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17 Three Decades of Reforms in Spain

Author(s):
Marc Robinson
Published Date:
October 2007
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Author(s)
Jesús Ruiz-Huerta, Eduardo Zapico, Javier Loscos and Tamón Takahashi1 

As in other continental European countries, public administration in Spain has a legalistic tradition focused heavily on the detailed regulation of procedures and the application of strict control mechanisms. The budgeting system has traditionally been focused on compliance—that is, on the control of the level and objects of spending rather than on the results of spending. Civil servants responsible for budget preparation and execution therefore have concentrated their efforts on complying with the budget legislation and instructions established in regulations, without much concern with the efficiency and effectiveness of their initiatives.

Since the mid-1970s various forms of budgeting by objectives or results (hereinafter performance budgeting—PB) have been prepared for introduction in Spain.2 Since that time continuous efforts have been made to move from administrative line-item budgeting to budgeting for results. As explained later, some relevant improvements have taken place. However, change proposals and tools have been focused on formulating new legislation and incorporating the main formal or technical elements of PB. After three decades of efforts to implement a PB-like model (for example, Planning, Programming, and Budgeting System—PPBS, zero-base budgeting—ZBB) there seems to be a new momentum for a new budget reform effort. At this stage it is important to review previous experience in order to get a better understanding of how best to move ahead and to avoid committing the same errors made in previous budget reform exercises. So far, insufficient attention has been paid to the behavioral effects and conditions imposed by this type of budget reform on those responsible for the reform and its stakeholders.

The aims of this chapter are to: (a) present an overview of Spanish experience with PB; (b) outline the current status and ongoing reforms; (c) discuss certain new challenges and opportunities for the further development of PB; and (d) present some thoughts on main lessons learned on the design and implementation of PB reform.

Historical background

The traditional approach to budgeting prevailed until the approval of the democratic Constitution of 1978. There were, however, a number of initial steps toward reform in the early 1970s, of which the most important, from a performance budgeting perspective, was the establishment of Development Plans (Planes de Desarrollo), which for the first time introduced provisions aimed at measuring programs and objectives. Associated with this, interdepartmental commissions were created to develop methodologies (such as ex-ante assessments and cost-benefit analysis) for evaluating public investment projects.

However, the initiative had numerous limitations. The analysis was applied to investment projects only, and these were analyzed in isolation from their current expenditure implications. Consequently, the global effects of the programs evaluated were not known. Moreover, the difficulties that arose when endeavoring to measure the non-financial benefits and costs of projects led to an analytic focus on programs or departments with a clearly economic/financial focus (public works, agriculture, and so on) (see Lozano Irueste, 1982). Another problem was the limited connection between the cost estimates obtained in the project evaluation process and the budget allocations to the project. A key reason for this was that budget allocations did not include the civil service wage costs of projects, because wage costs were treated as a ministry overhead cost assigned to the ministry central office (see Carreño Rodriguez-Maribona and González Finat, 1979). Civil servants’ lack of motivation and capacity for program-based management was a further obstacle (see Barea and Carreño, 1971).

Strong growth of the economy and public spending in the 1970s and 1980s was not accompanied by commensurate advances in financial and budgetary management capacities. During those years, public spending in Spain nearly doubled, rising to the level of the most developed countries. However, at the end of the 1970s the budget process remained in a very traditional mode. In effect, it was a process of incremental allocation of resources, in which:

  • the main interest of budget implementers was in spending, by the end of the fiscal year, all the resources allocated to them, in order to be regarded as “effective” and avoid budget cuts in the following year

  • financial control focused on formal compliance with budgetary and accounting regulations, with spending limits and fraud prevention constituting the primary objectives, and with control mechanisms based on an extremely rigid and detailed ex-ante control of every expenditure item

  • parliamentary control of budget execution was based on the role of the Court of Auditors, also legalistic by nature, and the approval of the General Ledger of the State (that is, the formal approval of the report on the execution of the budget) tended not to attract great interest on the part of members of parliament (se Argüello and Palacios, 1979).

It is clear that, at the end of the 1970s, the main priority of the Ministry of Economy and Finance (Ministerio de Economía y Hacienda—MEH) was focused on control of aggregate spending levels and compliance with budget and accounting regulations. Budget preparation was largely an exercise in administrative calculations (projections of spending increases stemming from administrative decisions, new laws, inflation, and so on) (see Gunther, 1980) and budgetary and financial control focused on the legality of procedures. Evaluation and planning played no significant role.

Since that time, however, the Spanish government has been reforming budgeting, in parallel with broader reforms in economic policy and management. It began, first, to pay greater attention to the economy, efficiency, and effectiveness of public spending, while at the same time focusing on aggregate fiscal discipline and sound macroeconomic policy.

In 1977, a new organic budget law (Ley General Presupuestaria—LGP) was adopted which included a number of important provisions for budget reform oriented toward achieving greater spending efficiency and effectiveness. The new democratic Constitution (Constitutión Española—CE) adopted in 1978 also set out a basic framework for the modernization of government finance management, stipulating that the programming and execution of public expenditure should meet the criteria of efficiency and economy (Article 31.2 CE), and that public administration should comply with the principle of efficiency (Article 103.1 CE).

In the late 1970s, the MEH started to require some departments to formulate their budgets by programs. This was extended to the government as a whole in the mid-1980s, with the development of a functional budget structure in which all expenditure was classified by programs. In the late 1980s, the focus of budget reform moved away from budget classification to the budget process: among other things, it focused on performance budgeting and the development of new multilateral budget negotiation mechanisms.

In more detail, the first step toward the introduction of program budgeting in Spain was taken in the 1979 budget preparation guidelines. It was quite partial (not involving a genuine change in traditional budgeting approaches) and limited to only two departments (see Sánchez Revenga, 2005, pp. 29-30). The extension of this across the whole Spanish administration in the 1984 budget was more formal than substantive: there was no requirement that program objectives be specified or that program performance indicators be identified. The sole requirement was for a program classification of expenditure, which in many cases ended up being a simple transposition of the organizational structure (cf. Ministerial Order of June 17, 1983, and Sánchez Revenga, 2005, pp. 30-1).

The need to improve on this was recognized in the Ministerial Order of April 23, 1984, requiring a more complete classification by programs identifying objectives to be pursued. The Ministerial Order also gave spending units authority to shift funding within programs (Sánchez Revenga, 2005, p. 31). It also mandated program performance indicators, by means of so-called program indicator sheets which were to include “in concise and clear form…the objectives, indicators, and measures proposed to reduce spending or spending increases as needed in order to carry out the program anticipated at its level [as well as] the regulations in force affecting the program, with reference to the conditions derived from same as to the rigidity of and changes in spending.”3

Alongside these advances, the government was placing much greater emphasis on fiscal discipline. In 1988, it approved the first Macroeconomic and Budgetary Scenarios (four-year projections signaling spending ceilings for the first year and updated annually). The Maastricht Treaty (1992) and the creation of the European Monetary Union (1999) increased the pressure for fiscal discipline. In 2001, parliament approved two Budget Stability Laws (one for the national and one for the regional governments),4 which were amended in 2006 to re-specify the budget balance requirement in cyclically adjusted terms.

In this context, there has been an increasing recognition of the need to reinforce aggregate spending discipline with greater effectiveness and efficiency of public managers. Several other innovations have been introduced to improve the budget process with a new system for the monitoring of objectives (see Sánchez Revenga, 2005, pp. 31-3) and the new multilateral budget negotiation arrangements based on the creation of the Spending Policy Commissions and Program Analysis Commissions (PAC) (see below). Negotiation at the PAC is the stage which features the most intensive debates between the Directorate-General of the Budget and the departments responsible for spending policies. At the beginning, the PACs were intended to introduce multilateral debates into the budget process, rather than to rely only on bilateral discussions between each ministry and the MEH. The multilateral negotiations would have encouraged departments and spending units to negotiate and compete among themselves for resources in a zero-sum game context, thus increasing the effectiveness of aggregate expenditure discipline. However, traditional bilateral meetings persisted.5 There was no political will to implement this approach to budget negotiations.

In the last two decades, the General Audit Office (Intervención General de la Administratión del Estado—IGAE) has made important efforts to follow up and report on the results of a selected group of budget programs. However, the performance information produced by the IGAE has not been considered as very relevant for budgeting.6 Furthermore, a Law on the Organization and Functioning of the General Administration of the State was approved in 1997,7 and the first steps were taken toward preparing a new organic budget law to be approved in 2003.

Current situation of performance budgeting

Performance budgeting developments are currently progressing along two different paths: the improvement of budgetary techniques and processes (particularly in the context of the new General Budgetary Law of 2003), and the refinement of the evaluation and control systems and their linkage with the budget process. But before analyzing these improvements it is necessary to present a brief description of the budget procedure and main actors.

Overview of the budget process

The budget preparation process starts each January when the MEH prepares a three-year budget outline and draft expenditure ceilings for the next year, and submits these to the Council of Ministers. The MEH then draws up the Multi-year Budgetary Scenario.8 To this end, the Directorate-General of Budget (DGP) in collaboration with the budget offices of spending departments prepares projections for a long-term scenario and submits them to the DGP. The DGP adds the revenue projections and sends them to the MEH who presents the Scenario to the Council of Ministers (CoM). The MEH then prepares recommendations for the Council of Ministers on budget stability objectives for both the national and regional governments (“Autonomous Communities”). The CoM decides on the budget policy—including a multi-year macroeconomic framework contained in the Stability Program drawn up in accordance with the EU Stability and Growth Pact—and submits it to the parliament, which reviews and either approves or rejects the proposed budget framework.9 Key institutional players in the budget preparation process include the following:

1. The Spending Policy Commission, chaired by the Minister of Economy and Finance with the assistance of the Secretary of State for Finance and Budget and with the participation of spending ministers or other top officials representing them. The role of this Commission is to reach agreement on an initial allocation of budgetary resources which is consistent with government priorities and aggregate fiscal policy. The Commission sets ceilings within which each spending department prepares its budget proposal.

2. The Revenue Commission, chaired by the Secretary of State for Finance and Budget, which is responsible for coordinating the preparation of the revenue forecasts.

3. The Departmental Budget Commissions composed of the representatives from within the relevant departments, and chaired by its Deputy Secretary. The task of these commissions is to make proposals for the preliminary draft budget, formulate priority criteria, review existing programs, and monitor their execution.10

4. The Program Analysis Commissions (at least one per department, chaired by the Secretary of State for Finance and Budget), whose functions include the analysis of the adequacy and validity of spending programs consistent with priorities defined by the Spending Policy Commission (see below for further details on these Commissions).11

The Preliminary Draft Budget is discussed and approved by the CoM in September, and is then submitted to the Congress by October 1. In considering the budget, Congress first sets an aggregate expenditure ceiling and then debates the allocation of spending within that ceiling. Normally, the debate at the parliament does not pay attention to program performance.

Budget execution is a highly regulated process with a particular concern on legal compliance. The functions of auditing and control are vested in various institutions: the internal audit done by the IGAE and the external audit done by the Court of Auditors (Tribunal de Cuentas).

A solid framework and clear rules of the budgetary game

As noted above, one of the key forces behind the budgetary reform process was the macroeconomic pressure to restrict public spending and comply with budgetary stability objectives. This demands not only the control of aggregate spending, but also improved quality of spending (Pollit and Bouckaert, 2004, p. 67). Budget stability and performance budgeting therefore need to be addressed in a coherent and complementary manner. The synergy between these issues is well captured in the four basic principles articulated in the Budget Stability Laws, namely: budgetary stability, multi-year projections (scenarios with first-year spending limits), transparency, and efficiency in the allocation and use of public funds.12

The MEH formulated a new organic budget law—the General Budgetary Law (LGP) of 2003—in order to give effect to these principles, and in particular to the one referring to efficiency in financial management. As observed by Sánchez Revenga (2005), “the substance of the new LGP 2003 shows a keen interest in establishing an appropriate normative framework, making it possible to apply efficiency approaches into budgeting and to develop a management by results culture in respect to expenditure.”

The law requires a multi-year programming and the definition of objectives on regular basis. It seeks to establish a systematic linkage between budget allocations and the objectives for departments and spending management units,13 by the following means:

  • Development of a system of spending management by objectives. Public managers are required to be effective in attaining their objectives, and to focus on results in programming and implementation expenditure initiatives. For each program, spending management units are required to specify a relevant set of objectives appropriate to their organization. These objectives must be included in their annual multi-year program.14

  • Development of information and performance monitoring systems. The management and control systems of public spending must be oriented towards results as well as financial compliance. Spending management units should prepare an annual report on the achievement of their objectives, which shall be included in their annual reports and in the multi-year programming.15

  • Continuous evaluation of spending policies. The MEH, in collaboration with the various spending management units, leads and coordinates the evaluation of budget programs with the purpose of ensuring that spending policies achieve their strategic and socioeconomic objectives.

Strengthening the budget process

At the end of 2004, in response to the opportunity offered by new legislation for developing performance budgeting, the Secretary of State for Budgeting created several working groups to study possible measures for improving the budget process and documentation. Two of these groups focused respectively on the role of the Program Analysis Commissions and on the quality of information presented in budget programs.

Improving the Commissions for Program Analysis (PACs)

The main official functions of the PACs are: analyzing the adequacy and validity of spending programs in relation to their objectives; allocating resources within the budget ceilings for each department or program; and ensuring that proposed allocations are consistent with priorities set at the political level. It is also intended that PACs should review and take into consideration program results in the preceding year.16

Although from an instrumental point of view the PACs have not been very successful, from other points of view they add value to the budget process. The symbolic and relational role played by the PACs in the process of preparing the budget should be underlined. As Zapico Goñi points out (2005):

They embody expenditure review and over sight… They significantly facilitate direct relationships among senior officials and shape expectations and standards of behavior or decision-making style facilitating progress towards reaching budget agreements. The PACs make it possible for technical specialists to obtain direct information on agreements or disagreements at the policy levels…

The capacity of the PACs to facilitate information sharing and useful debate on performance in the budget process remains at this stage quite limited. This is due to both technical and political factors. The major weaknesses identified by the working group in the preparation and functioning of the PACs are:

  • shortcomings in the instructions received at the Program Analysis from Commissions from the Spending Policy Commissions. These instructions are neither concrete nor effectively communicated

  • inadequate communication and collaboration between spending management departments and the Directorate-General of Budget

  • insufficient use of the analytical capacities of the DGP and other actors in the budget process. Better preparation of the starting positions for negotiation in both parts would facilitate more efficiency in the debates

  • limited scope of the debate in the PACs. Discussions are mainly focused on the projections of spending line-items according to expected variations in inflation, or according to new legislation (see Zapico Goñi, 2005, pp. 40-2; Directión General de Presupuestos, 2005).

Many other specific weaknesses may be mentioned. There is a tendency to avoid conflict rather than deal with it in a transparent manner. At a more technical level, there is sometimes a major imbalance between the volume of information requested by the DGP and that received from the spending management units. This information often arrives at the very last minute. The capacity to process and analyze this information is limited. Most of the information is financial in nature, and the amount of relevant performance information remains very limited. Analysis lacks sufficient depth, with most budget commitments being considered unavoidable (for example, personnel) and the scope for discretionary decision-making for budget corrections being therefore perceived as very limited. While this might be right in the short term, it is not necessarily the case over the medium- or long-term horizon.

Spending management departments often don’t have sufficient accurate information about the budget implications of departmental plans, reform programs, or legislative proposals, complicating oversight over the adaptation of annual plans to the medium-term budget scenarios.

There is not enough time for debate in the PAC meetings. In general, the focus of PAC discussions is incremental and, frequently, focused on the maximum percentage increases authorized for budget chapters. There is scarcely any systematic debate about spending policies or ministerial priorities and past or expected performance. There is also no debate on interdepartmental programs. So far, budget scenarios seem to have been considered as a mere formal exercise complementary to the annual budget. Instead it should be the other way around. Annual budgeting should be an extension of the budget scenarios.

The efficient allocation of resources in the framework of budgetary scenarios prepared with transparency (better knowledge on sector programs and information on performance) and with the active participation of spending managers, would be much more effective and relevant than the current annual program budget negotiations focus on chapters or line items expenditures. (Zapico Goñi, 2005, p. 43)

The suggestions made by the working group to improve the functioning of the PACs in the short or medium term involve: incorporating a more strategic and selective approach into the negotiations, introducing a multi-year perspective in the debate, and taking into account information sensitive to the institutional and political context. In particular, it is deemed necessary to strengthen the political leadership and supporting role that must be played by the Minister of Economy and Finance with a view to improving the functioning of the PACs.

Specific lines proposed for improving the PACs model are as follows (see Zapico Goñi, 2005, pp. 40-2; Directión General de Presupuestos, 2005):

  • Modification of the role and competencies of the DGP in the budget process. When preparing PAC meetings, the DGP must reorient its efforts and resources toward the analysis of selective strategic spending. Debates at the PACs should focus on long-term effects or impacts.

  • Applying resource allocation criteria in order to encourage the application of spending management by objectives. One of the main focuses of debates at the PACs should be on ensuring the consistency of budget programs with sector plans of spending ministries and/or with government priorities. Also, other types of analysis (for example, assessment of socioeconomic and environmental impact of policies, or cost-effective analysis) could be prepared in collaboration with external experts (see Zapico Goñi, 2005; CECAEE, 2004).

  • Introduction of new types of PAC meetings, and revision of their composition and size. Four types of meetings are suggested: (a) preparatory meetings, with experts from the budget offices and representatives of the IGAE in spending ministries; (b) main interface meeting between the DGP and spending ministry officials; (c) meetings to follow up compliance with agreements and solving controversies in a transparent manner; and (d) final meetings, at top level, after which no changes would be accepted unless accompanied by offsetting proposals from the same department (see Zapico Goñi, 2005; Directión General de Presupuestos, 2005). The composition and size of the PACs should be adjusted depending on the different types of meetings in order to ensure flexible and efficient functioning.

  • Improvement of the information used in PAC decision-making. To bring about this improvement it has been suggested, first, that the DGP develop a more proactive behavior during the preparation of new sector plans and programs in spending ministries. Officials of the DGP should be searching for information at early stages of sector policy-making on the potential budget impact of the main future initiatives. This would allow them to anticipate possible risks of excessive spending, and to ensure sound programming (that is, relating resources to objectives and actions; choosing relevant indicators, and so on), so that subsequent monitoring and evaluation are feasible.

  • Introducing incentives for coordination and collaboration between the DGP, budget offices, and management operational services. The study also recommends the use of incentives that have been applied in other countries to enhance collaboration among budget and management officials, such as: (a) sharing the “profits” derived from performance budgeting between the Ministry of Economy and Finance and the spending management units, rewarding savings resulting from cutbacks or from efficiency gains, or granting flexibility to allocate a portion of the profits in accordance with predetermined criteria; (b) creating a Reserve Fund for innovation and productivity, to be distributed on a competitive basis; (c) signing budget agreements specifying the information on resources, objectives, and activities which must be submitted to the Ministry of Economy and Finance by the spending management units for purposes of monitoring special budget programs; (d) using indicators of outcomes or impacts that require the cooperation of several services; (e) focusing evaluation efforts more on recognizing and promoting desirable management styles than on the identification of spending misbehavior or non-compliance; and (f) making the provision of funds contingent on meeting the information requirements of the Ministry of Economy and Finance so as to penalize resistance or delays in the provision of data on the budgetary impact of plans, or poor quality information on budgetary programs (see OECD, 2001; UK Cabinet Office, 1999; Chile National Budget Office, 2003).

Improving performance information presented in budget programs

The working party on performance information included representatives from the DGP (Budget), the IGAE (Financial Controller), and the budget offices of specific spending management departments. Its aim was to examine and suggest ways of improving the quality of program information presented in the budget documents (see Ministerio de Economía y Hacienda, 2004, pp. 3-5). Six “pilot programs” were analyzed with a view to assessing and proposing improvements in their structure, the consistency of their main elements (that is, objectives, activities, and indicators), and their level of “evaluability.”17

The main weaknesses identified were:

  • overly broad nature of many programs. The design of the program classification tends to be somewhat artificial. Normally it is a translation of the organic (organizational) classification of spending

  • lack of a useful definition of needs or problems being addressed

  • absence of a clear identification of the program target groups and their main characteristics

  • ill-defined objectives. Use of excessively general definitions, insufficiently focused on problem-solving, or not well supported with operational objectives and performance measures

  • lack, or inadequacy, of logical or conceptual framework of programs

  • failure to adequately link main components of the programs: for example, objectives not always related to activities and resources

  • performance indicators based on available data and statistics, rather than using goal-driven data and information

  • predominance of indicators based on resources, activities, or immediate output; almost no information on outcomes or external impacts on society.

In general, prior to 2005, public programs presented in the budget document were not sufficiently well specified to allow proper performance follow-up and evaluation. A key reason for the poor quality of budget programs in this respect was the lack of participation and ownership of managers. The incentive for public managers to actively participate in the budget reform has been a missing factor in the efforts made so far done to introduce PB in Spain.

The main future steps decided upon were (Espadas, 2005a, 2005b; Directión General de Presupuestos, 2006): correcting inconsistencies found for the pilot programs studied, extending the effort to other programs, improving program monitoring and information systems, identifying units dealing with program evaluation in spending departments, promoting greater involvement of managers, and conducting full quality appraisals (including options and management risks of programs, the adequacy of organizational structures, human resources, performance incentives, and information collection systems). Furthermore, the program classification will be better linked to a functional classification adapted to international standards.

The working party prepared guidelines for spending management centers covering the basic requirements that must be met during the preparation of budget programs in order to achieve the proposed aims, provide adequate systems for the follow-up and evaluation of program achievements, and provide the information necessary for the adoption of performance-based decisions during the process of resource allocation (Ministerio de Economía y Hacienda, 2004, pp. 3-5; 2005, p. 3). Regarding the functional classification of expenditures, the guidelines provide a better and clear link between programs and spending policies, and also continue to move forward with the alignment with international classifications (see Ministerio de Economía y Hacienda, 2005, p. 6).

In particular, strong emphasis is placed on identifying the so-called “Areas of Activity” and their corresponding objectives and performance indicators. The areas of activity may be defined as a set of activities aimed at achieving one or more common objectives. These areas of activity make it possible to identify the policy function and main internal components, the type of activities to be carried out and the ends pursued by them. Once the area of activity is identified, it can be associated with the strategic and operational objectives. For instance, the program “To promote labour insertion and stability” has as one of the areas of activity “Vocational training” with the strategic objective of developing working skills and enhancing business competitiveness. This strategic goal is to be operationalized through two specific objectives: (a) to promote access to a job through vocational training, and (b) to promote continued participation in the labor market through updating professional qualifications (Ministerio de Economía y Hacienda, 2005, p. 7).

The strategic objectives must consider the context of the program and the interaction with other programs sharing the same aim, thereby taking into account the consistency of all the initiatives associated with it. The number of strategic objectives of a program should not be excessive. They are complemented by operational objectives and at least one of them must address the issues related to performance-based expenditure management: efficiency and effectiveness. In addition, they should refer to key aspects of the program, that is, to activities that consume a sizable amount of resources. Some strategic objectives refer to the program globally, while others refer to specific areas of activity of the program. The operational objectives constitute a further breakdown of the strategic objectives at a lower level, thereby facilitating the linkages with the activities of the program concerned (see Ministerio de Economía y Hacienda, 2005, pp. 10-15).

All these innovations may be regarded as technical steps toward the consolidation of performance budgeting, but they are not enough. While the formal structure required for PB is strengthened, it remains to be seen whether it will be used and whether there will be the political will and support at all levels needed to move beyond “incrementalist” spending behavior.

Strengthening evaluation and performance audit

Budget offices within each spending ministry could play an important role in the development of these functions, as they are responsible for estimating the budget needs of each department. However, in general, their capacity for analysis and evaluation is very limited. They are understaffed and/or overloaded with a long list of bureaucratic functions.

Program evaluation and performance audit are now emerging in diverse policy spheres owing to the influence of a number of factors including the European integration, the regional decentralization process, and growing demands for effectiveness in public services. Budget-cutting scenarios have also had an influence on the increasing demand for these management assessment tools. Traditionally, these kinds of evaluation and analysis efforts have been developed in Spain on the initiative of the central government, but the role played in recent years by the universities and regional and local governments has been essential and is increasing.

The IGAE has made substantial efforts to use performance auditing for the follow-up of budgetary programs. The Budget Stability Laws of 2001 and 2006 and the General Budget Law of 2003 strengthened the role of the IGAE as the main internal control body in government, highlighting not only its traditional functions of accounting and financial audit, but also its performance auditing on public expenditure management. Clearly there has been a shift from ex-ante compliance controls and financial audits towards the so-called integrated auditing, including the follow-up of budget programs through the performance monitoring of the achievements of objectives. A new National Agency for Evaluation (Agenda Estatal de Evaluation) is being created in the Ministry of Public Administration.

Despite these developments, program evaluation and performance audit still have a long way to go.

Outlook: performance budgeting under decentralization

The outlook for the immediate future of PB in Spain needs to take into account the consequences of the current strong trend towards decentralization. Decentralization in Spain has two different dimensions. The first is an internal one aiming at administrative or management decentralization within central government. The second is an external one associated with the political decentralization or regionalization process that started with the new Constitution (1975).

Management decentralization within central government

The prospects in the immediate future for PB have been affected significantly by the recent approval, in 2006, of the Law of State Agencies (LSA) for the improvement of public services.18 The aim of this law is to provide a general organizational model for central government based on a high degree of managerial autonomy for state agencies and simultaneously on strengthened mechanisms for accountability focused on results.19

State agencies’ managers will have the authority to make decisions on their own resources and they will be held accountable for achieving their objectives. To this end, the law introduces a system of Transparent Management by Objectives based on the notion of multi-year management contracts (Article 13, LSA). These contracts must present, among other elements, (a) the objectives to be pursued, outcomes to be obtained, and, in general, the activity to be carried out; (b) the plans necessary for achieving the objectives, specifying the corresponding timeframes and the projects associated with each strategy and its time period, as well as the indicators for evaluating the results; (c) the staffing, material, and budgetary resources to be provided to achieving the objectives; (d) the effects associated with the degree of compliance with established objectives; (e) the procedure to be followed for covering whatever annual deficits may arise owing to a shortage in real revenue from the estimated levels, and the consequences in terms of accountability for management which may result from such deficits; and (f) the procedure for introducing annual changes or adaptations which may occur, as appropriate.

The management contract also determines the mechanisms of accountability for failing to achieve the objectives. Agencies are required to prepare an annual action plan, an activity report on the preceding fiscal year, and annual accounts, which will be available to the public (Article 15, LSA).

As regards their financial management regime, the law creates a new freedom for agencies to shift estimates between types of inputs (line-items), with the exception of personnel costs.20 Agencies are subject to the accounting principles and system established for public entities and subject to external auditing by the Court of Auditors and oversight by the IGAE.

This reorganization of central government is complementary to the PB reform. Both are based on the same rational decision-making model. However, it remains unclear to what extent and how the two departments responsible for them, respectively the MEH and the Ministry of Public Administration, will share the credit of the reforms and will coordinate efforts. As in past experiences, collective action incentives will be needed.

Performance budgeting in a regionalized state

The development of the Constitution of 1975 has led to a shift from a highly centralized political regime, in which virtually all power was vested in central government, to a highly decentralized model in which the Autonomous Communities (regional governments) are now the level of government with the greatest public spending authority (accounting for 34.6 percent of public expenditure).21

Inevitably, this shift has had an impact on regional government budgeting and management. In the near future it is expected that there will be a considerable effort to develop these budgeting techniques. These efforts may yield significant improvements in the quality of their public services (see Rosen, 1999, p. 476 et seq.).

A good illustration on the advances made in this line is the reform process initiated by the Catalonian government with the preparation of the budget for 2006. A serious effort has been made to introduce PB with a view to ensuring that the budget fulfills its dual role as an instrument for fiscal discipline and for spending management. The reform emphasizes the strategic dimensions of this type of budgeting, associated with a long-term perspective, the development of participation, and management flexibility. Also noteworthy are the PB implications of the need for changing the administrative culture and the development of information and evaluation systems focused on outcomes, serving as elements for feeding the budget decision-making under a framework of transparency (in these respects, see Maluquer and Tarrach, 2006).

The preparation process for the 2006 Catalonian budget22 required the broadening of the institutional scope of the budget (according to the European System of Accounts); the revision of the organizational, economic, and functional classifications of the budget; the implementation of a program budget, and the improvement of budgetary information and its accessibility.23 The next stage calls for the reform of the Catalonian Finance Law, as well as the improvement of the design of programs and their main components, the development of cost accounting and a comprehensive system of indicators, as well as policy evaluation and reporting (Maluquer and Tarrach, 2006).

The development of these initiatives in this and other Autonomous Communities promises to be one of the most important initiatives in the near future of performance budgeting in the whole Spanish public sector. Improving public expenditure management in regional governments may also have relevant consequences for the programming and budgeting of intergovernmental initiatives that may need sound and comprehensive information on the total resources and overall effects and impact of public policies shared by different levels of governments. Encouraging rational collective behavior among different layers will be a critical factor for the success of any effort towards public-sector-wide PB.

Conclusions: main lessons

The traditional main concern of the MEH has been controlling financial compliance of spending procedures. There have been three decades of budget reform efforts focused on changing the budget document, the program structure, and the formal process of resource allocation. In addition, performance auditing efforts have been specially focused on the follow-up and evaluation of a selected group of budget programs. These reforms began to yield benefits in the mid-1990s (see Sánchez Revenga, 1989, p. 70). It is now generally accepted that the new budget structure offers improved classification and more information on PB technical components and program performance.

However, the budget system in Spain still needs further improvements to consolidate an effective and sound performance budgeting system. For example, accountability for results is still in a phase of development; and better integration among main stakeholders—interministerial or intergovernmental coordination—is needed for efficient and effective public policy results. Currently, additional efforts are being made to further develop performance monitoring, program evaluation, and financial management capacities within the MEH, in spending departments, and in regional governments. The capacity to carry out these functions is gradually being improved. Yet there are several issues and factors to be considered for a substantial qualitative improvement for performance budgeting.

Reflecting on past experience, the following points appear important for further development of PB in Spain:

  • 1. Continuous political support is necessary. One explanation for the limited success of performance budgeting to date is the weakness or lack of continuity of political support. There has been strong commitment and political will in the MEH for supporting the use of efficiency and effectiveness criteria in public expenditure management. However, this interest has not been maintained over time.

  • 2. The formal introduction of the technical components of performance budgeting is not enough. Attention also needs to be paid to cultural values and behavior of budget main actors and stakeholders. Future advances in the quality of performance budgeting need to take into account, among others, the following conditions and considerations:

    • (a) Budgeting cannot be assumed to be a neutral and technical exercise for economic and financial prediction, or a mere legislative process. Some of the problems identified in this work relate to the attempts to impose reform processes from the center on the basis of a technically ideal solution. A non-participatory approach to budget reform might result in either a merely formal compliance, “creative budgeting,” or even the rejection of performance budgeting. Conflicts and negotiations in the process should not be perceived as dysfunctions to be avoided or solved by “objective or neutral” analysis and the corresponding “automatic” decision-making. Uncertainty, conflict, and interdependence are part of the reality of the budget process and its reform. Specifying objectives, measuring performance, analyzing options, and structuring the budget by programs may facilitate stability and predictability in budgeting, but do not guarantee an efficient allocation of resources. Programming does not eliminate risk or the need for conflict management.

    • (b) Respecting legal tradition should be complemented by the development of a management culture. There is a general feeling that the legal perspective of public budgeting is incompatible with a management approach. There is a perception that there is a trade-off between both of them. On the contrary, it is necessary to complement the concern with legality of spending with a new emphasis on performance. However, it seems to be difficult to apply this new perspective to budget reform itself. The efforts of the MEH have been based primarily on introducing new legislation and guidelines for implementing changes in budgeting, auditing, and evaluation.24 The follow-up and evaluation of the reform have been until recently neglected. A continuous effort is required to assess the impact of the reforms.

      Spending managers adapt their information systems and financial procedures to the requirements of the MEH, but do not regard them as genuinely valuable for their own management interests. The main values and elements of the reform model and implementation strategy are: hierarchical relationships, the assumption that the reform objectives are generally accepted, reliance on rules and norms, and “neutral” professionalism. Legal and hierarchical traditions are deeply rooted: new norms are proposed in the belief that success will be achieved once the “perfect” norm is established and strictly applied. Although the importance of formal procedures and accountability systems should not be underestimated, such systems are not sufficient by themselves to ensure the successful development of performance budgeting. It is necessary to apply the same model to the management of the reform (by results).

  • 3. The collective rationality of the reforms should hold sway over the specific reform preferences of each department. The importance of cooperation and coordination has not been sufficiently considered. The promoters of financial management or performance budgeting initiatives do not have sole responsibility or credit for the results of the reform. There should be more emphasis on the importance of managing interdependence for change. Conditions such as political support, the right incentives to ensure active participation of public managers in the reform and effective integration of new PB, program follow-up and evaluation, government reorganization, and interdepartmental and intergovernmental initiatives, have so far constrained reform results.25

  • 4. Learning capacity must be developed. Performance budgeting represents an ideal budgeting model which facilitates improvement in management performance and is perceived as the only solution possible—and the best one—for the public sector as a whole. The applicability of this model to different contexts or types of public organizations has not been questioned. Management and budgeting by results is regarded as a universally valid model. This may explain the difficulties identified when it comes to learning how to introduce the model or how to adapt it to a specific organizational contexts. The contingencies affecting its viability or validity need to be examined: inappropriate contexts, insufficient capacity to managing the reform, or a hierarchical or legalistic approach may affect the proper completion of the reform, even if the implementation strategy is correct.26

In short, the development of PB and management by results will depend on sustained political support for the reform, enhancing learning capacity, and introducing the right incentives (for example, accountability for results). Cross-cutting these three success factors, further emphasis should be placed on efforts to increase interaction and cooperation between reform stakeholders so as to overcome risk-averse behavior that may be blocking any collective efforts to move forward or to adapt the reforms to specific contexts.

Notes

The authors thank L. Espadas and J.L. Ruiz, of the Ministry of Economy and Finance of Spain, and M. Pazos, of the Institute for Fiscal Studies (Spain), for the information they provided. The opinions expressed in this chapter—and any possible errors—are solely the responsibility of the authors, and do not represent official positions of the Spanish government.

Effectiveness and efficiency are not the only valid criteria for measuring government performance: other key factors, such as participation, transparency, sustainability, might need to be considered (Schick, 2003).

Ministerial Order of April 23, 1984, of the Ministry of Economy and Finance.

Law 18/2001 of December 12, General Budget Stability Law (LGEP) and Organic Law 5/2001 of December 13, Supplementing the General Budget Stability Law (LOCGEP).

If full agreement cannot then be reached on a bilateral basis between a ministry and the Directorate-General of Budget, it will be taken to a higher level—ultimately to the Council of Ministers.

The IGAE is a body for the internal audit of the Administration, but is external to the spending units of the departments.

Law 6/1997 of April 14.

Article 12 of Law 18/2001, General Law on Budgetary Stability, and Article 28 of Law 47/2003, General Budgetary Law.

Article 8 of Law 18/2001, General Law on Budgetary Stability.

Article 2 of Royal Decree 2855/1979.

With regard to the functioning of the Program Analysis Commissions, see Zapico Goñi (2005).

See Articles 3-6 LGEP.

See Article 31 LGP.

Article 29.6 LGP.

Cf. Title V of the LGP (“State public sector accounting”).

See Article 2.1 of Order EHA/1032/2006 of April 6, establishing the rules for preparing the Budgets for 2007.

The programs are “Highway Safety,” “State Actions Abroad,” “Creation of Road Infrastructure,” “Coastal Activities,” “Energy, Environmental, and Technological Research,” and “Promotion of Labor Insertion and Stability.” See Espadas (2005a, 2005b).

Ley 28/2006, de 18 de julio, de Agencias estatales para la mejora de los servicios públicos (BOE 19 de julio), <www.map.es/iniciativas/mejora_de_la_administracion_general_del_estado/ servicios_publicos/ley_agencias_estatales/parrafo/00/document_es/ley_de_agencias. pdf>.

Articles 26-31 LSA indicate that budgets are “limitative in respect of their overall amount and estimative for the internal distribution, except personnel expenditure, with a…[changing power shared]…between the MEH—for…the overall budget and…personnel expenditure—and the Agency Director—for the remaining spending.” Preamble LSA.

Preamble and Article 27 LSA.

The next largest spending is that of social security (30 percent). Both are well ahead of central government (17.8 percent) and local governments (15.2 percent). Data are for 2006.

Diari Oficial de la Generalitat de Catalunya, no. 4398 (June 3, 2005), p. 16172 et seq.

The budget preparation order for 2006 and the main annexed budget documents may be consulted on the internet, <www.gencat.net/economia/ambits/finances/pressupost/ elaboracio/2006/index.html>.

This emphasis reflects both a lack of political support for change and a bias in favor of a “normative” approach to reforms.

Many of the changes promoted in the last three decades by the MEH and by the Ministry of Public Administration with a view to introduce performance budgeting and management by results were not sufficiently integrated.

This type of budget model is more adapted to a context of stability and increasing resources (see Metcalfe and Richards, 1989, p. 203) and might not be feasible or valid in conditions of uncertainty (that is, unstable policies, diversity of interests with regard to objectives, problems with measuring returns or with establishing cause-effect relationships between programs and outcomes, and so on).

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