Medium-term financial planning is an important feature of the new public management paradigm which many developed and developing countries have subscribed to since the 1990's. A main objective of this process is to improve the quality and relevance of spending, by allocating resources to areas of greatest potential benefit and by introducing a rigorous evaluation of actual and potential benefits. For the government budget as a whole this can involve introducing Medium-Term Fiscal Frameworks (MTFFs) while for individual government sectors this will involve Medium-Term Expenditure Frameworks (MTEFs). 

The overall objective of this process brings together three concepts of public management. The first of these is a more rigorous cost analysis of government expenditure to establish the baseline budget. This involves understanding the cost structure and drivers in the government’s budget and how expenditure moves in relation to demographic, economic and societal changes. It requires estimating the current and future costs of existing government policy commitments influencing the baseline budget, in order to more accurately and realistically calculate the costs and benefits of new policies and projects.

The second concept is that of policy performance monitoring and evaluation, understanding what has and has not worked and what needs to be achieved. This involves a system of performance measurement, the definition of clear objectives, meaningful indicators and targets to measure progress against those objectives and a rigorous process of follow-up and review.

The third concept is that of identifying and forecasting the amount of resources that would be available to implement new policies and programmes. This is sometimes referred to as the “fiscal space” or the amount of resources within the budget that can be reallocated to new programmes. Fiscal space can be created through economic growth, which increases revenues, and by shifting resources from existing programmes that are not effective, which reduces expenditure. This allows adequate and reliable funding to be reallocated to implement new initiatives.

Education is a popular sector for applying the MTEF approach for two reasons. Firstly, because of its size, as education often consumes between 15 and 25 per cent of the national budget. Secondly, because it is a sector where resource inputs can be more easily related to outputs and outcomes, than other sectors such as agriculture.

In recent years many developed countries have strategically implemented MTEF reforms in a range of sectors to good effect. Despite this, it is clear that for developing countries successfully implementing an MTEF in the same way may comprise a significant challenge. Generally this because the process requires strong political commitment and effective organizational leadership, as well as a strong annual budgeting and resource allocation framework. However, case studies such as those of Nepal and Viet Nam[1] show that important improvements have been made in these developing countries, and suggest that other countries can achieve better results if strong political engagement, high technical capacity and good financial systems are in place.

[1] Asia-Pacific Education Review Series - Education MTEF: Approaches, Experiences and Lesson from Nine Countries in Asia. UNESCO Bangkok 2010.