A budget prepared in the MTBF mode offers the line departments a greater level of certainty about the availability of the financial resources, improving the fiscal predictability and permitting the government to make a more accurate economic forecast over the medium term.
The provincial government is committed to begin preparing its budget in the MTBF mode under the $500 million Punjab resource management programme (PRMP). The programme is being funded by the Asian Development Bank (ADB) to help Punjab undertake critical financial and budgetary reforms in the province.
Punjab is trying to gradually switch over to budgeting in the MTBF mode since 2002-03 and has substantially increased the budgetary allocations for poverty-related, social sectors in line with the government's priorities.
While Punjab's initiative to lead the other provinces and the centre in implementing the MTBF mode should be welcomed in view of the expected improvements in planning and transparency in the budget making process, we must not ignore the snags in the successful implementation and functioning of the new budgeting system. Political will on the part of the provincial government and bureaucracy is the key to the success of the new system.
Secondly, the three-year projections of the current and development expenditure to be made by the line departments in the MTBF mode are to be based on the assumption that fiscal resources committed to them would remain constant except for unavoidable increase on account of inflation or enhancement of salaries of government employees or changes in the PC1s under implementation.
It means that the province should not only continue to receive the revenues from the federal government under the National Finance Commission (NFC) Award but also enhance its own tax and non-tax collections to ensure the stability in the flow of the resources committed to various sectors for the next three years. Any abrupt change in the macro-economic conditions for any reason may result in the derailing of the process.
The most critical factor, which is likely to determine the fate of the new budgeting system, is the government's ability to develop the capacity of its departments, bureaucracy and other functionaries involved in making of the baseline projections of current and development expenditure for the medium term.
The provincial finance department officials themselves admit that implementation of MTBF in its "entirety" is a long-drawn process which may take a decade or more.
And also that the entire mindset of departments and officials from top to bottom would have to be changed to move away from the existing one year budgeting to three-year planning.
Nevertheless, they say, in the initial years the government is going to lay emphasis on "rudimentary MTBF", which neither puts too much strain on the existing capacity nor requires immediate, complete cultural change in the mindset of the bureaucracy.
It means the departments would be preparing only "rough" projections of their needs for the next few years till they develop the capacity to work out detailed unit costing. The ultimate objective of the government is to introduce MTBF at the district and tehsil/town municipal administration (TMA) level.
However, in view of absence of enough capacity to completely implement the new mode even at the provincial level for the next several years and the bumpy road ahead, the government would have to wait for quite a long time to make the district governments to change over to the MTBF mode.
