## cr17170

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### PREFACE AND EXECUTIVE SUMMARY
- Mission dates: January 25 to February 6, 2017.
- Reform strategic intent:
  - Government committed to a budget reform strategy to modernize, strengthen, and lift the horizon of policy-making into the medium term; reform introduced by the Minister of Finance and approved by the Council of Ministers (CoM) in July 2016.
  - First step: March 2017 CoM meeting to compare macroeconomic and fiscal projections for the Multi-Year State Financial Plan (MYSFP) to spending envelopes and to launch preparation of Poland’s first Medium-Term Budget Framework (MTBF) for 2018–20.
- Six reform areas:
  1. implementation of an MTBF;
  2. integration of annual and multi-annual planning processes, and modifications to the budget calendar;
  3. redefinition of the role of the CoM, line ministries, and the MoF in the budget process;
  4. unification of the traditional budget classification and the performance-based classification, built around 20 broad policy areas;
  5. improvement in accounting and financial reporting systems;
  6. institutionalization of spending reviews.
- Recommended institutional response:
  - Create a MoF High-Level Committee, chaired by the Minister or co-chaired by the Deputy Ministers, to prepare a detailed, realistic, and prioritized road map for implementing the reform; road map to describe and sequence actions, coordinate with each upcoming budget cycle, and define MoF department responsibilities.

### FISCAL OBJECTIVES, CONSTRAINTS, AND TIMELINE
- Authorities' highest priorities:
  - introduce an MTBF integrated with the annual budget;
  - achieve MTO of a structural deficit of 1 percent of GDP by 2021 (Section I).
- Government commitment: annual fiscal consolidation equivalent to 1/4 percent of GDP starting 2018; additional measures required to attain the MTO.
- EU constraint: annual deficit not to exceed 3 percent of GDP.
- Key timing milestones in recommendations:
  - Immediate — First 8 weeks: until the March 2017 CoM meeting.
  - Short term — Next 8 months: until preparation and approval of the 2018 budget.
  - Longer term — Next 18 months and beyond: broader implementation of MTBF and other reforms.

### PREREQUISITES AND ASSESSMENT FOR MTBF IMPLEMENTATION
- Strengths noted:
  - Annual budget has a high degree of credibility.
  - Macroeconomic projections are generally accurate for the budget year.
  - Fiscal rules on debt, expenditure, and the deficit provide sufficient guidance to fiscal policy in the medium term.
- Weaknesses to address:
  - Many spending decisions taken outside the budget process.
  - Current budget classification is complex and does not align policy decisions with spending areas.
  - Single-stage budget decision-making process allows CoM to set priorities late in the budget cycle.
  - Within the MoF: poor coordination of information and decision making, resistance to change, missed opportunities for cross learning, lack of ownership of reforms.
- Budget credibility and execution:
  - Since 2000 the proposed budget has been underspent by an average of 3.4 percent, or by only 2.4 percent if the financial crisis is excluded.
  - The Annual budget process delivered a successful fiscal consolidation of 2.3 percent of GDP since 2004, while increasing capital spending.
  - Budget Act covers all central government spending and about 55 percent of general government spending.

### STABILIZING EXPENDITURE RULE (SER) AND FORECAST ACCURACY
- SER features and amendments:
  - SER introduced in 2013 and in force since 2015; caps nearly 90 percent spending at a general government level.
  - December 2015 amendments: inflation expectations/past inflation errors replaced by NBP inflation target (currently 2.5 percent); expenditure allowed to grow in the case of one-off revenue that exceeds 0.03 percent of GDP.
- Forecast accuracy:
  - Poland has one of the most accurate real GDP and inflation forecast records in the EU region for the budget year; outer-year forecasts show a limited optimistic bias.
  - Average revenue as a ratio of GDP was 0.6 percentage point lower than forecast for the budget year; for the outer years, revenue was close to 1 percentage point lower than forecast.
  - Macroeconomic and revenue forecast errors not correlated in recent years; revenue errors have been much larger.

### MTBF DESIGN CONSIDERATIONS — COMMITMENT, PRIORITIZATION, CONTROL, ACCOUNTABILITY
- Medium-term expenditure commitment mechanisms — design choices:
  - Nature of limits (nominal, real, output-linked); coverage (exclusions); level (aggregate, ministerial, program); frequency of revisions.
  - Practical recommendation: continue with existing general government aggregate ceiling (SER) decomposed between state budget and non-state budget; state budget treated as residual and basis for multi-year state budget expenditure limit.
  - Phased introduction of multi-year ministerial ceilings:
    - 2018-20 MTBF: three-year estimates by Parts, first year ceiling.
    - 2019-21: three-year estimates aggregating by spending area.
    - 2020-22 MTBF: binding ceiling for first year budget and estimates for outer two years by spending area.
- Multi-year prioritization mechanisms:
  - Require integrated medium-term expenditure planning and budgeting, clear separation of cost of existing policies vs new initiatives, and a binding forum for deciding priorities reporting to CoM.
  - Strengthen CoM role via a sub-committee charged with reviewing and clearing all new policies; Standing Committee of Under-secretaries to perform technical reviews with clearer mandate.
- Control mechanisms:
  - At least two updates per year of medium-term expenditure forecasts.
  - Sufficient margins between expenditure commitments and plans; firm controls on multiyear commitments; controls over carryovers.
  - Existing medium-term forecasts prepared three times a year (April Convergence Programme, June/July budget circular, August annual budget).
- Accountability and external scrutiny:
  - Ensure MTBF projections, annual budget, and final accounts are presented on a comparable basis.
  - Establish reconciliation between MTBF vintages with transparent explanations.
  - External scrutiny by NBP, EC, IMF, and NIK; EC recommended establishing an independent Fiscal Council.

### TOOLS UNDERPINNING MTBF: FORWARD ESTIMATES, POLICY COSTING, SPENDING REVIEWS
- Forward Estimates (definition and role):
  - Bottom-up expenditure forecasts for individual parts providing the best estimate of future costs of delivering existing policy commitments; aggregated to yield baseline expenditure projection on a no-policy-change basis.
  - Forward estimates should be based on broad spending areas rather than traditional “budget parts” in Poland’s case but initially use the 84 budget “parts” for practicality.
- Key methodological steps and modelling:
  - Understand existing budget; identify current level of service delivery; separate ministry into major spending units and spending areas.
  - Identify one-off expenditures and adjust base.
  - Identify and apply price and volume cost drivers linked to macroeconomic and demographic variables.
  - Aggregate for ministry and reconcile parameter variations.
  - Use simple Excel models initially; maintain aggregation file with controls and a recording system to archive changes.
- Policy costing:
  - Medium-term costing required for all new policy proposals and changes to existing policies, including eligibility or assistance rate changes.
  - Costing contents: financial costing over three years, identification of expenditure components, revenue impacts, distributional impacts, legal/institutional changes, and for investments cost benefit analyses.
  - Methodology: basic price times quantity approach, explicit assumptions, and behavioral impacts where relevant.
- Spending reviews:
  - Purpose: assess quality of existing spending to avoid incrementalism.
  - Poland has undertaken five spending reviews with limited impact; improvements needed:
    - broaden staffing, set clear top-down savings targets, and fully integrate reviews with the budget process.
  - Effectiveness caveat: successful reviews often deliver only around a third to a half of intended savings.

### DETAILED OPERATIONAL RECOMMENDATIONS (TIMING AND RESPONSIBILITIES)
- Immediate — First 8 weeks (selected):
  - 2.1 Establish a MoF High-Level Committee, chaired by the Minister or Deputy Ministers, to oversee design and implementation of PFM reform strategy and preparation of the MYSFP and the annual budget.
  - 4.1 Clarify that the MTBF is based on an aggregate binding commitment consistent with the SER, with lower-level indicative spending area/budget part allocations based on forward estimates.
  - 5.1 Define a standard template and conceptual model to produce 2018-2020 forward estimates; define “No-Policy Change”.
  - 5.6 Split State Budget investment expenditure between major and minor projects; seek 3-year spending profiles of major projects and define which investments are included in the no-policy-change baseline.
  - 6.1 Establish a Spending Review Steering Committee and working groups with MoF, line ministries, PM’s Chancellery and external experts.
- Short term — Next 8 months (selected):
  - 2.2 Prepare a detailed, realistic and prioritized road map of PFM reforms; define roles and responsibilities and extend implementation timetable beyond three years.
  - 3.2 Define roles and responsibilities in the MoF for implementing MTBF and broader budget reform.
  - 4.2 Finalize spending areas for MTBF spending ceilings and implement in stages over three budget cycles.
  - 4.4 Strengthen the role of the CoM in expenditure prioritization through a sub-committee charged with reviewing and clearing new policies.
  - 5.3 Set up process for agreeing forward estimate baseline models with line agencies and 5.4 extend RIAs to all new policy decisions in the budget process.
  - 6.2 Establish clear top-down targets for expenditure savings to be achieved through spending reviews.
- Longer term — Next 18 months and beyond (selected):
  - 3.4 Implement CoM decision to create a unified budget classification based on policy areas and programs.
  - 3.5 Prepare and adopt changes to the legal framework and budget calendar; revise the PFA by the end of 2017 so new arrangements can be fully implemented in 2018.
  - 4.3 Adopt a phased approach to introducing multi-year ministerial ceilings (detailed staging for 2018, 2019, 2020 budgets).
  - 5.5 Continue to refine forward estimates and reconcile each estimate to the previous round by identifying parameter, policy, and technical changes.
  - 6.3 Link outputs of spending reviews to the budget process, identifying measures for new spending and savings.

### TECHNICAL GUIDANCE: INVESTMENT, WAGES, TRANSFERS, CARRYOVERS
- Investment projects:
  - Immediate: classify major projects vs minor projects; request annual profiles for major projects; define inclusion in baseline.
  - Short term: develop an investment project tracking system for large projects financed through the State budget, mirroring EU funds system.
- Wage bill:
  - Immediate: maintain projection assumption of flat nominal wage bill; simulate alternative wage growth options for CoM.
  - Short term: develop proposal for treating wage bill in forward estimates to be approved by CoM.
- Transfers to other units:
  - Immediate: categorize, forecast and consolidate transfers to other entities in general government based on existing models.
  - Transfers represent 54 percent of the State Budget; key components include Social Insurance (PLN54 billion), Transfers and subventions to Local Government (PLN53 billion), Regional Governors (Voivods) (PLN39 billion).
- Carryovers:
  - Current law permits case-by-case carryovers that must be cleared within three months; most carryovers cleared shortly after year end.
  - Suggested reform: loosen carryover restrictions once medium-term framework is well established but design limits to avoid unfettered accumulation; consider limits by type, accumulation caps, or drawdown restrictions.

### CONTINGENCIES, PLANNING MARGINS AND ACCOUNTABILITY
- Contingency allocations:
  - Budget includes up to 0.2 percent of the budget for general contingencies and around 0.5 percent of spending for emergencies and disasters.
  - Recommendation: increase planning (contingency) margins for outer years under MTBF; consider margins between 1 to 3 percent of spending in year 2 and 3 to 5 percent in year 3 based on other countries, with higher end appropriate in near term for Poland.
- Accountability mechanisms:
  - Require reconciliation between MTBF vintages and transparent reconciliation tables explaining changes.
  - Consider introducing fiscal responsibility statements for line ministries and budget holders.
  - Suggest reconciliation framework starting with macro forecasts and expanding to MTBF aggregates.

### KEY STATISTICS AND EXACT FIGURES FROM THE SOURCE
- General government budget target in 2017: 2.9 percent of GDP.
- EU EDP limit: 3 percent of GDP.
- Structural relaxation: about 0.5 percent of GDP.
- FCL two-year amount: €8.24 billion.
- Consolidation commitment starting 2018: at least a 1/4 percent of GDP adjustment per year.
- Authorities’ Convergence Program targets:
  - headline deficit of 1.2 percent of GDP by 2020;
  - MTO of one percent of GDP structural deficit by 2021.
- Budget underspend averages since 2000:
  - 3.4 percent (average underspend);
  - 2.4 percent (if the financial crisis is excluded).
- Fiscal consolidation since 2004: 2.3 percent of GDP.
- Selected State Budget part values referenced for forward estimates:
  - Social Insurance: PLN54 billion.
  - Transfers and subventions to Local Government: PLN53 billion.
  - Regional Governors (Voivods): PLN39 billion.
  - National Defense: PLN35 billion.
  - Debt Servicing: PLN32 billion.
  - Earmarked Reserve: PLN22 billion.
  - Internal Affairs: PLN20 billion.
  - Multi-year programs in 2017: PLN16.8 billion (4.35 percent of State Budget spending in 2017); stock of pre-committed programs: PLN132 billion as of end-2016.
  - Multi-annual investment program annexes: PLN33.9 and PLN4.7 billion respectively for EU and domestic components; PLN15.7 billion of PLN33.9 billion EU funds executed outside State Budget.

### PROCESS AND RECORD-KEEPING (ANNEX 4 EXCERPTS)
- Define “No Policy Change” baseline explicitly; example components:
  - Fixed spending: 75 percent of spending.
  - Semi-fixed spending (wage bill and contractual commitments): 12 percent.
  - Flexible spending: 13 percent; included in baseline only if explicit commitment exists.
- Dispute resolution: escalate disagreements between budget teams and line agencies to a senior MoF official or Under-Secretary.
- Record each step of forward estimates and provide reconciliation tables explaining variations between forecast vintages; record technical updates and policy inclusions consistently.
- Five-step rolling update process: roll forward T+1 to become budget year, update execution actuals, update macro parameters, include approved new policies only with explicit CoM/MoF authorization, and record technical updates.

*Source: Excerpts from IMF report (cr17170).*

### PREFACE __________________________________________________________________________________________  6

### PREFACE

### Mission and meetings
- Mission dates: January 25 to February 6, 2017.
- Ministry of Finance (MoF) senior officials met included: Hanna Majszczyk, Leszek Skiba, Aneta Cieloch, Anna Napiorkowska, Tomasz Robaczyński, Katarzyna Szarkowska, Joanna Bęza-Bojanowska, Joanna Stachura, Marek Szczerbak, Barbara Brodowska-Maczka, Karolina Burzynska, Bartosz Staszewski.
- Additional meetings with:
  - Ministry of Development: Marcin Sobczyński, Stanisław Sudak.
  - Ministry of Infrastructure and Construction: Jarosław Waszkiewicz, Adam Orzechowski, Ewa Szczepańska, Michał Perliński.
  - Supreme Audit Office (NIK): Stanislaw Jarosz.
  - National Bank of Poland (NBP): Tomasz Jedrzejowicz.
  - Chancellery of the Sejm: Dr Zofia Szpringer, Prof. Kamilla Marchewka-Bartkowiak.
  - Social Security Institution (ZUS): Pawel Jaroszek, Hanna Zalewska, Radoslaw Socha.
  - European Commission: Tomasz Gibas.
  - Office of the World Bank in Warsaw: Iwona Warzecha, Leszek Kąsek, Ryszard Malarski.
- Presentation topics delivered: Medium-Term Budget Frameworks and Forward Expenditure Estimates Techniques, including international best practices and an assessment for Poland.
- Acknowledgements: Support by Bartosz Staszewski and Olga Krasicka-Wezykowska in coordination; IMF resident representative in Warsaw Bas B. Bakker and his staff for logistical and other assistance.

### Executive summary — strategic intent and immediate actions
- The Polish government committed to a budget reform strategy to modernize, strengthen, and lift the horizon of policy-making into the medium term; reform introduced by the Minister of Finance and approved by the Council of Ministers (CoM) in July 2016.
- First step: March 2017 CoM meeting where macroeconomic and fiscal projections for the Multi-Year State Financial Plan (MYSFP) will be compared to spending envelopes and policy priorities for the coming budget determined; this meeting will also launch preparation of Poland’s first Medium-Term Budget Framework (MTBF) for 2018–20.
- Budget reform strategy covers six areas:
  1. implementation of an MTBF;
  2. integration of annual and multi-annual planning processes, and modifications to the budget calendar;
  3. redefinition of the role of the CoM, line ministries, and the MoF in the budget process;
  4. unification of the traditional budget classification and the performance-based classification, built around 20 broad policy areas;
  5. improvement in accounting and financial reporting systems;
  6. institutionalization of spending reviews.

### Fiscal objectives and constraints
- Authorities' highest priorities:
  - introduce an MTBF integrated with the annual budget;
  - achieve medium-term objective (MTO) of a structural deficit of 1 percent of GDP by 2021 (Section I).
- Government commitment: annual fiscal consolidation equivalent to 1/4 percent of GDP starting 2018; additional measures required to attain the MTO.
- EU constraint: annual deficit not to exceed 3 percent of GDP.

### Reform complexity and proposed management
- The strategy is comprehensive, complex, and ambitious (Section II); implementation within a three-year period requires careful sequencing and management.
- Recommended institutional response:
  - create a High-Level Committee of the MoF, chaired by the Minister or co-chaired by the Deputy Ministers to prepare a detailed, realistic, and prioritized road map for implementing the reform.
  - Road map should describe and sequence actions; coordinate with each upcoming budget cycle; define MoF department responsibilities for implementing and supervising each component.

### Assessment of prerequisites for an MTBF
- Many prerequisites already satisfied in Poland (Section III):
  - the annual budget has a high degree of credibility;
  - macroeconomic projections are generally accurate;
  - fiscal rules on debt, expenditure, and the deficit provide sufficient guidance to fiscal policy in the medium term.
- Remaining weaknesses to address (in parallel or as part of MTBF reform):
  - many spending decisions taken outside the budget process;
  - current budget classification is complex, outdated, and does not align policy decisions with spending areas;
  - single-stage budget decision-making process allows CoM to set priorities late in the budget cycle;
  - within the MoF: poor coordination of information and decision making on fiscal and budgetary issues, resistance to change, missed opportunities for cross learning, lack of ownership of the reforms.

### MTBF design considerations
- No single ideal model; a set of design choices to instill discipline, create legitimacy, ensure compliance, and build credibility (Section IV).
- Key questions:
  - design basis for medium-term expenditure commitment mechanism;
  - organization of multi-year prioritization process;
  - control mechanisms to enforce multi-annual spending commitments;
  - accountability mechanisms to establish credibility.
- Report provides recommendations tailored to the Polish context for each area.

### Tools underpinning the MTBF (Section V)
- Forward estimates:
  - MTBF should be anchored in the stabilizing expenditure rule (SER).
  - Based on a well-defined, bottom-up expenditure forecast for each ministry on a no-policy-change basis.
  - In Poland’s case, forward estimates should be based on broad spending areas rather than traditional “budget parts.”
  - Detailed guidance on application and use of forward estimates provided in the report.
- Costing of new policy proposals:
  - Medium-term cost estimates should be prepared for all new policy proposals and for changes to existing policies, including eligibility criteria or assistance rates of existing transfers or social security programs.
- Spending reviews:
  - Poland has established a framework of spending reviews, but impact in identifying savings or reallocation options has been limited.
  - To increase effectiveness: give reviews clear targets for achieving savings; fully integrate them with the budget process; staff them with representatives from the MoF’s budget departments, line ministries, and possibly external experts.

### Summary of recommendations — timing and responsibilities (Table 1 highlights)
- Recommendations organized over three time periods:
  - First 8 weeks: until the March 2017 CoM meeting.
  - Next 8 months: until preparation and approval of the 2018 budget.
  - Next 18 months and beyond: broader implementation of MTBF and other reforms.
- Selected specific recommendations verbatim where identified in Table 1:
  - 2.1 Establish a MoF High-Level Committee, chaired by the Minister or Deputy Ministers, to oversee the design and implementation of the PFM reform strategy.
  - 2.2 Prepare a detailed, realistic and prioritized road map of PFM reforms; define roles and responsibilities of the key actors; set key deliverables and performance targets; monitor results; and extend the implementation timetable to more than three years.
  - 3.1 The proposed MoF High-Level Committee should also oversee the preparation of the MYSFP and the annual budget (see Recommendation 2.1).
  - 3.2 Define roles and responsibilities in the MoF for implementing MTBF and for broader budget reform.
  - 3.3 Carry out assessment of forecasting errors and identify solutions by using more disaggregated data and better modeling techniques.
  - 3.4 Implement CoM’s decision to create a unified budget classification based on policy areas and programs.
  - 3.5 Prepare and adopt changes to the legal framework to formalize decisions of the CoM.
  - 4.1 Clarify that the MTBF is based on an aggregate binding commitment consistent with the SER, with lower-level indicative spending area/budget part allocations over the medium term based on forward estimates.
  - 4.2 Finalize spending areas for setting MTBF spending ceilings and implement in stages over three budget cycles.
  - 4.3 Adopt a phased approach to introducing multi-year ministerial ceilings. 2018-20 MTBF: three-year estimates by parts, first year ceiling. 2019-21: three-year estimates aggregating by spending area. 2020-22 MTBF: binding ceiling for first year budget and estimates for outer two years by spending area.
  - 4.4 Strengthen the role of the CoM in expenditure prioritization through a sub-committee charged with reviewing and clearing all new policies.
  - 4.5 Design and implement a more strategic expenditure prioritization process earlier in the budget cycle, focused on improved scrutiny of baseline and new policies, that feeds into the MTBF and Convergence Program.
  - 4.6 Define a framework for setting planning margins in the MTBF, using a risk averse approach to begin with.
  - 4.7 Strengthen the arrangements for multi-year commitment controls and carryovers to better underpin the new MTBF framework.
  - 4.8 Establish a framework for reconciling between forecast vintages, starting with macro forecasts, expanding to MTBF aggregates.
  - 4.9 Consider introducing fiscal responsibility statements for line ministries and budget holders.
- Responsibilities as listed in Table 1: Minister, Deputy Ministers, PW, BP, PM, D R, DP, PR, FG, FS (as indicated in Table 1); specific assignment of responsibilities preserved as in the source.

*Italic source attribution line.*

### 5.1 Define a template to produce 2018-2020 forward estimates for budget teams. Include conceptual model; basis upon whic

### 5.1 Define a template to produce 2018-2020 forward estimates for budget teams. Include conceptual model; basis upon whic

### Recommendations and Operational Steps (Sections 5.1–6.3)
- 5.1 Define a template to produce 2018-2020 forward estimates for budget teams. Include conceptual model; basis upon which estimates will be built, and definition of “No-Policy Change”.
- 5.2 The Expenditure Policy Department and Macroeconomic Policy Department should work together to verify and assess the first initial bottom-up forward spending estimates.
- 5.3 Set up a process for agreeing forward estimate baseline models with line agencies.
- 5.4 Extend the use of Regulatory Impact Assessments to all new policy decisions considered through the budget process.
- 5.5 Continue to refine and improve forward estimates, reconciling each estimate to the previous round by identifying changes due to parameters, policy decisions, and technical adjustments.
  - Responsibility labels: BP, PW; PW, PM, BP (as indicated alongside the recommendation text).
- Tracking of investment projects
  - 5.6 Split State Budget investment expenditure between major projects and minor projects and capital purchases; seek 3-year spending profiles of major projects from implementing agencies and define which investments shall be included within the no-policy-change baseline.
  - 5.9 Develop an investment project tracking system for large projects financed through the State budget, mirroring that used for EU funds.
  - Responsibility labels: FG, BP (for 5.9).
- Fiscal impact of public service wages
  - 5.7 Maintain projection assumption of flat nominal wage bill; simulate options and implications of alternative wage growth.
  - 6.0 Develop a proposal for improving the projection of the wage bill in the forward estimates to be approved by the CoM.
  - Responsibility labels: FS, PW, PM.
- Transfers to other units
  - 5.8 Categorize, forecast and consolidate transfers to other entities in the general government based on existing models.
  - Responsibility labels: PM, BP.
- Spending reviews
  - 6.1 Spending Review Steering Committee expanded and tasked with conducting spending reviews.
  - 6.2 Establish clear top-down targets for expenditure savings to be achieved through spending reviews.
  - 6.3 Strengthen spending reviews by linking recommendations to the budget, including budget and line agency officers, and identifying savings/reallocation to meet targets.
  - Responsibility labels: PW, BP, FG, FS.

- Key: PR = Legal; PW = Expenditure Policy; PM = Macroeconomic Policy; BP = State Budget; FG = Economy Financing; FS = Budget Zone Financing; DP = Public Debt; DR = Accounting and Auditing Departments. Numbers correspond to the number of the recommendation in the report.

### Context and Rationale for Forward Estimates and MTBF Reform
- The general government budget target of 2.9 percent of GDP in 2017 is close to the EU’s Excessive Deficit Procedure (EDP) limit of 3 percent of GDP and represents a relaxation of about 0.5 percent of GDP in structural terms.
- New measures such as the reduction in the retirement age and the increase in income tax allowances will increase fiscal pressures in both 2017 and over the medium term.
- Under the January 2017 Flexible Credit Line (FCL) arrangement, the authorities were committed to start fiscal consolidation from 2018 with at least a ¼ percent of GDP adjustment per year while ensuring that the deficit does not exceed the EDP limit of 3 percent of GDP in 2017.
- In the April 2017 Convergence Program Update, the authorities presented targets aiming to:
  - improve headline deficit to 1.2 percent of GDP by 2020; and
  - hit the MTO of one percent of GDP structural deficit by 2021.
- The authorities intend to treat the two-year €8.24 billion Flexible Credit Line (FCL) arrangement as insurance against external shocks.
- Having an MTBF would signal commitment to maintain the strength of their framework and help reassure the international community in face of recent slippages.

### Implementation Timing, Sequencing, and Institutional Arrangements
- The CoM approved an “Assumptions to Budget System Reforms” paper in July 2016 initiating reforms including the revision of the PFM Act, presentation of the budget strategy reform to the CoM, and implementation of forward estimates.
- The MoF is preparing for a CoM meeting scheduled in March 2017 at which spending projections for the three-year period 2018 to 2020, on a no-policy-change basis (“baseline” spending estimates), will be presented to ministers. This brings forward the budget calendar by more than one quarter.
- Immediate - First 8 weeks:
  - 2.1 Establish a MoF High-Level Committee, chaired by the Minister or the two Deputy Ministers (Expenditure and Budget), and including representatives of all relevant departments to oversee the design and implementation of the PFM reform strategy. The same Committee would also oversee the preparation of the MYSFP and the annual budget.
- Short Term - Next 8 months:
  - 2.2 The proposed MoF High-Level Committee should prepare a detailed, realistic, and prioritized implementation road map of PFM reforms that lists and sequences the different activities; coordinates proposed changes with upcoming budget cycles; defines the role and responsibilities of key actors; sets key deliverables and targets; monitors results; and extends the implementation timetable to more than three years.

### Prerequisites and Assessment for Implementing an MTBF
- Credible annual budget:
  - The annual budget provides the foundation for medium-term projections; without credibility, medium-term projections cannot serve as a basis for decision making.
  - The Public Finance Act (PFA) sets a legal obligation not to exceed the budget spending envelope and deficit limit, unless the budget law is revised.
  - Poland’s budget credibility observations:
    - Since 2000 the proposed budget has been underspent by an average of 3.4 percent, or by only 2.4 percent if the financial crisis is excluded.
    - The annual budget process delivered a successful fiscal consolidation of 2.3 percent of GDP since 2004, while increasing capital spending.
    - The PFA does not permit transfers to be made across budget parts, resulting in actual spending by budgetary parts corresponding closely to initial appropriations; earmarked reserves are used in specific cases (transfers to the 16 regions of Poland – voivods - and rural development spending).
- Prudent medium-term macroeconomic forecasts:
  - Credibility of medium-term fiscal projections depends critically on underlying macroeconomic assumptions.
  - Most budget items have economic and demographic determinants (examples listed in source): direct taxes, indirect taxes, retirement pensions, wages, investment spending.
  - Forecast accuracy can be improved and biases reduced by independent checks and validation mechanisms.

### Key Statistics and Exact Figures from the Source
- General government budget target in 2017: 2.9 percent of GDP.
- EU EDP limit: 3 percent of GDP.
- Structural relaxation: about 0.5 percent of GDP.
- FCL two-year amount: €8.24 billion.
- Consolidation commitment starting 2018: at least a ¼ percent of GDP adjustment per year.
- Authorities’ Convergence Program targets:
  - headline deficit of 1.2 percent of GDP by 2020;
  - MTO of one percent of GDP structural deficit by 2021.
- Budget underspend averages since 2000:
  - 3.4 percent (average underspend);
  - 2.4 percent (if the financial crisis is excluded).
- Fiscal consolidation since 2004: 2.3 percent of GDP.

*Source: Excerpts from IMF report (cr17170), sections on forward estimates, PFM reform, and prerequisites for MTBF implementation.*

### 13. Over the past 15 years, macroeconomic forecasts in Poland have been accurate for

### 13. Over the past 15 years, macroeconomic forecasts in Poland have been accurate for the budget year, with some limited optimistic bias for the outer years.

### Forecast accuracy: real GDP and inflation
- Poland has one of the most accurate real GDP and inflation forecast records in the EU region for the budget year.
- For the outer years, forecasts of both real GDP and inflation have underperformed, implying an overall optimistic bias in forecasts of nominal GDP for the outer years (the main basis for medium-term fiscal forecasts).
- The optimistic bias for outer years remains low in comparison with peers.
- Time horizon referenced: 2000–15 (Figures 4 and 5).

### Fiscal framework and fiscal rules
- Constitution: upper limit on the stock of debt of 60 percent of GDP (based on a Polish definition).
- PFA: sets strict limits on local government borrowing.
- Stabilizing Expenditure Rule (SER) introduced in 2013 and in place since 2015; limits the rate at which general government expenditure can grow.
- EU rule: annual deficit must not exceed 3 percent of GDP.
- Government medium-term objective: reaching a structural deficit of 1 percent of GDP by 2021.

### The Stabilizing Expenditure Rule (SER) — key features and amendments
- Original SER formula: keep growth of nominal general government expenditure below combined medium-term growth rates of real GDP, inflation expectations for the given year, and past inflation errors.
- Original correction mechanism: reduce expenditure growth when (i) debt or deficit exceeded thresholds in the PFA, or (ii) cumulated difference between nominal balance and the “medium-term objective” (MTO) exceeded six percent of GDP.
- Counter-cyclical dimension: in “bad” times (real GDP growth less than 2 percent), there was no expenditure correction when fiscal balance deviated from the MTO.
- December 2015 amendments:
  - Inflation expectations and past inflation errors were replaced by an inflation target set by the National Bank of Poland (currently 2.5 percent). Expenditure now allowed to grow in line with the inflation target irrespective of actual inflation.
  - Expenditure is allowed to grow in the case of one-off revenue that exceeds 0.03 percent of GDP, meaning temporary revenue increases can lead to a permanent increase in the level of expenditure.
- Adoption and enforcement: SER adopted in 2013, came into force with the 2015 budget.

### Revenue forecasting performance and drivers of errors
- Average revenue as a ratio of GDP was 0.6 percentage point lower than forecast for the budget year.
- For the outer years, revenue was close to 1 percentage point lower than forecast.
- This bias has translated into fiscal deficits that are higher than projected.
- Macroeconomic and revenue forecast errors have not been correlated in recent years; revenue errors have been much larger.
- Possible root causes of inaccurate revenue forecasts:
  - Weak forecasting techniques.
  - Structural changes in the economy.
  - Frequent changes in tax policy.
- Recommended further work: diagnose root causes and identify possible solutions.
- Note on tax elasticity: overall elasticity of taxes to GDP is positive in Poland (citation to EU Commission 2005); a positive elasticity should yield positive correlation between revenue and macroeconomic forecast errors if the former were driven by the latter.

### Budget unity and comprehensiveness
- Annual budget process is highly fragmented; many decisions are made outside the budget (financing of EU structural fund program, social security funds, transfers to local government) and are governed by separate laws with little discretion.
- Budget Act covers all central government spending and about 55 percent of general government spending.
- Existing budget classification is highly complex and does not allow clear identification of spending areas; this hampers alignment of policy decisions with spending areas.

Box: Budget classification in Poland — key points
- Two systems of classification: traditional system (used by Parliament) based on 84 budgetary parts, and a programmatic classification introduced in 2009.
- Budgetary parts: some relate to spending areas (e.g., education, health), others to budgetary units (e.g., courts), transfers to extra-budgetary funds (e.g., social security), transfers to voivods, and reserves (general and earmarked).
- No clear mapping between budgetary parts and line ministries or spending areas; line ministries may hold multiple parts; spending areas may cut across parts.
- Traditional classification: sections, chapters, paragraphs; Parliament authorizes and controls expenditure at the level of budget parts, subdivided into sections and chapters and group of paragraphs (grants, transfers to natural persons, current expenditures of budget units, investment, servicing the public debt, EU own resources, and co-financing of EU projects).
- Programmatic classification (2009): requires budget holders to develop multi-year financial plans by functions, tasks, subtasks and activities; performance information presented mainly as an annex and not used in decision-making by budget holders or the MoF.

### Institutional arrangements and the link between MYSFP and the annual budget
- Preparation of macroeconomic and fiscal projections for the Multi-Year State Financial Plan (MYSFP) is largely disconnected from the budget preparation process.
- MYSFP update process:
  - Finalized in April each year (update of Poland’s Convergence Programme) before submission to the European Commission.
  - Prepared by the Macroeconomic Policy Department using macroeconomic assumptions developed in March, State Budget revenue forecasts, State Budget expenditure forecasts derived from the SER (calculated by the Expenditure Policy Department), and information provided by major general government units.
  - Does not contain medium-term expenditure projections by budgetary parts because projections provided by line ministries during the previous budgetary exercise are not used (figures are not current and are prepared using the programmatic classification).
- Annual budget cycle starts in May, managed by four budget departments in the MoF (State Budget Department, Economy Financing Department, Budget Zone Financing Department, Paying Authority Department).
- Annual budget and MYSFP are based on broadly consistent macroeconomic projections but are largely independent exercises with separate timetables.
- Under CoM arrangements approved in 2016, the two processes would be integrated; improvement to be implemented to formalize decisions for 2018.

Internal coordination within the Ministry of Finance (MoF)
- Silo culture prevails within the MoF:
  - Macroeconomic Policy Department and Expenditure Policy Department supervised by one Under-Secretary.
  - Budget departments supervised by another Under-Secretary.
- Communications between departments on MYSFP and annual budget are weak and limited to essential business only.
- Consequences: issues around ownership, leadership, realism, and implementation of reform initiatives.
- Other EU Member States: stronger mechanisms for exchanging information and coordinating internal decision making on fiscal policy and budgetary issues; typically budget department would be responsible for developing and proposing reforms.

Role of the Council of Ministers (CoM) and Parliament
- Current PFA defines a single-stage budget process in Poland, limiting CoM role in setting spending priorities.
- Other EU Member States: two-stage (“top-down”) budget process where spending priorities and ceilings set in first stage, detailed annual budget prepared in second stage.
- Reforms initiated by CoM in 2016 should introduce a first stage to set strategic decisions about budget priorities and spending ceilings.
- Parliament: legislative process for approving the budget is orderly; Parliament cannot amend the draft budget if it would lead to a “budget deficit exceeding the level provided in the draft budget” (Art. 221(1) of the Constitution).
  - In practice, amendments requiring MoF approval tend to be very small, averaging 0.03 percent of the total budget in the last 10 years.
  - Supplementary budgets are rarely used; in-year adjustments (“virement”) are relatively small and confined to chapters and paragraphs.
  - Parliament partly circumvents restrictions by proposing laws outside the budget process that do not undergo sufficient validation of fiscal impact.

### Summary assessment of prerequisites for implementing an MTBF (excerpted conclusions)
- Credibility of annual budget process: A credible budget that delivers spending consolidation and prevents over spending.
- Prudent medium-term macroeconomic forecasts: Accurate budget year forecast, with some optimism bias for outer years, but bias is low compared to peers.
- Fiscal rules: Fiscal rules provide sufficient guidance to fiscal policy for the medium term.
- Revenue forecasts: Actual revenue usually below revenue forecasts.
- Unified budget: A fragmented budget with many decisions made outside of the budget process.
- Comprehensive budget: Budget Act covers substantial part of central government activity but budget classification does not allow alignment of policy decisions with spending areas.
- Link between MYSFP and the annual budget: Weak link; improvement expected under revised budget process for 2018.
- Role of the Council of Ministers: One-stage budgeting process that does not give the CoM the opportunity to set priorities at an early stage.
- Role of Parliament: Parliament makes limited changes to the proposed budget but some laws with financial implications are approved outside the budget process.
- Internal coordination within MoF: Strong silo culture and lack of ownership of reforms.

### Recommendations and reform timeline
Immediate - First 8 weeks
- 3.1: Establish a proposed MoF High-Level Committee, chaired by the Minister or the two Deputy Ministers (Expenditure and Budget), to oversee preparation of the MYSFP and the annual budget.

Short-term - Next 8 months
- 3.2: Issue guidelines defining roles and responsibilities of various MoF departments regarding (i) preparation of the MYSFP and the annual budget; and (ii) implementation of the budget reforms already approved by the CoM. These instructions should be prepared and approved by Senior Management of the Ministry.
- 3.3: Improve revenue forecasting by:
  - (i) carrying out further diagnostic assessments of forecasting errors (e.g., a forecast reconciliation table that decomposes sources of past forecast errors into policy changes, structural changes and changes to the economic outlook);
  - (ii) identifying possible solutions which could include use of more disaggregated data and better modeling techniques.

Longer-Term - Next 18 months and beyond
- 3.4: Implement the CoM decision in 2016 to create a unified budget classification based on policy areas and programs (complex reform requiring time to design and implement).
- 3.5: Prepare and adopt changes to the legal framework and budget calendar required to formalize CoM budget reform decisions taken in July 2016. In particular, revise the PFA by the end of 2017 so that new arrangements can be fully implemented in 2018.

*Source: cr17170 - 13. Over the past 15 years, macroeconomic forecasts in Poland have been accurate for the budget year, with some limited optimistic bias for the outer years.*

### 25. Given the CoM’s decision to implement an MTBF in Poland, authorities should

### Given the CoM’s decision to implement an MTBF in Poland, authorities should

### A. Medium-Term Expenditure Commitment Mechanisms
- Purpose: Ensure decision-makers remain committed to revenue and expenditures targets beyond the budget year by setting limits on future spending.
- Design choices to address:
  - Nature of future years’ spending limits: nominal, real, or linked to output?
  - Coverage of the limits: should some expenditure be excluded from multi-year restrictions?
  - Level of the limits: aggregate, ministerial, programs or economic category?
  - Frequency of revisions: how often should the limits be revised to allow for discretionary changes?
- Coverage and level trade-offs:
  - More aggregated limits → broader coverage of commitments.
  - More detailed (e.g., binding multi-year ministerial ceilings) → lower coverage, since areas out of a ministry’s direct control (interest, pensions, unemployment benefits) need exclusion.
  - Examples cited: Sweden’s aggregate expenditure limit includes 96 percent of spending; the UK’s ministerial ceilings include 59 percent of spending.
- Current Polish arrangement and recommendation:
  - The SER caps nearly 90 percent spending at a general government level.
  - Practical recommendation: continue with the existing general government aggregate ceiling, decomposed between state budget and non-state budget (non-state treated as largely exogenous; state budget is the residual forming the basis for the multi-year state budget expenditure limit).
- Level-setting approach:
  - Ceilings should be set below aggregate spending level within the MTBF for credibility.
  - Adopt a gradual approach: first improve quality of budgetary estimates based on existing policies—forward estimates—while establishing more robust approach for approving new policies.
  - Forward estimates are prepared for non-state budget entities but not yet for entities within the state budget; development of forward estimates for state budget entities is recommended.
- Timing of ministerial working spending ceilings:
  - Current practice: ceilings adopted by CoM in August (late in budget process).
  - Reform proposal: bring setting of working spending ceilings earlier—July and eventually March CoM meetings—to allow prioritization earlier and better comparison with estimates for each part.
- Definitions (Box 3 key terms preserved):
  - Forward Estimates: bottom-up expenditure forecasts for individual parts providing best estimate of future costs of delivering existing policy commitments; aggregated to yield baseline expenditure projection (no-policy-change basis).
  - Ceilings and Limits: maximum levels of expenditure determined by MoF or CoM; ceilings commonly for ministries/budget holders; limits more commonly define aggregate expenditure (e.g., the maximum level of general government expenditure under the SER). Can be single-year or multi-year.
  - Fiscal Space/Savings Task: difference between imposed expenditure limit and baseline expenditure projection; if the former exceeds the latter → fiscal space; if latter exceeds former → savings task required.
  - Indicative spending amounts: adjustable in future due to parameter variation or policy changes; associated with forward estimates and forecasts; applied to medium-term ministerial allocations below binding aggregate limit.
  - Binding spending commitments: cannot or should not be altered in the future regardless of policy or parameter changes; may be defined in law or as political commitment.
  - Appropriations: binding legislated maximum amount of spending for individual budget parts approved within the budget law; only applicable for the annual budget.
- From forward estimates to ceilings:
  - As MTBF matures and forward estimates improve, consider introducing multi-year ministerial ceilings to reallocate resources to higher priority areas; do so in a phased manner to avoid enforcing ceilings based on inaccurate estimates.
- State Budget ceilings and introduction of spending areas:
  - Current annual binding ceilings set at level of parts (84 budget parts).
  - MTBF reforms envisage binding ceilings at level of some 20 newly created spending areas.
  - Authorities propose a one-to-many relationship: one spending area → one or more parts; a part belongs to only one spending area to limit institutional resistance.
  - Spending areas intended to present forward estimates more effectively and allow reallocations: 20 spending areas better than 84 parts for manageability and alignment with ministerial responsibility.

### B. Multi-year Prioritization Mechanisms
- Dual objectives for MTBF credibility:
  - Reflect government’s policy priorities.
  - Be consistent with multiyear spending limits.
- Required institutional mechanisms:
  - Integrated medium-term expenditure planning and budgeting process and presentation.
  - Clear separation between cost of maintaining existing policies and cost of new policy initiatives in budget documents, based on unambiguous and widely accepted methodology.
  - A forum for discussing and deciding expenditure priorities that is comprehensive, politically legitimate, evidence based, and binding.
- International variants of prioritization mechanisms (examples preserved):
  - Coalition agreements at start of mandate (Finland, Netherlands).
  - Agree medium-term policy directions ahead of annual budget (Sweden).
  - Periodic spending reviews (UK, France).
  - Enhanced scrutiny of all policy changes (Australia).
- Current Polish situation and weaknesses:
  - Prioritization fragmented in coverage and decision-making:
    - New programs reviewed and approved throughout the year.
    - Strategic development spending overseen by Ministry of Development (MoD).
    - Convergence Programme policy directions not fully reconciled with annual budget allocations.
  - Standing Committee of Under-secretaries reports to CoM on budgetary issues, but role in reviewing proposals and deciding priorities is neither formalized nor comprehensive.
- Role of National Development Strategy (NDS):
  - NDS objectives: sustainable economic growth, socially and territorially sustainable development, efficient state and economic institutions.
  - NDS focuses on six areas: human and social capital, transport, digitalization, energy, environment, national security.
  - NDS includes some 180 strategic and 10 flagship projects; classifies over 1,000 billion PLN of state and local budget spending between now and 2020 as “development” (about 55 percent of GDP), much of which is current spending (education, defense, other NDS-identified areas).
  - Given the scale and use of EU funds, the NDS role in guiding multi-year prioritization cannot be ignored.
- Costing of policy initiatives:
  - Fiscal impact assessment process for new legislation coordinated by Chancellery in PM’s Office.
  - Public Finance Act: for all government-led legislative changes that affect expenditure level, a Regulatory Impact Assessment (RIA) including 10-year forecasts of fiscal impact must be prepared.
  - RIAs are scrutinized by MoF as part of public consultation, establishing binding limits on program spending related to new legislation over first 10 years of implementation.
  - Recommended broadenings:
    - Broaden to all new policies, not just new legislation.
    - More closely link to the budget cycle.
  - Current gaps:
    - New legislative proposals can be initiated throughout the year and are not linked to budget process.
    - Ex-ante scrutiny excludes legislation initiated in the Sejm (approximately 50 percent of legislation adopted in the first year of the current term of the Sejm).
    - Unclear whether proposals must align with the NDS.
- Spending prioritization timing problems:
  - Prioritization often occurs late in budget preparation, too late to guide initial budget bids.
  - Absence of early decisions → budget bids tend to exceed available fiscal space → difficult negotiations and intense debates at August and September CoM meetings.
  - Line ministries must often prepare bids twice with insufficient time for adequate budget preparation.
- Institutional recommendation:
  - Strengthen and streamline institutional arrangements for budget approval and policy prioritization.
  - The body reviewing and approving new policies (including changes) should have full authority of, and report to, CoM.
  - Standing Committee of Under-secretaries important for technical reviews but broad membership may complicate decision-making, especially on spending cuts.
  - Alternative to explore: Economic Committee.
- Decision-making streamlining proposal:
  - CoM retains authority to approve budget and new policies; Standing Committee of Under-secretaries to do detailed work and provide recommendation on final budget package.
  - Example of decisions sought from March CoM meeting (Box 5, preserved language):
    - CoM notes first indicative forward estimates produced by MoF.
    - CoM recognizes implied savings tasks required to meet SER of PLNX billion in 2018, PLNY billion in 2019, and PLNZ billion in 2020, noting these may be revised.
    - CoM decides increases for minimum wages and pensions to be included in forward estimates, subject to agreement with Social Partners.
    - CoM directs MoF and relevant line ministries to work up savings proposals to meet savings tasks in areas: cross-cutting savings, X (e.g., health), Y (e.g., transport).
    - CoM directs Standing Committee of Under-secretaries to assess and provide recommendations regarding savings options at July 2017 CoM meeting.

### C. Control Mechanisms
- Purpose: Ensure expenditure limits and indicative spending allocations are delivered over a multi-year period.
- Recommended controls:
  - At least two updates per year of medium-term expenditure forecasts to ensure government knows its fiscal position.
  - Sufficient margins between expenditure commitments and expenditure plans to absorb unexpected events without requiring reprioritization.
  - Firm controls on ministries’ and agencies’ ability to enter into multiyear expenditure commitments.
  - Controls over accumulation, stock, or drawdown of carryovers.
- Expenditure projections and current practices:
  - Medium-term macroeconomic and revenue forecasts prepared three times a year:
    - For Convergence Programme in April.
    - For budget circular in June/July.
    - For annual budget in August.
  - These forecasts include aggregate expenditure ceilings derived from the expenditure rule; top-down ceilings prepared by Expenditure Policy Department in consultation with budget departments.
  - Detailed medium-term expenditure estimates prepared by budget holders in March are not used for the Convergence Programme; State Budget Department consolidates them, but as bids they are not used in bottom-up estimation for Convergence Programme. These estimates are not updated during the year.
- Reserves and margins:
  - State Budget Department monitors budget execution during the year and has a record of keeping it on track despite absence of formal budget review process.
  - Department’s control linked to approval role for releases of funds from special purpose earmarked reserves (identified under part 83).
  - Earmarked reserves ensure spending reflects actual commitments and allow discretion to address emerging in-year developments.
  - These earmarked reserves are not part of the general contingency reserve and often end up fully allocated by year-end.
  - Uses of earmarked reserves: when spending details (including loans and EU funds) unknown at preparation; when required by statute; where distribution between regions cannot be pre-determined (e.g., social payments).
  - Public Finance Act (Article 140) caps domestic earmarked reserves at 4 percent of budget reserves; loans and EU funds are not capped.

*Italicized: IMF staff discussion and recommendations as presented in the source document.*

### 48. The budget also includes up to 0.2 percent of the budget for general contingencies

### 48. The budget also includes up to 0.2 percent of the budget for general contingencies

### Contingency allocations and planning margins
- The budget includes up to 0.2 percent of the budget for general contingencies and a further amount of around 0.5 percent of spending for emergencies and disasters.
- This level is described as low compared to other countries.
- Under the MTBF, the general contingency allocation should be increased for outer years to reflect increasing uncertainties regarding the funding of existing policies.
- Recommendation: Increase planning (contingency) margins for new policies:
  - Initially set margins for years 2 and 3 at higher, more risk-averse levels, and gradually reduce them in subsequent MTBFs.
  - Given the expected need to consolidate in the next few years in Poland, a higher planning margin for outer years is prudent to signal that future spending related to current policies will need reduction to accommodate new policy initiatives.
- Under the MTBF the total unallocated expenditure in outer years (contingency plus planning margin) would be set as a percentage of the aggregate spending ceilings.
  - Based on practices in other countries these vary between 1 to 3 percent of spending in year 2, and 3 to 5 percent in year 3.
  - The higher end of these margins would be appropriate for Poland in the next few years, but the most appropriate level should be calculated by the authorities.

### Controls over multi-year contracts and pre-commitments
- Existing multi-year public expenditure controls include:
  - Multi-year programs approved by the CoM with binding limits that include an estimate of the total fiscal impact (based on RIAs), performance indicators and expected results. Three-year forecasts are presented in the State Budget documentation (Annex 10) on each program.
    - Such programs represent PLN16.8 billion or 4.35 percent of State Budget spending in 2017, with the stock of pre-committed programs amounting to PLN132 billion as of end-2016.
  - Up to 10-year limits on expenditures on specific new government-led initiatives, which may result in an increase in expenditure.
  - Multi-year projections of projects co-financed with EU structural funds presented in Annex 15 of the State Budget documentation for each agreed “investment program”, totaling PLN33.9 and PLN4.7 billion respectively for EU and domestic components. Together these represent 10 percent of State Budget spending, although some PLN15.7 billion of the PLN33.9 billion EU funds will be executed directly through the National Road Fund which is outside the State Budget.
- Approval and control processes:
  - MoF reviews multi-year program projections prior to CoM approval; MoD with MoF reviews EU-funded investment proposals.
  - Subsequent multi-year contracting that can encumber future budgets is subject to strict MoF control.
  - Some budget holders circumvent controls by slicing investment contracts into annual tranches because controls are sometimes considered too stringent.

### Carryovers
- The Public Finance Act permits carryovers with case-by-case approval; such carryovers must be cleared within three months.
- There has been uptake and most carryovers are cleared shortly after year end.
- Some line ministries avoid carryover restrictions via extra-budgetary funds, which are not subject to carryover restrictions.
- Strict carryover rules affect expenditure timing, as budget holders rush to spend before year end to avoid losing future entitlements.
- Suggested reform: Loosen carryover restrictions once the medium-term framework for budgeting is well established, but design new rules carefully to avoid unfettered accumulation that can undermine budget credibility and fiscal targets.
- Design considerations for carryovers (country examples cited):
  - Limit the type of appropriations that can be carried over (example: Australia allows full carryover of administrative costs within departments, but requires cabinet approval and re-appropriation for program expenditure).
  - Limit accumulation of carryovers from one year to the next (examples: France and Sweden allow only three percent of expenditure to be carried over).
  - Limit drawdown of carryovers in a given budget year (example: until 2010 the UK allowed unlimited accumulation but required treasury approval before spending carryovers in a given year).

### Accountability mechanisms and external scrutiny
- Credibility of an MTBF depends on demonstrating delivery against previous commitments; accountability mechanisms should ensure:
  - For any given financial year, MTBF projections, the annual budget, and final accounts are presented and costed on a comparable basis.
  - Governments and line ministries are held to account for any large unjustified deviations from multi-year plans.
  - Full reconciliation between vintages of MTBFs that comprehensively and transparently explains changes, with successive vintages presented side by side.
- External scrutiny in Poland:
  - National Bank of Poland (NBP) and the European Commission (EC) already scrutinize budget assumptions.
    - The NBP’s Monetary Policy Council provides an independent opinion on macroeconomic assumptions underlying the budget proposal submitted to the Sejm.
    - The EC comments on the Convergence Programme submitted in April.
  - The IMF reviews the budget and its assumptions under the FCL and through regular surveillance.
  - The Supreme Audit Office (NIK) undertakes ex post audit of budget assumptions.
  - EC has recommended establishing an independent Fiscal Council to enhance external scrutiny.
- Parliamentary scrutiny:
  - The Sejm’s Bureau of Research supports internal analysis, prepares committee analyses, amendment details and cost implications, and opinions on the Convergence Programme.
- Fiscal responsibility and ministerial accountability:
  - There are currently no rules regarding fiscal responsibility; a fiscal responsibility law is being considered but is not yet in place.
  - Example measure: obligation for line ministers to sign a fiscal responsibility statement at budget finalization (example: Croatia), which could encourage higher-quality budget submissions in Poland.

### Reconciliation between forecast vintages
- There is currently no reconciliation between vintages of forecasts for either macro or expenditure projections.
- Importance: Reconciliation tables should explain differences between year 2 and 3 of the previous MTBF and year 1 and 2 of the current MTBF.
- Factors affecting changes between MTBF vintages include:
  - Macro-economic: Revisions to macroeconomic parameters (e.g., GDP, inflation, exchange rate).
  - Other parameters: Revisions to operational parameters (e.g., prices of goods, volumes of claimants).
  - Accounting adjustments: Revisions in accounting treatment (e.g., reclassifying expenditure between ministries).
  - Policy measures: Discretionary additions or cuts to ceilings (e.g., new investment, efficiency savings).
  - Carryovers: Net drawdown or accumulation of carryovers as authorized by the Council of Ministers.
  - Over/Under Spending: Operational overruns or underspends (e.g., claims on reserve, unauthorized overspending).
- Illustrative reconciliation tables are provided in the source to guide presentation of revisions across budget vintages.

### Recommendations (summary for multi-year commitment, prioritization, control and accountability)
- Multi-Year Commitment Mechanism
  - Immediate - First 8 weeks:
    - 4.1 Clarify that the MTBF is based on an aggregate binding commitment consistent with the SER, with lower level indicative spending area/budget part allocations over the medium term based on forward estimates.
  - Short-term - Next 8 months:
    - 4.2 Finalize spending areas definition for setting MTBF spending ceilings and implement in stages over three budget cycles.
  - Longer-term - Next 18 months and beyond:
    - 4.3 Adopt a phased approach to introducing multi-year ministerial ceilings to assist in reallocating resources to higher priority areas.
      - For the 2018 budget: at the March CoM, approve 3-year estimates by Parts based on current policy of State Budget spending, in line with general government spending forecasts within the expenditure rule; at the July CoM, include in the budget circular indicative ceilings by Parts for the budget year; at the August CoM, set binding ceilings by Parts for the budget year and require budget holders to update outer year estimates; at the September CoM, approve the budget and the revised MTBF for delivery to the Sejm.
      - For the 2019 budget: at the March CoM, approve 3-year estimates by Parts, showing aggregation by proposed spending areas; remainder as before.
      - For the 2020 budget: at the March CoM, approve indicative ceilings for the budget year and estimates for two outer years by spending areas; at the July CoM, approve binding ceilings by spending areas for the budget year; no August CoM.
- Multi-year prioritization mechanism
  - Short-term - Next 8 months:
    - 4.4 Strengthen the role of the CoM in expenditure prioritization through a sub-committee charged with reviewing and clearing all new policies.
    - 4.5 Design and implement a more strategic expenditure prioritization process earlier in the budget cycle, focused on improved scrutiny of baseline and new policies, feeding into the MTBF and Convergence Programme.
- Control mechanisms
  - Immediate - First 8 weeks:
    - 4.6 Define a framework for setting planning margins in the MTBF, using a risk averse approach to begin with.
  - Short-term - Next 8 months:
    - 4.7 Strengthen arrangements for multi-year commitment controls and carryovers to better underpin the new MTBF framework.
- Accountability mechanisms
  - Short-term - Next 8 months:
    - 4.8 Establish a framework for reconciling between forecast vintages, starting with macro forecasts and expanding to MTBF aggregates.
    - 4.9 Consider introducing fiscal responsibility statements for line ministries and budget holders.

### Forward estimates (tools underpinning the medium-term budget)
- Concept and role
  - A medium-term budget should be based on well-defined, bottom-up expenditure forecasts for each ministry on a no-policy change basis (forward estimates or baseline projections).
  - Forward estimates should be the basis of expenditure projections and budget bids prepared by ministries, representing the best estimate of the cost of continuing existing policies at current service levels over the next three years.
  - Initially, these estimates should be prepared by the MoF’s budget department, in consultation with line ministries.
- Purposes and benefits
  - Forward estimates link annual budgets to medium-term fiscal forecasts, improving assessment of fiscal space or required fiscal savings.
  - They identify early spending pressures and dynamics, informing policy choices and where changes may be necessary.
  - They provide a starting point for next year’s budget, based on agreed models and automatic adjustments for exogenous inputs like inflation, wages and exchange rates, simplifying negotiations and shifting focus to policy quality.
- Current government practice and gaps
  - The Government already prepares forward estimates for half of the general government sector as part of the Convergence Programme:
    - Social security spending forecasts by the Social Security Institution (ZUS) based on MoF macro assumptions.
    - Forecasts for spending local government and special funds by the Macroeconomic Policy Department.
  - Convergence Programme forecasts for the State Budget sector are more rudimentary with little linkage to the budget.
  - The State Budget is still prepared on an annual basis with no link to the medium-term estimates in the Multi-Year State Financial Plan (MYSFP).
- Implementation steps
  - As a first MTBF step, MoF budget departments are preparing baseline forward estimates for three years ahead within the State Budget.
    - The first version of these estimates is expected to be produced by early March and used to inform the March CoM meeting to determine fiscal space or required savings.
  - Forward estimates will take years to mature; initial rounds will contain mistakes and inconsistencies and require ongoing reassessment and interaction with line agencies.
- Practical challenges and methodological needs
  - Challenges for budget departments include:
    - Providing budget teams with a basic methodology for preparing forward estimates and defining the concept of no policy change.
    - Addressing technical issues for investments, the wage bill and transfers to other agencies.
    - Verifying the first round of estimates and improving updates in future rounds.
    - Developing supporting tools, such as new policy proposals and spending reviews, to strengthen medium-term budgeting.
- Basic methodology steps
  - Steps focus on understanding the existing budget, applying medium-term cost drivers, aggregating forward estimates and summarizing overall sources of variation.
  - Methodology should be agreed between the MoF and line ministries because forward estimates form the basis of future budget allocations.

*Source: cr17170 - 48. The budget also includes up to 0.2 percent of the budget for general contingencies*

### Annex 4 includes a detailed

### cr17170 - Annex 4 includes a detailed

### Defining no-policy-change estimates and a new policy approval process
- Baseline requires explicit definition of existing policy; State Budget Department, working with Expenditure Policy Department, should define the “No Policy Change” baseline.
- Example definition: The level of spending that will continue to occur over the next three years in the absence of any new or amended laws, decisions by the CoM or approvals by the Minister of Finance.
- Components of the example no-policy-change baseline:
  - Fixed spending within the budget: 75 percent of spending.
  - Semi-fixed spending such as the wage bill and other contractual or policy commitments currently funded: a further 12 percent.
  - Earmarked reserves for ongoing social benefit programs: included.
  - Flexible spending: the remaining 13 percent of spending; included in the baseline only if explicit commitment to the spending has previously been made.
- Dispute resolution: disagreements between budget teams and line agencies should be elevated to a senior MoF official or Under-Secretary as ultimate technical arbiter (kept within the civil service).
- New policy decisions must explicitly state what is ongoing spending; defined within the policy costing in the RIA and the cabinet/legal or budget decision authorizing the new spending.

### Level on which to form estimates
- Current budget classification (mix of functional, organizational and economic classifications) can be used despite fragmentation; programmatic structure is currently low-use and not recommended for the first round.
- Use the 84 budget “parts” as the practical basis for forward estimates, focusing on largest areas.
- Key parts and indicative current expenditure or features:
  - Social Insurance (PLN54 billion): projected deficit based on ZUS’s scrutinized forecasts consistent with MoF macroeconomic and demographic projections.
  - Transfers and subventions to Local Government (PLN53 billion): transfers via revenue-sharing formula of personal and corporate income tax; subventions principally related to education spending with weak link to revenue sharing rule.
  - Regional Governors (Voivods) (PLN39 billion): spending (mostly on family, new child benefits) usually exceeds budgeted amount by around 30 percent due to earmarked reserves distributed over the year.
  - Social benefit expenditures: project based on target population and CPI/wage parameters.
  - Miscellaneous spending: either excluded from baseline, or held constant as a share of GDP, depending on nature.
  - National Defense (PLN35 billion): initially use stated policy intent of funding equivalent to 2 percent of GDP; future estimates to be bottom-up by military agency to align with 2 percent of GDP target.
  - Debt Servicing (PLN32 billion): provided directly by the Public Debt Department.
  - Earmarked Reserve (PLN22 billion): requires further internal discussion.
  - Internal Affairs (PLN20 billion): split between police and other spending areas.
- Estimation approach:
  - Prepare most estimates at entire part level; disaggregate only when radically different spending types exist within a part.
  - Split forecasts between departmental expenses (economic basis: wages and salaries, goods and services; agency overheads) and administered expenses (entitlements and transfers).
  - Some parts will include both departmental and administered expenses requiring separate estimation.
- Planned aggregation:
  - Reform intends to aggregate the 84 parts into 20 ‘Spending Areas’ (broadly around Ministerial portfolios) as defined in the “Assumptions to Budget System Reforms” paper.
  - Aggregation should be jointly produced by State Budget and Expenditure Policy Departments and carefully explained to the CoM.

### Administered Programs versus Agency Overheads (Box 6)
- Departmental expenses: day-to-day operations and program support (agency overheads, salaries, property rental, goods and services used to manage administered programs).
- Administered expenses: costs of delivering programs (benefit payments, transfers to local government), usually defined in law and not at discretion of delivering agency (e.g., unemployment benefits, per capita education funding).
- In forward estimates, departmental and administered expenses are usually estimated separately and then aggregated.
- Not all parts have both types: e.g., transfers to local government are purely administered; MoF often only departmental expenses.

### Investment spending
- Challenges: multi-annual decisions, unspecified annual profiles, frequent re-profiling, cost changes, implementation delays, and defining existing policy to include in baseline.
- Capital expenditure tends to trail off in outer years as projects complete, leaving room for new projects.
- Include associated operating and maintenance costs of projects within relevant parts; identify at capital project approval and treat as existing policy for approved projects.
- Context:
  - Majority of Polish budget projects funded via EU funds and co-financing, presented in a multi-annual appendix to the budget.
  - Around PLN20 billion (one percent of GDP) of internally financed capital spending is managed through the State Budget; overall project costs known but no breakdown beyond the current annual year.
- Immediate categorization for forward estimates:
  - Major projects: top ten or twenty projects (likely majority of investment expenditure); delineation based on a de minimis level for minor projects potentially around PLN2 billion.
    - For major projects: request annual project expenditure profiles from agencies, confirm approval basis, aggregate and include as administered expenses.
  - Minor projects/capital purchases: treat current level of spending as baseline and hold steady (nominal, real, or share of agency expenditure), particularly for durable goods treated as departmental expenditure.
- Systems and tracking:
  - Economy Financing Department should set up an investment project tracking system, mirroring or using existing EU-funded project systems.
  - Update tracking each forecasting round for newly approved projects and re-profiling; gradually lower inclusion threshold to increase coverage.

### Wages and salaries
- Compensation of civil servants is a large share of expenditure and uncertain in direction.
- Keeping nominal wage bill flat over three years usually understates expenditure (overstates fiscal space); including future wage changes can affect negotiations with unions.
- Initial approach: hold the wage bill flat in nominal terms within forward estimates while providing wage alternative options to the CoM as a lever to adjust expenditure levels; workable initially but not sustainable long-term.
- Usual method: apply a standard wage and employment growth index linked to macro parameters uniformly to civil service employment expenditures (e.g., average of inflation and minimum/average wage growth); treat as baseline (not an entitlement), with deviations treated as policy changes.
- Process could be developed and agreed by the CoM over the coming eight-month budget process.

### Transfers to other units
- Transfers to other units constitute 54 percent of the State Budget (main transfers: social security and local government).
- Consistency across units and sectors is essential when consolidating State Budget with General Government spending ceilings.
- Three main forms of transfers and estimation approaches:
  - Formula driven transfers: e.g., grants to local governments via formula; can be related to macroeconomic or revenue forecast parameters. Initially base on models used by Macroeconomic Policy Department.
  - Gap filling transfers: e.g., social security where government ensures sufficient funds to meet legislated payments; require reliable forecasts of entities’ finances (revenues, expenditures, deficits, use of reserves). Use projections by ZUS, scrutinized by Macroeconomic Policy Department; defense expenditure may be allowed within 2 percent of GDP ceiling initially but should be refined.
  - Fixed transfers: fixed amounts often for specific purposes; inclusion in no-policy-change baseline requires case-by-case assessment (discretionary vs fixed by law vs multi-year agreements). Initial approach: identify and rank fixed payments by size; assess largest to determine inclusion in baseline; assume smaller numerous payments remain within baseline and assess them over next eight months.

### Verifying and improving the forward estimates
- Expect initial forward estimates to be imprecise; subsequent rounds will refine models and inputs. Once forecasts become actuals (noted: as will occur in March 2018), assess forecast errors to learn and correct models.
- Cross checks to verify accuracy:
  - Compare aggregated State Budget expenditure estimates to latest top-down State Budget expenditure forecasts from Macroeconomic Policy Department and relevant budget departments.
  - Check plausibility against macro parameters: implied government expenditure as a share of GDP and in real terms; component shifts (capital vs current); wage growth consistency with government policy; identify large spending increases/decreases.
  - Identify big shifts of expenditure to determine intentionality or oversight, and assess expirations of spending that could increase flexible share in outer years.
  - At each Part level, compare forward estimates to multi-annual financial plans (program bids) provided by agencies in early February; program bids are historically optimistic but provide cross checks and flag potential agency challenges.
  - Prepare backward-looking analysis of ministries’ past multi-year program bids and comparison of appropriations and execution in previous years to assess realism of bids.
- Leverage existing MoF expertise:
  - Macroeconomic Policy Department has produced expenditure forecasts for almost a decade; budget departments should draw on this expertise.
  - Staff from Macroeconomic Policy Department could work with budget department teams over the next 8 weeks to prepare initial set and undertake plausibility checks.

### Updating forward estimates
- Key practices to facilitate rolling forward:
  - Identify key parameters that evolve with macro forecasts; set models up for easy updates and record impact as parameter changes.
  - Accept initial model simplicity and set a process for scrutiny, vetting, and improvement of model refinements; technical improvements must be approved by both MoF and line agencies.
- Five-step process for updating in future forecast rounds:
  - Rolling estimates over so that T+1 becomes the budget year and a new T+2 is added; timing usually at the budgeting process start so each Budget shows a new T+2 year; adjust previous budget year as estimates become actuals.
  - Update budget year estimates for execution actuals based on outturns once budget year is complete, or updated forecasts mid-year; exclude one-off deviations between appropriation and budget year forecast when changing bases.
  - Update macroeconomic parameters from Macroeconomic Policy Department, enter into forward estimates models, and record spending variation as effect of parameter changes.
  - Include new policy decisions taken since previous rounds only if policy approval explicitly provided via CoM decision or MoF-line agency agreement; costings must be consistent with RIA; such new policies are thereafter included in the baseline.
  - Record technical updates to forward estimates models and their impact on overall expenditure; technical updates can occur between forecasting rounds and should be agreed between line agencies and MoF.

*Annex 4 — process for producing forward estimates (excerpts).*

### 92. Each step of this process should be recorded, and provided in a reconciliation table

### 92. Each step of this process should be recorded, and provided in a reconciliation table

### Reconciliation and transparency
- Each step of the forward estimates and forecasting process should be recorded and provided in a reconciliation table explaining the variations in expenditure level between the two forecasts (Section IV, Table 6).
- Purpose:
  - Provide scrutiny, accountability and assurance that all policy decisions are reflected in both the budget and medium-term expenditure forecasts.
  - Many countries provide a table of policy changes included within the budget documentation.

### B. New Policy Proposals — Concept within the forward estimates framework
- Medium-term expenditure costing for all measures and policy proposals is a key element of MTBFs.
- Roles and benefits:
  - Requires analysis of longer-term impacts of policies.
  - Acts as a discipline against agreeing to policies without acknowledging costs that may grow significantly over time, potentially producing unsustainable fiscal policies.
  - Demonstrates impact of policy changes against baseline expenditure projections to meet fiscal rules.
  - Once aggregated, MoF can calculate available fiscal space to guide line ministries in prioritizing spending requests.

### Scope of costing
- Costing should be prepared for:
  - All new policy proposals both within and outside the budget approval process.
  - Changes to existing policies.
  - Alterations to eligibility criteria or assistance rates of existing transfer or social security programs.

### Contents of policy costing
- Policy costing should provide:
  - Financial costing of new policies over the three-year period.
  - Identification of different components of expenditure (for example wages and salaries and capital expenditure).
  - Revenue impacts (for instance due to tax expenditures, or increased own revenues).
  - If costs are likely to differ significantly beyond the medium-term, a statement about the financial impact of the measure over the longer term.
- Additional information required for assessment:
  - Objectives of the policy and the problem it addresses.
  - Expected impact of the policy.
  - Distributional impacts on different groups/income levels.
  - Any necessary legal or institutional changes.
  - Impacts on other layers of government.
  - For investment projects: results of cost benefit analyses.
  - Regulatory Impact Assessments (RIAs) currently provide useful information on new policy proposals.

### Methodology and assumptions for costing
- Costing preparation should follow the same basis as baseline expenditure forecasts (See Box 7 for an example).
- Typical methodology:
  - Basic price multiplied by quantity approach.
  - Allowance for factors to vary over time according to well identified parameters.
  - If fixed cash costing is provided, ensure amount is sufficient for designated purpose.
- Behavioral impacts:
  - Costing should consider behavioral impacts (example: a first home buyers allowance increasing number of first home buyers).
  - Behavioral impacts should be identified and assumptions specified clearly.

### Box 7 — A Medium-Term Costing Process: Airport Security (illustrative)
- Steps to cost a new passenger screening process at airports:
  1. Determine number of airports affected that lack the requisite screening process.
  2. Determine price and installation cost of each screening equipment required for each step:
     - explosive detection system for baggage,
     - explosive trace detectors and walkthrough metal detectors for passengers,
     - X-ray machines for passenger carry-on baggage.
  3. Assess cost of operating the equipment including:
     - costs of employees with technical expertise (based on number and type of employees, salary rates, and time required),
     - consultative forums between administering agency and airports (travel costs, meeting expenses),
     - ongoing audit and compliance activities (number of officers, salary rates, number of visits, time required).
  4. Define time profile of expenses:
     - well-defined upfront capital expenditure,
     - depreciation/replacement costs over the medium-term,
     - ongoing operational costs changing over time due to parameter variations in input costs (e.g., salary rates),
     - increased volume of screening activities over time as passenger numbers increase, requiring more operational staff.
  5. Total cost profile over the medium-term should:
     - take account of all costs,
     - identify each major cost center separately,
     - be understood and verified by Ministry of Finance officials.
  6. Key parameters for each costing element should be identified and incorporated so parameter changes flow through to policy costing when incorporated into the baseline estimate.

### C. Spending Reviews — Role in the forward estimates process
- Risk: Forward estimates can create incrementalism by treating baseline spending as automatically continuing, leading to insufficient scrutiny of existing spending.
- Purpose of spending reviews: periodically assess quality of existing spending.
- Approaches observed:
  - Comprehensive spending reviews (e.g., UK and France): assess all spending every four or five years; resource intensive (teams of 20 to 30 people over 9 months).
  - Rolling focused reviews (e.g., Australia, Canada, Korea): focus on one or two areas at a time, rolling through all spending over a longer period; spreads resource demands.
  - Annual comprehensive reviews (zero based budgeting) do not work due to continuous excessive resource demands.

### Existing practice in Poland
- Poland has conducted five spending reviews focusing on:
  - (i) road programs supported by the National Road Fund;
  - (ii) subsidies for seeds;
  - (iii) supporting low income families;
  - (iv) housing policy;
  - (v) the flexibility in budgetary expenditure.
- A methodology has been developed to support reviews, but teams have made limited progress in identifying savings; impact on current consolidation efforts has been small.

### Missing elements for effective spending reviews in Poland
- Elements currently not present but required:
  - A broad-based staffing of review team.
  - Clearly defined saving targets.
  - Clearly defined links between spending reviews and the budget process.

### Effectiveness caveat
- Even successful spending reviews tend to deliver only around a third to a half of intended savings targets, as savings options are often disputed, overoptimistic and rolled back through the budget process.
- Spending reviews are valuable, but do not replace ongoing rigorous scrutiny of ministerial spending by the Ministry of Finance.

### D. Recommendations
- Forward estimates methodology — Immediate (First 8 weeks)
  - 5.1 Define a standard approach to producing forward estimates for budget teams to use over the next eight weeks, based on the methodology presented in Section VA, specifying:
    - The conceptual model.
    - The basis upon which estimates will be built (spending areas, parts, sub-parts where necessary, departmental and administered programs).
    - A definition of no-policy change, and a process for defining this where it is not clear.
  - 5.2 The Expenditure Policy Department and Macroeconomic Policy Department should work together to verify and assess the first initial bottom-up forward spending estimates.
- Forward estimates methodology — Short-Term (Next 8 months)
  - 5.3 Set up a process for agreeing on forward estimate baseline models with line agencies.
  - 5.4 Extend the use of RIAs to all new policy decisions considered through the budget process.
- Forward estimates methodology — Longer-Term (Next 18 months and beyond)
  - 5.5 Continue to refine and improve forward estimates, while reconciling each estimate to the previous round by identifying changes due to parameter changes, policy decisions and technical adjustments.

- Addressing critical technical issues — Immediate (First 8 weeks)
  - 5.6 Investment projects: Split State Budget investment expenditure between major and minor projects, seek three-year spending profiles of major projects from implementing agencies and define which investments shall be included within the no-policy-change baseline.
  - 5.7 Wages: Maintain the current approach of assuming flat nominal wage bill projections, with options and implications of alternative wage growth decisions provided to CoM.
  - 5.8 Transfers: Categorize, forecast, and consolidate transfers to other entities in the general government based on existing models.
- Addressing critical technical issues — Short-Term (Next 8 months)
  - 5.9 Investment projects: Develop an investment project tracking system for large projects financed through the State budget, mirroring that used for EU funds.
  - 6.0 Wages: Develop a proposal for treating the wage bill in the forward estimates to be approved by the CoM.

- Spending Reviews — Immediate (First 8 weeks)
  - 6.1 Implement current regulation and establish a Spending Review Steering Committee that oversees working groups tasked with conducting spending reviews, with representatives from the MoF (budget departments, expenditure policy department), line ministries and agencies, Chancellery of the Prime Minister and external experts.
- Spending Reviews — Short-Term (Next 8 months)
  - 6.2 Establish clear top-down targets for the expenditure savings to be achieved through each spending review.
- Spending Reviews — Longer-Term (Next 18 months and beyond)
  - 6.3 Link the outputs of the spending review to the budget process, by identifying measures for new spending initiatives and savings for each line of the budget to meet targets.

### Annexes (as noted in source)
- Annex 1: Coordination Arrangements on Fiscal/Budget Issues in EU Member States — examples from France, the Netherlands, and the United Kingdom illustrating formal and informal coordination mechanisms for MTBF, budget preparation and macro-fiscal forecasting.
- Annex 2: Multi-year Commitments Mechanisms — tabulated country practices (coverage, specificity, binding/indicative, time horizon in Years, discipline, % of CG spending, rolling or fixed, frequency of update) including entries for Sweden, Finland, Netherlands, United Kingdom, France, Austria, Australia.
- Annex 3: Carryover Practices in Countries with Established MTBFs.
- Annex 4: Basic Methodology for Preparing Forward Estimates — major procedural steps, trade-offs between complexity and tractability, need for early agreement between MoF and line ministries; Table 1: Major steps in Producing the Forward Estimates.
- Key methodological points from Annex 4:
  - Step 1: Understand current spending base and allocate against key spending areas within each Ministry or Part.
  - Step 2: Identify current level of service delivery or the no-policy change baseline (example for education: maintaining enrolment rates vs. policy-induced increases).

*Source: cr17170 - 92. Each step of this process should be recorded, and provided in a reconciliation table*

### 7. The third step is identifying the major spending areas within the spending units.

### 7. The third step is identifying the major spending areas within the spending units.

### Identifying major spending areas
- Spending units are often set up on an economic basis, such as salaries and wages; goods and services; transfers.
- Within spending units, break down major areas into key elements (example: for education, separate goods and services into textbooks, food and utilities).
- Usually there will be an “other” category. As a general rule, this should make up no more than 10 percent of total spending within the unit.
- Each spending area within the spending unit will be modeled separately.

### Steps in the medium-term expenditure estimating process (summary of process points 1–3)
- 1. Understand the Existing Budget
  - Identify Current Level of Service Delivery
  - Separate the Ministry into Major Spending Units, and spending areas within those units
  - Identify One-off Expenditures
- 2. Understand and apply medium-term cost drivers
  - Identify and Apply Price and Volume cost drivers
  - Link Price and Volume Parameters to macroeconomic and demographic variable
  - Grow base spending by price and volume parameters
- 3. Aggregate for the Ministry and Summarize
  - Aggregate for the spending units then Ministry
  - Aggregate ministry wide parameter variations

### One-off expenditures (step 4)
- Identify any one-off expenditures that need to be taken out to adjust the base.
- Examples to exclude from the base if not expected to recur next year: the triennial PISA Tests Xxx, upgrade in computers and printers.
- Account for one-offs that need to be included in specific years over the medium term (classic examples: elections and census collections).

### Price parameters (steps 5–6)
- Identify price parameters that will affect spending (factors such as wages, inflation, specific input factor prices such as fuel and utilities).
- Analyze relationships between these factors and expenditure growth; changes will not always be one for one.
- Link price parameters to relevant macroeconomic parameter forecasts.
  - Often price parameters will simply be linked to the overall inflation forecast.
  - Some specific parameters (for example, fuel) may differ from overall inflation and be driven by world oil prices.
- General rule: keep price-parameter detail as simple as possible; only use unique parameters if large differences with overall inflation occur.
- As parameters are identified, communicate requirements to the units preparing macroeconomic and fiscal forecasts (central bank and Ministry of Finance) to confirm availability and methodology.
  - Example constraint: CPI forecasts may only be prepared for the overall CPI, but forward estimates may require fuel price CPI, requiring development of a methodology for lower-level CPI series.

### Volume parameters (step 6 continuation)
- Identify changes in volume parameters that drive the cost of providing services.
- Factors affecting service volumes over the medium term:
  - Demographic change (example: population of school-age people).
  - Policy changes (example: increased capital expenditures requiring higher maintenance once projects come on line).
  - Macroeconomic factors (example: higher unemployment rate requiring higher unemployment benefits).
- Link volume parameters to macroeconomic and demographic forecasts prepared mainly by ZUS and the Statistical Office (GUS) and projections prepared by the Macroeconomic Policy Department.
- The range of macroeconomic and fiscal forecasts provided by the Macroeconomic Policy Department may need to be increased to provide required parameter inputs.

### Applying parameters to produce expenditure forecasts (step 7)
- Apply overall price and volume parameters to the adjusted base expenditure to yield an expenditure forecast for each spending area.
- Calculation method: multiply the adjusted base (accounting for one-off expenditures) by both the overall price and volume parameters.
- Note interaction between price and volume: price variations are applied to volume variations.
- Example interaction (footnote):
  - For a spending base of 100, a 10 percent increase in both price and volume will lead to an expenditure forecast of 121, greater than if price and volumes were applied individually, which would lead to a forecast of 120. This difference is described as the interaction term, and needs to be accounted for when reconciling the change in expenditure between the base and BY+1.

### Aggregation and reconciliation (step 14)
- Aggregate expenditure forecasts for individual spending areas within a spending unit to give forward estimates for the spending unit.
- Sum spending units to produce overall forward estimates for the Ministry.
- Aggregate across ministries to yield the budget forward estimate.
- Price and volume parameter variations should be used to provide a full reconciliation of changes in the forward estimates (Appendix Table 1 referenced).

### Modeling, storage, and record-keeping (step 15)
- Estimates models can be prepared using simple excel files rather than a new IT system.
  - Advantages: flexibility and fluidity while models are refined.
- An aggregation file with appropriate controls is required.
- As the process matures, introduce a basic recording system to automatically archive and record changes.

*Fiscal Affairs Department  
International Monetary Fund  
700 19th Street NW  
Washington, DC 20431  
USA  
http://www.imf.org/capacitydevelopment*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17170.pdf_