Review of International Practices for Determining Medium-Term Resource Needs of Spending Agencies

This paper reviews international practices for ‘bottom-up costing’ for medium-term expenditure frameworks. Medium-term expenditure frameworks are important because they incorporate the multi-annual nature of the fiscal policy into the budget process, mitigating its short-term bias. They also allow for the incorporation of the effects of policy decisions and provide for a comprehensive fiscal sustainability picture. However, there are significant gaps in current understanding of how costing and cost information is implemented within medium-term expenditure frameworks. The objective of this paper is to assemble information on practices used in Australia, Austria, Canada, and the Netherlands to determine program costs as part of medium-term expenditure planning, and to provide preliminary observations on the strengths and weaknesses of current arrangements. The overall findings are that current costing practices fall short of the declared objectives of medium-term expenditure frameworks. The report makes some specific observations on the status of costing practices within the surveyed jurisdictions, namely that: (i) although there is no typical medium-term expenditure frameworks, some features tend to be more compatible with a greater role for bottom-up costing; (ii) where costing practices are specified, they are generally expected to be used across the entire budget, but in practice the focus is on new or expanded programs; (iii) the capacity to distinguish existing and new programs is important in utilizing cost information; (iv) the distinction between conventional program costing and forecasting helps to explain differences in costing approaches; and (v) where they are specified, costing methodologies are recommended but not mandated.