Requirements for Effective MTEFs
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can be made that reforms are easier to introduce when the going is tough, in which case the unavoidable need for short-term adjustment should be seen as an opportunity to implement structural reforms. There is no clearcut answer as to which of these views is right. And while experience suggests that some reforms, such as civil service restructuring, are easier in bad times, this is not necessarily true of other reforms. Indeed, it may be imprudent to rush into reforms that require careful planning and preparation even if immediate circumstances are favorable. In the case of MTEFs, there is a specific issue as to whether they should be implemented to attain or consolidate fiscal adjustment. The econometric evidence clearly suggests the former—that is, the causation runs from MTEF adoption to improved fiscal discipline. However, the latter cannot be ruled out entirely given that the approach to addressing the reverse causality problem does not eliminate this possibility. Moreover, as a practical proposition, although an MTEF can facilitate fiscal adjustment in many cases, in others a weak fiscal position may be turned around without one. In these cases, there is no reason to expect that an MTEF cannot assist in safeguarding a stronger fiscal position and in the process provide room for flexibility in conducting fiscal policy (for example, to achieve short-term stabilization or to respond to materializing fiscal risks). This seems to be what happened in Russia. But even where it is believed that an MTEF should be introduced to back up a decision to tackle fiscal imbalances, there may be a trade-off. While an MTEF can support and lend credibility to fiscal adjustment, it requires careful preparation and often needs to be accompanied by other budget reforms if its full potential is to be realized. This being the case, there is a risk that a hastily implemented MTEF could compromise adjustment efforts. On balance, it would seem that an MTEF could safely be adopted to support fiscal adjustment where supporting budget systems are in place. Where this is not the case, the success of an MTEF cannot be taken for granted, and the sequencing of MTEF implementation with other budgeting and PFM reforms becomes an issue. This is discussed in more detail below. A related issue is whether MTEFs are more effective when accompanied by fiscal rules. The idea is that ceilings become an implementation rule designed to support high-level policy rules (that is, deficit and debt rules or less common aggregate expenditure rules). Such an approach also reflects the fact that spending is a natural candidate for a fiscal control variable, because spending pressure is the main source of deficit bias and the focus of the budget process. However, the econometric analysis does not suggest