Rao, Govinda M., and Tapas Kumar Sen, Government Expenditure in India: Level, Growth and Composition, National Institute of Public Finance and Policy, New Delhi, 1993.
The paper was prepared in response to an invitation from the sponsors of an international conference on “Financial Management and Accountability in the Public Sector,” February 7-11, 1994, New Delhi, India.
This is also known as New Public Management (NPM). The main ingredients of NPM, as identified by Hood (1991) are hands-on professional management, explicit standards and measures of performance, emphasis on output controls, shift to disaggregation of limits in the public sector, greater competition in the public sector, stress on private sector styles of management practice and stress on greater discipline and parsimony in resource use. Some of these elements are considered under different headings in this paper.
For a discussion of the creation of agencies in the United Kingdom where this movement started, see Likierman’s paper in Premchand, A. (1990).
It would appear that in the initial scheme prepared in this regard, not much attention was paid to accountability aspects. For an interesting insiders’ account, see Lawson, Nigel (1993), p. 391-392.
In the traditional system of the United Kingdom and other Commonwealth countries, the head of a department (who is from the civil service) is also conceived as its Chief Accounting Officer. Such a designation was intended to communicate the integration of policy and financial management in a single functionary. There is no equivalent of this in the United States type of systems where the political head is also the head of the administration of the department. It is for this purpose, and as a compromise to the proposal of Hamilton during the eighteenth century for the establishment of a British type of treasury control system in the United States, that the Treasury was made responsible for revenue and payment administration, a feature that continues to prevail.
A recent proponent of this traditional view is Lawson (1993). He states (p. 298) “those who seek to assimilate the system of public expenditure control to the conventions and methods used in the private sector remind me of small children playing at shops; it has little relationship to the real thing.”
A typical example often cited relates to the pension liabilities of the government. Many governments in the developing world do not have information on this aspect, and even the estimates included in the annual budget tend to be lower than the annual outcome.
The insistence on the full presentation of liabilities could have unintended and ironic effects. For example, under the new accounting rules set by the Financial Accounting Standards Board (United States), a private body whose guidelines are accepted by government and private sector, companies must estimate health care costs for present and future retirees and enter these in their books. IBM entered the entire amount, $2.26 billion, in the first quarter of 1991 which cut sharply into profits and taxes payable.
The reference here is to goods and services produced in the government for the use of the government. This category includes construction and maintenance of offices, procurement, legal and printing services, etc. Under the application of the market principles regime, this provision was placed on a more commercial footing, while allowing client departments to vary the amounts purchased and the suppliers. Several country experiences in this regard are considered in OECD (1993) Occasional Paper No. 6 products.
In some cases, the governments used their role as a major buyer of goods and services to manipulate the prices. This approach, viewed more as a part of industrial policy, was employed, among others, in Germany and Japan, to fix the prices of fees payable to doctors and prices for medical products.
For a comprehensive account of these benefits, their financing and related issues (as well as the experience of many industrial countries) see Barr (1993). Most of the discussions on social services generally avoid mentioning the outlays incurred on the correction or rehabilitation of people that have committed punishable crimes and are undergoing detention in penitentiaries. The average annual expenditure per prisoner in the United States is estimated to be more than $20,000. In magnitude, this is comparable to the annual average expenditure of $30,000 in the United States per elderly person staying in a nursing home, most of which is financed by the Federal Government, as an integral part of the medicare program.
It is the experience in the United States that physicians and hospitals engage in “upcoding” (billing for procedures that receive higher reimbursement rates) and “unbundling” (billing for one procedure as two or three parts that cost more than the whole). More significantly, it should be noted that software makers sell programs that help physicians and hospitals maximize billing. For an interesting discussion of these practices, see Eckholm, Erik (ed), 1993, p. 285.
This practice continues, however, in several countries, regardless of their economic status. The underfunding was usually met with a four-fold approach at the recipient level: (a) strengthening the political lobby aimed at restoring budgetary cuts; (b) incurring arrears in payments that had to be funded by governments; (c) an informal rationing of services or a more rigorous application of the traditional triage principle; and (d) in the case of developing countries, seeking additional aid in kind directly from donors and outside the general budgetary process of the government.
In Japan, however, the payments to physicians have a national scale that envisages no regional variations.
For an account of these measures, their content and limitations, see Premchand (1993), chapter 3, pp. 53-78.
The relevant legislation is known as Balanced Budget and Energy Deficit Control Act of 1985. This legislation included rules and procedures that were intended to insure some predetermined outcome and to that extent was different from the traditional budgetary process that sought to guide the formulation of the annual budget.
For a discussion of these aspects, see Schick’s paper “Why Deficit Persists?” in Premchand (1990). In particular, the discussion on pp. 50-51 is relevant.
Despite a very severe implementation of this sequestration process, the deficit continued to grow, due to a variety of other factors affecting the domestic economy.
Hood (1991) provides a summary of other criticisms. These are to the effect that the new management philosophy is all hype and
The major problem with this approach is that it computes only the cost of producing and ignores the costs of non-producing which may be substantial in governments.
Under this approach, the costs for a given time are assumed to be fixed. The only thing that is both variable and controllable is the time taken in a process and the benefit is seen in terms of reducing
See, for example, the definition of fraud by the European Community: “Fraud covers any infringement, whether intentional or not, of a legal provision committed by private persons or bodies having adverse financial consequences for the community budget.” See the Final Report (1987) of the European Communities on “Tougher Measures to Fight Against Fraud Affecting the Community Budget.”
This area of enquiry into administrative cultures which is relatively of recent origin has yet to develop a viable framework of analysis. See studies by Pye and Putnam which offer two excellent examples of pioneering work in this area.
A simple example illustrates this. In several countries, studies show that the use of paper currency for lower denominations is an expensive method and a more economical method would be to substitute coinage, which has longer life to the currency. For example, in the United States, the life of currency of one dollar denomination is estimated at about 2 years, while the life of a one dollar coin, if introduced, would be about three decades. Despite this obvious advantage, no dollar coins are in circulation now. There are any number of similar practices that continue in government, if only for the reason that they do not receive any attention.
See Row, Govinda and Sen (1993). They concluded that “the inequalities in expenditure levels has not shown any trend towards convergence (p. 135).
The Goodhart’s principle (named after professor Goodhart, a former central banker), is that any statistical measure will start behaving differently the moment it becomes an official target.
One of the measures suggested in this regard relates to the introduction of an amendment to the Constitution that would enforce a balanced budget. The experience of countries that already have a constitutional provision to this effect illustrates that circumvention of the intent of this provision, which was rampant, was not more difficult than the circumvention of any other legislation.