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PUNJAB will adopt a multi-year approach to budgeting by switching over to Medium Term Budgetary Framework (MTBF) for estimating its annual budget from the fiscal year 2005-06.It will be part of budgetary and financial reforms. The province is implementing the change in the budgeting mode under a five-year, $500 million Punjab Resource Management Programme of the Asian Development Bank, which aims at improving public finances.
The shift, says the recently released Punjab Economic Report, will improve effectiveness, certainty and predictability of resources over a medium term, and accountability of provincial financial management through “preparation of transparent and user-friendly budgets within a MTBF”.
The adoption of MTBF is said to be the primary instrument of the province’s financial and fiscal reforms undertaken to create space for investment in pro-poor public service delivery areas. Theoretically, MTBF - which is also known as MTEF or Medium Term Expenditure Framework - helps governments define their “quantifiable, medium-term policy objectives in a rolling multi-year (three years in case of the Punjab) plans”, the term used to indicate a budgetary cycle where a year is added at the end as each year passes.
It also underscores strategic planning for the years forming the budgetary cycle and compels governments to spell out their goals and plans to attain them. The existing budgeting method is for one fiscal year and is incremental in nature. Besides, it doesn’t focus on service delivery and quantifiable outcomes of spending.
For this reason, the provincial officials insist, MTBF will link the government’s policy objectives - a fully literate and employed, skilled, and internationally connected affluent society by 2020 - with resource allocation and spending.
“To achieve full employment and eradicate poverty, we must create 1,000,000 productive and sustainable jobs each year. We also need to invest heavily in social sector and human resource development. For this the provincial economy has to grow at 7-8 per cent a year. This kind of growth wouldn’t come without certainty and predictability about the availability of resources over the medium term, increase in public sector development spending, and medium to long term planning. The change to the MTBF mode will help the government to plan for the medium term and achieve better and quicker results from its interventions,” they say.
It is also held by the officials that the new budgeting practice will prove to be a better means for implementing the economic strategy of the provincial government, which stresses development of social sector and economic infrastructure, poverty alleviation and improvement in the incomes of citizens and delivery of public services, to achieve its policy objectives.
Through sustained flow of resources over the medium term, it is said, the new mode of budgeting will also narrow the high social deficits caused by inadequate investment in education, health, water supply, sanitation, etc over the years. It is also believed that it is going to help improve maintenance as well as development of the much-needed irrigation, communication and other infrastructure, suffering for lack of sustained funding, in the province.
PROJECTIONS FOR THE FIRST MTBF CYCLE: According to the presentations made by the senior officials of the finance and planning and development departments at the 2nd Punjab Development Forum (PDF) last month, the Punjab government’s resource estimates for the first MTBF period (2006-08) are based on two major assumptions: First, it is being hoped that the National Finance Commission (NFC) Award would be announced before the 2005-06 budget and the federal tax to GDP ratio of at least 14.3 per cent maintained. It is expected that the divisible pool taxes will continue to grow by 13.2 per cent per annum and the straight transfers at the existing rate of 7.5 per cent per year, ensuring improved resources for the province each passing year.
Furthermore, the province will continue to receive additional federal transfers at the existing benchmark of Rs5 billion per year. Secondly, it is being hoped that the provincial revenues will improve through better resource mobilization and cost!
Savings through better public expenditure management. It is estimated that the provincial tax revenue will grow by at least 12-15 per cent and non-tax revenue by 11 per cent each year. The local government receipts are expected to grow to Rs12.100 billion in 2007-08 from the projected Rs10 billion in 2005-06. Besides, the donors are expected to continue to dole out financial assistance at the current rate of $200 million a year, which will be used by the province to retire its expensive federal cash development loan stock and create fiscal space for development. In addition, the government is expecting such additional resources from federal government as royalty from the Ghazi Barotha Dam.
Like other provinces the Punjab, too, is heavily reliant on federal transfers of funds under the NFC dispensation, and its effort to mobilize own resources is restricted by a very low potential tax base. The delay in the finalization of the NFC award has created a kind of thinking for the last couple of years to reduce the province’s reliance on the federal transfers as much as possible, and improve its own resource (tax and non-tax) base. Moreover, the provincial finance managers do not hope to obtain much out of the new award. “Maybe we get additional Rs4-5 billion if the award is announced before the budget. We need to generate as much we can by improving our own tax and non-tax revenues,” says a senior official.
With a view to curtailing the share of federal transfers in its total revenues and reducing its dependence on them, the provincial government intends over the first MTBF period to slash their percentage share in the total current revenue (projected at Rs290.067 billion) to 76 per cent (projected at Rs220.260 billion) in 2008 from 82 per cent in 1999-03 and increasing the share of provincial (tax and non-tax) receipts to 24 per cent (projected at Rs53.899 billion) from 18 per cent.
High establishment costs, mounting debt repayments and pensions, and such other expenditure have been the hallmark of the provincial budgets until a couple of years, resulting in inadequate provision of services to the people due to low development spending and/or unplanned, political motivated allocations as is evident from the huge number of schemes undertaken over the last several years and left incomplete due to lack of/non-allocation of funds in the second year.
Over the first three MTBF years, the share of development spending is projected to go up to 33 per cent (projected at Rs101.772 billion) of the total expenditure (projected at Rs311.068 billion) by 2008 from 16 per cent in 1999-03 by reducing the percentage share of current expenditure to 62 per cent (projected at 184.195 billion) from 84 per cent.
Any project undertaken in the first year of MTBF will be ensured supply of funds in the subsequent years till its completion. Other fiscal targets for the first MTBF years include plans to increase the non-salary recurrent expenditure to 15 per cent by 2008 as percentage share in the total expenditure from nine per cent in 1999-03, raise O&M costs to 10 per cent from six per cent, bring down debt payment to 4.5 per cent from 18 per cent through premature retirement of expensive federal cash development loans stock to create fiscal space for development, reduce establishment expenditure to 41 per cent from 45 per cent and cut subsidies to one per cent from three per cent. These measures are expected by officials to spare additional resources for development of social sector and infrastructure in the province.
As always, the provincial government has missed its main declared targets for the outgoing fiscal announced by chief minister Pervaiz Elahi on the eve of the budget less than a year ago. He promised creation of one million sustainable jobs - 25,000 were to be created in the provincial departments, 100,000 through public sector development interventions and the remaining 875,000 by the private sector - during this year.
The government seems to have miserably failed in achieving this goal despite that the provincial GDP is claimed to have grown at least 7.5 per cent. The other crucial budgetary targets and goals - like poverty reduction, private investment in infrastructure building - are also said to have met the same fate.
Although the government hopes to utilize 95 per cent of the provincial and district development allocations by the close of the fiscal, it seems to have left little impact on the quality of life of the people, especially those living outside and away from the major cities. The official response to this failure is not new: “Such changes do not take place overnight. They take time; what matters is that the direction of the policies and reforms should be right.”
The existing mode of budgeting hasn’t led us anywhere despite the fact that we have been told year after year that “the economy of the province was moving in the right direction”. Would budgeting in the MTBF mode get us anywhere?
