|**Variable**|**Hypothesis**|**Data**<br>**Source**|**Variable Description**|
|---|---|---|---|
|**Deficit**|Improved PFM systems should<br>enable better aggregate fiscal<br>discipline|IMF WEO<br>Database|General government<br>primary net<br>lending/borrowing as a<br>percent of GDP|
|**Overall budget**<br>**credibility (PI-1)**|Improved PFM systems should lead<br>to better overall budget credibility –<br>which is in turn a pre-condition for<br>aggregate fiscal discipline|PEFA,<br>indicator<br>P-1|Aggregate expenditure out-<br>turn compared to original<br>approved budget|
|**Inter-sectoral**<br>**budget**<br>**credibility (PI-2)**|Improved PFM systems should lead<br>to greater credibility of sectoral<br>allocations – as a proxy for allocative<br>efficiency|PEFA,<br>indicator<br>P-2|Composition of expenditure<br>out-turn compared to<br>original approved budget|
|**Health Efficiency**|Improved PFM systems should<br>support a greater achievement of<br>service delivery outputs per unit<br>spent(operational efficiency)|Vlaicu et<br>al. (2014)|Operational efficiency of<br>government health<br>expenditure, with output<br>measured as life expectancy|
|**Education**<br>**Efficiency**|Improved PFM systems should<br>support a greater achievement of<br>service delivery outputs per unit<br>spent (operational efficiency)|Authors<br>calculation<br>based on<br>UNESCO<br>data|Operational efficiency of<br>government expenditure,<br>with output measured as<br>primary education<br>completion rates|

We hypothesize that PFM quality, measured by the aggregate PEFA score (PI-5 through PI-28, excluding PI-13 through PI-15), is positively associated with budget credibility (PI-1 and PI-2) on average, ceteris paribus. In other words, the better and more effective a country’s PFM system, the more likely total actual expenditures will reflect planned expenditures (i.e. the variance between total actual and budgeted expenditures will be small). We also hypothesize that PI-2 will have a positive relationship with PFM quality. If policy planning and the budgetary process are well integrated, and if budget execution follows established procedures, then the composition of expenditures should align closely with the original budgets.

The last two variables we include in the analysis of PFM on expected outcomes are the technical efficiency of health expenditure _(health_ ) and of education expenditure ( _education_ ), i.e. the costeffective delivery of key public services. We hypothesize a positive relationship between PFM quality and these two variables. Better PFM systems should support cost-effective service delivery through several mechanisms: through effective up-front planning of where funds are needed and how much, making funds promptly available when and where they are needed, by reducing leakage – such as ensuring that ghost workers are removed from the payroll – and by ensuring or incentivizing efficient use of funds – for example by ensuring that value-for-money is obtained in procurement.

The outcome variables are calculated by relating key outputs for each sector to government per capita spending, and estimating the technical efficiency scores from a parametric Stochastic Frontier (SF) model, using maximum likelihood.<sup>34</sup> In the case of health, we used a dataset

> 34 SF analysis was originally modeled by Farrell (1957) and elaborated by Greene (2005).

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