written by Matt Andrews
The months of October, November and December are commonly busy in City Treasuries, Provincial Budget Bureaus and Ministries of Finance across the world. This is the time of year when these officials are finalizing their budget proposals and are getting ready to present the proposals to political representatives.
More often than not, one expects to see revenue and expenditure plans for next year that resemble the year before—with some incremental changes to reflect inflation and other expected and programmable influences on revenue availability or policy need.
Budgeting for 2021 will look very different, creating an immense challenge for budget officials. In a recent informal survey, we at the Building State Capability Program asked such officials about this challenge.
The questions in the survey asked what respondents expected with respect to revenue and expenditure estimates next year. A good number responded ‘I don’t know’, explaining that there were still too many questions to answer, like:
- ‘will we find a COVID-19 vaccine?’
- ‘if so, how much will the vaccine cost?’
- ‘will we be able to increase fiscal space?’
- ‘will international organizations provide more funds?’
- ‘can we renegotiate our debt?
- ‘will the economy grow?’
- ‘will tourism (and revenue from tourism) rebound?’
- ‘can we unwind government supports to firms, the unemployed and other citizens?’
These questions are incredibly difficult to answer, and in many cases, unanswerable for 2021 (and perhaps even beyond). This makes it incredibly difficult to estimate revenues and expenditures moving ahead. But budget plans must be written, negotiated, and finalized. How should this be done?
For respondents who described their revenue and expenditure estimates, regardless of these unknowns, the numbers were sobering. As shown in the bar graphs below, estimates in different contexts covered quite a range – but all were negative (such that everyone expects decreases in revenue and expenditure next year).
The majority of estimates from our (admittedly unscientific) survey suggest that revenue shortfalls and expenditure cuts will be well above 20%. This means that governments expect to raise 20% (or more) less revenue next year than they did in 2020 (which was already a tough year). And governments expect to decrease expenditures by 20% (or more) in 2021. How should this be done?
Source: 50 officials answering an informal, anonymous survey by the Building State Capability informal online survey in September 2020.
Source: 50 officials answering an informal, anonymous survey by the Building State Capability informal online survey in September 2020.
When I ask officials how they plan to handle these kinds of realities I am struck by two observations:
- First, MANY OFFICIALS ARE NOT ACTUALLY PLANNING TO PREPARE BUDGETS WITH THESE REALITIES IN MIND. They are developing estimates for negotiation based on much less dire projections, hoping that the economy will rebound, or new sources of debt financing will appear, and expenditure demands will settle into a more normal trend.
- Second, MANY OFFICIALS ARE STILL USING AN INCREMENTAL APPROACH TO BUDGETARY PLANNING, applying whatever cuts they are willing to accept uniformly across their government budgets. This means that they cut 5% from the budgets for primary schooling, health and international diplomacy.
There are many reasons for budgetary officials adopting business and usual processes to their 2021 budget proposals. I have heard concerns that any other approach will not allow for political agreement and may lead to having ‘no budget at all’. I have heard other worries about getting more realistic budgets through the ‘popularity gauntlet’ created by a hostile media. I have heard unsettled voices say that they simply do not know how to do anything better: “how do we budget when we don’t know so many things and what we do know is all negative?”
This is, however, the challenge of government budgeting for 2021—and officials must develop better answers.
We at the Building State Capability program do not have all these answers. But we are working hard to share ideas for budgeting professionals struggling with the challenge. We will be sharing these ideas in a one week executive education program on budgeting through crisis from October 26th to 30th, 2020. One of the faculty members will be Teresa Curristine, Deputy Division Chief of the IMF’s Fiscal Affairs Division. Teresa will offer practical advice she has already been sharing in various blogs and papers, where she and her colleagues suggest (among other things):
- Outlining several scenarios in budget proposals and making policies contingent on such scenarios.
- Planning now to have more frequent revisions to the macro-fiscal framework through 2021 (creating expectations of such).
- Clearly identifying priority areas for spending, and structuring proposals to maximize reallocations from non-priority areas to these priority areas.
- Anticipating budget execution constraints and ensuring agility and flexibility in disbursement, procurement and other execution processes.
- Providing a complete picture of the budget proposal and its assumptions and uncertainties to political authorizers (whether legislatures or councils).
Teresa notes that these kinds of practical ideas “will require more time and engagement with ministries than usual.” She may also have added that more time will be needed engaging with political representatives, civil society members, and even the media. We will be discussing these and other ideas in the executive program, including how to talk about the budget with all these groups. The goal is to help budget officials in cities, regions and countries (and those helping such officials) manage the 20%-plus cuts they face.
Watch for more blog posts on the topic!