Expenditure baselines estimate the cost of the government’s existing spending commitments. They illuminate the multi-year implications of spending decisions and show emerging expenditure trends. OECD countries typically project expenditure baselines for a 3-5 year period and show these in the budget at the level of the main spending controls. These baselines are updated regularly to reflect changing assumptions and to integrate policy decisions that have been adopted by Cabinet.
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Developments in OECD Countries
Abstract
Expenditure baselines estimate the medium-term costs of current policy. They show how spending plans change over time, even if the government's policies do not. When the government adopts a new spending policy, it is added to the baseline to provide an updated projection of public expenditure.
Once integrated into the budget process, baselines are treated as the government’s intended expenditure plans as they reflect spending decisions by the Cabinet or the Council of Ministers. Each year, baseline estimates are updated to provide a starting point for the coming year’s budget. When the baseline estimates change, Cabinet decisions with financial impacts are passed to the central budget authority so the baselines can be updated.
Multi-year expenditure baselines provide a powerful tool for spending control and reallocation. The government can use baseline projections to anticipate and avoid breaches to its fiscal objectives and medium-term expenditure ceilings. Baselines can also help officials to track the pressures that drive changes in public spending, and to manage associated fiscal risks.
While the majority of OECD countries have adopted a medium-term perspective to budgeting, the full potential of using baselines to support budget allocation and controls is still evolving (Moretti, Keller and Majercak, 2023[1]).
3.2.1. Projections of the government’s spending commitments
Expenditure baselines are a projection of the government’s existing spending plans. They show how spending is expected to change over the medium-term before new policies are adopted. The projections are based on assumptions about the future demand for services and the costs of providing those services. They will also factor in policies that were adopted through previous budgets and are still being rolled out.
The projections of baseline spending are not fixed. The costs of newly adopted policies are added to the baseline. Even when policies remain unchanged, planning assumptions can be revised. Updated macroeconomic forecasts, for example, will offer new assumptions on inflation or employment rates.
The concept of an expenditure baseline is closely related to that of top-down expenditure ceilings. Both are based on the government’s spending plans. Ceilings are the government’s approved limits for spending. Baselines are technical projections of the costs of spending plans. This means that:
During budget formulation, ceilings will include the cost of new measures, but baselines will not.
During budget execution, baselines will be updated with new assumptions, but ceilings may not.
The coverage of ceilings may exclude some areas of spending, while baselines should not.
For some countries, like Australia, these differences are minimal (Box 3.1). Other countries, including Sweden, deploy the different concepts as part of their fiscal framework.
Australia’s Forward Estimates present revenue and expenditure estimates for the budget and a further three financial years. The medium-term budget then projects budget aggregates for a further seven years. This provides information on what public expenditure is expected to be in the budget and over the next decade, if no new policy decisions were made.
The Forward Estimates provide a rolling expenditure plan. That means the first year of the Forward Estimates becomes the starting point for preparing next year’s budget, and another year is added to the projections to maintain the forward look. The Forward Estimates are presented at the same level of detail as the budget. They cover spending authorised through both annual and special (standing) appropriations, which account for around 20% and 80% of Commonwealth spending, respectively.
The Forward Estimates are published at least twice per year, in the budget and then in the Mid-Year Economic and Fiscal Outlook. A further internal update is provided to the Expenditure Review Cabinet Committee meeting that sets overall budget strategy. In each case, the expenditure baselines are revised with new economic or programme assumptions (parameter and other variations). These baselines are presented with new policy proposals that together make up the revised estimates. While these carry important policy status, the Forward Estimates are not enacted into the law.
The Department of Finance is responsible for expenditure and non-tax revenue estimates, while the Department of Treasury is responsible for tax revenues. The Department of Finance actively manages the expenditure baselines throughout the year to ensure that the Forward Estimates reflect the latest assumptions and policy decisions. Line ministries and other public entities are required to provide Finance with information on expected material variations in a timely way, generally in advance of the update for the Expenditure Review Committee.
All new policy proposals are assessed and discussed in terms of their impact on the Forward Estimates. In some cases, policies need to be assessed over the longer medium-term budget period. This is usually required if a policy will start later in the forward estimates or beyond the forward estimates period, or if there are material changes in costs beyond the forward estimates.
Source: Department of Finance and Parliamentary Budget Office, Australia.
3.2.2. The benefits of well-defined and costed baselines
Without a well-defined and costed baseline, spending plans can only be compared to past budgets or to the execution rate of the current budget. This provides limited information about how and why spending changes from year to year. Expenditure baselines offer the CBA and line ministries more information for budget formulation, monitoring and oversight and are a powerful tool for forward planning and control.
Up-to-date baselines provide a starting point for preparing the next budget. They ensure the CBA and the line ministry jointly understand the estimated costs of continuing existing policies. This common understanding allows ministers to focus on substantive issues, including what new measures to include in the budget.
Publishing expenditure baselines separately from new policy measures supports budget oversight. It helps parliament, ministers and the public understand the changes announced in the budget, and whether these deliver existing policies or introduce new ones.
Projections of existing spending commitments support budget planning. Baselines are paired with revenue forecasts to reveal the budget balance and the path of public debt. This will show if current spending plans are consistent with the government’s fiscal objectives or fiscal rules and with top-down expenditure ceilings. It also informs the judgement on the fiscal space for new policies.
Baselines can allow governments to act early when spending pressures are building in specific sectors or programmes. Taking early action can reduce the build-up of debt and interest payments.
3.2.3. Challenges in preparing baselines
Adopting multi-year expenditure baselines in budget management requires broad-based capacities for preparing spending plans and projections. Given that baselines are prepared using a range of assumptions, each major category of spending presents its own challenges. Wages, transfers and capital investment make up the majority of public spending in OECD countries, and face different cost drivers:
Wages and salaries are influenced by staffing levels, hiring plans and public sector wage agreements. While some countries will leave this to individual ministries, others take a more centralised approach for human resource management.
Transfer spending for social security and pensions, is shaped by legal entitlements, indexation rules and changes in the population that is eligible and interested in claiming different benefits. It may also require modelling of population behaviours, such as the take up of benefits.
Capital expenditure will be informed by infrastructure pipelines and project costs in business cases, which are often subject to revision based on new information.
Each sector or programme will also have its own cost drivers. Health care costs, for example, have been rising in real terms in most OECD countries due to a combination of demographics and technological advances that make newer forms of treatment available. These costs have historically been under-estimated in some countries, requiring regular revisions.
The CBA needs to establish rules and guidelines to ensure a consistent and transparent approach to making changes to baselines. A practical example is to prevent contingencies from being included more than once for a category of expenditure. Another is to support a consistent classification of proposed changes to the budget into policy changes and baseline revisions.
Line ministries can provide important inputs into the rules and guidelines issues by the CBA. Line ministries can also help identify and share good practices for preparing baseline estimates, which will be important for reforms like using artificial intelligence for modelling and costing, so the government can make the most of these and other technologies (Moretti, 2024[2]).
Expenditure baselines should be designed so they support budget planning and controls. This means:
Baselines should be prepared as projections for a three to five year period beyond the budget.
Baselines should cover all spending and be comparable to expenditure ceilings.
New policy measures should be presented separately from changes to the baseline.
3.3.1. Multi-year projections
Baselines should have a medium-term horizon of three to five years beyond the next budget. Each baseline should be rolled over for an additional new year with each budget, maintaining this extended forward look. More specifically, this means that the budget year is replaced by “actual” outturns. The first year of the baseline projection is replaced by the new budget, and an additional year is added to the existing projections.
In the majority of OECD countries, the multi-annual expenditure baseline covers at least three years beyond the coming budget (Figure 3.1). In Germany, for example, each annual budget cycle agrees the figures (at detailed line-item level) for the annual budget and for the following three years. When preparation for a new budget starts, line ministries update their forecasts for the entire four-year period, rolling forward the baseline estimates (OECD, 2015[3]).
Shorter periods are also possible, but they provide less information on the costs of significant policy changes and capital investments. A shorter horizon may also be insufficient for a government to show how it is making material progress on its fiscal objectives and rules.
Number of OECD countries, 2023
Note: Data for Lithuania and Mexico are not available. Data shows the length of multi-annual expenditure baselines beyond the upcoming budget year. Other includes, but is not limited to, varying or longer time periods.
Source: OECD (2023), Senior Budget Officials Survey on Budget Frameworks, Question 11.
3.3.2. Aligned with expenditure controls
To support fiscal control, baselines should cover all expenditures, whether authorised in the annual budget law or in separate legislation (e.g. mandatory expenditures on entitlements). They should be presented for aggregate spending and at an institutional level to align with top-down expenditure ceilings.
Baselines are calculated using detailed assumptions of the cost drivers for each line in the budget. These costs are calculated separately for different spending categories (e.g. wages, transfers and capital investments) and for different outputs (programmes and activities). Detailed baseline estimates are aggregated so that they can be compared to the expenditure ceilings for line ministries. The sum of all baselines is used to forecast total expenditure in conjunction with the latest revenue forecasts in the MTBF.
Aggregated expenditure baselines help the government to make budget decisions that are consistent with its high-level fiscal objectives. They improve budget accountability, by focusing on the “big picture” for each portfolio rather than the many fine adjustments made to spending plans during implementation.
Baselines can also strengthen control over “mandatory” or “entitlement” expenditure when these cannot be limited to a fixed expenditure ceiling or appropriation. Monitoring baseline projections allows the government to track spending trends and introduce policy changes that will keep entitlement expenditure within affordable limits over the medium-term.
In Belgium, the National Institute for Health and Disability Insurance (INAMI) is responsible for the organisation and funding of the mandatory health insurance system. The system is funded mainly through social security contributions (70%), with the remaining resources provided through transfers from the government (30%). INAMI allocates the overall budget to seven health insurance funds using a combination of forward looking projections and retrospective adjustments.
The overall expenditure ceiling for the health sector is established in law. This Global Budget Objective is determined by three factors:
a real growth rate for health spending.
expenditure related to Revenue Article 81/111.
agreed funding for new policy initiatives.
The real growth rate usually accounts for between 70%-90% of the annual increase in health budgets. It is informed by estimates of health expenditure baselines and stakeholder consultations before a final decision by the federal government.
Expenditure baselines are calculated by INAMI and referenced against the 10-year spending projections prepared by the Federal Planning Bureau. In May, INAMI actuaries calculate technical estimates for health expenditure, which are then aggregated and submitted to the INAMI General Board. The technical estimates are compared to the Global Budget Objective for the coming financial year to guide decisions over the budget space for new policy proposals or pharmaceuticals, or whether savings measures will be needed. The process is repeated during each financial year using data on actual expenditure for the first five months of that financial year before a final proposal is included in the budget that is submitted to parliament.
3.3.3. Separate costings for baselines and new measures
In the budget, expenditure baselines are presented separately from new policy proposals. This separation requires the government’s framework to categorise changes to spending plans, and to determine when the changes represent a “policy change” relative to a continuation of the cost of the existing policy. The baselines for future health spending, for example, to factor in supply-side pressures such as wage agreements. They also estimate future demand for health services resulting from demographics and other factors (OECD, 2024[5]).
However, the costs of delivering government policies can change, even if the policies remain the same. To stay accurate, baselines need to be revised to reflect the latest assumptions about cost drivers and lessons from policy implementation. These revisions should be reflected in the budget.
Adjustments to the baseline can go by different names, e.g. “parameter and other variations” or “underlying forecast differences”. Both reflect two types of adjustments:
Changes in the baseline projections that result from factors outside the government’s direct control, such as updated assumptions about inflation (economic parameters) or claims for unemployment benefits (programme specific parameters) and changes to the projections for debt interest payments.
Minor changes to spending plans, including where resources have been reallocated between budget lines or from one fiscal year to another. Australia uses the category “Other Variations” to reflect these adjustments.
These adjustments are not just presentational but determine how the CBA will approve changes to baseline estimates. For example, the New Zealand Treasury may approve “fiscally neutral adjustments”, such as virements between the budget lines, but if a ministry asks for changes that are not fiscally neutral or are beyond the limits set in budget guidance, a separate approval is required.
New policy initiatives will need to be approved by the cabinet and authorised by parliament through the budget. The CBA will maintain a record of all new spending policies agreed since the baseline was last published. When the baseline is updated for the next publication, policy changes will be presented separately from the adjustments to the baseline. Detailed costing notes are also published with the budget statement in a growing number of countries, including Australia’s Budget Measures paper.
The costs of new measures are often presented in terms of how they will change the existing baseline. That means the budget does not always show the full cost of a policy change, unless it is introducing an entirely new initiative. Instead, it will reflect the net addition or reduction in spending as compared to the existing baseline for that policy area. These costs will usually accumulate over time, showing how much the baseline has changed in total by the end of the period set by the MTBF.
Where they are well established as a tool for spending control, multi-year expenditure baselines are an integral part of the budget process, not a separate exercise. Preparing the baselines should be the responsibility of the same entity that prepares the annual budget. Baselines should also be updated and reviewed regularly as a routine part of budget preparation and monitoring.
3.4.1. Shared responsibilities
In six OECD countries, the responsibility for preparing baselines lies solely with the CBA; but in most countries, baselines are produced collaboratively between the CBA and line ministries. Typically, the CBA will co-ordinate the process for preparing baselines. The CBA will also scrutinise the assumptions used for each baseline to ensure they are reasonable and consistent across ministries and programmes. In practice, the responsibilities for costing baselines are shared in different ways:
Australia: Baselines are prepared by line ministries, with economic assumptions from the Department of Finance.
France: Baselines are estimated separately by the Ministry of Economy and Finance and by line ministries and then agreed upon before the expenditure ceilings are set.
Sweden: Baseline updates are managed by line ministries, with a distinction – agreed with the Ministry of Finance – between those influenced by macroeconomic conditions and those that are not.
In a few cases, like the United Kingdom and United States, responsibilities are shared with an IFI. However, a more frequent practice is that the IFI will offer an alternative projection of the expenditure baseline, as is the case in Canada and Ireland (Moretti, Keller and Majercak, 2023[1]).
3.4.2. Regular updates of expenditure baselines
Baselines should be continually updated within the CBA to reflect all policy decisions that impact public expenditure, and should be published at regular intervals. Updates to the baseline estimates are generally considered to be “technical” changes to the budget plans. Officials in the CBA and the line ministry will agree most changes to the baselines and share these changes with the minister of finance and line minister.
Updates to the baselines can be timed to inform the budget process and to coincide with revisions to the macroeconomic and fiscal forecasts. Australia, Canada, Sweden and the United States update expenditure baselines for the pre-budget statement or mid-year review, in sequence with the macroeconomic and fiscal forecasts. Updated economic forecasts are used by the CBA to issue standardised planning guidance for line ministries. Revised baselines are aggregated to feed into the fiscal forecasts, alongside new policy proposals.
Regular updates of multi-year expenditure baselines also support in-year spending controls. For instance, Sweden updates baselines four times per year, with two updates used internally and two supporting the published budget bills (Spring and Autumn). The Netherlands requires line ministries to update baselines six times each year, while the United Kingdom completes monthly updates.
3.4.3. Reconciling expenditure baselines with outturns
There should be a reconciliation of the expenditure baseline and actual expenditure to encourage discipline in its preparation and foster transparency. This reconciliation compares the new projection and the old to explain what has changed and why. At the end of the financial year, when actual spending data is available, budget estimates should be compared to the final outturn for spending.
The accuracy of baseline estimates can be assessed for aggregate spending or in relation to more detailed baselines. Analysis of aggregate expenditure levels helps systematically highlight the largest sources of deviations from earlier spending plans, and whether or not these were under the government’s control. More detailed analysis can improve the projections for specific ministries, policy areas or budget lines and help make better assumptions when costing new policy measures.
Spending reviews offer a core budgetary tool to assess expenditure baselines, including the assumptions that have been made to justify previous policy measures. Spending reviews are used to identify measures to reprioritise baseline spending, either to free up fiscal space for other goals or to improve spending efficiency in a specific policy area. A spending review will look at why the government adopted a specific policy, how spending on that policy has evolved over time, whether policies are still relevant and if there are ways to deliver similar results with fewer public resources.
References
[2] Moretti, D. (2024), Using Artificial Intelligence in Public Financial Management, https://one.oecd.org/document/GOV/SBO(2024)14/en/pdf.
[1] Moretti, D., A. Keller and M. Majercak (2023), “Medium-term and top-down budgeting in OECD countries”, OECD Journal on Budgeting, https://doi.org/10.1787/39425570-en.
[5] OECD (2024), Fiscal Sustainability of Health Systems: How to Finance More Resilient Health Systems When Money Is Tight?, OECD Publishing, Paris, https://doi.org/10.1787/880f3195-en.
[4] OECD (2022), Effective Management of Health Expenditure, OECD Joint Network of Senior Budget and Health Officials.
[3] OECD (2015), “Budget Review: Germany”, OECD Journal on Budgeting, https://doi.org/10.1787/budget-14-5jrw4sxb32q4.