- Marc Robinson
- Published Date:
- October 2007
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Library of Congress Cataloging-in-Publication Data
Performance budgeting: linking funding and results / edited by Marc Robinson.
ISBN 0-230-55356-7 (alk. paper)
1. Program budgeting. I. Robinson, Marc, 1953-
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 09 08 07
Printed and bound in Great Britain by
Antony Rowe Ltd, Chippenham, Wiltshire
Denise M. Fantone
Peter C. Smith
John Pierce and Michael Di Francesco
Peter C. Smith
Jesús Ruiz-Huerta, Eduardo Zapico, Javier Loscos, and Tamón Takahashi
Elisabeth Paul and Marc Robinson
Elena Belyanova, Ole Hovland, and Alexey Lavrov
Israel Fainboim Yaker
Philip G. Joyce
Matt Davies, Marijn Verhoeven, and Victoria Gunnarsson
List of Tables and Figures
Notes on Contributors
Professor Kate Ashcroft has recently returned from two and a half years in Ethiopia as management advisor to the Minister of Education and Acting Director of the Ethiopian Higher Education Strategy Center. During her time in Ethiopia she chaired the National Committee of Enquiry into Governance, Leadership and Management in Ethiopia’s Higher Education Institutions, chaired the task force on Private/Public Partnership in Higher Education, undertook a major report on the curriculum, organizational arrangements and financing of the 13 new higher education institutions to be opened in Ethiopia, as well as leading the development of a funding formula for teaching and learning in Ethiopia’s higher education system to be operated from next financial year. Before going to Ethiopia, Kate had experience as a senior manager in the Higher Education Funding Council for England and a senior and middle manager in four UK higher education institutions, finishing as the Deputy Vice Chancellor of the University of Wales Institute, Cardiff. Kate has published 11 books and numerous papers and reports on educational issues. She is now working as an independent educational consultant, mainly in Ethiopia and Zambia, and is visiting professor at the University of Northampton and the University of Wales Institute, Cardiff.
Dr. Elena Belyanova is a Managing Partner of ECORYS Nederland BV (successor of the Netherlands Economic Institute (NEI)). Since 1990 Elena has been working as manager and consultant in many projects promoting social and economic reforms in all CIS countries and in Africa. In 1997 she set up the Russian branch of NEI and headed it for ten years. In 2003-06 she managed three subsequent EU-funded projects which supported the RF Ministry of Finance in initiating a multi-year results oriented reform, elaborating its concept and managing its implementation. Her professional activities also encompass research into corporate and public finance, developing and delivering an interactive course on Financial Sector in Transition in the Moscow State University, Economic Department, and running the Economic Analysis Chair there. Elena co-founded the Russian Economic Barometer, an organization which was the first to launch economic surveys in Russia, and co-managed it from 1991 to 1996. At present she chairs the Board of the Economic Development and Civil Society Foundation, a Russian NGO which has been recently established on her initiative.
Jim Brumby, an Australian national who joined the IMF in 1999, has been engaged in public management reform at state, national, and international levels for two decades. Prior to moving to the Fund’s Office of Budget and Planning in late 2005, he worked in FAD on public expenditure management, providing technical assistance to China, Indonesia, the Slovak Republic, Slovenia, Bulgaria, Malawi, Ghana, and Nigeria. He has also contributed to fiscal transparency reports on Italy, Malawi, and the USA, and played a leading role in assessing public expenditure management systems in the so-called “heavily indebted poor countries.” Prior to joining the IMF, he was in charge of the Organization for Economic Co-operation and Development’s program on budgeting and management run by the Public Management Service (PUMA), with responsibilities that included coordinating the work of the Senior Budget Officials working party. He worked in the New Zealand Treasury for four years as head of its unit providing advice on public service reform and prior to that at the central finance ministry of the State of Victoria in Australia. He has a Masters degree in public administration from Harvard University.
A senior French civil servant, Benoît Chevauchez has dedicated most of his professional career to public finance and public management. A graduate of the Ecole Nationale d’Administration, Benoît held several positions in the Budget Directorate of the Ministry of Finance and was budget advisor to a former Prime Minister. After having spent one year as an advisor to the OECD, Benoît established in 2001 the Public Management Institute—the Ministry of Finance training agency—which he managed until the summer of 2005. Now a “Controleur Général” and consultant, Benoît also teaches public finance at Sciences Po and Paris I La Sorbonne, two leading Paris universities.
Teresa Curristine works for the Budgeting and Public Expenditure division of the OECD Public Governance Directorate. She leads the project on governing for performance and heads the OECD Senior Budget Officials Network on Performance and Results. She manages projects and teams working on accountability and control issues and the OECD database on budget practices and procedures. She planned and coordinated a directorate-wide project on public sector modernization. She edited the book entitled Modernizing Government: The Way Forward, which resulted from this project and was the main book for the recent OECD ministerial meeting for ministers of public sector reform. She has also worked as lecturer at Oxford University from where she received her PhD.
Matt Davies is currently a senior economist in the Asia and Pacific Department of the IMF. He previously worked in the Fiscal Affairs Department on expenditure policy and management issues where the work on his paper for the Performance Budgeting seminar was undertaken. Prior to joining the Fund he worked in the UK government, in the Department for International Development and the Department of Social Security, and for the Government of Papua New Guinea in the Ministry of Finance and Planning.
Michael Di Francesco
Michael Di Francesco is Principal Advisor in Financial Management Policy in NSW Treasury, where his responsibilities include leadership for developing and implementing Results and Services Plans and financial management reform in the General Government sector. Prior to joining the Treasury in 2001, Michael was a Lecturer in Government in the School of Economics and Political Science at the University of Sydney, where he taught public sector management and Australian politics, and directed the graduate program in Public Policy and Policy Studies. He has served as a Councillor with the NSW division of the Institute of Public Administration Australia (IPAA). Michael holds a Bachelor of Economics with first class honors in Government and Public Administration from the University of Sydney, and a PhD in Public Policy from the Australian National University. He has published on performance evaluation and financial management and budgeting reform in the public sector. In 2001 he shared IPAA’s prestigious Sam Richardson Prize for the most important/influential article published in the Australian Journal of Public Administration.
Jack Diamond was, prior to his retirement after a long career with the International Monetary Fund, Division Chief, Public Financial Management Division I, in the Fiscal Affairs Department. Over his career. Jack worked in many countries and made a particularly notable contribution during the transition period in Russia and other parts of the ex-Soviet bloc. He is the author of many IMF Working Papers and other publications, including Introducing Financial Management Information Systems in Developing Countries (2005, with Pokar Khemani), Reforming the Russian Budget System: A Move to More Devolved Budget Management? (2005), Establishing a Performance Management Framework for Government (2005), From Program to Performance Budgeting: The Challenge for Emerging Economies (2003), Performance Budgeting: Managing the Reform Process (2003), and Performance Budgeting - Is Accrual Accounting Required? (2002).
Israel Fainboim Yaker
Since 2004 Israel Fainboim has been a Technical Assistance Advisor with the Public Financial Management Division of the Fiscal Affairs Department, IMF. Before joining the Fund he led the Mission on Institutional Reform of Bogota and was the Secretary of Finance of that city, and a board member of four public utilities. He held the position of Research Associate at Fedesarrollo, a leading think tank on economic policy. Previously he was a member of the Council on Fiscal Policy in the Ministry of Finance and Director of Economic Research in the Corporación Financiera del Valle. At the beginning of his career he worked in the Economic Research Unit of the Banco de la República (Central Bank of Colombia) and was an advisor to the National Planning Department. He has also been a consultant of the World Bank, the Inter-American Development Bank and the Ministry of Finance and professor of Public Economics in the Universidad de los Andes. He has published papers on fiscal sustainability, public investment, decentralization, concession contracts, credit subsidies, contingent liabilities, and regulation of public utilities.
Denise M. Fantone
Denise M. Fantone is Acting Director, Education, Workforce, and Income Security, US Government Accountability Office (GAO). After working for local government and a public utility in California, Ms. Fantone began her federal government career at the Department of Justice in the charter class of the Presidential Management Intern Program. Following her internship, she joined the US Office of Management and Budget’s (OMB) Budget Review Division, where she served as an OMB analyst on appropriations issues, was team leader for the budget execution and apportionment unit, and led teams in the annual preparation of the President’s Budget. Prior to coming to GAO, she was progressively Budget Director, Deputy Director for Planning and Budget, and Assistant Inspector General for Oversight at the Peace Corps. At GAO, she is primarily responsible for agency budget execution issues. Recent work includes reports on performance integration efforts in the Veterans Health Administration, the Administration for Children and Families, and Nuclear Regulatory Commission; reviews of OMB’s Program Assessment Rating Tool (PART); and best practices in state performance budgeting. Ms. Fantone is currently on a rotational assignment as part of GAO’s Executive Candidate Development and Assessment Program.
Victoria Gunnarsson is a Research Officer in the Expenditure Policy Division of the Fiscal Affairs Department. She joined the Fund in October, 2005 from the World Bank Institute where she worked on designing and interpreting impact evaluations of the effectiveness of capacity enhancement programs. In the Fund her work has centered on measuring the efficiency and flexibility of health and education expenditure in various country contexts. Her previous research focused on the impact of child labor on educational attainment of young children in developing countries and the effect of school autonomy on schooling outcomes.
Marcela Guzmán is a principal of Politeia, a consultancy firm based in Santiago de Chile, and was formerly Chief, Performance Monitoring Division, Budget Office, Ministry of Finance in Chile, since 2000. Prior to that, she held a range of other senior positions in the Finance Ministry, including Chief of the Research Department in the Budget Office. From 1997 to 1999, she was Chief, Research and Statistics Department, Ministry of Education. Marcela spent a year on secondment at the Budget and Management Division of the OECD in Paris from October 2002 to September 2003. She has undertaken many consultancies for the World Bank, the Inter-American Development Bank, and other organizations. She holds two degrees from the Universidad de Chile and an MSc. in Economics from ILADES-Georgetown University.
Ole Hovland worked in the Norwegian Ministry of Finance from 1980 to 2001 on taxation, macroeconomics, and budget issues, the last ten years as Budget Director. From 2001 to 2005 he worked as IMF Budget and Treasury advisor to the Russian Ministry of Finance, and from 2005 to 2006 as an IMF Macro-Fiscal advisor to the Egyptian Ministry of Finance. Mr. Hovland is presently a director in the European Bank for Reconstruction and Development representing Norway, Finland, and Latvia on the board.
Philip G. Joyce
Philip Joyce is Professor of Public Policy and Public Administration at The George Washington University. His research primarily focuses on the US federal budget and the use of performance information in the budget process. He has 12 years of public sector work experience, including five years each with the US Congressional Budget Office and the Illinois Bureau of the Budget. He has consulted internationally, both as an individual and with the International Monetary Fund and the World Bank, in the People’s Republic of China, Latvia, Slovenia, and Mexico. Professor Joyce is a Fellow of the National Academy of Public Administration.
Brice Lannaud has been Manager of the Performance Project within the Directorate of Budgetary Reform at the French Ministry of Economy, Finance and Industry since 2003. In that capacity he has been responsible for organizing and coordinating cross-ministry work on the specification of program objectives and indicators for inclusion in the annual budget. He also oversees the preparation of methodological manuals on these matters. A graduate of the Ecole Nationale d’Administration, his previous civil service positions include that of Chief of the Bureau of Budget and Finance at the Ministry of Culture and Communications.
Alexey Lavrov is Director of Budget Policy in the Russian Ministry of Finance. He has previously held other senior positions in the Ministry of Finance, including deputy head of intergovernmental financial relations (1999-2002) and advisor to the Minister of Finance (1998-99). Mr. Lavrov was advisor to the Deputy Chairman of the government of Russia in 1998, and served on the staff of the President from 1994 to 1997. He commenced his civil service career with Gosplan, the former ministry for the economy. During 1997-98, he was a visiting expert with the OECD in Paris. He is a graduate of Moscow State University and the University of Birmingham.
Javier Loscos is a lecturer in the Department of Applied Economics IV, Universidad Complutense de Madrid. His academic qualifications range from a degree in law from the Universidad Pontificia “Comillas” de Madrid and another in economics from the UNED (the Spanish Open University) to a PhD in applied economics from the Universidad Complutense de Madrid (Department of Applied Economics IV). He lectured previously at the University of Salamanca. He is also a member of the Department of Governance, Administration and Public Policies at the University Research Institute “Ortega y Gasset” as Director of the postgraduate course on Public Governance and Management. At present, he is carrying out research at the Spanish Institute of Fiscal Studies where he is Deputy Director of Tax Studies.
Elisabeth Paul received her PhD in management/economics at the University of Liège (Belgium) in 2006, with a thesis on “Improving Public Outcome in Developing Countries—Applications of Incentive Theory to Foreign Aid and Public Finance Management.” She is a member of the “GRAP-SWAP,” a multidisciplinary research group which studies sector-wide approaches in health, supporting the Belgian cooperation policy. Elisabeth was FNRS (Fonds National de la Recherche Scientifique) Research Fellow in 2002-06 and after that, she became a consultant, notably for the Belgian Co-operation Agency and the European Commission. In 2005, she was a visiting scholar to the International Monetary Fund/Fiscal Affairs Department. Elisabeth has field research experience in a dozen less-developed countries, especially in sub-Saharan Africa. Notably, she has studied the public financial system in Benin, as well as the aid system and sector-wide approaches to health in Benin, Mali, Senegal, and Rwanda. At present, she is technical advisor to the Ministry of Health in Mali.
John Pierce was appointed as Secretary of the Treasury of New South Wales, Australia’s largest state, in April 1997. Prior to joining NSW Treasury, John held the position of Chief Economist at Pacific Power. He joined NSW Treasury in 1993 as the Chief Economist and then held a senior executive position responsible for intergovernmental financial relations, tax policy, revenue forecasting, economic analysis, and reform. John also headed the Treasury team responsible for restructuring the NSW electricity industry and the introduction of competition. As Secretary, John is responsible for the strategic direction of NSW Treasury. He advises the government on matters relating to the management of the State’s finances and economic policy. He has continuing involvement in the reform of the state’s electricity sector. His position as Secretary of Treasury also includes the Chairmanship of NSW Treasury Corporation. John has an honors degree in Economics from the University of NSW and was President of the NSW Branch of the Economic Society of Australia for three years from 1996 to 1999.
Marc Robinson is Senior Economist in the Fiscal Affairs Department of the IMF. Since joining the IMF staff in November 2004, he has led and participated in Fund missions on public financial management and fiscal issues to Belarus, Botswana, Bulgaria, Ethiopia, Haiti, Hungary, and Italy. Prior to joining FAD, he was an economics professor in Australia for ten years during which time he published extensively on public financial management, medium-term fiscal policy and government accounting. During this period, he was a frequent public policy commentator, particularly as an op-ed contributor to Australia’s leading national business newspaper. Dr. Robinson was Visiting Scholar with FAD from November 2003 to February 2004. Before becoming an academic, Dr. Robinson was a senior civil servant with the government of the Australian State of Victoria, serving, amongst other things, as board member of a number of public enterprises and as director of research of the Economic and Budget Committee of the Victorian parliament. He commenced his career as a civil servant with the Australian national government. Dr. Robinson holds degrees from the Australian National University, the University of Melbourne, and Sydney University.
Jesús Ruiz-Huerta is Professor in Public Economics in the Department of Applied Economics II, at the Universidad Rey Juan Carlos, Madrid. He was a professor in Public Finance at the Universities of Salamanca and Complutense (Madrid). He also worked for eight years in the Institute of Fiscal Studies in Madrid as Deputy Director of Budget and Public Expenditure Studies, and Research Director. At present, he is the General Director of this Institute. Professor Ruiz-Huerta has published different articles and books on public finance, that is, budgeting, fiscal decentralization and economic impact of public expenditure and revenue.
David Shand is a public financial management consultant, who prior to his retirement in 2005 worked in the World Bank, the IMF, and the OECD on public sector reform issues, with particular emphasis on performance management. He was convenor of the OECD’s 1996 symposium on Performance Auditing and the Modernization of Government. Prior to his work in these international organizations he held senior positions in the Australian government at both federal and state levels, including Chief Director of Audits in the Victorian Auditor-General’s Office (1983-86) and First Assistant Secretary for Financial Management in the Australian Department of Finance (1986-90).
Peter C. Smith
Peter C. Smith is Professor of Economics and Director of the Centre for Health Economics at the University of York, UK. His research areas include public finance, regulation, and productivity analysis, both in health care and in the broader public sector, and he has a particular interest in the link between research and policy. Current research includes efficiency measurement, health care payment mechanisms, and the financing of health care, topics on which he has written extensively. Recent books include Measuring Efficiency in Health Care: Analytic Techniques and Health Policy (with R. Jacobs and A. Street, Cambridge University Press) and Formula Funding of Public Services (Routledge). Peter has sat on numerous UK government advisory committees, and is currently a commissioner at the Audit Commission and chair of the Advisory Board of the UK Centre for the Measurement of Government Activity. He has acted as consultant to a range of national and international agencies, including the World Health Organization, the World Bank, and the OECD, and has a special interest in the methodology of international comparisons.
Tamón Takahashi is currently studying for a PhD in Government and Public Administration at the Instituto Universitario de Investigación Ortega y Gasset, and collaborating in several research projects with the Instituto de Estudios Fiscales, in Madrid, Spain. He has worked at the Ministry of Finance in Mexico as Director of Budgetary Research since 2002. He graduated Magna Cum Laude in Law from the Universidad de las Américas-Puebla in Mexico in 1999, where he also studied Mathematics. In 2001, he graduated European Master in Law and Economics from the universities Erasmus Rotterdam, Ghent, and Complutense de Madrid; and took part in the III Course in Law and Economics at Harvard Law School in Cambridge, MA. As Director of Budgetary Research, he has studied several issues on budgeting policy and best practices and made some case studies on budgetary issues from different countries, which were used during the formulation of the new Mexican Federal Budget Law. He also participated in the elaboration of the Federal Budget Act from 2002 to 2005. Some of his current research papers are about budgeting in Mexico and about incentives to enhance the efficiency of public expenditure, under a law and economics perspective.
Mrs. Ter-Minassian holds degrees in Law from the University of Rome, Italy, and in Economics from Harvard University in the United States. From 1967 to 1978, she was on the staff of the Central Bank of Italy, part of the time on secondment to the International Monetary Fund. In the IMF, she was for eight years Chief of the Southern European Division in the European Department (which covered Italy, Spain, and Portugal, among other countries). In this capacity, she negotiated the 1983 IMF Stand-By Agreement with Portugal. From 1988 to 1996, she held the position of Deputy Director of the Fiscal Affairs Department of the Fund. In 1990, she headed the IMF Task Force for the joint study of the Soviet economy, commissioned to the IMF, IBRD, OECD, and EBRD by the G-7. As Deputy Director of the Western Hemisphere Department from 1997, she headed the negotiations of the IMF programs with Brazil and Argentina, and oversaw the department’s work on various other countries in the region. Mrs. Ter-Minassian was appointed Director of the Fiscal Affairs Department effective January 2, 2001. Her areas of principal interest and expertise include macroeconomic analysis, fiscal policy, budget management, and intergovernmental fiscal relations. She has published several papers in these areas, including the book entitled Fiscal Federalism in Theory and Practice.
Holger van Eden
Holger van Eden is a senior economist in the Public Financial Management Division II of the Fiscal Affairs Department of the IMF. He has worked extensively with Ministries of Finance in Eastern Europe, China, and the Caribbean. His areas of focus are budget preparation—including program budgeting and medium-term budgetary frameworks—institutional restructuring, budget law, and government cash management. Before joining the Fund, Mr. van Eden worked as team leader and project coordinator on major EU- and Dutch government-funded projects in the public financial management field. He has also worked as economic journalist and editor for a nationally circulated magazine in the Netherlands, and as a government financial consultant for one of the major global accounting/consultancy firms. Mr. van Eden started his career in the Dutch Ministry of Finance.
Marijn Verhoeven is a Deputy Division Chief in the Expenditure Policy Division of the IMF’s Fiscal Affairs Department. He holds a Masters and postgraduate degrees in economics from Tilburg University in the Netherlands. Mr. Verhoeven joined the Fund in 1994, where he has spent most of his time in the Fiscal Affairs Department. He was also the Fund’s resident representative in Bangladesh during 2001-04. His research interests focus on expenditure policy questions, including the efficiency and flexibility of government spending, public spending and addressing human development issues in low-income countries, social protection issues, and the economics of pensions.
Eduardo Zapico is advisor in the Evaluation Unit of the Directorate General of the Budget of the European Commission. Previously he worked as a Deputy Director of Policy Analysis, in the DG Budget at the Ministry of Finances in Spain. He has worked in the National Audit Office of the Spanish central government, in the fields of public expenditure control and program evaluation. He has collaborated on budgeting and PEM capacity development projects with the OECD/SIGMA department, for Central and Eastern Europe, and with the World Bank financial management team for Latin America. Previously he worked at the European Institute of Public Administration in Maastricht, teaching and researching on public management and budgeting, and was a part-time associate professor on public management and budgeting at the Universidad Autonoma de Madrid. His publications include The Symbolic Modernization of Public Budgeting in Spain (WAP, 1989); with Aaron Wildavsky, National Budgeting for Economic and Monetary Union (EIPA, 1993) and, with John Mayne, Monitoring Performance in the Public Sector (Transaction Publishers, 1997).
The Fiscal Affairs Department of the International Monetary Fund (IMF) has seen in recent years a marked upsurge in demand for technical assistance on the design and implementation of performance budgeting systems. This upsurge reflects a broader wave of international interest in performance budgeting. Leaders in the field such as the United Kingdom, the United States, and Australia have, over the past decade, implemented new performance budgeting systems with strikingly novel features. Nations as diverse as France, India, South Africa, Ethiopia, Brazil, Belarus, and Colombia—to name just a few—have also implemented, or are in the process of implementing, performance budgeting.
This volume is part of the IMF response to these developments. Performance budgeting is about expenditure efficiency, and the IMF views expenditure efficiency as not only important in its own right, but also as having an important connection with fiscal discipline and, therefore, macroeconomic stability.
Performance budgeting seeks to improve expenditure efficiency by systematically linking funding to results, making use of performance information to achieve that linkage. It aims to redesign the budget process so as to improve the allocation of public expenditure—so that it is directed towards services of greatest social value—and also to increase the efficiency of the production process. In the language of economists, it aims to boost both allocative and technical efficiency. There are, as this volume stresses, different forms of performance budgeting. One major strand of performance budgeting practice—of which “program budgeting” is representative—places primary emphasis upon allocative efficiency and, more specifically, upon improving expenditure prioritization in the budget preparation process. Governments have not always been good at prioritizing expenditure. They have often been much better at identifying priorities for new or increased spending than at identifying and cutting out low priority or ineffective spending. This suggests that there are great welfare gains which can be made by improving prioritization processes.
Good expenditure prioritization is particularly essential when governments face new and unexpected challenges which require substantial expenditure responses. We are all well aware, for example, of the enormity of the fiscal challenge which the AIDS pandemic has posed for many countries over recent decades. Finding the funds to meet these and other emerging challenges is never an easy matter.
It is not an option to respond to emerging new fiscal priorities by continually increasing aggregate expenditure. Rising expenditure has to be financed, and this can only be through deficits or higher taxes—both of which are costly in resource and social terms. Budgeting is therefore necessarily about expenditure choices. And these choices are often tough. The tighter the aggregate expenditure constraints facing governments, the more important it is to be able to prioritize expenditure well.
A distinguishing characteristic of some of the new performance budgeting systems which have emerged over the past decade has been the idea of using the funding process as a means of putting pressure on government agencies to perform better, either or both by improving technical efficiency and by improving the design and management of programs. In some countries, this has been done by setting demanding performance targets as part of the budget process. In other countries, the funding process has been transformed in something like a “purchaser-provider” transaction. In general, the idea is to build even tighter links between funding and results than classic forms of performance budgeting sought to build. Closely linked to this has been the idea that budgeting mechanisms—and public management systems more generally—should be stripped of unnecessary controls and restrictions which inhibit managers from performing effectively.
Whether achieved through better expenditure prioritization, or through improved efficiency and effectiveness at the agency level, the social benefits of increased expenditure efficiency are clear. There is also good reason to believe that expenditure efficiency can contribute to aggregate fiscal discipline. If performance budgeting contributes to rising public sector productivity, agencies are able to do more with less and this will help to some extent to reduce the upward pressure on public expenditure over time. Good expenditure prioritization should also have the same effect of facilitating aggregate expenditure restraint over the medium and long term by helping to finance new priorities by cuts in low-priority existing programs. In the short run, moreover, improved expenditure prioritization should contribute to aggregate fiscal discipline under circumstances where fiscal consolidation is required. This is because if expenditure reductions target the least useful areas of expenditure and preserve higher-priority social spending, fiscal adjustment is more likely to be sustainable.
The inherent importance of expenditure efficiency and its close link with fiscal discipline are key reasons for the current wave of interest in performance budgeting. It is not accidental that countries facing particularly significant structural fiscal pressures tend to be those most interested in implementing performance budgeting systems.
This volume aims to help governments and their advisors assess the most appropriate way of reforming their budget and funding processes to boost expenditure efficiency. Because there are today a number of forms of performance budgeting, the starting point for this has to be the development of a clear taxonomy of performance budgeting systems. What are the key forms of performance budgeting? In what specific and different ways do they seek to link results and funding? How do they differ in their approach to the use of performance information? To what extent are they alternatives, and to what extent are they complementary?
Against this background, this volume aims to significantly improve our understanding of what forms of performance budgeting work, and under what circumstances. This is not an area where we are able to easily reach conclusions with scientific rigor. The complex causality of public budgeting and management systems makes that exceedingly difficult. Nevertheless, international experience and theoretical analysis can and do provide substantial guidance on the efficacy of alternative approaches to linking funding and results. It can, moreover, be of as much value to identify what has not worked well—and to understand why—as to identify the apparent success stories. To paraphrase the famous adage, those who do not understand the lessons of failed budgeting experiments are fated to repeat them. This underlines the importance of frankness in the review of national experiences with performance budgeting.
There are many important questions which arise in any systematic assessment of performance budgeting. To give some flavor of the issues addressed in this volume, let me identify just a couple:
What type of performance information is most useful for performance budgeting? This is a question on which opinion and practice diverge to some degree. For example, some countries place primary emphasis on performance measures, while others place considerable stress on program evaluation. Some believe that accrual budgeting is essential if proper allocative decisions are to be made. Others disagree. The answer to this question is, clearly, closely linked to the choice of the type of performance budgeting. For example, the newer forms of performance budgeting have more demanding information requirements because they seek to build tighter links between results and funding. But performance information is not costless. The more sophisticated the performance information system, the more costly it will be. This makes it essential that choices about information systems be made carefully, as part of a broader decision on what model of performance budgeting is most suitable for the circumstances of each country, based on a judgment of whether the expected benefits are likely to justify the cost.
How do we make sure that performance information is actually used in the budget process as performance budgeting intends that it be used? It is not uncommon to hear that great efforts have been made in particular countries to develop performance information but that this information is not actually being used in the budget process. There are, for example, a number of countries where the budget classification has been subject to a detailed overhaul to put it on a program basis, but no use has been made of this new budget classification as a tool to improve expenditure prioritization. In other countries, performance indicators have been developed and then used for no other purpose than filling in reports. What is the problem here? Does it indicate a need to pay more attention to the mechanisms and processes for the systematic use of that information? Or are there, in the case of at least some countries, more fundamental problems which raise questions about the appropriateness of introducing performance budgeting prior to other reforms?
To what extent, and under what circumstances, is it possible to give agencies and managers greater budgetary freedom without compromising aggregate fiscal discipline? In a budgeting context, greater managerial freedom means, in particular, the reduction or elimination of appropriation controls based on input types. The idea is that managers should be held responsible for the results they deliver—and not controlled in the manner in which they produce those results. This sounds very appealing. Are there not, however, risks that this freedom will be abused to enter commitments (such as increased employment) which will reduce longer-term fiscal flexibility? What are the preconditions which should be met for such deregulatory moves?
These questions point to a key theme of this volume: in performance budgeting, one size definitely does not fit all.
For example, more complex forms of performance budgeting may not suit countries with greater financial and human capacity constraints. The cost of the necessary information requirements may be simply unjustifiable. Or budgetary institutions may not be robust enough to make use of that information. It is always a mistake to simply copy the management systems of advanced nation without explicitly considering local circumstances and capacity.
For some countries, performance budgeting may actually be inappropriate in any form. There are, for example, a minimum set of basic elements of good public financial management which any country should have in place before it contemplates moving to performance budgeting.
Performance budgeting systems need also to take into account national characteristics in other ways. For example, the type of political system can have major consequences for the appropriate form of performance budgeting, and its probability of success. In a parliamentary system, the executive branch may be in a strong position to impose a single set of expenditure priorities. By contrast, in some presidential systems, both the executive branch and the legislature possess strong independent budgetary power. Priorities have to be negotiated.
All of these, and many other, questions are explored in this volume. They are examined partly from the perspective of national experience, in case studies which cover countries ranging from Ethiopia to the United States. And they are examined also through the prism of thematic chapters focused on, for example, the information requirements of performance budgeting and specific models such as formula funding and the purchaser-provider mechanism.
It is important that performance budgeting be seen in a broader context. It is a tool to address the basic performance problems which often characterize the public sector. In the public sector, there is no mechanism of consumer choice which directs resources to the production of the goods and services which society needs most. Competition is usually weak or entirely absent. The result is a lack of competitive pressure to be efficient.
Performance budgeting is, however, only one among a number of tools with which to address these problems. For example, many governments have been working hard to increase the degree of consumer choice in publicly financed services. Others have harnessed competitive forces by outsourcing, where appropriate, the production of such services. Moreover, as made clear in this volume, many contemporary forms of performance budgeting are part of a broader managing-for-results movement which calls for reforms on multiple fronts, ranging from human resource management through to organizational design, and including budgeting.
In the final analysis, all of these tools—including performance budgeting—have limitations. All too often, management reforms, including budget management reform, are oversold by their advocates. Exaggerated expectations inevitably produce subsequent disillusion. So in assessing performance budgeting, we need to take a dispassionate and critical perspective in order to identify its limitations as well as its potential benefits.
Precisely because of the limitations of reforms in the management of the public sector, it is also crucial to continually keep under review the boundaries of the state. If there is no good reason why a service should be provided by government, it is far better to leave it to private production and provision.
Although performance budgeting should not be seen as a solution to all of the performance problems of the public sector, it is my belief that well-designed performance budgeting systems which are appropriate to relevant national circumstances can do much to improve the efficiency of public expenditure. It is for this reason that the IMF is pleased to be able to offer this volume as a contribution to the work of improving the design and implementation of performance budgeting around the world.
Fiscal Affairs Department
Widely used to refer to government-wide budgeting systems, inspired by the purchaser-provider model, which were introduced, most notably, in New Zealand in the mid-1990s and in Australia in the late 1990s.
Types or categories of work undertaken in the production and delivery of outputs. The term is also often used to refer to lower-level components of the program hierarchy (see below).
The use in budget preparation of information on activity costs derived from activity-based costing.
A costing methodology in which input costs are allocated to categories of activity, using an allocation basis which as closely as possible reflects the real consumption of resources by those activity categories.
Programs which cover overhead costs of a ministry or agency, such as central management and personnel services.
Formula or principle used to allocate a specific indirect cost between two or more “cost objects”—in the context of program costing, between two or more programs.
The delivery by government of the mix of different types of services which most closely reflects social priorities, based on society’s valuations of output choices.
A variation of zero-base budgeting in which decisions are focused not on a zero base but on the margins near the current budget base. Usually three or more alternative budgets have to be submitted for each program. Generally, at least one of the alternatives has to be less than the current budget. Often a specific percentage reduction is mandated.
The extent to which a policy or program is consistent with current government priorities. Also known as “relevance.”
Funding on a per-head basis or some similar proxy for expected output.
Funding based on actual output.
Services for which the demand is unpredictably variable, which must be supplied immediately when the demand arises, and for which it is necessary to have pre-existing production capacity if demand is to be quickly met. Emergency services (fire, ambulance) are examples.
The achievement of intended outcomes at the lowest possible cost.
Functional relationship between outputs and cost, assuming technical efficiency.
The deliberate avoidance by providers of complex, and therefore high-cost, clients/cases. May be used as a strategy to maximize profits or avoid losses under an output-based payment systems where there is significant client/case heterogeneity.
A system for classifying hospital services (outputs) originally introduced for performance measurement purposes, which has subsequently been used as the basis for output-based funding systems.
The acquisition of inputs at appropriate prices. An element of (technical) efficiency.
The degree of success of an output in delivering its intended outcomes.
See technical efficiency, for which it is an equivalent term in the public administration literature.
Analytic assessments typically addressing the cost-effectiveness or appropriateness of public policies, organizations, or programs.
Factors outside the control of government which influence the outcomes achieved by public programs—that is, which impact on the effectiveness of programs. External factors may be either client/case characteristics or aspects of the context in which the program is delivered. Sometimes these are also referred to as “contextual factors.”
When used as a performance budgeting tool, formula funding is a system in which funding provided by government to a public sector agency is an explicit (that is, algebraic) function of measures of expected and/or actual results—that is, of measures of outputs and/or outcomes.
Projections by a central budget agency of aggregate expenditures over a fixed term (usually budget plus three years) on a no policy change basis. Forward estimates are the basis for medium-term fiscal planning and may also be used as the basis for imposing expenditure limits.
The deliberate variation in the amount and/or types of activities delivered to different clients/cases receiving the “same” service, particularly in response to difference in client/case characteristics. For example, more intensive teaching activity directed to students with disabilities.
Incentives are more “high-powered” the more strongly and more directly they are linked to measured results and conversely more “low-powered” the weaker and more indirect that link.
The more indirect outcomes of outputs, which arise as a consequence of the achievement of proximate outcomes. For example, in education, the proximate outcome of higher numeracy and literacy contributes to the higher-level outcome of better economic performance. Also sometimes known as “end” or “ultimate” outcomes.
Term used by some to refer to outcomes, or to higher-level outcomes.
Material rewards and sanctions linked to desired behaviors.
Budgeting that is characterized by “inattentiveness to the (budgetary) base”—in other words, that budgetary decision-makers take the budgetary base more or less for granted as the starting point in budget formulation, and focus their attention primarily on the size of the increment (or, occasionally, decrement) in agency or program budgets, mainly by a process of adjusting budgets for cost changes.
In the context of costing programs, costs of inputs or activities which contribute to more than one program. More generally, shared costs which need to be allocated between a number of “cost objects.”
Controls imposed either in the appropriation legislation, or by regulation on the part of the Ministry of Finance, over the manner in which a line agency’s expenditure is to be allocated between different input types (setting, for example, a limit for expenditure on salaries).
Resources used in the carrying out of activities to produce outputs (for example, labor, equipment, buildings).
See proximate outcomes.
Goods or services which are supplied to an internal user rather than to the external client/customer. For example, IT support services delivered by ministry IT staff to staff of the ministry.
Behavioral motivation independent of any immediate external pressure or inducement. Can be of two types—moral motivation and intrinsic motivation.
A planning methodology that uses “cause and effect” hierarchies to map logic links between outputs, proximate outcomes, and outcomes.
Motivation which derives from the enjoyment of work—that is, from pleasure in undertaking work activities one enjoys or producing results in which one takes pleasure or pride.
Budgeting in which agencies are provided with budget appropriations specified in terms of input categories (that is, by economic classification).
The use of formal performance information to improve public sector performance across the board, including in human resource management, in strategic planning and budgeting. Sometimes also referred to as “performance management.”
Expenditure which occurs by virtue of standing legislative provision (“standing appropriation”), as opposed to allocation in the annual budget. Most social security expenditure is usually of this type.
Internal motivation driven by a desire to behave in accordance with one’s moral beliefs and values.
Changes brought about by public interventions upon individuals, social structures, or the physical environment. Expressed differently, the impacts of public services.
A good or service provided by an agency to or for an external party.
Audit of the efficiency and effectiveness of public expenditure.
Public sector funding mechanisms and processes designed to strengthen the linkage between funding and results (outputs and outcomes), through the systematic use of formal performance information, with the objective of improving the allocative and technical efficiency of public expenditure.
See performance measure.
Information on results achieved by public expenditure and/ or on the costs of achieving those results.
Ratings or quantitative measures which provide information on the effectiveness and efficiency of public programs.
Quantitative statements of the output and/or outcome an agency or subordinate unit is expected to deliver.
The original form of program budgeting introduced in the United States in the 1960s.
The means by which inputs are transformed into outputs.
The degree of technical efficiency.
The appropriation of funds in the budget on the basis of programs.
Technique developed by the US Office of Management and Budget from 2004 in order to rate program performance for use in the budget process. Programs rated in five categories ranging from “effective” down to “ineffective” and “results not demonstrated.”
The systematic use of performance information to inform decisions about budgetary priorities between competing programs, based on the program classification of expenditure (see programs).
Classification which breaks programs into component subprograms, and in turn breaks these into lower-level components. In one common version of the program hierarchy, programs are broken into sub-programs, which are in turn broken into activities.
The manner in which an agency classifies its expenditures into objective-based programs and other elements (subprograms, and so on) of its program hierarchy.
Objective-based categories of expenditure, where objectives should generally refer to the intended outcomes of the expenditure. As used in this book, generally refers to the highest level of the program hierarchy.
The more direct or immediate impacts of outputs. For example, in education, student knowledge (such as, higher numeracy and literacy) is a key proximate outcome.
System developed in the United Kingdom from the late 1990s, under which high-level performance targets are set for each ministry as part of a biennial spending review process which defines multi-year agency budgets. Targets have evolved over time from being primarily output focused to primarily outcome focused.
An altruistic motivation to serve the interests of the community, as perceived by public employees.
Funding systems under which government agencies are paid “prices” for the results (usually outputs) which they deliver.
The extent to which the characteristics of an output—in the case of a service output, the activities delivered and their timeliness—are such as to increase its potential capacity to achieve its intended outcome. Not to be confused with the outcome itself.
Fine-tuning a case payment or capitation payment system so that funding more closely reflects the variability of client/ case costs due, in particular, to heterogeneity.
Implementation strategy which combines pressure from above to encourage managers to change, with action from below to increase their capacity to change.
Deliberate underservicing of more complex clients/cases; for example, as a response to an output-based payment system in which the quality of the output delivered is imperfectly measured.
Behavior motivated by the desire of individuals to build certain types of social relationship (in the context of this book, in the workplace), such as the acceptance and approval of others, or power and status.
Audit to assess the efficiency and effectiveness of a program or agency.
Auditing of management systems to gauge their capacity to contribute to the efficiency and effectiveness of public expenditure.
Production of an output at minimum cost while holding quality constant, given prevailing input prices. Requires both the avoidance of waste and the choice of the least-cost combination of inputs.
Cost per unit of output. Can refer to average cost or average variable cost.
Shifting of funds between appropriation categories. A system of performance budgeting in which expenditure is broken down into, and analyzed in terms of, “decision packages” (also known as “service increments”) which constitute a series of optional funding levels from the presumed base of zero to and beyond the current level of service. Priority rankings are attached to these decision packages, and these rankings are used to ensure that the available level of revenue funded those decision packages which are of highest priority.