Subnational Public Finance Management in Myanmar

Transcription

1 Subnational Public Finance Management in Myanmar Budget Brief Series: Bago No.1 March 217 Introduction 1. Public finance management will play an essential role in Bago s development, as well as the development of other States and Regions. Governments have to make difficult choices about how to allocate scarce resources to achieve societal goals for economic growth and poverty alleviation. Healthy public finance management is essential to ensure effective prioritization of government targets, efficiency and equity of spending. The aim of the budget brief series is to encourage continuous debate on policy priorities, sustainability, overall state of public finance as well as to promote budget transparency and accountability. We hope the series to provide vital data analysis, which is fundamental to successful public finance management. In the future, access to more detailed revenue and expenditure data will provide an opportunity to undertake greater value reviews into expenditure and revenue, allocative efficiency and more. 2. This first Bago budget brief provides a reference point with an overview of the current fiscal environment in Bago and reviews the composition of its revenue and expenditure. Between 211 and 216 Union transfers to States and Regions increased from 2.2 percent of Union expenditures to 8.7 percent. Driven by Union transfers, Bago s total expenditure grew over 15 times during the period. Despite increased transfers Bago s per capita available fiscal resources are smaller than in most of the country. Data suggests modest improvements in fiscal discipline following the introduction of a formula based Union grant transfer mechanism under MTFF reforms.1 Subnational tax revenues have been slowly increasing, with heavy reliance on receipts from fisheries and excise tax. Changing classification and accounting norms pose challenges to accurate data analysis on overall revenue performance. Own revenue performance shows a decline in recent years, this is however largely driven by the changed accounting arrangement following the reorganization of Public Works within the Ministry of Construction in 215. The share of capital expenditure has grown considerably as a percentage of total expenditure in Bago, with largest share of resources spent by the Department of Highways. Bago s Regional Government Office (Cabinet) accounts for about a quarter of the Bago budget, with most of the Cabinet s current expenditure budgeted for Agricultural projects. 1 MTFF Medium Term Fiscal Framework

2 Aggregate fiscal environment 3. Overall Bago government spending significantly expanded over the last 6 fiscal years, and has recently steadied with smaller year-to-year changes. Total expenditure grew from MMK 16 billion in FY to nearly MMK 11 billion in the FY, according to the revised budget estimate (Fig. 1). 2 3 This translates to a per citizen increase in spending from MMK 6,49 to MMK 31,273. The revenue in Figure 1 excludes any identifiable Union transfers; including the Union deficit grant transfer, constituency grant, tax revenue sharing and other miscellaneous transfers. 4 Fig. 1: Revenue and Expenditure 16, MMK per capita 4, Expenditure 12, 8, 4, 3, 2, 1, Revenue (excludes any Union transfers) Per capita expenditure (RHS) Per capita revenue (excludes Union transfers) (RHS) 4. Fiscal expansion has been primarily financed through increased Union grant deficit transfers and fiscal autonomy remains constrained. Union transfers have been consistently growing as a share of total available resources, totaling around 84 percent of the total in RE (Fig 2). Other Union transfers in the form of the constituency grant, tax revenue sharing and other miscellaneous transfers make up 2.4 percent of total available resources. Similarly, the estimated share of expenditure financed by own revenue (represented by a purple line) has been declining, and makes up less than a quarter in the most recent fiscal year. 5 Fig. 2: Breakdown of fiscal resources % of available resources 1% 8% Own revenue as % of expenditure 75% 6% Union grant transfer 6% 45% Other Union transfers 4% 2% 3% 15% Non-tax own current revenue % % Tax revenue 5. The size of Bago government s fiscal resources is relatively small on per capita basis, compared to other States and Regions (Fig. 3). 6 Only Ayyerwaddy has smaller per capita fiscal resources available (own revenue + transfers) than Bago. Currently, State and Region governments in Myanmar are not responsible for providing public services like education and health. However, they still shoulder responsibility for other essential public services. Consequently, improving the efficiency of State and Region public finance management is vital to enhancing the quality of public spending and maximizing its impact on growth, equity and poverty reduction. According to national plans GDP growth averaged around a strong 8.8 percent between 2 BE - Budget Estimate; RE - Revised Estimate (revised budget estimate); PA - Provisional Actual (the preliminary figure for government expenditure; A Actual figures (after Auditor review); FY Fiscal Year 3 All budget expenditure and revenue data are provided by the Bago Region Budget Department. 4 Union grant transfer is an unconditional transfer from the Union Government to State and Regions; constituency grant is an unconditional transfer of MMK 1 million for each township; tax revenue sharing refers to a transfer of share of tax receipts collected by the Union Internal Revenue Department (IRD) and includes commercial tax, income tax, special goods and stamp duty taxes. 5 Own revenue refers to revenue that excludes any identifiable transfers from Union government. 6 Figure 2 illustrates each State and Region s available resources (own revenue + Union transfers) per each citizen in FY. 2

3 211 and 217 fiscal years, and economic activity is projected to slow down to 7.7 percent in FY. (Fig. 4). 7 3, 25, Fig. 3: Available resources, by State and Region MMK per capita ( BE) Fig. 4: Aggregate own revenue and expenditure % of GDP GDP Growth 4.5% 11% 2, 3.% 9% 15, 1, 1.5% 7% 5, Ayyerwaddy Bago Sagaing Mon Magway Shan Yangon Kayin Rakhine Kachin Mandalay Tanintharyi Kayah Chin.% Expenditure Subnational (Own) Revenue 5% 6. The overall balances have been consistently kept close to zero (Fig. 5). Prior to FY this was achieved by adjusting the Union deficit transfers using the supplementary budget to match the gap between actual revenue and expenditure. The overall balance as a share of GDP varied from -.21 to.6 percent between and fiscal years. Following MTFF reforms in FY the Union Government has introduced a formula based grant transfer in order to systematize and improve the intra-governmental fiscal relationship. The zero balance in the following years could suggests improved fiscal discipline; possibly as a response to a formula based budget constraint and better foresight with regards to Bago government s available fiscal resources. An important factor to highlight is that despite rapid increases in spending, the government has a modest recurrent deficit (recurrent revenue covering recurrent expenditure) (Fig. 6). While the deficit is small it has been increasing; keeping a positive current balance will be an important aspect for fiscal sustainability in the future. 4, Fig. 5: Overall balance, Post-Union Transfer % of GDP.1%.% Fig. 6: Fiscal balances, Pre-Union Transfer Share of GDP 2,.5% -.5%.% -2, -.5% -1.% -4, -.1% -1.5% -6, -.15% -8, -.2% -2.% -1, % -2.5% Overall balance Overall balance (as % of GDP) Overall balance Recurrent balance 7. Mis-estimation of own revenues has modestly impacted fiscal discipline. Budget deviations from budgeted expenditures have been small, relative to projected GDP. Overestimation of revenues in FY has led to the cut of nearly 2 percent in budgeted expenditure; the biggest deviation in a 6-year period (Fig. 7). The 2 most recent fiscal years show identical deviations for both expenditure and revenue (Fig. 8). This seems to be driven by own over-realized revenues, which were used to finance unplanned/unbudgeted expenditure. 7 Real GDP growth figures are based on national planning laws using price level and may not reflect actual growth rates. 3

4 12% 1% Fig. 7: Budget expenditure execumon rates Expenditure as % of budgeted (BE) 15, 1, 5, Fig. 8: Budgetary deviamons From BE MMK, millions 8% 6% -5, 4% 2% , Revenue -4, , ,82. 9, ,52.5 3,588.3 Expenditure -5, , , ,52.5 3,588.3 Revenue performance 8. Changing classification and accounting norms pose challenges to accurate data analysis on revenue performance. Although a more detailed revenue analysis is necessary, Bago revenue mobilization, like in the rest of the country, appears to be constrained. After significant increases, albeit from a low base, between 211 and 214 own revenue growth has since showed a decline (Fig. 9). Budget books in RE show a 25 percent year-on-year decrease in own revenue collection (excluding Union transfers). Current receipts show a decline from MMK 4 billion to around MMK 2 billion between and fiscal years. However, the drop is largely the result of a change in accounting arrangements (see next point). An increased Union grant transfer has largely counterbalanced a decline in budgeted own current revenue. Fig. 9: Breakdown of fiscal resources and own revenue growth 2, 15, Own revenue year-on-year % growth 16% 12% Union grant transfer 1, 5, -5, % 55% 45% -37% % % 4% % -4% Other Union transfers Non-tax own current revenue Tax revenue Note: "Own revenue" refers to revenue that excludes any identifiable transfers from Union government 9. Recorded own revenue decline on recent budgets is largely driven by the change in accounting arrangements following the reorganization of Public Works within the Ministry of Construction (Fig. 1). In 215, the government reformed the structure of Public Works (SEE) in all States and Regions and transformed it into the Department of Highways (DOH) and the Department of Bridges (DOB). During its last year on Bago budget books in FY, Public Works expenditures on roads & bridges were recorded as enterprise revenues and amounted to over MMK 29 billion as revenue on the Regional budget; nearly 6 percent of all current revenue. The reorganization meant that road & bridge expenditures were no longer recorded as enterprise revenues, resulting in the observed drop on budgets. The accounting change largely contributes to the observed overall negative current own revenue growth. 8 8 Pre-restructuring accounting norms of Public Works might have also inflated own current revenue collection numbers. 4

5 5, 4, 3, 2, 1, Fig. 1: Non-tax current revenue Excludes Union "deficit" transfer 1% 8% 6% 4% 2% Fig. 11: Current revenue Tax vs. Non-tax current revenue, excludes Union "deficit" transfer % Government central bodies (Union Transfers) Department of Highways Development Affairs Committees Government central bodies (other current receipts) Public Works Non-tax current: other Union transfers Non-tax current: own revenue Tax revenue 1. Almost all revenue in Bago is classified as current revenue. Though, capital and finance revenues are occasionally recorded on the budget books they are currently negligible in size and are not explored in this brief. Current revenue can be separated into tax, non-tax and Union transfers. Figure 11 presents historic composition of such current revenue breakdown, excluding the Union deficit grant transfer. Non-tax current revenue makes up the majority of current revenue as well as own collection. Between 211 and 216 fiscal years, nontax current revenue has consistently accounted for over 8 percent of current revenue (Fig. 11). Breakdown for non-tax current revenue (yellow bars in Fig.11) are shown in Figure Development Affairs Committees (DAC/DAO) and Bago Central Bodies account for nearly all of nontax current revenue in FY (Fig. 1). 9 DAO revenues have been increasing every year; with commercial license sale and other current revenues accounting for nearly all of DAO's revenue and growth (Fig. 12). License sale makes the largest share of non-tax receipts, and while it provides a valuable revenue source, questions arise about its merit and distortionary effects on local markets (See Local Economic Governance in Myanmar, Jared Bissinger 216). 1 Furthermore, low levels of tax collection by DAO imply that its service provision is increasingly reliant on non-tax revenue. Non-tax share of DAO s revenues account for 54 percent of total Bago non-tax current revenue. Revenues for Central Bodies, which account for around 44 percent of total non-tax current revenue, are mostly recorded on the books of the Regional Government (Cabinet) office and are presented in Figure 13 in more detail. It is not clear from available data what types of revenue make up Other Current receipts, an important detail given its significant share of revenue in and fiscal years. The rest of the Central Bodies revenue is composed of Union transfers; for example, through the Poverty Reduction transfer and the Constituency Grant of MMK 1 million per township (MMK 28 million in total). 11 It is important to highlight that while these transfers appear as Central Bodies current revenue they are in fact Union transfers and not own revenue. Fig. 12: DAO current revenue breakdown 12, Fig. 13: Central Bodies current revenue breakdown 25, Other current receipts 1, 8, 6, 4, 2, 15, 1, Commercial Tax (15% share) Other Reserved Fund ConsVtuency Grant 2, 5, Poverty ReducVon Grant (BE) Property Tax Wheel Tax Licenses & Other (BE) Transfers from Union 9 Central Bodies are comprised of (1) Regional Cabinet Office (2) Regional Parliament (3) Court (4) Attorney General Office and (5) Auditor Office Other Union contributions include transfers for the following categories: (1) Township Development (2) Construction of collective government offices (3) Housing Project (4) Land Sharing program for landless farmers 5

6 12. Tax revenues have grown over the last 6 fiscal years, largely driven by increased receipts by GAD (Fig. 14). 12 Currently Bago collects around MMK 1 in tax per capita and tax makes only 26 percent of all own current revenue. General Administration Department (GAD) and Department of Fisheries have consistently contributed to largest tax receipts; accounting for nearly 8 percent (over MMK 4 billion) in RE. More specifically, excise tax (collected by GAD) and tax on fisheries combine to 7 percent of all tax collection in FY (Fig. 15). 13 6, 5, Fig. 14: Tax breakdown By department Fig. 15: Tax breakdown By tax item, RE 13% 4, 13% 43% 3, 4% 2, 1, (A) (A) (A) General Administration Department Department of Fisheries Forestry Department Development Affairs Committees 27% Excise Tax Tax on Fisheries Tax on the extraction of Forest Produce Property Tax Other 13. Low tax share of subnational revenues could result from a combination of limited tax authority, low collection efficiency and legal ambiguities. Currently, subnational tax collection is fragmented into multiple agencies, possibly resulting in duplication of effort and miscoordination. In addition, conversations with State and Region government officials around the country suggest confusion over legal authority to change outdated tax rates for items like land tax. Land revenue is a Schedule 5 item in the Constitution, and falls under the authority of State and Region governments. However, prior legislation doesn t seem to be in accordance with the constitution presenting an obstacle to State and Regions from exercising full authority over subnational tax policy. Composition of Expenditure 14. State Government spending has grown over 15 times between 211 and 217. The largest year on year increase in expenditure occurred in FY, albeit from a very low base (Fig. 16). The expenditure has since grown at decreasing rates and has marginally declined in RE. While this budget brief presents a reference point to composition of expenditure, there remains scope to evaluate allocative efficiency and equity in the composition of spending. It is important to assess how aggregate spending allocation to programs within and across sectors impact social welfare, including the impact on the poor. 16, Fig. 16: Year on Year expenditure growth 12, 8, 4, Own current revenue excludes the Union grant transfer and is categorized as tax and other non-tax current revenue 13 The excise tax collected by GAD is a license fee for sale of excise goods. A tax on actual consumption of such goods is collected by IRD as a Special Goods Tax. 6

7 15. The share of capital expenditure has grown considerably as a percentage of total expenditure in Bago (Fig. 17). Capital expenditure accounts for nearly 6 percent of total expenditure in RE. This is largely driven by capital expenditure within the recently established Department of Highways (DOH), Electricity Distribution Enterprise and DAO, with 57, 12 and 11 percent of total capital expenditure, respectively (Fig. 18). Questions remain whether this shift is a reflection of more capital spending by DOH or a change in accounting practices associated with the reorganizations within the Ministry of Construction and Public Works. Going forward, it is important to ensure that the recurrent cost implications of new capital investments are taken into account. Future work could also examine how well capital spending is aligned with the Bago Government s development priorities. Fig. 17: Expenditure breakdown Share of expenditure Fig. 18: Expenditure breakdown Share of expenditure, by department 16, 12, 8, Capital as % of total expenditure 8% 6% 4% 1% 8% 6% 4% 4, 2% 2% % % Central Bodies GAD DAO Department Electricity of Highways Distribution Enterprise Capital Current Capital Current 16. Spending by DOH and the Regional Government (Cabinet) Office account for over 6 percent of total expenditure in RE (Fig. 19). Budget changes in recent fiscal years reflect the reorganization within the Ministry of Construction and relatively larger role of the Regional Government in managing local resources. Expenditure by DOH now accounts for around 36 percent of total Bago expenditure, possibly taking on some of the expenditure previously undertaken by Public Works and expenditure on Maintenance of Buildings, Roads and Bridges. Expenditure on electricity has also grown from to over 7 percent of total expenditure by RE, with nearly all electricity spending related to capital expenditure (Fig 18). A more detailed expenditure breakdown is necessary to assess the sustainability, strategic allocation of resources and the efficiency of spending. Fig. 19: Expenditure composimon Shares of total expenditure, by administravve categories (departments) 1% 8% 6% 4% 2% % Other Electricity Distribution Enterprise Maintaince of Buildings, Roads and Bridges Department of Highways Public Works DAO GAD Central Bodies 17. A considerable share of Central Bodies current expenditure is spent on agriculture related projects. 14 Expenditure on Irrigation, Dam, Lake, Drainage and Agriculture Water Supply accounts for 7 percent of total current expenditure undertaken by Central Bodies (Fig. 2). This translates into over 17 percent of total budget expenditure in Bago. It is understood that recording this expenditure on the books of the Cabinet executive office, rather than the Ministry of Agriculture itself, is rationalized by the fact that there 14 9 percent of Central Bodies current expenditure is recorded under the Regional Government office. 7

8 isn t a Department of Irrigation in Bago. It is unclear whether Regional Government is also responsible for the related fund execution. While this may be seen as a practical necessity and sign of pragmatism, such arrangement poses challenges to budget transparency and accountability. Salary payments account for 1 percent of total Central Bodies current expenditure and have grown nearly 2 percent between and fiscal years, reflecting official Union driven wage increases and hiring of new staff. 4, 3, 2, 1, Fig. 2: Current expenditure composimon For Central Bodies Subsidies Current Expenditure of Water Resources Utilization Department Township Development (Administrative expenditure) Constituency Grant Irrigation, Dam, Lake, Drainage & Agricultural Water Supply Poverty Reduction Fund Transfers (to households) (BE) Purchases of goods and services Salary payments Conclusion 18. The classification of budget data imposes limits on analysis. Despite recent progress in disclosure of budget information, there is room for improvement with a more detailed breakdown of expenditure and revenues to help further analysis on sustainability and strategic allocation of resources. Aggregate reporting of budget sections poses challenges in estimating resource distribution to a specific function of government, assessing expenditure efficiency and equity. Lastly, any expenditure analysis and review of Region priorities would not be exhaustive without better knowledge and understanding of the Union government s spending in Bago, specifically in areas of education and health. 19. There remains scope for more analysis in the subsequent Bago budget brief. With additional data on actual budget revenue/expenditure for the fiscal year and budget estimate for , the brief could examine budget credibility and access changes in the budget stemming from shifts in new government s priorities. Township level expenditure will allow for a more sophisticated expenditure review. 2. Despite large unconditional transfers from the Union questions remain about the degree of Regional autonomy for prioritizing resources. Increasing expenditure by the Regional Government office suggests relative autonomy over a share of public resources; however, a degree of Regional influence over strategic allocation across Regional ministries is unclear. 8

9 About the Renaissance Institute The Renaissance Institute (RI) is a policy institute focused on assisting the reform of Myanmar s economy. RI provides analytical support, assists government capacity building and facilitates communication between Myanmar s government and other relevant stakeholders focused on revitalizing Myanmar s economy. In particular, the Renaissance Institute is supporting key policy priorities of the current government: Fiscal decentralization, and Public Financial Management reform. No. 51-A6, Thayarwaddy Street Sayar San Ward, Bahan Township Yangon, Myanmar Tel Fax: