## 1ukrea2019010 ## Source details **Canonical URL:** [1ukrea2019010](https://www.imf.org/-/media/files/publications/cr/2019/1ukrea2019010.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ukrea2019010.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ukrea2019010.pdf.json) --- ### PREFACE AND EXECUTIVE SUMMARY - IMF FAD mission visited Kiev, Ukraine during November 28 to December 10, 2018 to assist with strengthening budget preparation and fiscal risk analysis. - FAD mission team: Amanda Sayegh, Michelle Stone, Julien Dubertret, Martin Johnson. - Key executive summary points: - Strategic planning and a Medium-term Budget Framework (MTBF) are core components of Ukraine’s Public Financial Management (PFM) reform strategy. - A pilot MTBF conducted in 2017 formed the basis for amendments to the Budget Code in December 2018, establishing MTBF as the basis for budget preparation and providing legal basis for related reforms, including spending reviews and fiscal risk monitoring/management. - Approval of Budget Code amendments enabled the first full-fledged MTBF to be conducted in 2019. - The Budget Declaration under the pilot MTBF contained important MTBF elements and should be built on in 2019; the 2020–22 Budget Declaration should include: - Detailed explanation of main drivers of medium-term macroeconomic and fiscal projections. - More detailed breakdown of medium-term expenditure projections. - Explanation of expenditure ceiling allocations. - Information on objectives, programs and performance for key spending units. - MTBF roll-out requires substantial coordination and capacity building; MoF should urgently develop updated instructions and templates to line ministries and local governments. - Fiscal Risk Management Division (FRMD) operational since 2017 with primary focus to date on SOE-related fiscal risks; responsibilities for monitoring other sources of fiscal risks are fragmented. - Fiscal Risk Statement published in the most recent year represents significant advancement and should be expanded to include quantitative macro-fiscal and public debt risk analysis, enhanced disclosure of financial sector exposures, and more comprehensive SOE-related analysis. ### MAJOR RECOMMENDATIONS (summary from Table 0.1) - Strengthening the Budget Preparation Process: - 1.1 Review the appropriateness of the budget calendar after the first year of the MTBF. - 1.2 Finalize and issue new budget instructions and templates to KSUs. - 1.3 Develop a forward baseline estimates methodology. - 1.4 Issue guidance and templates for local governments and conduct training. - 1.5 Improve content of the Budget Declaration. - Supporting an Effective MTBF: - 2.1 Clearly define conditions for technical adjustments in the Budget Declaration. - 2.2 Establish a central budget margin and procedures for multi-year commitments. - 2.3 Strengthen strategic planning to provide a stronger basis for the MTBF. - 2.4 Prepare guidelines for the conduct of spending reviews and launch the second round of reviews. - Enhancing Fiscal Risk Analysis and Disclosure: - 3.1 Establish clear responsibilities for fiscal risk assessment in CMU resolution. - 3.2 Improve disclosure of fiscal risks in the annual fiscal risk statement. ### STRENGTHENING BUDGET FORMULATION — STRATEGIC TWO-STAGE PROCESS - Two-stage design: - First stage: "February to June" — focus on determination of new policy proposals given the available fiscal envelop. - Second stage: "June to September" — focus on detailed annual budget preparation and development of the draft budget law. - Key timing and statutory deadlines (BCU-mandated): - Preliminary macroeconomic projections submitted by "March 1" and finalized before "April 15". - Draft Budget Declaration submitted before "May 15" to the CMU, which shall approve it before "June 1" for transmission to Parliament by "June 5". - MoF proposed selected timeline entries (verbatim): - "February 15" MoF receives proposals from KSU - "March 1" MoF receives revenue, tentative macro-projections, and social indicators - "March 25" Finance Minister presents proposed budget indicators including aggregate expenditure ceiling to Ministers who discuss KSU 3yr ceilings and prioritization - "April 5" MoF informs the KSU of their indicative ceilings - "April 10" KSUs return information on their targets and expected results of activity - "April 15" MoF receives final revenues and macro-projections - "April 20" MoF submits to CMU targets and expected results of activity - "Apr 21 – May 1" CMU conducts meetings for final harmonization and prioritization - "May 15" MoF submits draft Budget Declaration to CMU - "June 1" CMU approves macro-projections and Draft Budget Declaration - "June 5" CMU submits draft Budget Declaration to Parliament - "June 30" The Parliament makes its decision on the Budget Declaration - "September 15" Deadline for CMU to approve and submit draft state budget law to the Parliament - "October 20" Deadline for consideration of draft budget in the first reading - "November 3" Revised budget submitted to Parliament - "November 25" Deadline for consideration of draft budget in second reading - "December 1" Deadline for adoption of draft Budget - "January 1" 2020 budget year commences - Calendar evaluation and issues: - If rigorously implemented, the revised calendar should improve MTBF preparation; the "June 5" submission deadline is demanding but achievable. - Practical constraint: preliminary parameters updated after KSUs prepare proposals may limit strategic phase effectiveness. - Specific concerns and suggested changes: - Replace "April 5" communication of ceilings by an assessment of agreements/disagreements. - Consider shifting finalization of expenditure ceilings closer to "May 15". - Consider shifting KSU submission deadline ("February 15") later by two to three weeks. - Consider establishing an additional macroeconomic update around "end August" to incorporate into Parliamentary debate. ### BASELINE, FORWARD ESTIMATES, AND NEW POLICY PROPOSALS — DEFINITIONS AND IMPLEMENTATION - Definitions proposed (Box 1.1): - Baseline estimates – the cost of existing services based on actual expenditure from the most recent complete budget year, after having accounted for one-off and other non-linear expenditure not representative of current service delivery commitments. - Forward baseline estimates – the future cost of existing government services derived by applying agreed cost driver (both prices and volume) adjustments to baseline estimates. - New policy estimates – the future cost of new policy initiatives distinct from and additional to forward estimates of the cost for existing government services. - Current gaps: - No formal distinction between baselines and new policy proposals in KSU submissions; MoF has not formally calculated fiscal envelope for new policies. - Many KSUs have limited capability to develop robust baselines; short- to medium-term approach: maintain centralized MoF adjustments while building KSU capacity. - MoF template and instruction priorities: - New instructions and tables should allow presentation of three-year budget request within one table, highlight deviations from current MTBF, and separate baseline/forward estimates from new policy requests. - Instructions should set degree of detail, require justifications for deviations, and ensure strong financial linking across years. - Development path: - MoF could prepare baseline forward estimates in the first year; from the second year ("2020") KSUs should increasingly prepare their own estimates with training and models. ### MTBF DESIGN: EXPENDITURE LIMITS, TECHNICAL ADJUSTMENTS, MULTI-YEAR COMMITMENTS - BCU establishes framework for expenditure limits and program budgeting, but design choices remain: - Need to clearly define technical adjustments that change expenditure limits (e.g., exchange rate, inflation, interest rates). - Circumstances allowing adjustment of expenditure limits should be defined ex ante and limited to a narrow set of circumstances. - Create a central margin to accommodate budget volatility for urgent, unavoidable and unforeseeable expenditure pressures; margin should be tightly controlled, centrally managed and transparently reported. - Multi-year commitments and carryovers: - Current prohibition on multi-annual commitments undermines medium-term planning and capital projects. - Recommendation: review arrangements and consider procedures for multi-year commitments for capital projects, up to a limit and subject to MoF approval. - Trade-offs for allowing carryovers: benefits in efficiency vs risks of slower execution and budget volatility; most mature MTBFs limit carryovers (see Annex V examples). - First step: establish procedures for multi-year commitments and commitment controls before widespread adoption. ### MANAGING BUDGET VOLATILITY — MARGINS AND CONTINGENCY PRACTICES - International approaches considered (advantages/disadvantages): - Conservative Forecasts: provide buffer but can undermine credibility and lack transparency. - Central margin/contingency Reserves: transparent and centrally managed but requires tight access criteria. - Margins in KSU ceilings: allow flexibility for KSUs but risk full spend and reduce planning incentives. - Exclusion of certain spending (e.g., debt interest) from ceilings: provides flexibility but can increase volatility. - Recommended initial approach: - A central contingency margin, centrally managed by MoF, with tight controls and clearly defined drawdown purposes. - Size guidance from other countries: - Unallocated expenditure reserves tend to vary between 1 to 3 percent of budgeted expenditure in years 2 and 3. - Annex IV explicit ranges (verbatim): - Canada: Contingency reserve of 1.5% to 2% of total spending; MoF targets a surplus of 0.1% of GDP; Total 3.5% to 4.0%. - United Kingdom: Reserves and margins equal to 0.75% to 1.0% of total expenditure; MoF targets average surplus of 0.2% of GDP; Total 2.5% to 3.0%. - Sweden: Budget margin in expenditure ceiling rising from 1.5% to 3.0% of total spending; Total 1.0% to 3.0%. - Netherlands: Central contingency reserve of 0.1% of total spending; Most recent CA targets structural surplus of 1.0% of GDP; Total 1.1% to 2.0%. - Australia: Conservative bias in forward estimates of 0.5% to 1.5% of expenditure; Total 0.5% to 1.5%. ### INTEGRATING CAPITAL BUDGETING, STRATEGIC PLANNING, AND SPENDING REVIEWS - Capital budgeting: - MTBF provides opportunity to improve capital expenditure efficiency; lack of multi-year budgeting is a significant constraint. - Recommendation to introduce carryovers for capital spending up to a fixed level with MoF approval and prohibit reallocation from capital to other expenditure. - Strategic planning: - Draft strategic planning legislation should strengthen integrated policy-making, strategizing, planning and budgeting. - Components of a top-down MTBF process include baseline, forward estimates, fiscal envelope, and allocation of available fiscal envelope to KSUs. - Fiscal anchors in 2019 Budget Declaration caps: state budget deficit at 2.2 percent of GDP; government debt at 56 percent of GDP; limits guarantees approved over the budget period to an amount equivalent to 3 percent of revenue. - Spending reviews: - Pilot in 2018 limited to five Line Ministries; time constraints and methodological shortcomings limited results (only one final report submitted). - MoF plans larger-scale spending reviews in early 2019 for 2021 Budget incorporation; regular spending reviews entrenched in BCU. - Recommendations for spending reviews include: consensus on objectives, common methodological guidance, high-level ministerial steering committee at start/mid/end, and strong MoF technical leadership. - Suggested ambition level: initially develop two to three options to improve spending efficiency and effectiveness within each ministry. ### FISCAL RISK ANALYSIS, FRMD ROLE, AND FISCAL RISK STATEMENT (FRS) - Mandate and institutional framework: - FRMD role established in MoF regulation (CMU resolution No. 375, amended in 2018). - BCU amendments empower MoF to identify, evaluate and monitor fiscal risks (Art 32.1), develop mitigation measures, collect necessary information, and publish a regular FRS with the draft state budget (Art. 38). - Draft CMU resolution under development should define roles and responsibilities for each government department/agency. - Current focus and progress: - FRMD primary focus on SOE-related fiscal risks; detailed SOE methodology approved by CMU (No. 7 of 2018). - A list of 25 SOEs identified for in-depth analysis; these 25 comprise around 90 percent of total assets of all SOEs assessed. - FRS submitted with 2019 draft budget included qualitative macro risk discussion, maximum exposure from guarantees, SOE assessments, and broader risk discussion. - Recommended FRMD expansions and coordination: - Act as focal point to consolidate fiscal risk analysis, disclosure and management across government. - Provide advice on fiscal risk mitigation measures in collaboration with MEDT and shareholding ministries. - Develop methodological guidance for assessing specific fiscal risks and coordinate quarterly monitoring and annual FRS preparation. - Roles/responsibilities for key risks (high-level summary from Table 3.1): - SOEs: FRMD (primary); MEDT; Shareholding Ministries; SOEs. - Macroeconomic risks: MoED, MoF Strategic Planning Directorate (SPD), MoF Revenue Forecasting Dept. (RFD), FRMD (lead). - Financial sector: NBU, MOF Financial Policy Department. - Debt portfolio and guarantees: Debt Policy Dept., FRMD. - PPPs: MEDT, FRMD. - Local governments: Dept. of Local Budgets. - Long-term fiscal pressures: Pension Fund, SPD, Ministry Social Policy, Ministry of Health. - Environmental risks: State Emergency Service. - Suggested enhancements to the FRS: - Macroeconomic risks: incorporate sensitivity and scenario analysis to illustrate impacts on main fiscal aggregates. - Public debt: include composition of government debt portfolio (share in foreign currency, floating rate debt, average maturity, share maturing in under one year) and sensitivity analysis as capacity allows. - Financial sector: disclose explicit contingent liabilities to Deposit Guarantee Fund, financial soundness indicators, historical payments/recapitalizations. - SOEs: disclose total liabilities, profitability, and risk ratios for 628 entities and especially 25 highest-risk entities; disclose all direct transactions with government and quasi-fiscal activities. - Other risks: include local government liabilities (borrowing and arrears) as share of own source revenues and by major region/city; natural disaster exposures; PPP risks; security-related fiscal costs. - Recommendations (verbatim): - Recommendation 3.1: Establish clear responsibilities and procedures for fiscal risk analysis in a CMU resolution (June 2019). Expand risks covered (include debt portfolio risks); define functions/responsibilities and coordination role for FRMD; review/update methodologies. - Recommendation 3.2: Improve the disclosure and analysis of macroeconomic and specific fiscal risks in the annual FRS. Build on the 2019 FRS by incorporating elements outlined in sub-Section C. (September 2020, and September 2021). ### FORWARD ESTIMATES: PRACTICAL GUIDANCE, SCOPE, AND TECHNICAL ISSUES - Forward estimates characteristics: - Initially "rough forecasts" that "will inevitably contain mistakes, gaps and inconsistencies." - MoF could prepare baseline forward estimates for three years ahead as first step. - Implementation challenges for KSUs (enumerated): - Provide basic methodology and define "no policy change". - Technical issues for investments, wage bill, and transfers. - Verification and iterative improvement of estimates. - Development of supporting tools, costings and spending reviews. - Methodological guidance (high level): - Steps: understand existing budget; apply medium-term cost drivers; aggregate and summarize sources of variation. - Define "No Policy Change" baseline example: spending that will continue over next three years absent any new/amended laws, CMU decisions or MoF approvals; includes fixed and semi-fixed spending and earmarked reserves for ongoing social benefit programs. - Investment spending rules: - Major projects: establish multi-annual profiles and include administered expenses. - Minor projects/capital purchases: treat current level as baseline and hold steady. - Include associated operating and maintenance costs in forward estimates. - Wages approach: - Apply a standard wage and employment growth index linked to macro parameters (e.g., average of inflation and minimum/average wage growth) uniformly to civil service employment expenditures; treat index as baseline but not an entitlement. - Transfers: - Formula driven, gap based, and fixed transfers require different forecasting treatments and verification of beneficiary entities’ finances. - Costing of new policies: - Costing must be prepared for all new policy proposals and changes, providing three-year financial costing, revenue impacts, identification of components (wages, capital), and indication of impacts beyond medium-term if applicable. - Use a basic price multiplied by quantity approach with allowances for time-varying factors; state behavioral assumptions. ### ANNEXES AND SUPPORT MATERIALS (selected highlights) - Revised Budget Calendar selected deadlines and objectives (verbatim entries reproduced under Budget Formulation). - Forward and Baseline Estimates guidance: forward estimates defined as bottom-up forecasts on a no-policy-change basis; benefits include linking annual budgets to medium-term fiscal forecasts. - Annex III: Transforming the Budget Declaration into Fiscal Strategy Statement — required elements for Budget Overview, Macroeconomic Outlook, Fiscal Strategy and Medium-term Fiscal Projections, Medium-term Expenditure Ceilings, Summary Discussion of Fiscal Risks, and Annexes (distribution of state capital investments; relationship with local budgets). - Annex V: Carryover practices across countries; examples show variation in approvals and limits (e.g., France up to 3% of budget; Sweden up to 3% of budget; Netherlands up to 1%). - Annex VI: Potential structure for sector strategy statements and list of draft law envisaged strategy documents (including Ukraine Development Strategy (15 years), Strategic Plans of Central Executive Authorities (5 years)). *IMF Fiscal Affairs Department mission report: "PREFACE" and "EXECUTIVE SUMMARY" (extract), November 28–December 10, 2018.* ### PREFACE _________________________________________________________________________________________ 5 ### 1ukrea2019010 - PREFACE _________________________________________________________________________________________ 5 ### PREFACE - IMF FAD mission visited Kiev, Ukraine during November 28 to December 10, 2018 to assist with strengthening budget preparation and fiscal risk analysis. - FAD mission team: Amanda Sayegh, Michelle Stone, Julien Dubertret, Martin Johnson. - Meetings held with: - Ms. Oksana Markarova, Minister of Finance; Mr. Vladimir Lozytsky, State Budget Director; Ms. Oleksandra Betliy, Chief Economist; Mr. Oleksiy Zhak, Director General for Strategic Planning; Mr. Andrey Savenko, Head of the Fiscal Risk Management Division; Mr. Romaniuk Yuri, Director of the Department of Budget Revenue Projections and Accounting Methodology; Mr. Yaroslavl Tashuta, Head of Industrial Production Finances Division; Ms. Olena Machuluna, Deputy Director, Department of Local Budgets; Mr. Denys Khrystoforov, Deputy Director, Debt Policy Department. - Mr. Gennadii Dyki, Mayor of Bila Tservka City and staff; Mr. Pavlo Kovtoniuk, Deputy Minister and Ms. Iryna Lytovchenko, Director General for Strategic Planning and European Integration of the Ministry of Health; Ms. Valeria Voytenko, Deputy Director, Economic Strategy and Macroeconomic Forecasting Department and Mr. Pavlo Onischenko, Head of the Unit for Economic Development in the Ministry of Economic Development and Trade; senior officials from the Ministry of Education; Mr. Vasyl Amelchenko, Deputy Chair of the Budget Committee of the Verkovna Rada and members of the Budget Committee Secretariat. - Representatives from a coalition of civil society organizations and experts, the European Union Delegation to Ukraine, and other PFM capacity development providers. - Mission acknowledgements: IMF Office staff support, especially Mr. Ihor Shpak; interpretation and translation by Mr. Serhiy Kolesnyk and Ms. Lisa Snegireva. ### EXECUTIVE SUMMARY - Strategic planning and a Medium-term Budget Framework (MTBF) are core components of Ukraine’s Public Financial Management (PFM) reform strategy. - A pilot MTBF conducted in 2017 formed the basis for amendments to the Budget Code in December 2018, establishing MTBF as the basis for budget preparation and providing legal basis for related reforms, including spending reviews and fiscal risk monitoring/management. - Key points on strengthening the Budget Preparation Process: - Approval of Budget Code amendments enabled the first full-fledged MTBF to be conducted in 2019. - A detailed calendar prepared by the MoF is based on largely sound principles but has aspects warranting review: - Notification of macroeconomic parameters after line ministries develop baseline estimates may constrain strategic planning consistency and effectiveness. - Absence of a second update of macroeconomic parameters prior to submitting the draft budget to the Verkhovna Rada may reduce budget reliability and introduce risks during parliamentary procedure. - Timing for notification and finalization of expenditure ceilings could be extended to free up space earlier for budget proposal preparation. - Recommendation: review the budget calendar after the first year of the MTBF to assess efficacy. - Budget Declaration under the pilot MTBF: - Contained important MTBF elements; should be built on in 2019 to enhance transparency and support fiscal policy-making. - The 2020–22 Budget Declaration should include: - Detailed explanation of main drivers of medium-term macroeconomic and fiscal projections. - More detailed breakdown of medium-term expenditure projections. - Explanation of expenditure ceiling allocations. - Information on objectives, programs and performance for key spending units. - Subsequent statements should include reconciliation of fiscal forecasts and medium-term expenditure limits from those presented in the previous year. - MTBF roll-out: - Requires substantial coordination and capacity building. - MoF should urgently develop updated instructions and templates to line ministries and local governments. - As line ministry capacity develops, they should take increasing responsibility for managing medium-term budgets. - Supporting an Effective MTBF: - Some key design elements remain to be finalized despite Budget Code amendments. - To underpin credibility, circumstances allowing adjustment of expenditure limits should be clearly defined ex ante and limited to a narrow set of circumstances. - A central margin should be established to accommodate budget volatility and meet costs of genuinely urgent, unavoidable and unforeseeable expenditure pressures. - Margin should be tightly controlled, centrally managed and transparently reported. - Multi-annual commitment rules: - Multi-annual commitments are currently prohibited; appropriations lapse at year-end, undermining medium-term planning and spending efficiency, especially for capital projects. - Recommendation: review arrangements and consider procedures for multi-year commitments for capital projects, up to a limit and subject to MoF approval. - Strategic planning needs strengthening to provide a stronger basis for integrated policy-making, strategizing, planning and budgeting. - Plans for a program of spending reviews are commendable; success requires strong MoF leadership and methodological guidelines. - Enhancing Fiscal Risk Analysis and Disclosure: - Legal basis and institutional architecture within MoF for fiscal risk monitoring/management is firmly established. - Good progress on SOE fiscal risk analysis; efforts underway to broaden scope to other fiscal risks which will require significant capacity building and cross-department collaboration. - Fiscal Risk Management Division (FRMD) operational since 2017: - Primary focus to date on SOE-related fiscal risks. - Responsibilities for monitoring other sources of fiscal risks are fragmented across government. - FRMD should consolidate fiscal risk information to ensure a complete picture of aggregate fiscal risk exposures. - Responsibilities should be clearly defined in a CMU resolution and supported by development of risk assessment methodologies where absent. - FRMD should build on SOE work by developing mitigating strategies in collaboration with relevant departments. - Fiscal Risk Statement published this year represents significant advancement in disclosure: - Should be expanded to include quantitative analysis of macro-fiscal and public debt risks, enhanced disclosure of financial sector exposures, and more comprehensive analysis of SOE-related fiscal risks. - Table 0.1: Summary of Recommendations and indicative timeframe (Next 6 months; July–Dec 2019; 2020) listed across three areas: - Strengthening the Budget Preparation Process: - 1.1 Review the appropriateness of the budget calendar after the first year of the MTBF - 1.2 Finalize and issue new budget instructions and templates to KSUs - 1.3 Develop a forward baseline estimates methodology - 1.4 Issue guidance and templates for local governments and conduct training - 1.5 Improve content of the Budget Declaration - Supporting an Effective MTBF: - 2.1 Clearly define conditions for technical adjustments in the Budget Declaration - 2.2 Establish a central budget margin and procedures for multi-year commitments - 2.3 Strengthen strategic planning to provide a stronger basis for the MTBF - 2.4 Prepare guidelines for the conduct of spending reviews and launch the second round of reviews - Enhancing Fiscal Risk Analysis and Disclosure: - 3.1 Establish clear responsibilities for fiscal risk assessment in CMU resolution - 3.2 Improve disclosure of fiscal risks in the annual fiscal risk statement ### I. STRENGTHENING BUDGET FORMULATION - A. Progress to Date - 1. Government has made significant progress implementing an MTBF. A pilot in 2017 formed basis for BCU amendments passed by the Verkhovna Rada in December 2018. An updated budget calendar reflects the amendments. - 2. Pilot MTBF in 2017: Budget Declaration for 2018–2020 was approved by CMU on June 1 and by Parliament in July; it contained many standard MTBF elements but allowed only limited bilateral negotiations between line ministries and MoF. - In 2018, without transitionary legislation, the process digressed: Budget Declaration did not set expenditure ceilings or revenue estimates and was not approved by Parliament; MoF informally shared draft medium-term ceilings with KSUs but process largely reverted to pre-2017 practice. - 3. Legal basis for multi-year budgeting established by BCU amendments adopted December 6, 2018: - Medium-term budgeting placed at core of budget process: yearly multi-annual budget statement established as key outcome (Art. 2) and its content defined (Art. 33 (7)); instituted as framework for annual budgets (Art. 22.5.2); MoF responsibilities asserted (Art. 33 (1-6)). - 4. BCU amendments establish legal basis for related PFM reforms: - Program budgeting enhanced via obligation to establish strategic action plan for each program (Art. 20 (3)) and strengthened role of chief budget managers (Art. 20 (4-6) and 22 (5)). - Clear mandate for monitoring/managing fiscal risks assigned to MoF (Art.32 (1-5)) and requirement to submit a report on fiscal risks with the draft budget (Art. 38). - Regular spending reviews entrenched (Art. 20 (10)). - 5. BCU amendments set main milestones of a revised budget calendar with fixed dates (Art. 33): - Submission of macroeconomic projections and updates: March 1, April 15, May 15. - Budget Declaration process: reception before May 15, approval before June 1, submission to Parliament before June 5. - MoF has sought comment on detailed calendar. - B. Enhancing the Budget Process and Calendar — Strategic Budget Phase - 6. Historically, budget preparation has been largely annual with little strategic resource allocation. KSUs have not participated in a strategic phase; they begin detailed budget preparation in July and August. - Key budget cost driver information required for updating baseline costs has not been available to KSUs until mid-fiscal year. - Absent/weak strategic plans further constrain strategic planning. - 7. Strategic budget allocation in an MTBF requires early establishment of the macroeconomic framework to inform aggregate expenditure ceilings consistent with fiscal rules/targets, enabling KSUs to calculate fiscal costs of current services and MoF to identify resources for new priorities. - 8. Ukraine’s collaborative approach to macro-fiscal framework preparation involves multiple government partners over a three-month period; policy assumptions (minimum wage rates, social protection payments) developed consultatively. Aggregate and KSU expenditure ceilings developed by MoF toward end of process and approved by Cabinet alongside macro framework and key social parameters by June 1. - 9. Strategic phase attempt during pilot MTBF was constrained by compressed timeframes and unchanged timelines for macroeconomic framework generation; institutional arrangements did not clearly distinguish baselines from new policies. *Italic source attribution: IMF Fiscal Affairs Department mission report: "PREFACE" and "EXECUTIVE SUMMARY" (extract), November 28–December 10, 2018.* ### 10. The new budget calendar attempts to establish the two-stage approach process. As ### 1ukrea2019010 - 10. The new budget calendar attempts to establish the two-stage approach process. As ### Strategic two-stage budget process: design and constraints - Two-stage design: - First stage: "February to June" — focus on determination of new policy proposals given the available fiscal envelop. - Second stage: "June to September" — focus on detailed annual budget preparation and development of the draft budget law. - Practical constraint: effectiveness of the strategic phase may be limited by the absence of early up to date assessments of the available fiscal envelop, with preliminary economic parameters updated after KSUs have prepared their budget proposals. - Ideal sequencing: - Strategic phase should begin with an update of fiscal forecasts and cost drivers based on latest information. - Requires an earlier first version of the macroeconomic framework, with scope for subsequent updates. - Requires tentative initial assumptions for important socio-economic cost drivers (including minimum wage rates and social protection payments). - Political sensitivity and alternatives: - Tentative initial assumptions prior to official approval may be politically sensitive and infeasible. - Politically neutral alternative: use existing values to calculate baseline budget costs, adjusted centrally by the MoF based on initial (confidential) proposals from relevant organizations; information retained centrally to calculate aggregate baseline costs and the fiscal envelope for new spending. ### Baseline, forward estimates, and new policy proposals — definitions and implications - Current practice and gap: - No formal distinction between baselines and new policy proposals in KSU budget submissions. - No formal calculation of the fiscal envelope for new policies by the MoF. - KSUs may incorporate both forward baseline estimates and new policy initiatives within each existing program, complicating calculation of the fiscal envelope. - Required reforms: - New methodology, institutional arrangements and enhanced capability to introduce a robust strategic phase. - Practical definitions for baselines, forward estimates and new policy initiatives are needed. - Anticipated disputes over classification are normal, especially in an inaugural MTBF. - Box 1.1. Potential Definitions for Strategic Budgeting Concepts: - Baseline estimates – the cost of existing services based on actual expenditure from the most recent complete budget year, after having accounted for one-off and other non-linear expenditure not representative of current service delivery commitments. - Forward baseline estimates – the future cost of existing government services derived by applying agreed cost driver (both prices and volume) adjustments to baseline estimates. - New policy estimates – the future cost of new policy initiatives distinct from and additional to forward estimates of the cost for existing government services. - Data and adjustment rules: - Establishing a baseline on execution data from the most recent budget year should inform forward baseline estimates. - One-off deviations that reduce expenditures (e.g., unexpected reduction in utilities caused by favorable weather) should not influence forward baseline costs. - One-off expenditures (e.g., cost of holding national elections) should be removed from base data to avoid inclusion in forward baseline estimates. - Capacity and transition: - Many KSUs have limited capability to develop robust baselines. - Short- to medium-term approach: maintain centralized MoF adjustments for cost drivers while building KSU capacity. - Progressive devolution: responsibility for baselines and forward estimates should progressively pass from MoF to KSUs as capacity increases. - Training and models: prior FAD TA mission reports (April 2011 and May 2017) advise development of official models to forecast key spending lines and extensive training in forward estimates modeling. ### Budget calendar: statutory deadlines, timeline for 2019, and assessment - Key BCU-mandated deadlines: - Preliminary macroeconomic projections submitted by "March 1" and finalized before "April 15". - Draft Budget Declaration submitted before "May 15" to the CMU, which shall approve it before "June 1" for transmission to Parliament by "June 5". - Simplified Budget Timeline for 2019 (2020–22 Budget) — MoF proposed timeline (selected entries preserved verbatim): - "February 15" MoF receives proposals from KSU - "March 1" MoF receives revenue, tentative macro-projections, and social indicators - "March 25" Finance Minister presents proposed budget indicators including aggregate expenditure ceiling to Ministers who discuss KSU 3yr ceilings and prioritization - "April 5" MoF informs the KSU of their indicative ceilings - "April 10" KSUs return information on their targets and expected results of activity - "April 15" MoF receives final revenues and macro-projections - "April 20" MoF submits to CMU targets and expected results of activity - "Apr 21 – May 1" CMU conducts meetings for final harmonization and prioritization - "May 15" MoF submits draft Budget Declaration to CMU - "June 1" CMU approves macro-projections and Draft Budget Declaration - "June 5" CMU submits draft Budget Declaration to Parliament - "June 30" The Parliament makes its decision on the Budget Declaration - "September 15" Deadline for CMU to approve and submit draft state budget law to the Parliament - "October 20" Deadline for consideration of draft budget in the first reading - "November 3" Revised budget submitted to Parliament - "November 25" Deadline for consideration of draft budget in second reading - "December 1" Deadline for adoption of draft Budget - "January 1" 2020 budget year commences - Evaluation of calendar: - If rigorously implemented, the revised calendar should improve preparation of the MTBF and draft budget; mandatory critical deadlines are beneficial and should be retained. - The "June 5" deadline for submission of the Budget declaration by the CMU to Parliament is a strong driver for discipline; considered demanding but achievable. - Time allocations for stages (verbatim durations and purposes): - Around four to five weeks ("February 12 to March 20") for detailed administrative-level discussions to reconcile top-down and bottom-up approaches and analyze the baseline. - Around two weeks ("March 25 to April 5") for negotiations at the level of Ministers on prioritization informing proposed ceilings provided to line ministries of "4 April". - Around two weeks ("April 5 to April 20") for MoF preparation for final CMU arbitrations and potential resolution via the budget sub-committee of the CMU. - A one-week period appears fit for finalization of ceilings by the CMU; allowing more time risks re-opening the process. - Issues requiring attention and possible calendar changes: - Absence of updated parameters issued to KSUs to prepare baselines and assess fiscal envelope for new policies. - Issuance of a first set of ceilings at the end of March, long before the end of the budget process. - Difficulties with early KSU submission requirements and absence of macroeconomic updates during summer. - The MoF has planned for potential future amendments to the BCU in negotiation with the Budget Committee of the VR. - Specific calendar concerns and recommendations: - Communication of initial indicative ceilings to KSUs on "April 5" may be inconsistent with intended process; at that point a clear assessment of agreements/disagreements may be more appropriate than issuing 'ceilings'. - Long interval between CMU finalization of ceilings ("May 1") and their transmission to Parliament ("June 5") — a five-week period — may be a vulnerability permitting KSUs to contest ceilings; consideration for finalization closer to "May 15" may be warranted. - As KSUs take on more responsibility, the "May 1" finalization deadline may become difficult to meet; possible shift closer to "May 15". - Early "February 15" time limit for KSU budget request submission may be challenging; MoF should inform KSUs early and provide active support, especially for baseline establishment. - Over the medium term, early deadline limits KSUs from using latest macroeconomic assumptions and may require shifting the budget request submission deadline by two to three weeks. - Absence of a summer macroeconomic update: - Last macroeconomic update expected before "May 15", creating a four-month gap before the Budget is tabled in Parliament on "September 15". - Risk: Government may present obsolete economic assumptions and revenue estimates, affecting parliamentary debates and risking recycling additional revenues into new expenditure or criticism of MTBF sincerity. - Recommendation: consider establishing an additional macroeconomic update delivered around "end August" for incorporation prior to Parliamentary debate. ### Content of budget submissions: current shortcomings and reform measures - Current rules (instruction No. 687 of 2012 and annual MoF letters) have shortfalls for MTBF implementation: - Require presentation of appropriations within ceilings previously notified by the MoF and additional requests by KSUs above notified ceilings — inconsistent with top-down/bottom-up reconciliation. - Current tables do not allow separate requests for baseline forward estimates and new policies (including savings) — fundamental distinction missing for MTBF. - Current tables do not allow comparison between three-year budget requests and the former MTBF where deviations should be highlighted and technically justified. - Requests currently provide information for three years but use one table for the budget year and another for years two and three; not aligned with MTBF spirit. - Current tables require execution of the previous year and budget of current year; main issue is ensuring these past data are used effectively for baseline calculation and that logical links exist between years. - MoF intentions and template features to be developed: - Prepare new instructions and tables reflecting full multi-year budgeting and separate baseline/new policy requests. - Disseminate initial instructions for the 2019 year quickly; complement or revise for 2020. - Templates should allow: - Presentation, within one table, of the three-year budget request and execution of the past year and the current year budget. - Highlighting of any deviation from the current MTBF. - Distinction of requests for (a) baseline and forward estimates; and (b) new policies (including savings). - Instructions should: - Set degree of detail for submissions (program level or more disaggregate for large/complex programs). - Require detailed justification for any deviation from current MTBF. - Require strong financial linking between years, including current and past years, and calculations explaining it. - Separate baseline requests from new policy requests to ensure no implicit new policy is conveyed through baseline adjustments. - Development and devolution of baseline methodology: - No generally accepted consistently applied methodology for baseline and forward baseline estimates currently. - Baseline calculations could be made by the MoF in the first year of reform, informed by KSU information. - From the second year of the reform ("2020"), most KSUs should be able, with training, to increasingly prepare their own baseline and forward baseline estimates. - Annex II elaborates on baseline and forward estimate techniques. *Source: 1ukrea2019010 - 10. The new budget calendar attempts to establish the two-stage approach process. As* ### 28. The roll out of medium-term budgeting reforms to local government from the ### The roll out of medium-term budgeting reforms to local government from the 2020 Budget ### Roll-out context and scope - The recently revised BCU requires all local budgets to be prepared on a medium-term basis and incorporate the submission of new local financial plans. - The change affects thousands of oblast, city and hromada governments, and is complicated by the ongoing local government reform process under which local communities may voluntarily amalgamate. - Ukraine was estimated to have a total of 9,300 subnational units of organization at December 2017 across four levels. The Department of Local Budgets within the MoF deals with larger subnational units directly and expects to have a direct relationship with around 2,000 units when local government reform is completed in 2020. ### Implementation challenges and support needs - Significant attention should be given to training and support for local government MTBF implementation. - The task to support implementation is large given the number of entities involved in the reform. - Adequate resources are needed to prepare detailed guidance and provide training. - This should be done as early as possible so that local entities will be able to: - develop local medium terms budgets for the 2020 Budget, and - develop local financial plans from the 2021 Budget as required by the BCU. - It is likely to take some time before many local organizations will be able to participate fully in medium-term budget planning and flexibility in implementation may be required. ### Expected benefits for local planning - MTBF implementation will ultimately benefit local government planning through greater certainty about future receipts from the State budget. - Improved predictability of receipts from the State budget will allow for better planning by local governments. - The MTBF will provide a stronger basis for local governments to better plan their development budgets, which under the current framework is hindered by lapsing capital subventions and lack of a multi-year commitment framework. - Providing earlier notice of final budget subventions, as intended by recent updates to the budget calendar, will facilitate better planning and help avoid situations that require significant readjustment in local budgets with limited notice. ### Budget Declaration: current practice and suggested enhancements - The 2018–20 Budget Declaration, submitted to the CMU under the pilot MTBF, contained several sound elements including: - medium-term macroeconomic projections; - a statement of fiscal objectives, including deficit, debt and guarantee limits; - description of new policies and strategic goals; - presentation of medium-term projections, for revenues, expenditures, financing and deficit of the General Fund; - expenditure ceilings for KSUs; and - discussion of fiscal risks. - Further enhancements could be considered for the Budget Declaration to be prepared in 2019: - Describing the macroeconomic context: include a chapter on the macroeconomic outlook, disclose underlying assumptions, and detail GDP, unemployment, and price and income projections and the main factors driving future trajectories. - Explaining the medium-term fiscal projections: discuss, for each revenue category, the forecast for the budget year and future trends with regard to underlying economic drivers; break down expenditure forecasts further by economic and functional classifications and explain new policies and cost drivers. - Providing justification of the expenditure ceilings: explain expenditure ceiling allocations, including links to strategic objectives and new policy measures. - Including information on objectives, performance, and programs for KSUs: a chapter on major objectives and programs under KSUs, medium-term allocations, and discussion of past performance with reference to key performance targets. - The MoF is studying international experience regarding content and format of budget documents to enhance future budget declarations; Annex III provides guidance on possible structure. - To underpin credibility, future budget declarations should explain how macroeconomic and fiscal projections have deviated from the previous vintage. This is required by the BCU (Art. 33.8). - At a minimum, present a comparison of aggregate revenue, expenditure, and deficit projections to their previous projections with explanations differentiating policy-driven changes from macroeconomic and other adjustments. - Good practice would include reconciliation tables that disaggregate differences between current MTBF and prior year into different components (see Box 1.2). ### Box 1.2 — Reconciling between MTBF vintages (summary) - Reconciliation tables explain differences between different vintages of an MTBF. - Initial stage disclosure: distinguish changes due to policy decisions from other factors. - More elaborate disaggregation can include: - revisions in macroeconomic parameters (e.g., GDP, exchange rates), - volume changes (e.g., number of beneficiaries), - price changes (e.g., pharmaceuticals). - The source provides an illustrative reconciliation table (numbers reproduced verbatim from the source): - Expenditure (2020-22 Budget Declaration)90100110120 - Adjustment for policy decisions0023 - Adjustment for parameter changes0223 - Price variation-1-2-3-4 - Volume variation 0346 - Technical Adjustment 1111 - Total variation0246 - OutcomeCurrent YearBudget YearBY+1BY+2 - Expenditure (2021-23 Budget Declaration)90102114126145 ### Recommendations (selected, verbatim) - Recommendation 1.1. Consider minor enhancements to the proposed budget calendar for 2019 and review its appropriateness after the first year of MTBF. - For 2019, replace the communication of ceilings on April 5 by an assessment of agreements and disagreements between the MoF and KSUs for the purpose of finalizing the budget process; - Assess the scope to shift finalization of expenditure ceilings to a later date, while still meeting the requirements of the BCU, and allowing for later submission of budget proposals by KSUs; - Assess the appropriateness to establish a macroeconomic update around the end of August to ensure the draft budget is based on up-to -date economic data. - Recommendation 1.2: Finalize and issue new instructions and templates for preparation of KSU budget requests. The new instructions and templates should allow for: an overview of the three-year requests, the assessment of their link with previous years, the highlighting of deviations from the current MTBF and separation of requests for baseline and new policies estimates. (December 2018) - Recommendation 1.3 Develop a forward baseline estimates methodology. - Define a standard approach for KSUs to produce robust forward estimates of spending under current policies and cater for training requirements in forward estimates modeling (December 2018) - Maintain central updates of KSU baseline estimates in 2019, but progressively increase responsibility for this task as KSU capability increases, with the MoF maintaining a key role in reviewing and scrutinizing these estimates. - Recommendation 1.4: Develop and distribute guidance, templates and tools on medium term budget requirements for local governments (March 2019). - Recommendation 1.5: Further enhance the content of the Budget Declaration. Elaborate on the pilot MTBF Budget Declaration by including in the 2020–22 Budget Declaration: - More detailed explanation of the main drivers of the medium-term macroeconomic and fiscal projections; medium-term expenditure by economic and functional classification; - Explanation of the expenditure ceiling allocations as well as information on KSU objectives and performance; and - In subsequent years, include a reconciliation of the fiscal forecasts and medium-term expenditure ceilings from those published in the previous year, distinguishing between those caused by policy decisions and those driven by economic and other parameter adjustments. ### Designing the MTBF: expenditure limits and technical adjustments - The recent BCU amendments establish the framework for expenditure limits, but further design choices are needed. - The BCU effectively establishes limits linked to areas of spending, with amounts attributable to the General and Special Fund separately identified. - Elements to do with technical adjustments and margins are yet to be developed. - Important considerations and trade-offs: - Clearly define technical adjustments that flow through to changes in expenditure limits; the BCU is unclear on whether changes in macroeconomic and other parameters (e.g., exchange rate, inflation, interest rates on debt) flow through automatically. - Accommodate policy changes within existing expenditure limits where possible or confine consideration to the strategic budget phase; automatic increases in expenditure limits due to new laws would undermine discipline. - Clarify arrangements for special fund expenditure limits: Article 32 of the BCU provides for additional special fund revenues to be spent on defined categories and flow directly to increase expenditure limits; ensure ceilings are reduced if special fund revenues are less than expected. - Box 2.1 (considerations) highlights: - Fixed or indicative expenditure limits; nominal versus real terms; linking inflation, expenditure and revenues; allowing technical adjustments for other macroeconomic parameters (including exchange rates) and making such adjustments in both directions; excluding volatile areas of spending (e.g., debt interest) from expenditure limits; the organizational level at which limits are applied. - Ceilings are currently established for some 90 different KSUs, creating logistical challenges for the MoF and limiting ministries’ ability to participate in strategic resource allocation decisions across their portfolio of KSUs. - Consider establishing consolidated institutional arrangements for negotiation processes in the future. ### Multi-year commitments, carryovers, and execution risks - The inability to secure funding for multi-year commitments can undermine expenditure quality because current budget rules do not allow multi-annual commitments, with funding lapsing at the end of the year. - This demands rapid scoping, tendering and execution of projects in discrete time-limited components, particularly affecting capital projects and annual subventions to local governments. - Creating a process for approval of multi-year commitments could facilitate improved planning and execution of multi-year projects. - Before widespread use of multi-year commitments, robust commitment controls and expansion of commitment tracking procedures (currently limited to the budget year) are needed to ensure future expenditure limits are not breached. - Multi-year commitments could be limited to specific commitments, such as approved multi-annual investment projects, and be subject to agreement with the MoF. - Allowing limited carryovers of unspent expenditure involves tradeoffs: - Benefits: boost expenditure efficiency and reduce incentive for inefficient end-year spending. - Risks: slower budget execution, increased budget volatility and greater difficulty in achieving fiscal targets. - To minimize risks, conduct a thorough evaluation of requirements needed to support an effective multi-year commitment system prior to implementing a multi-year commitment scheme. - Most mature MTBFs that permit carryovers limit their amounts (Annex IV). - The case for allowing carryovers is strongest for multi-year capital commitments where carryovers can assist implementation of multi-year investment projects. - The first step should be establishing procedures for multi-year commitments, which can be implemented regardless of whether carryovers are permitted. *Source: 1ukrea2019010 - 28. The roll out of medium-term budgeting reforms to local government from the* ### 44. The methods to be implemented to reduce budget volatility under the MTBF are ### 1ukrea2019010 - 44. The methods to be implemented to reduce budget volatility under the MTBF are ### Methods to manage budget volatility under the MTBF - The methods to be implemented to reduce budget volatility under the MTBF are yet to be determined. The MoF has undertaken an initial review of international experience in applying budget margins but has not decided on the best approach for Ukraine. - Approaches used internationally (advantages and disadvantages summarized): - Conservative Forecasts: Forecasts for key parameters are set conservatively so it is likely actual performance is better than budgeted. - Advantages: Provides a fiscal buffer and flexibility in the event expenditures increase. - Disadvantages: Over time, it can undermine credibility in medium-term fiscal projections, particularly if assumptions are not transparent. It can also be hard to know how conservative the budget is in aggregate, given interactions. - Central margin or contingency Reserves: A provision is made in the budget for urgent and unforeseen expenditure pressures, and is centrally managed by the MoF. - Advantages: Provides a transparent mechanism for reducing overall budget volatility, and in the event the reserve is not needed, it is not spent. - Disadvantages: Can reduce incentive for KSUs to properly plan, is open to misuse in absence of tight criteria for access, and can make it harder to resist new spending pressures. - Margins in KSU expenditure ceilings: Margins are included in each KSU’s ceiling, for expenditure pressures that could arise. - Advantages: Allows for some flexibility for KSUs to meet urgent and unforeseen expenditure and is transparent if disclosed in ministerial allocations and execution reports. - Disadvantages: Reduces incentive for KSUs to prepare accurate budgets and is likely to be fully spent even in circumstances where pressures are not urgent. Cannot be withheld if fiscal situation deteriorates. - Exclusion of certain spending from ceilings: Volatile or cyclical spending is excluded from expenditure ceilings (for example, interest on State debt). - Advantages: Provides flexibility by ensuring expenditure ceilings cover only spending that can be controlled. - Disadvantages: Increases budget volatility and can undermine the government’s ability to meet its fiscal objectives. - A central contingency margin, centrally managed by the MoF, is recommended as a useful first step. Any margin should be tightly controlled and purposes for drawdown clearly defined. - Size guidance: In other countries, the size of unallocated expenditure reserves tends to vary between 1 to 3 percent of budgeted expenditure in years 2 and 3. ### Integrating capital budgeting and MTBF - MTBF implementation offers an opportunity to improve the efficiency of capital expenditure. - Findings from IMF’s June 2016 PIMA: - Lack of a multi-year budget is a significant constraint on effective capital expenditure. - The MTBF will assist execution of the medium-term investment pipeline developed by the Strategic Investment Committee. - Recommendation to introduce carryovers for capital spending up to a fixed level with MoF approval, while prohibiting reallocation from capital to other expenditure. - Strengthening prioritization and integration of capital decision making would improve infrastructure investment quality; further IMF follow-up assistance may be warranted. ### Linking planning, performance evaluation, and the MTBF - Draft strategic planning legislation should provide a stronger basis for integrated policy-making, planning and budgeting to support MTBF rollout from 2019 onwards. - Strategic and sector strategies are necessary to: - Provide organizing frameworks for policy implementation and resource identification. - Test technical and financial feasibility of policy commitments. - Steer medium-term and annual budget decisions and prevent KSUs competing for funding irrespective of constraints. - Fiscal anchor and operational rules: The starting point for successful policy implementation is to ensure overall affordability (e.g., debt to GDP ratio) and establish operational rules to ensure consistency with sustainable public finances. - Current 2019 Budget Declaration caps: state budget deficit at 2.2 percent of GDP; government debt at 56 percent of GDP; limits guarantees approved over the budget period to an amount equivalent to 3 percent of revenue. - Going forward, the MTBF could inform development of medium-term fiscal anchors. - Strengthening strategic planning will improve basis for KSU ceiling decisions; Annex VI (in source) presents good practice components. - Practical considerations for KSUs and MoF when preparing and assessing budget proposals: - Whether a proposed new spending initiative is consistent with strategic plans, and if not, justification to include it. - Degree to which the proposal is a priority according to those plans. - Whether the level of resources proposed is commensurate with the policy’s priority ranking. - Components of a top-down MTBF process: - Baseline component: costs of current service delivery, derived from recent spending after adding/removing one-off expenditure (e.g., cost of holding elections). - Forward estimates: baseline adjusted by cost drivers (e.g., demographics, inflation, exchange rate). - ‘Fiscal envelope’: aggregate ceiling minus KSU forward estimates (amount available for new policies and investments in each MTBF year). - Each KSU ceiling = KSU baseline + KSU share of the available fiscal envelope. - Allocating the available fiscal envelope determines which KSUs can implement new policies and investments. - Spending reviews, informed by performance evaluation, provide: - A stock check of the baseline and a reality check on policy. - Periodic reviews to audit performance and assess need for restructuring to align baselines with priorities. - Sector-wide approaches should be enabled by the law for areas like health and education where trade-offs require coordinated budgeting. - Existing guidelines need overhaul once new strategic planning legislation is in force; current guidelines focus on program performance indicators without links to technical feasibility, cost, or strategy, and restrict time frame to just three years. - Institutional arrangements: creation of Strategic Planning Directors and Performance Monitoring Directors and senior strategy, budgeting and performance teams in each KSU to institutionalize links. ### Spending reviews: progress and lessons - Pilot spending review in 2018: - Launched by the CMU in February 2018, limited to five Line Ministries (LMs). - Time constraints and capability issues: final reports were to be completed by June (extended from April); only one of five submitted a final report. - Shortcomings: limited timespan, absence of clear methodological framework, narrow focus, capability constraints. - Positive elements of pilot: - Strong involvement of LMs, dedicated working groups co-chaired by MoF and LM, incorporation of independent experts, political backing via CMU resolution. - MoF plans: - Commence larger-scale spending reviews in early 2019, with results to be considered for the 2021 Budget. - Regular conduct of spending reviews embedded in the BCU. - Consider sectoral or horizontal spending reviews in time. - Enhancements needed for effective spending reviews: - Consensus on objectives and expected outcomes. - Establishment of common methodological guidance. - Consider supplementing organizational arrangements with a high-level ministerial steering committee meeting at three points (start, mid-way, end). - Role of MoF leadership: - Strong leadership from MoF is critical: high-level representation in working groups, active technical participation, coordination support. - Some countries establish spending review teams or secretariats within MoF to coordinate and build capability. - Guidance on ambition level: - Some countries require spending reviews to identify minimum levels of low priority/inefficient spending or to define minimum number of reallocation options. - MoF view: in early stages, setting targets may be counterproductive; guiding ambition (e.g., develop two to three options to improve spending efficiency and effectiveness within the Ministry) could focus efforts. ### Recommendations (extracts relevant to volatility, MTBF, strategic planning, and spending reviews) - Recommendation 2.1: - Clearly define in the Budget Declaration the circumstances under which ceilings can be amended. Limit these to a narrow set of technical adjustments (e.g., interest on floating rate public debt service obligations or the impact of exchange rate movements on obligations under foreign currency denominated contracts) (June 2019). - Recommendation 2.2: - Develop frameworks for establishing a central budget margin and multi-year commitments. - Include a small central contingency reserve in the budget, with tight controls and transparency mechanisms (June 2020). - Assess the supporting requirements needed to establishment an effective multi-annual commitment system (December 20019) and establish the legal basis for commencing with multi-annual commitments for capital projects, up to a defined level and subject to agreement with the MoF (December 2020). - Recommendation 2.3: - Strengthen strategic planning to provide a stronger basis for medium-term budget planning. - Modify the draft law on strategic planning to accommodate sector strategies, covering the strategic planning requirements of more than one ‘central executive authority’ where their respective services are sufficiently related to one another (July 2019). - Overhaul the existing strategic planning guidelines in line with the new draft law and with good practice in sector strategy formulation (December 2019). - Recommendation 2.4: - Establish methodological guidelines for the conduct of spending reviews and launch the second round of reviews. - Develop a spending review manual setting the framework and objectives of the spending reviews, clearly laying out the different phases of the review (data collection, analysis, and policy development), providing guidance on how to conduct analysis and develop proposals, and providing templates and instruction for final outputs (March 2019). - Launch the second round of spending reviews in early 2019 for completion in early 2020, with proposals available for potential incorporation into the 2021 budget. *Source: 1ukrea2019010 - 44. The methods to be implemented to reduce budget volatility under the MTBF are* ### 64. The MoF’s mandate to monitor and manage fiscal risks is now well established. The ### 1ukrea2019010 - 64. The MoF’s mandate to monitor and manage fiscal risks is now well established. ### Mandate, institutional framework, and recent developments - The Fiscal Risk Management Division (FRMD) role is established in MoF regulation (CMU resolution No. 375, amended in 2018). - The recent amendments to the BCU empower the MoF to: - identify, evaluate and monitor fiscal risks (Art 32.1); - develop measures to mitigate fiscal risks; - collect information necessary to execute its fiscal risk function; - publish a regular fiscal risk statement (FRS) on the MoF website after submission with the draft state budget to the VR. - The draft CMU resolution under development could be expanded to define specific roles and responsibilities for each government department or agency. ### Enhancing fiscal risk analysis and management (FRMD role expansion) - Current emphasis: - FRMD has primarily focused on monitoring and assessing budgetary risks from SOEs. - Recommended expanded FRMD functions: - Provide advice on fiscal risk mitigation measures in collaboration with MEDT and shareholding ministries. - Act as the focal point to consolidate fiscal risk analysis, disclosure and management across government. - Ensure regulatory and institutional architecture for monitoring, assessing and managing fiscal risks operates effectively. - Develop methodological guidance for assessing specific fiscal risks and ensure consistency in approaches. - Assess adequacy of risk mitigation practices and recommend actions to strengthen them. - Coordinate and prepare the annual FRS and quarterly internal fiscal risk monitoring reports. - Coordination needs: - Increased coordination between FRMD and multiple MoF departments and external stakeholders is required. - Roles and responsibilities should be clearly defined (e.g., MEDT assigned macroeconomic risk analysis in draft CMU, but revenue forecasting, budget, and macroeconomic analysis divisions within MoF must be involved with FRMD coordinating). Box 3.1 — Developing Mitigating Measures for SOEs (steps in an integrated framework) - Identification of problematic SOEs and distinguishing those that require deeper analysis (already undertaken by FRMD). - Preparation of detailed SOE analyses covering management and governance weaknesses, operational problems, drivers of poor performance, and risks. - Development of remedial action plans with the entity overseeing the SOE and the SOE Supervisory Board (or management) for CMU approval. - Regular reporting on progress against the action plan by the SOE and the overseeing entity. - Possible remedial actions: - More intense monitoring and more frequent performance reporting for high-risk SOEs. - Tighter controls on SOE transactions that materially affect balance sheets (limit new borrowing, restrict asset disposals). - Require SOEs to improve financial performance (e.g., disposal of non-core assets, restructuring operations, reducing non-core activities). - Consider restructuring the entity in more extreme cases. ### Current practice and progress in fiscal risk analysis and disclosure - Methodological and operational advances: - A detailed methodology for assessing SOE fiscal risks (developed in line with FAD advice and good international practice) was approved by CMU (No. 7 of 2018) in January and is being implemented. - A list of 25 SOEs identified for in-depth analysis. - A summary FRS was submitted to the VR in 2017 (largely qualitative); expanded in 2018 with more in-depth assessment of certain fiscal risks. - FRMD has sought advice on roles, structure, interaction with stakeholders, and main products to further enhance fiscal risk analysis and management. - The FRS submitted with the 2019 draft budget: - Included a qualitative discussion of macroeconomic risks and channels to the budget, maximum exposure from government guarantees, analysis and assessment of SOE-related fiscal risks, and general discussion of privatization receipt shortfall risks and financial sector risks. - Summarized overall performance of 628 enterprises and discussed individual performance of a number of major SOEs. - Identified 25 enterprises bearing the highest fiscal risks (heavily leveraged, significant foreign currency assets/liabilities, or borrowing backed by state guarantees); these entities comprise around 90 percent of total assets of all SOEs assessed. - For the 25 highest-risk entities the FRS discloses outstanding stock of guarantees; total liabilities in foreign currency; and taxes paid to the budget, and discusses factors that could cause risks to materialize and mitigating measures in place. ### Suggested enhancements to the Fiscal Risk Statement (FRS) - Macroeconomic Risks: - Once capacity for sensitivity and scenario analysis exists, expand discussion to illustrate potential impacts on main fiscal aggregates of changes in macroeconomic parameters most relevant to public finances. - Public Debt: - Include composition of government debt portfolio (share in foreign currency, floating rate debt, average maturity, share maturing in under one year). - As capacity develops, include sensitivity of the value of the stock of debt to changes in key risk variables (exchange rate, interest rates). - Financial sector: - Disclose explicit contingent liabilities from commitments to provide back-up funding to the Deposit Guarantee Fund, including total insured deposits and assets of the Fund, and historical payments from the Fund or recapitalizations to the banking sector. - Provide financial soundness indicators of the banking sector to elaborate on existing discussion. - SOEs: - For the 628 entities (and especially the 25 highest risk entities) disclose total liabilities, profitability, and risk ratios (leverage, solvency, liquidity), and all direct transactions with government (subsidies received, dividends, taxes paid, loan obligations). - Provide detailed discussion of quasi-fiscal activities. - Other specific fiscal risks: - Include a brief section on local governments with summary of liabilities (borrowing and arrears) including as a share of own source revenues and by major region or city using Department for Local Budgets data. - Include brief discussion of natural disaster exposures (historical fiscal costs and management strategies), PPP related risks, and risks surrounding fiscal costs of security-related activities. ### Roles and responsibilities: Table 3.1 summary of key fiscal risks and actors (high-level) - SOEs: - Responsibility: FRMD (primary); MEDT; Shareholding Ministries; SOEs (where applicable). - Tasks include maintaining SOE financial indicator database, regular SOE risk assessments (in accordance CMU No. 7), stress-testing macro-significant SOEs, developing remedial action plans for CMU approval, reporting progress, advising on privatization receipt risks (MEDT), and providing inputs to quarterly monitoring and annual FRS (FRMD). - Macroeconomic risks: - Responsibility: MoED, MoF Strategic Planning Directorate (SPD), MoF Revenue Forecasting Dept. (RFD), FRMD (lead). - Tasks include monitoring macro conditions and risks, preparing alternative macro scenarios and budget impacts, consolidating impacts of alternative macro-fiscal scenarios for inclusion in FRS, and providing inputs to monitoring reports. - Financial sector: - Responsibility: NBU, MOF Financial Policy Department. - Tasks include monitoring financial system stability and state-owned banks, supervising financial regulatory compliance (NBU), conducting regular stress tests and publishing financial stability reports (NBU), and providing input to annual FRS. - Debt portfolio and guarantees: - Responsibility: Debt Policy Dept., FRMD. - Tasks include assessing and disclosing main debt portfolio risks, developing risk management frameworks within medium-term debt management strategy, maintaining registrar of guarantees, providing credit risk assessments for guarantee decisions, and advising on risk-based guarantee fees. - PPPs: - Responsibility: MEDT, FRMD. - Tasks include maintaining PPP registry (MEDT), assessing PPP risks prior to CMU approval, and providing PPP exposure inputs for annual FRS. - Local governments: - Responsibility: Dept. of Local Budgets. - Tasks include monitoring budget execution, borrowing, arrears, guarantees and other contingent liabilities. - Long-term fiscal pressures: - Responsibility: Pension Fund, SPD, Ministry Social Policy, Ministry of Health. - Tasks include assessing sustainability and risks from pensions, health care costs and other demographically sensitive expenditures. - Environmental risks: - Responsibility: State Emergency Service. - Tasks include risk management framework for man-made, environmental and natural disasters. ### Recommendations - Recommendation 3.1: Establish clear responsibilities and procedures for fiscal risk analysis in a CMU resolution (June 2019) - Expand the set of risks covered by the CMU resolution to include debt portfolio risks. - Define in the CMU resolution clear functions and responsibilities of the various departments involved in assessing fiscal risks and an explicit coordination role for the FRMD. - Review existing risk methodologies and assess the need to update these or establish new frameworks for fiscal risk assessment. - Recommendation 3.2: Improve the disclosure and analysis of macroeconomic and specific fiscal risks in the annual FRS. Build on the FRS submitted with the 2019 draft budget, by incorporating the elements outlined in sub-Section C. (September 2020, and September 2021) ### Annex highlights: Revised Budget Calendar and Forward Estimates guidance - Revised Budget Calendar selected deadlines and objectives: - February 15: MoF receives proposals from KSU concerning new policies, changes in KSU cost structure (years 1 and 2 specified and year 3 added), and projections of revenues of the special fund. - March 1: MoF receives tentative information from NBU on revenues, MEDT tentative macro-projections, Ministry of Social Policy preliminary social protection standards, High Council of Justice proposals for judicial financial support. - March 20: MoF informs the NSDC on expenditures for defence and security for each year of the mid-term period. - March 25: Minister of Finance presents main approaches to budget indicator planning; ministers discuss KSU ceilings. - April 5: MoF informs KSU on ceilings (excluding NSDC proposals). - April 10: MoF receives KSU targets and expected results of activity. - April 15: MoF receives finalized NBU revenue indicators, MEDT finalized macro-projections, NSDC allocation for defence and security. - April 20: MoF submits to CMU information on targets and expected results for reconciliation with strategic priorities and expenditure ceilings. - April 21 – May 1: CMU conducts harmonization meetings. - May 15: CMU receives MoF Draft Budget Declaration and MEDT macro-projections. - June 1: CMU approves macro-projections and Draft Budget Declaration. - June 5: CMU submits draft Budget Declaration to Parliament. - June 30: Parliament decides on the Budget Declaration. - Forward and Baseline Estimates guidance (concept and use): - Forward estimates are bottom-up expenditure forecasts for each ministry on a no-policy change basis for the next three years. - Benefits: - Link annual budgets to medium-term fiscal forecasts. - Identify early spending pressures and dynamics to inform policy. - Provide a starting point for next year’s budget with models adjusted for exogenous inputs like inflation, wages and exchange rates. *Source: IMF staff summary of Ministry of Finance and related documents as presented in the content unit.* ### 5. The forward estimates process will take time to mature. Initially, the forward ### 1ukrea2019010 - 5. The forward estimates process will take time to mature. Initially, the forward ### Forward estimates: maturity and initial scope - Forward estimates are initially "rough forecasts" that "will inevitably contain mistakes, gaps and inconsistencies." - Ongoing reassessment, interaction with KSUs and continual improvements are required for precision. - As a first step in the implementation of the MTBF, the MoF could prepare baseline forward estimates for three years ahead. - Preparing forward estimates will pose a challenge to the KSUs due to limited experience in expenditure forecasting and a range of conceptual, modelling and practical issues. ### Key implementation challenges for KSUs (enumerated) - Providing budget teams with a basic methodology for preparing forward estimates, and defining the concept of no policy change; - Specific technical issues in dealing with investments, the wage bill and transfers to other entities; - Verification of this first round of estimates, and issues relating to improving and updating the estimates in future rounds; - Developing supporting tools, such as new policy proposals and spending reviews to strengthen the medium-term budgeting process. ### Basic methodology for preparing forward estimates - Producing expenditure forecasts at the disaggregated level involves steps focused on: - understanding the existing budget; - understanding and applying the medium-term cost drivers; - aggregating the forward estimates and summarizing overall sources of variations. - Each step should be identified, analyzed and have the methodology agreed between the MoF and the LM. ### Defining "No Policy Change" baseline and approval process - Example definition provided: "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 CMU or approvals by the MoF." - This definition includes: - all fixed spending within the budget; - semi-fixed spending such as the wage bill and any other contractual or policy commitments that currently receive funding; - earmarked reserves for ongoing social benefit programs. - Remaining flexible spending is included only if explicit commitment has previously been made, to avoid overstating fixity. - Border disputes over classification are expected; a clear technical process (kept within the civil service) should decide classification. - Budgeting instructions from the MoF should define what is and is not ongoing spending for new policy decisions. ### Investment spending: challenges and practical rules - Challenges: multi-annual decision nature, unspecified annual profiles and frequent re-profiling, changes in costs, delays in implementation, and ambiguity about what constitutes existing policy. - Capital expenditure estimates tend to trail off in outer years as projects complete, leaving room for new projects as new policy proposals. - Associated operating and maintenance costs should be included in relevant parts of the forward estimates and identified at project approval. - Immediate categorization rule: - Major projects: establish multi-annual profiles and confirm approval basis; aggregate and include as administered expenses. - Minor projects/capital purchases: treat current level of spending as the baseline and hold steady (nominal, real or share of KSU’s expenditure), especially for durable goods (cars, ICT equipment etc.) treated as departmental expenditure. ### Wages and salaries: recommended approach - Wages are large share of expenditure; keeping nominal wage bill flat over three years usually understates expenditure and overstates available fiscal envelope. - Including information on future wage changes may pre-determine policy decisions. - Recommended method: standard wage and employment growth index linked to macro parameters, applied uniformly to civil service employment expenditures; can take the form of an average of inflation and minimum/average wage growth. - Treat this index as the baseline (though not an entitlement); deviations are policy changes. ### Transfers to other public entities: categories and forecasting needs - Formula driven transfers: projections tied to macroeconomic or demographic parameters or defining revenue (in Ukraine: some education and health subventions, equalizing grants). - Gap based transfers: government ensures sufficient funds for legislated payments; requires reliable forecasts of entities’ finances (revenues, expenditures, deficits, use of reserves) over forward estimate period. - Fixed transfers: fixed amounts often for specific purposes; inclusion in no-policy-change baseline assessed case by case, informed by nature of payment (discretionary, fixed by law, multi-year agreement). ### Costing of new policy proposals (medium-term costing) - Costing for measures and policy proposals is key to MTBFs; requires analysis of longer-term impacts and disciplines decision makers. - Aggregated policy proposals enable MoF to calculate available fiscal envelope to guide KSUs. - Costing should be prepared for: - all new policy proposals; - changes to existing policies; - alterations to eligibility criteria or assistance rates of existing transfer or social security programs. - Policy costing should provide: - financial costing over the three-year period; - identification of expenditure components (e.g., wages and salaries, capital expenditure); - identification of revenue impacts (e.g., tax expenditures or increased own revenues); - statement on financial impact beyond medium-term if applicable. - New proposals should include objectives, expected impact, distributional impacts, legal/institutional changes, impacts on other government layers; for investments, cost benefit analysis results. - Costing methodology: basic price multiplied by quantity approach with allowance for factors to vary over time according to identified parameters; fixed cash costing must be sufficient for purpose. - Costing should consider behavioral impacts and specify assumptions (example: first home buyers allowance increases number entering market). ### Annex III: Transforming the Budget Declaration into Fiscal Strategy Statement — Required elements 1. Budget Overview - Main objectives and priorities for fiscal policy and summary of medium-term fiscal aggregates. 2. Macroeconomic Outlook - Overview of recent developments in domestic and global macroeconomic conditions. - Discussion of major macroeconomic projections for the budget and forward years. - Table showing medium term macroeconomic projections (current year, budget year, and two forward years) and their underlying assumptions. - Detailed discussion of main components of GDP forecasts and drivers (consumption, investment, government, exports or by key sectors). - Brief discussion of risks to the macroeconomic outlook. - For future budgets: discussion of how forecasts have changed since previous budget forecasts. 3. Fiscal Strategy and Medium-term Fiscal Projections - Statement of medium-term budget policy objectives and limits on main fiscal aggregates. - Medium-term projections of main fiscal aggregates for State and Consolidated Budget (revenue, expenditure, deficit, debt). - Discussion of revenue performance and revenue projections, medium-term projections for main revenue categories and explanation and new objectives for tax policy. - Presentation of aggregate medium-term expenditure projections, and breakdown by economic and functional classification. - For future budgets: discussion and reconciliation of medium-term fiscal projections from the previous year. - Financing requirements and debt management, including projections for government debt. 4. Medium-term Expenditure Ceilings - Discussion of medium-term expenditure priorities. - Expenditure ceilings for KSUs. - Strategic goals and outcomes for KSUs. Summary Discussion of Fiscal Risks - Summary discussion of macro-fiscal risks, main contingent liabilities, and other factors that could cause fiscal projections to deviate from baseline forecasts. Annexes (amend as required by the Budget Code) - Distribution of state capital Investments for public investment projects. - Relationships of the state budget with local budgets. ### Annex IV: Implicit and explicit margins in other jurisdictions (high-level findings) - Examples of implicit and explicit margins and contingency practices in Canada, United Kingdom, Sweden, Netherlands, Australia. - Explicit numeric ranges reported in the table: - Canada: Contingency reserve of 1.5% to 2% of total spending; MoF targets a surplus of 0.1% of GDP; Total 3.5% to 4.0%. - United Kingdom: Reserves and margins equal to 0.75% to 1.0% of total expenditure; MoF targets average surplus of 0.2% of GDP; Total 2.5% to 3.0%. - Sweden: Budget margin in expenditure ceiling rising from 1.5% to 3.0% of total spending; Total 1.0% to 3.0%. - Netherlands: Central contingency reserve of 0.1% of total spending; Most recent CA targets structural surplus of 1.0% of GDP; Total 1.1% to 2.0%. - Australia: Conservative bias in forward estimates of 0.5% to 1.5% of expenditure; Total 0.5% to 1.5%. ### Annex V: Carryover practices in countries with established MTBFs (summary) - Cross-country practices vary by spending category (Operations, Transfers, Capital) and approval requirements: - Australia: Operations Yes; Transfers No; Capital Yes; Finance Minister Approval. - Austria: Operations Yes; Transfers Yes; Capital Yes; Full approval. - Finland: Some; Some; Some; Explore after 2 years. - France: Yes; No; Yes; Up to 3% of budget. - Sweden: Some; Yes; Yes; Up to 3% of budget. - Netherlands: Yes; No; Yes; Up to 1% of budget. - UK (1990-2009): Yes; No; Yes; Full. - UK (2010-): MoF approval; None. ### Annex VI: Potential structure for a Sector Strategy Statement (content outline) - Draft law envisages 16 types of strategy and planning documents, including: - Ukraine Development Strategy (15 years); - Ukraine Regional Development Strategy (15 years); - Strategic Plans of Central Executive Authorities (5 years); - Strategy for Development of Cities, Towns, Villages, United Territorial Communities (5 years). - Importance of national, sector and ministry strategies for strategic budget decisions; good practice includes strategies formulated across sectors and horizontally (e.g., wage costs; environment, gender). - Typical content elements for sector strategies: - Vision (longer term); - Current state of affairs across major service delivery areas, including barriers to success; - Desired future state of affairs; - Overall structure of service delivery (government, non-government public sector, NGOs, private sector) and role of government; - Structure of government involvement (ministries, agencies) and coordination arrangements; - Strategic goals and associated indicators and targets; - Role of programs and actors in delivering strategic goals, coordination descriptions; - Major outputs (including public investment outputs) and associated indicators and targets over the life of the strategy; - Projection of resources available under alternative financing scenarios and sources of funds; - Projection of costs for each year for each main service delivery area; - Major implications of each financing scenario on ability to deliver key outputs; - Summary of major initiatives requiring Council of Ministers approval with expected month/year of submission and type of document; - Institutional arrangements for monitoring sector strategy implementation. *Source: IMF country report content (PDF chapter).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ukrea2019010.pdf_