A Stocktake on Top-Down and Medium-Term Budgeting in OECD Countries

This article is published in association with IMF.

The OECD Senior Budget Officials Committee (SBO) is a network of senior budget officials from OECD member countries. It serves as a platform for exchanging information and experiences on budgetary frameworks and procedures.

The SBO conducts comprehensive surveys every few years, such as the 2023 OECD SBO Survey on Budget Frameworks, to collect data on various aspects of budgeting practices. These surveys provide valuable information that helps countries to benchmark their practices against international standards and to learn from each other.

The most recent survey provided important insights on the current state of affairs with Top-Down (TD) and Medium-Term (MT) budgeting, summarised in a recent paper of the OECD Journal on Budgeting. Full survey data is forthcoming on the OECD Data Explorer website.

What are Top-Down and Medium-Term Budgeting?

In the wake of global crises such as the COVID-19 pandemic and geopolitical tensions, many countries are grappling with elevated debt levels and high deficits. This economic landscape demands robust budget frameworks that can ensure fiscal sustainability while addressing urgent spending needs. Two critical approaches in this context are TD and MT budgeting.

TD budgeting involves setting overall expenditure limits at the highest levels of government before allocating funds to specific departments or projects. This method aims to enforce fiscal discipline by controlling total spending from the outset.

MT budgeting, on the other hand, extends the planning horizon beyond a single fiscal year, usually over three to five years. This approach helps governments to anticipate future fiscal challenges and opportunities, providing a more stable and predictable financial environment.

Why are These Budgeting Practices Important?

The benefits of TD and MT budgeting are well-documented. By adopting a longer-term perspective, MT budgeting helps policymakers consider the future implications of today’s decisions. This can prevent fiscal surprises and allows for more strategic allocation of resources. Similarly, TD budgeting ensures that spending aligns with overarching fiscal goals, preventing ad hoc expenditures that can derail financial plans.

In the context of the OECD’s “Spending Better Framework,” which outlines ten principles for quality budget institutions, TD and MT budgeting are essential. These principles advocate for setting clear fiscal objectives, producing multi-year expenditure forecasts, and adopting expenditure ceilings. Together, these measures help maintain fiscal discipline and enhance the efficiency of public spending.

What does the OECD Survey reveal?

Despite their advantages, the implementation of TD and MT budgeting is not without challenges. According to the 2023 OECD Survey on Budget Frameworks, while most OECD countries have adopted these practices, there are significant variations in their effectiveness. For example, only a minority of countries reported that their most recent budgets were consistent with the expenditure ceilings set in previous years. This inconsistency highlights the ongoing difficulties in maintaining strict adherence to pre-set budget limits.

One structural issue is the preparation of expenditure baselines. These are estimates of future spending based on current policies, which should ideally be updated regularly and used as a foundation for setting expenditure ceilings. However, in practice, baselines are often prepared at an aggregated level and updated infrequently, reducing their utility for effective budget management.

Another challenge is the integration of these processes. Effective TD and MT budgeting requires that expenditure ceilings and baselines are not only accurate but also fully integrated into the budget cycle. This means updating baselines at key stages and ensuring they are detailed enough to inform annual budget negotiations.

What can be learned from OECD countries?

Several OECD countries provide valuable lessons on how to implement TD and MT budgeting, with main take-aways being to:

Strengthen Baseline Processes: Countries should publish detailed methodologies for baseline preparation and ensure these baselines are updated more frequently. Publication of baselines is also a powerful accountability mechanism.

Foster Integration: Fully integrating TD and MT budgeting processes into the budget cycle is crucial. This includes updating baselines at key stages and ensuring they are used to inform expenditure ceilings and budget negotiations.

Enhance Credibility of Expenditure Ceilings: How this credibility is achieved varies, but often requires considering trade-offs between various parameters including comprehensiveness of the ceilings and exclusion of expenditures that are cyclically sensitive and/or would be challenging to manage and restrict, size of the budget margin or reserve and limitative rules with regards to reopening or revising the ceilings.

Where To From Here?

While TD and MT budgeting are not without their challenges, they remain indispensable tools for effective fiscal management and need to be strengthen in many countries. Learning from past errors and successes, governments should stop rushing the implementation of these frameworks but rather focus on creating the conditions for their success. This means recognizing that TD and MT budgeting is not merely about publishing a Medium-Term Expenditure Framework (MTEF) or a Medium-Term Budget Framework (MTBF); it is equally about developing the underlying processes and institutions that support these frameworks.