Policy-Based Budgeting in a Medium-Term Framework This IDF project will support institutionalization of policy and expenditure analysis capability in the Department of Budget and Management of the Government of the Philippines.  It combines hands-on capacity building activities and advisory for refining the annual budgeting and medium-term expenditure planning process.  These activities form the core of the ongoing medium-term expenditure framework initiative.  The grant is intended to provide advice and technical assistance to strengthen the government#s capacity in policy-based budgeting as an element of its medium-term expenditure framework (MTEF). The government's enhanced capacity to develop sound policy analysis would improve the quality of its advice to the cabinet-level Development Budget Coordination Committee (DBCC) and the President. This in turn can contribute to improved strategic allocation of budgetary resources on a sustainable basis by informing political decisions with sound technical analyses and systematic internal consultations at the technical level, while reducing dependence on analytical support from the Bank and other development partners over time.  The current round of MTEF development in the Philippines consists of three technical instruments: (i) forward estimates (FEs) of budgetary costs of existing policies, programs and projects in each department; (ii) medium-term sectoral expenditure plans (for selected departments); and (iii) a paper on budget strategy (PBS). The Department of Budget and Management (DBM) coordinates the process, updates the FEs annually, and prepares a PBS which reviews priority expenditure policy issues and recommends decisions. Strategic allocation of budgetary resources is achieved by (i) estimating the total "allocable" resource envelope based on the forward estimates (i.e., the cost of ongoing programs and projects) and the revenue projection; and (ii) determining how this "allocable" amount should be distributed to different departments on the basis of policy advice contained in the PBS.  For the past two budget cycles, the PBS has emerged as a relevant input for high-level budgetary decisions by the DBCC, the full cabinet and the president. Much of the input originated from Bank-supported analytical work, even though the DBM has been fully in charge of finalizing the PBS document. The proposed grant will support strengthening of the DBM's capacity to manage production of sound policy and expenditure analysis and thus its "graduation" from fairly extensive reliance on the Bank and other development partners in producing analytical inputs for the PBS. It will also help the government refine the internal process of consultations and joint decision-making.  The proposed grant will facilitate parallel initiatives by certain line departments which are developing their own medium-term spending plans. The grant will be used to establish better linkage between these sector-led initiatives and the DBM-led MTEF reform.  The overall objective of this grant is to help institutionalization of the MTEF process as a credible tool for guiding the government's policy-based budgeting exercise. Such institutionalization is more likely in the Philippines by making sure that the key decision-makers perceive the tool (MTEF, in this case) as reliable, useful and credible rather than by, for example, formal codification (e.g., an executive order mandating the MTEF process). During the last two budget cycles (2006-2007), the MTEF has proven to be useful tools for actual decision-making and the grant is intended to support the continuation and strengthening of this momentum.  An IDF grant is an appropriate instrument for these objectives given that the grant will permit more extensive technical assistance than what a Bank-executed AAA could provide. With the grant, the focus of the Bank support will shift from offering analytical advice directly on the basis of Bank-executed studies to facilitating the DBM to manage production of required analytical inputs for the annual PBS process. The DBM envisions that some of the analyses will be done #in-house# by its staff, with advice and mentoring from expert consultants to be hired with the grant's financial assistance while others will be contracted out, in which case, an adviser to be hired with the grant will coach the DBM staff in supervising consultants and assuring quality of their outputs. The basic modality of this capacity building is "learning-by-doing" whereby DBM staff will actually produce analytical outputs as well as manage consultants hired to produce reports under the guidance of specially-hired senior consultant(s) acting as mentors/coaches.