Medium Term Expenditure Framework

Context:

Recently, the Ministry of Finance has conveyed its inability to release the Medium Term Expenditure Framework (MTEF) statement, mandated by the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Medium-Term Expenditure Framework (MTEF)
2. Why is the Ministry of Finance Unable to Release MTEF?
3. Fiscal Responsibility and Management Act

Medium-Term Expenditure Framework (MTEF):

The Medium-Term Expenditure Framework (MTEF) is a fiscal planning tool used by the government to set expenditure targets and estimates for a period of three years. It serves as a link between fiscal policy, budget formulation, and long-term fiscal sustainability. Here are the key aspects of the MTEF:

Purpose and Presentation:

• The MTEF statement establishes a three-year rolling target for expenditure indicators, along with underlying assumptions and associated risks.
• Presented in Parliament under Section 3 of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
• Provides estimates of expenditure across various sectors, such as education, health, rural development, energy, subsidies, pensions, and more.

Timing and Presentation:

• Presented in the session following the presentation of the Union Budget, typically during the monsoon session.
• Offers a comprehensive overview of expenditure commitments and allocation strategies for the upcoming years.

Inclusions in MTEF:

• Incorporates data related to expenditure commitments across central ministries, including salaries, pensions, major programs, grants-in-aid for capital asset creation, defense spending, interest payments, major subsidies, and other government commitments.

Objective:

• The primary goal of the MTEF is to establish a closer integration between the fiscal responsibility targets outlined in the FRBM Act and the actual allocation of funds through the Union Budget.
• Aims to ensure consistency, transparency, and accountability in fiscal planning and expenditure management over the medium term.

Why is the Ministry of Finance Unable to Release MTEF?

The Ministry of Finance is unable to release the Medium-Term Expenditure Framework (MTEF) due to several reasons related to the current global and economic circumstances. Here are the key factors contributing to the delay in releasing the MTEF:

Unchanged Global Headwinds and Risks:

• The global economic conditions and associated risks have not witnessed significant and favorable changes since the presentation of the Union Budget for FY 2023-24 in February.

Infeasible Medium-Term Projections:

• Given the persistent global uncertainties and challenges, the Ministry of Finance has found it challenging to establish medium-term projections that are considered feasible and accurate.

Flexibility in Fiscal Management:

• The Finance Ministry recognizes the importance of maintaining flexibility in fiscal management.
• This flexibility allows the government to effectively respond to unexpected external shocks and uncertainties that may arise in the global economic landscape.

Fiscal Firepower for Contingencies:

• Retaining fiscal firepower is crucial for the government to address unforeseen contingencies that might emerge during periods of economic ambiguity.
• The ability to allocate resources in response to unforeseen challenges is seen as a priority.

Exogenous Shocks and Economic Ambiguity:

• The current global economic environment is characterized by exogenous shocks and uncertainties.
• The Finance Ministry acknowledges the need to navigate these challenges effectively while ensuring prudent fiscal management.

Fiscal Responsibility and Management Act

The Fiscal Responsibility and Management Act (FRBM) is a parliamentary act enacted in 2003 to ensure fiscal discipline, transparency, and accountability in government spending. It aims to control deficits and manage fiscal policies effectively. Here are the key provisions and components of the FRBM Act:

Fiscal Deficit Targets:

• The act mandates the government to gradually reduce the fiscal deficit over time. It sets specific targets for reducing fiscal deficit, with the aim of ultimately achieving a prudent level of deficit.
• The fiscal deficit is the difference between the government’s total expenditure and its total revenue.

Elimination of Revenue Deficit:

• The act requires the government to eliminate revenue deficit, which is the excess of total expenditure over total revenue.
• This ensures that the government’s regular expenses are covered by its regular income.

Limit on Fiscal Deficit:

• The FRBM Act initially limited the fiscal deficit to 3% of the Gross Domestic Product (GDP). This served as a cap to control excessive borrowing and ensure fiscal sustainability.

Medium-term Fiscal Strategy:

• The act requires the government to create and execute a medium-term fiscal strategy that outlines plans for reducing fiscal deficit over a three-year period. This provides a roadmap for achieving fiscal consolidation.

Annual Fiscal Reports:

• The government is obligated to present an annual fiscal responsibility statement to Parliament, detailing progress made in achieving fiscal targets and consolidation.

Macro-Economic Framework Statement:

• This statement presents macroeconomic assumptions forming the basis of budget estimates.
• It includes key economic indicators and projections that influence revenue and expenditure decisions.

Medium-Term Fiscal Policy Statement:

• This statement outlines the government’s medium-term fiscal policy objectives and strategies for the next three years. It aligns fiscal targets with broader economic goals.

-Source: The Hindu