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Medium-term Expenditure Framework (MTEF) Statement

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The Medium-term Expenditure Framework Statement is a statement presented to the Parliament under Section 3 of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and sets forth a three-year rolling target for the expenditure indicators with specification of underlying assumptions and risks involved.

The statement provides an estimate of expenditure commitments for various items viz. Education, Health, Rural Development, Energy, Subsidies and Pension etc. While formulating the MTEF Statement, information on expenditure commitments spread across the various central ministries on salaries (including grants-in-aid for salaries) and pensions, grants-in-aid for creation of capital assets, major programme, interest payment, defense expenditure and major subsidies etc. and other commitments of Government, will be considered. To take an example, in MTEF, salary component which now appears scattered amongst the various Demand for Grants of central Ministries would be aggregated and projected into the future. Expenditure commitments are shown separately for Revenue and Capital expenditure. " Grants-in-aid for creation of capital assets" and its projection are also depicted as a part of Revenue expenditure.

The objective of the MTEF is to provide a closer integration between budget and the FRBM Statements. This Statement is presented separately in the session next to the session in which Union Budget is presented, i.e. normally in the Monsoon Session.


Background

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted with a view to provide a legislative framework for reduction of deficit, and thereby debt, of the Government to sustainable levels over a medium term so as to ensure inter-generational equity in fiscal management and long term macro-economic stability. FRBM Act required the government to lay before the parliament three policy statements in each financial year namely, Medium Term Fiscal Policy Statement , Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement. Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget Management Act, 2003 through which it was decided that in addition to the existing three documents, Central Government shall lay another document - the Medium Term Expenditure Framework Statement (MTEF) - before both Houses of Parliament in the Session immediately following the Session of Parliament in which Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement are laid.

The MTEF is essentially a vertical expansion of the aggregates of the expenditure projections in the fiscal framework presented along with the Annual Financial Statement and the Demands for Grants. While the Medium Term Fiscal Policy (MTFP) lays down the fiscal constraints of the Government in medium term, Medium Term Expenditure Framework (MTEF) lays down the expenditure commitments for various sectors over a 3 years rolling framework.

MTEF, inter alia, contain:

a) The expenditure commitment of the government on major policy changes involving new services, new instrument of service, new schemes and programmes;

b) The explicit contingent liabilities, which are in the form of stipulated annuity payments over a multi-year time-frame;

c) The detailed break-up of grants for creation of capital assets.


The first Medium Term Expenditure Framework was laid in the Monsoon Session of Parliament in August 2013. Subsequent MTEFs can be seen here.


International Experience

Internationally, MTEF is more commonly used as the umbrella term to cover various stages of public finance management. In that sense, FRBM framework, the macro-economic framework statement, the fiscal policy strategy statement and the medium term fiscal policy statement adopted in India can be considered as stages prior to achieving MTEF.

There is no single, concise definition of the term "MTEF" according to OECD. Rather, it represents a set of broad principles for sound budgeting that are implemented in different ways in different institutional settings.

The report "Beyond the Annual Budget: Global Experience with Medium-Term Expenditure Frameworks" issued by World Bank in 2013 gives a review of the MTEF frameworks across the globe. The report cites that MTEFs are not a recent innovation, but their spread around the world is a recent phenomenon. In one form or another, MTEFs have been around since at least the early 1980s, when Australia launched its forward estimates system. A few industrial countries followed suit in the 1980s and early 1990s (Denmark, New Zealand, the Netherlands, and Norway), with some African countries implementing MTEFs in the late 1990s. The specific context in these countries particularly the African countries (with the exception of South Africa) was the need to ensure a multiyear commitment of resources to policies included in poverty reduction strategy papers (PRSPs). Donors like IMF and World Bank played an important role in encouraging the implementation of MTEFs. Part of their motivation was to improve public financial management as a means to ensure that external assistance and domestic resources would support development programs directed toward poverty alleviation. Consequently, the World Bank built MTEFs into the standard budgeting toolkit that it was recommending to client countries at the time. This toolkit became an integral part of the Public Expenditure Management Handbook, of World Bank issued in 1998 which says that an MTEF “facilitates the management of policies and budget realities to reduce pressure throughout the whole budget cycle, … results in better control of expenditure and better value for money within a hard budget constraint, and resolves the tensions between what is affordable and what is demanded”. By the end of 2008, more than two-thirds of all countries had adopted a medium-term expenditure framework (MTEF) as per the report of the world Bank. In fact, over the period from 1991 to 2010, the Bank was directly involved with MTEF reform in 109 low- and middle-income countries in all six regions.


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