How should developing countries’ governments best manage public investment and expenditure? What are the most appropriate tools and institutional arrangements for effective budget delivery? India’s National Institute of Public Finance and Policy discusses economic planning and budgeting in developing countries. Current trends in development planning include, (1) a less interventionist role in the economy by governments, (2) concentration on more narrowly focused public investments and (3) increased use of multi-year plans. The article examines budgetary issues that should be considered by governments and donors accordingly.
The role of macroeconomic management and microeconomic planning is emphasised for formulating and implementing government budgets. Before effective implementation, budget designers must first address macroeconomic needs and then micro-level investment and expenditure plans. The first step is to formulate a macroeconomic framework setting medium- and long-term economic performance targets. Once annual and medium-term macro strategies are determined, the government can design a budget which will best meet those economic priorities.
Other conclusions include:
- Concentration on new investments leads to disproportionate resource allocation, at the expense of continuing projects, delaying their completion and benefit generation.
- Investment expenditure for continuing projects should be balanced with maintenance expenditure on completed projects.
- Expenditure decisions on continuing projects should be determined jointly between donor and government. Decisions on new projects should consider: (1) Wider development plans, (2) macro priorities, and (3) the administrative capacity of fund recipients.
- Investment levels can be affected by more than budget formulation decisions, for example unexpected underfunding if fiscal troubles force sudden expenditure restrictions.
- Planning agencies are best placed to monitor and evaluate implementation, while for most effective regulation, the release of funds is centralised under the control of finance ministries. Financial management responsibility is typically delegated, once funds are released, to project management authorities.
Macroeconomic strategies and micro-level plans must be finalised before the implementation process begins. Micro planning must be led by political and economic debate determining annual and medium-term spending priorities. Other policy pointers for planning and implementing budgets include:
- The Ministry of Finance must coordinate policy management with the Central Bank, planning/investment departments and other ministries. Budget design responsibility should be shared between internal authorities (central and local government, public enterprises) and donors.
- Project design may change during implementation. Rolling investment plans increase flexibility in project management, allowing for annual reviews of, and changes to, investment and expenditure targets.
- Donors should seek regular technical reports and evaluations from planning agencies for thorough monitoring of implementation, in addition to monitoring by internal, central authorities.
- With more responsibilities now, finance ministries in former command/planned economies need support in strengthening their fiscal management capacity. Greater independence for Central Banks will encourage responsibility in monetary policy management.
- Separate capital budgets improve understanding of budget organisation. They allow better control and coordination between planning and budget agencies – linking sector priorities and annual budgets with development and investment plans.
- Expenditure decisions should consider both capital and current budgets, to ensure the overall budget remains within the established macroeconomic framework.
