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Medium-Term Sectoral Ceilings - a Response

(Originally published in September 2008 at the IMF's PFM Blog)
What my piece is about is medium-term funding commitments by the government to spending ministries. I stand by my position that it is inappropriate in most countries for the government to make such commitments. Bill Dorotinsky seems to agree to the extent that he is unwilling to defend what he calls “hard” ceilings. He does, however, mount an eloquent defence of “indicative” ceilings.

The notion of indicative ceilings seems pretty vague and problematic to me. It seems to imply a commitment which is, well ...not really a commitment. So let me ask: does an “indicative” ceiling imply some level of commitment, or does it not? If not, how do you stop the spending ministries interpreting the ceiling as a commitment—particularly if you want them to plan on the basis of it? And if you are making some type of commitment, how much commitment? (Surely you’d want to give spending ministries an idea of what types of circumstances—e.g. macroeconomic shocks—might force you to walk away from that commitment. Leaving it vague would serve no purpose at all.)

It seems to me that in most countries, we’d be better off if we stopped talking about ceilings—with the implication of commitment—and talked instead about estimates. Medium-term expenditure estimates tells the government what each spending ministry will need to receive if existing spending policies are continued. They enable the government to adjust spending policies to ensure that they are compatible with fiscal policy, and to change spending policies if they are not.

Good medium-term estimates can reduce the uncertainty which spending ministries face about their future budgets, while not committing the government or preventing it from making expenditure policy improvements in each budget. They do this because, by facilitating the reconciliation of fiscal policy and spending policy in the medium-term, they tell spending ministries that their existing spending policy are affordable. Expressed differently, they reduce the risk of programs suddenly needing to be cut because the government will otherwise breach its fiscal targets.

Oh, and finally, I did not suggest that improved fiscal policy performance was the only objective of medium-term budgeting. What I said was that it was the most fundamental one—and that giving spending ministries budget certainty was not.
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