Public Expenditure Management

Front Matter

Front Matter

Author(s):
A. Premchand
Published Date:
March 1993
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    Public Expenditure Management

    A. Premchand

    International Monetary Fund

    Washington, D.C.

    1993

    For Rama Lakshmi and Padma

    © 1993 International Monetary Fund

    Reprinted March 2000

    Library of Congress Cataloging-in-Publication Data

    Premchand, A., 1933–

    • Public expenditure management / A. Premchand

      • p. cm.

    • Includes bibliographical references.

    • ISBN 1-55775-323-7

    • 1. Budget. 2. Expenditures, Public. I. Title.

    HJ2005.P69 1993

    350.72—dc20

    92-44308

    CIP

    Price: US$20.00

    To order publication, please contact:

    International Monetary Fund, Publication Services

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    Preface

    Resource allocation and the effective use of resources have been two major concerns of citizens, countries, and their governments. Systems of public expenditure management have been organized largely with these two concerns in mind. Without iron-clad rules in this regard, public authorities have over the years shaped these systems on the principles of administration, the broad tenets of economics, and the specific requirements of a political-constitutional framework. Thus, the systems have been evolving while responding to changing requirements. Wars, major political movements, changing ideologies, and concern for economic growth and stabilization have had and continue to have their impact on expenditure management in public organizations. This book is an endeavor to examine these systems from the management point of view.

    Many chapters are drawn from lectures delivered as part of the budgeting workshops organized by the Harvard Institute of International Development, Cambridge, Massachusetts, and the course on Public Expenditure Management organized by the National Institute of Public Finance and Policy, New Delhi, and various seminars organized by the IMF Institute. Parts of Chapter 2 were published in a book edited by Thomas Lynch and Lawrence Martin, Handbook on Comparative Public Budgeting and Financial Management (New York: Marcel Dekker, Inc., 1992). Permission to include those parts is gratefully acknowledged. Chapters 6 and 7 were published earlier in a different form in IMF Survey.

    This book would not have been possible without the active involvement and support of various government officials who attended the training programs. Their experience and insights, while reinforcing the author’s analysis, also widened the scope of the book. These officials, who also prepared preliminary versions of the tables incorporated in Appendix I, have in a sense become collaborators in the writing of this book. They are not, however, responsible for the facts and views contained therein, which of course remain the sole responsibility of the author. The views expressed are personal and do not in any way reflect those of the International Monetary Fund.

    A number of debts are incurred in the process of writing a book, and the author gratefully acknowledges the help received from the following: Graeme Rae kindly provided the facilities that permitted this project; Rachel Lomax was always kind in responding to numerous queries and furnishing relevant literature. An earlier draft of the book was read by Richard Bird, Jack Diamond, Richard Goode, S. Ramakrishnan, Y.V. Reddy, Allen Schick, Vito Tanzi, and Ali Tazi. Their constructive comments and good-natured support were helpful in bringing clarity to many aspects. Turan Kivanc assisted in the preparation of Appendix I. Elin Knotter of the External Relations Department was as usual unstinting in her support and edited the book for publication. Yoke Kum Hee typed the several versions of the draft with her customary carefulness and prepared the final manuscript. The book was typeset by Betty Maguire, and its cover designed by Susan Scott, both of the IMF Graphics Section.

    Contents

    Introduction

    Management of public expenditures has always been an issue. It may be more dominant at critical times than at times of relative stability and prosperity but it always has been, and will remain, a matter for concern. Although taxpayers may be more worried about the amounts that they pay to the government, their concern about the benefits, even if less vocal and articulate than their opposition to taxes, is constant. More recently, however, with the persistent growth in fiscal problems in developing countries, former centrally planned economies, and established western, industrialized democracies, the efficacy of public expenditure management has been increasingly discussed. Whereas some analysts wonder openly whether a coherent system even exists that is an assurance to the (legitimately) agitated public, others frequently suggest that the recent spate of fiscal problems is partly ascribable to a decline in the government’s capacity to govern.

    The increased concern is appropriate and inevitable as more and more governments become democratic (in spite of the occasional suspension of civil rights and, sometimes, of parliamentary institutions). According to one source, the number of liberal democracies rose from 3 in 1790 to 61 by 1990. The development of the democratic form of government has also brought into sharp focus the issue of expenditure management in government. Some old questions like accountability are being raised again and a large selection of new ones are being added. Democratic compulsions have traditionally given rise to a new rhetoric and a continual search for new labels that adequately reflect their dreams, visions, and hopes. Such rhetoric has always led, and will continue to lead, to higher expectations. As the gap between reality and expectations widens, a gap in the credibility of the government also emerges. Its failure to deliver what was promised, as well as the cost of providing it, is indelibly printed on the public mind, to the exclusion of the good that it may have done. This dissatisfaction leads in turn to an effort to locate the failure—real or apparent—and the factors that contributed to it. An unrecognized drawback to these efforts, however, is that they are preceded by negative perceptions about the efficacy of governments that are formed without empirical verification. Indeed, some in government would say that those who are logical in thought and expression frequently suspend this logic when it comes to judging a government’s performance. Nevertheless, the people have to be given the benefit of the doubt, for they provide the finances in the first place. The continued viability of democratic forms of government inevitably depends, at least in part, on assuring the existence of not only administrative machinery but also a management system that reasonably addresses the issues of public finances.

    The reason for the persistence of fiscal problems through the eighties is that the policy goals have not been sustained by the machinery and the management. A nation is normally expected to maintain its policy objectives and its management capacity in broad equilibrium. Its purposes should normally be within its means, and its resources and commitments must be equal to its policy goals. If the two diverge, the result can easily be predicted. In assessing this balance, however, the presumptions that both scholars and laymen make are not proving adequate or realistic.

    Although expenditure management is an operational framework and not an abstraction, both in theory and practice perceptions differ, proving the old dictum that where you stand depends on where you sit. To an optimist, expenditure management is a bridge between unlimited political rhetoric and limited financial resources. To a pessimist, it is a ritual performed perfunctorily like a simple folk rite, more with faith than with reason. To a politician, depending on the podium and the occasion, it is a framework for accountability, or a needless impediment, or a brimming honey pot. To an administrator, it is a religion with defined ceremonies to be performed at regular intervals. To a representative of a spending agency, it is a tool of power in the hands of overzealous bureaucrats in the ministry of finance. To an official of the ministry of finance, it is a source of frustration—a broken bridge between what is needed and what is delivered. To a macroeconomist, it is the primary instrument that stands between his hopes for macroeconomic stability and chaos. To a professional contractor, expenditure management is a system that stands between his capacity to enhance his profits and the actual level of profits. To a citizen (if there is a typical one, it is usually an abstraction), it is everything that seeks to provide a satisfactory answer to the numerous questions that he may have on what he has paid and the benefits that he is getting, or, even more important, why some other groups are getting more than their “due” share of those benefits. From his point of view, today’s safety net may be tomorrow’s enduring entitlement. None of these views may fully reflect the picture, but each, as in a “Roshomon” effect, may be correct in its own way. Behind or within this complex vortex is the compressed reality of a state at work.

    Although the actual working of the system may to some be indistinguishable from the theater, the difference is that the play may remain a memory for the audience after it is over. For the citizen, the effects of expenditure management remain with him—either strengthening or weakening him depending on the public goods that are provided. As Abraham Lincoln noted, “the legitimate object of government is to do for a community of people whatever they need to have done, but cannot do at all, or cannot so well do, for themselves—in their separate and individual capacities.”

    In performing these tasks, policymakers and analysts make several presumptions. Although these presumptions vary in range from one discipline to another, in practice the following are frequently presumed. First, that the level of expenditure planned by a government is appropriate for that year. This implies a careful and balanced assessment of the needs and resources, of the implementation capacity, and of the appropriateness of the size of the outlays to achieve specified economic policy goals. Also, it implies that the level refers to the “total” expenditure regardless of its formal or legal shape, that is, within or outside the budget.

    The second presumption is that the resources received are used efficiently. Such efficiency is to be observed in both allocational and technical terms. Allocative efficiency, although highly desirable, may not lend itself in the practical world to immediate, precise measurement, particularly in regard to pure public goods such as national defense. But technical efficiency lends itself to measurement on both an ex ante and an ex post basis. Without this assurance of efficiency, the willingness of taxpayers to pay taxes and comply with laws may be less than needed. Indeed, in a democratic form of government, it could presage a change of power.

    Third, the presumption is that governments are both benign and neutral. This presumption, which is often made in scholarly studies of public finances, may be quite different in practice. Although the state may not be, as Nietzsche described it, the “coldest of all cold monsters” (and he added for good measure—“whatever it says it lies—and whatever it has it has stolen”), it is contrary to experience and history to suggest that a state is benign and neutral. It has its objectives and manifestos, and in a pluralistic society these objectives may benefit some at the expense of others. Although a public expenditure management system is not necessarily intended to prove that a state is neutral, it is incumbent on the system to demonstrate that the losses of the few are intended for the greater good of the many.

    The fourth presumption is that the prices assumed in the expenditure management system are the proper ones to reflect the reality of the market. Years of central planning experience suggest that multiple exchange rates and centrally determined prices—although consistent in a theoretical framework—do not reveal the correct picture and, moreover, may introduce distortions into the economy.

    Fifth, the presumption is that budgetary outcomes are congruent with the intent of the government. If outcomes are different, it suggests that either policy formulation failed or an administrative slippage occurred. Although some divergences are inevitable in any setting, it is their magnitude and their persistence over time that cast long shadows on the credibility of the system.

    Finally, the presumption is that the processes are transparent and fully accountable. In short, that the government is competent. Converting these presumptions into reality, either partly or completely, is the task of the public expenditure management system. That system has evolved over the years in response to different challenges. However, it is appropriate at this stage to explain the preference for the term “management” over the term “administration,” which has traditionally been used.

    Although interpretations vary, for the analytical purposes of this book, “administration” is relatively narrow in scope, primarily concerned with the formulation, application, and clarification of rules that govern the constituent units of an organization. Its focus is uniformity. It recognizes that the interests and outlook of the units in government vary for the obvious reason that each one has a different policy territory. Whereas finance is the underlying, unifying link, the agencies may pay it less attention because of their preoccupation with their policies, or because of lack of knowledge of the intricacies of finance, or because of a combination of both. Management, on the other hand, is a wider concept that covers policy formulation, design of an administrative structure aimed at facilitating the implementation of those policies, and an information system that assumes accountability and transparency in transactions. Implicitly, it recognizes the diversity—or at least the lack of homogeneity—in the approaches of government agencies, and seeks to endow them with the flexibility necessary to stress achievement of policies and objectives within a framework of accountability. Management thus represents an evolutionary advancement over administration. An added reason for using the term management is the origin of the word “economy” itself. It is a combination of two Greek words oikos (house) and nèmein (manage), or household management. Here it refers to the collective management of finances by an organization on behalf of its citizens.

    Public expenditure management has traditionally been considered in the framework of control. Control in turn reflected two functions. First, it reflected the function of checking, testing, and verifying, if necessary through a duplicate set of accounts or registers. Second, it reflected a hierarchical function under which one dominated another, albeit for a specified purpose, to regulate or direct influence over another level of responsibility. This in turn contributed in due course to a control or a controlling account, to a control center, and to a control span or control grid. Although some of these terms were borrowed from the physical sciences, they also illuminated the practical aspects of control that came to be increasingly embodied in a controlling agency. From there, controllability—the state of being controllable or capable of being controlled—was only a short additional step.

    The control so exercised is not, and cannot be, static in nature. One way of understanding its nature is to borrow Oliver Wendell Holmes’s analysis of common law. He pointed out, more than a century ago, that legal principles are not rooted in nature or in the ancient past but instead evolved in response to social, economic, and political change. “The life of the common law has not been logic,” he wrote, but “it has been experience.” Two caveats should, however, be noted in extending this analogy to expenditure management. First, the deep roots in the past, whether ancient or more recent, cannot be totally ignored. Expenditure management has mostly grown, reflecting the nature of the society and the form of government that it has chosen to govern itself. Populations have grown, despite many protracted wars; cities have expanded; societies were stratified differently; and the growth of the mass media has made possible a different society in which the distance between those governed and those governing has been reduced spatially and in time. Some economic events, such as the expanding role of governments—in regard to ownership, production, and distribution of goods and services, which contributed to a widening of the span of control—have also left an enduring imprint on the composition of expenditures and their control.

    A second caveat relates to the need to recognize the organizational form of control. Initially, controllership or the pivot of power was located in royalty, or the chief of the tribe, or the head of a religion. In terms of government, it was located, since the time of Socrates, in the hands of the elite who could be entrusted with the management of public moneys, reflecting a degree of trust as well as the usual coercive power associated with government. The form of this organization, although not very relevant from Holmes’s legal point of view, is important for expenditure management if only because the effectiveness of control depends on what is to be controlled and who is controlling. These aspects are crucial in addressing the timing of public policy and its implementation by the largest organization. The analogy, however, has an additional virtue in that it offers a basis for evaluating the machinery established and that has been evolving over the years. What were the changes in tasks? And what were the responses?

    Over the years, the tasks of expenditure management have gradually grown and have become increasingly complex. The changing economic hardships have had their impact on the tenor and content of expenditure management. Political forces contributed to expenditure increases to such an extent that they stimulated government, while forcing government institutions to produce viable and acceptable policies for expenditures. The soft options of raising additional revenues each year to meet growing expenditures—which have been extensively resorted to in the last four decades—have now given way to a more determined look at expenditures and their management. The previous eagerness to raise revenues to match expenditures implied that expenditures were immutable and productive. Now, as options narrow and constraints increase, expenditures are receiving the spotlight. Also, past patterns of expenditure have a large hold on present and future spending. As debt service claims a substantial share of expenditures, the issue of ensuring a balance, as well as flexibility in allocations, has become prominent. Inflation is yet another issue that introduces new elements into expenditure management. In all these, the issue has been what kind of public expenditure management system has evolved over the years and how well does it provide accountability? What kind of techniques would be relevant for specific sectors? What has been learned from commercial practices—in particular in applying information technology, cost measurement, and decentralized management?

    Answers to these kinds of questions have so far been provided in unidimensional ways. There were those that looked into the politics of spending, and there were those that looked into the administrative processes; then there were those that studied government budgeting or government accounting. Each aspect tended to be examined in isolation. This book attempts to study expenditure management more comprehensively, as a management process, and as a composite culture. Expenditure management is like weaving a Persian carpet, where every tiny knot is as important as the grand design itself. It has to promote the right policies, and the systems should be designed to compensate for any policy shortfalls. Expenditure management is viewed for this purpose as a long value chain starting with budget formulation and going on to implementation through procurement and contracting out and to the courteous delivery of services to the public. In these phases, disciplines like economics, public administration, political science, accounting, auditing, procurement, and contracting specializations play an extensive role. No segment of this process can function independently of the others. Indeed, each is a link, passing the baton on to the next link. A malfunction at any stage can prevent the achievement of the announced economic policies. Thus, the technician has to be mindful at every stage not only of the citizen looking over his shoulder but also of the subsequent stage to which the baton is passed. A variety of objectives have to be fulfilled at numerous stages in the process in which several agencies and many people are involved.

    Practical politics have an enormous influence on these processes. Indeed, politics is what spending is all about and thus is an integral part of expenditure management. But conventional wisdom holds that politics is dominant in policy formulation, and that implementation is administrative in nature. This is a myth, however—for political influence and the interplay of political forces are to be found at every stage of management. They may be hard to measure, but the results often show the footprints of politics. This book does not examine the political forces or the role of the legislature. Rather, it attempts to delineate the composite culture of expenditure management within a government. It considers the issues from the point of view of a decision maker (concerned with both policy formulation and implementation) who, notwithstanding the influence of his public or private religion, has to address the issues in that role. In all these phases, the need to formulate the strategies of management is emphasized. For too long, the performance of ritual has held sway. But as Helmut Schmidt noted, “Governments are like wheelbarrows; they are useful, but they need to be pushed.” That push, or a common motivating force, is an expenditure management strategy. Without it, outcomes would be uncertain and often contrary to intent, as well as costly and counterproductive. The need for a strategy is inherent in the long process of expenditure management, in which each stage of the system has a separate vision and its own scale of values. These visions and values have to be blended into a harmonious whole. Such harmony may at first appear difficult, for the central agencies may be more concerned with stability and the pursuit of economy and efficiency, whereas the spending agencies are concerned with the size of budgetary allocations, volume and prices, and the effectiveness of their programs. Working harmony, however, is imperative in a country and vital for its success. Thus, each chapter in this book has at its core a strategy for pursuing expenditure objectives.

    In dealing with the several issues, however, the temptation to find success stories and to evaluate them is inevitable. This could conceivably contribute to a kind of ethnocentrism in that there may be a belief that the industrial west has successfully managed the conflicts inherent in expenditure management. Although some lessons are to be learned, they do not by any means provide an adequate basis for generalization or for identifying a group of countries as being particularly successful. In fact, each country has its own problems. The following chapters consider the factors that contribute to the slow and halting effort toward improving expenditure management. The attempt here is not to analyze current events but to form a coherent perspective on expenditure management strategy in governments. The implications of pursuing stabilization, economy, efficiency, and effectiveness are analyzed as well as how they may be achieved during resource allocation planning and resource utilization. In all areas, the aim is to provide a discussion of the state of the art, drawn from the experience of industrial and developing countries, and a pattern for designing expenditure management in the years ahead.

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