In my recent technical note Top-Down Budgeting Today, I set out a clear alternative to the failed hard ministry ceilings doctrine. The HCM doctrine, which has become PFM conventional wisdom, asserts that governments should set expenditure ceilings for ministries during the initial (strategic) phase of the budget preparation process. Ministries should then prepare their budget proposals based on their ceilings, strictly respecting them.
Decades of experience tell us that the HCM doctrine rarely works. In most countries where the Ministry of Finance (MOF) announces ministry expenditure ceilings in the budget circular, these “ceilings” are not respected. The extent to which ministry ceilings are disregarded is often spectacular – as in the case of one country where the higher education ministry was notified of 2024-25 “ceiling” of 25 billion, demanded 126 billion and was ultimately allocated 65 billion. Repeated calls by international advisers for MOFs to take a tougher stand and make the ministry ceilings stick have typically had little effect.
In my technical note, I outline the appropriate alternative approach in three key points:
- Ministry indicative allocations — not ceilings — should be set in the strategic phase.
- The MOF should retain an unallocated amount to make it possible for some ministries to receive additional funding during the subsequent stage of the budget preparation process (in which case their final allocations will be higher than their indicative allocations). Access to any such additional funding should be tightly limited both procedurally and with respect to the purposes for which it might be provided.
- The indicative ministry allocations should be clearly and logically related to ministry expenditure requirements, using a methodology that starts with ministry baselines. They should represent realistic allocations that ministries can cope with if — as should be the case for most ministries — they do not receive any additional funds.
I’ve discussed what is wrong with the HMC doctrine in detail before. The main point is that requiring the government to set hard ceilings before ministries are given any opportunity to make formal budget proposals creates a huge information problem for the MOF, which is in no position to unilaterally make all the appropriate decisions about where funds should be allocated. This virtually guarantees that ministry ceilings will lack credibility, making them difficult to enforce.
In response to this reality, many MOFs set what they call “indicative” ministry ceilings. An indicative ceiling is a ministry allocation that is explicitly open to upward negotiation in response to spending ministry budget requests. But an upwardly adjustable “ceiling” is, obviously, not a ceiling at all. At best – to the extent that it influences the ministry’s final allocation – it is an indicative allocation.
Moving from setting ministry “ceilings” to setting indicative allocations is the right way to go, but only if these indicative allocations are credible. This requires a solid methodology for setting them. In my technical note, I draw on the successful practice of several countries to suggest that the best methodology to determine indicative allocations is to start with ministry baselines and adjust them by:
- Pruning them to the extent necessary to leave an adequate unallocated amount (using spending review and mechanisms such as so-called “productivity savings”1) and
- Where appropriate, adding to some ministry indicative allocations in response to major government priorities that are sufficiently clear to be factored in during the strategic phase of budget preparation.
Such a methodology makes indicative allocations adjusted baselines. This gives them credibility. It also makes it possible to bar spending ministries from requesting additional baseline funds from the unallocated amount, thereby limiting such requests to new spending initiatives. This greatly reduces bottom-up spending pressure, which can be further reduced by tough procedural requirements for additional funding requests.
The hard ministry ceilings doctrine is a “zombie idea” that continues to roam the planet despite being manifestly lifeless. It’s time to give it an honourable burial. And while we’re at it, let’s drop the notion of indicative ceilings and shift to indicative allocations based on a clear and credible methodology.
- Small across-the-board reductions to baselines. ↩︎
Ok, so the term has changed but someone at least is trying to keep some semblance of fiscal responsibility. The place where are CEILINGS are essential is revenue budgeting. The revenue envelope must operate to curb the enthusiasm of ministers trying to look good for their constituents with an implied “Screw the Rest of You” built into their blathering.