Abstract
Significant changes with far-reaching impact have taken place during recent years in public expenditure management. These changes which are being implemented in a few industrial countries are likely to be emulated by other industrial and developing countries. The content of these changes is enumerated in some detail, and their impact is assessed in terms of specified criteria. Other continuing problems that are not addressed by these advances are also considered in detail.
I. Introduction
Several developments of far-reaching significance and that in some way reflect a radical departure from the practices of the 1960s and 1970s have taken place (and are continuing to take place) during the 1980s and 1990s (particularly since the mid-1980s) in public expenditure management. Most of these developments have occurred in a few industrial countries, most notably in Australia, Canada, New Zealand, United Kingdom, and to a lesser extent, in the United States. The experience of these countries constitutes a public good that is likely to be emulated in one form or other by other industrial countries as well as developing countries and former centrally planned economies.
The developments in these countries which cover several areas represent significant efforts at applying some economic principles to the expenditure management processes and practices. Most of the practices reflect changing fiscal problems, advances in information technology, and developments in the management of large organizations. These developments had their origins in widely differing situations, and unlike the budgetary innovations of the 1950s and 1960s (such as Performance Budgeting, Planning, Programming Budgeting System, and Zero-Base Budgeting System) were not part of any unique package that was ushered in to bring about a revolution in government fiscal management, but were more pragmatic both in intent and content.
This paper seeks to present an overview of these developments. It describes first each of these developments in some detail so as to present a proper perspective and in the light of this, an attempt is made to consider the relevance of these developments to other groups of countries and concludes with a discussion of the priorities that are likely to emerge and that need to be addressed by governments.
II. Legacy of the 1980s
Fiscal policies or related reforms do not lend themselves to be neatly divided into decades or into experiences that are always linear. Each era contributes its own imprint reflecting the trends in government finances and efforts to improve them. The experience of the 1970s, which in a way sets the framework for the 1980s, shows that the planning, programming budgeting systems (PPBS) which were hailed in the mid-1960s as solutions to the contemporary problems, were not a panacea. Inevitably, the initial enthusiasm yielded place to an indifferent implementation and finally to abandonment. However, some features of the system continued in the spending agencies, and in some cases some features continued as major elements of the overall government expenditure management systems. Two of these features - expenditure planning and forecasting, and investment in informational aspects (the latter aspect did not receive much attention, except in the Department of Defense in the United States, even at what may be considered as the Zenith of the Planning Programming Budgeting System) continued to receive substantial attention and indeed additional stimulus and more extended application in the 1970s.
A major feature of the PPBS was the preparation of budget estimates over a multi-year period so that any action aimed at strengthening some programs or abandoning them could be considered at length. Moreover, it was expected, among other purposes, that the preparation of the multi-year estimates would provide a better perspective to the decisions-makers in the executive and the legislature on the continuing financial implications of current policies and thus indicate the extent to which available resources were already committed to current policies. As an extension of this approach, the related analysis would indicate the margins available for expansion or alternatively the extent of additional resources to be mobilized for the purpose. The preparation of these multi-year estimates on a rolling basis became a prominent feature of expenditure management of most European countries during the 1970s. But by the end of the decade, two handicaps of the system had eroded its fundamental strengths. These relate to the fact that expenditure estimates prepared for the future years tended to become institutionalized floor levels of expenditure and, as an extension, presented formidable difficulties in reducing expenditures when macroeconomic adjustment mandated such a reduction. As the decade was characterized by relatively higher levels of inflation, the preparation of multi-year estimates in volume terms, as was the case in the United Kingdom, meant that those levels of expenditure had to be adjusted for inflation regardless of financing. Thus, a system which was perceived as providing an element of flexibility imparted rigidity that had to be counteracted by other means. Accordingly, the multi-year estimates were subjected, at a later stage, to the formulation of global ceilings or envelopes. Thus, the system which was originally envisaged as a bottom-up process became a top down or a devolutionary one. In countries with high inflation, very little premium was placed on the relevance or usefulness of rolling expenditure planning as planning for a year at a time and ensuring the implementation of the budget as planned became a herculean task.
The decade also witnessed substantial investment in the introduction and extended application of automatic data processing of information to government expenditure management. As the costs of modern technology tended to decline, its more extended application to the budgetary process, compilation and consolidation of government accounts, storage and quick retrieval of fiscal information became less controversial and was indeed expected as a normal feature. More significantly, the developing world also started making additional investments in this area and started reaping the benefits.
The decade is remarkable for three other features. First, it witnessed a new era in legislative budget-making in the United States. The Congressional Budgetary Process Act of 1974 specified the new roles of the Congress and the President and started relationships that were expected to reflect the new realities of macroeconomic management. Very soon, similar efforts were made in Italy and by 1978, a new era in legislative budget-making was also ushered in there. Second, as rates of inflation tended to rise and as more difficulties were experienced in implementing the budget as originally planned, cash limits were imposed, limiting the budget to centrally imposed levels. Further, a vast range of expenditure reductions (either through uniform percentage reductions or specific reductions) was introduced in the mid-year to ensure that the budget deficit did not become too large. To be sure, these measures were often at variance with the multi-year estimates and the annual budgets and introduced enormous uncertainty into the whole process. They were, however, justified on the consideration that extraordinary situations required extraordinary measures and that if budget deficits were to be contained to the estimated levels, prevention of fiscal slippages should be the primary concern guiding the operations of the expenditure management system. Third, the decade also witnessed a more organized effort by the audit agencies to contribute to the improvement in expenditure management. For too long, the audit agencies, which were always zealous about their independence, concentrated their efforts on regularity audit, financial audit, and appropriation audit, and were ambivalent about the proprietary or efficiency audit. Although some developing countries made some efforts to introduce efficiency audit to evaluate completed development projects, these efforts were few and far between, and in any event were not part of the major focus of their work program. The decade witnessed a gradual retreat from this posture and a more active role was pursued in the value for money audit, which for all intents and purposes was an indistinguishable variant of the earlier efficiency audit.
III. Development During the 1980s and Early 1990s
Developments during and since the end of the 1980s cover, as in the earlier periods, several fields. For the sake of analytical convenience, these are enumerated here in terms of six broad but interrelated categories. In analyzing these developments no claim can be laid for exhaustiveness. Rather, the attempt is to identify those elements that signify a departure from the previous times and those that are likely to continue in the future, unless preempted by some unexpected factors. These categories are: (i) new management philosophy; (ii) extended application of commercial type of accounting in governments, (iii) application of market principles to budgetary allocations and their use; (iv) innovations in sectoral controls; (v) deficit reduction packages; and (vi) greater application of computer technology.
IV. New Management Philosophy
The traditional philosophy that governed expenditure management in governments is that most public services provided by the agencies were insulated from the day-to-day exercise of market discipline and related price mechanisms, and, therefore, there was a need for maintaining financial discipline of a different sort. Such a discipline formed part of treasury control--or control by a central agency--throughout the various phases of the budgetary process--from formulation to implementation. This financial discipline was ensured through controls of inputs - largely personnel and limits on the amount of purchases of goods and services to be made by the government agencies.
This approach, which anyway had been going through a gradual process of transformation over the years, received additional stimulus in the 1980s and as a consequence a new management philosophy had come to be ushered in. 1/ The main premise of this approach was, following the examples of major corporations where autonomous divisions are established with their own budgets and assigned tasks, that the executive functions of the government should preferably be organized as separate agencies to be run by chief executives. 2/ These agencies would then be given financial targets or fixed budget (with a hard budget constraint and based on a profile of operational costs) that in turn would be based on the assured delivery of goods and services of a specified quality. The executives of the agencies are endowed with management flexibility in the use of budgetary resources if so needed to achieve the defined goals. Any gains made through the efficient use of assigned resources would, unless otherwise specified, remain with the agency without reverting to the central or general consolidated funds of the government. This built-in provision of incentives was intended to stimulate the agencies to be continuously vigilant to the possibility of achieving economies. To aid decision-making both within and outside the agency, management information systems suitable to the needs of each agency were installed. Since the provision of management freedom without appropriate accountability would not be permitted in an open society, the agencies were given specific productivity and work load targets as well as the goods and services that would be produced or generated by the agency. 1/ Further, the agencies were expected to have evaluation so as to assess the achievements and their costs and to learn lessons of experience.
The new management philosophy, which is to be found in the innovations introduced in Australia, Canada, New Zealand and the United Kingdom (although some specific features differ from one country to another, both in structural content and extent of application), represents a departure from the past. Although, in some ways, the new management philosophy may be viewed as a culmination of several previous innovations, in a more fundamental way, it is different not merely in packaging but also in implementation. Excluding Canada, the number of agencies created as a result of this philosophy is substantial in other countries. From a philosophical viewpoint, the new management approach is significant in that it shifted the budgetary focus from the traditional inputs to outputs and how they may be achieved. It recognized that governments have grown too large to be centrally controlled and that command-based controls would, while not producing the desired results, have long-term adverse impact on the financial management capability in the spending agencies. Further, it takes into account explicitly the fact that each agency should develop its own corporate culture. In this regard, it recognized that expenditure management in government is a continuum and that the agency responsible for policy formulation in its sphere should also be responsible for managing its finances--from the formulation of the budget to the payment 2/ and to the delivery of goods and services. While central agencies would have obvious responsibility for the overall management of the economy, their role should not degenerate into frequent intervention that often reflects their desire to demonstrate their power, rather than policy intent. To be sure, however, these approaches had their precedents in the form of traditional concordats with defense departments (in the British type system--where the defense budget is agreed in global terms--details being left to the services and there is no agreement on the delivery of services), performance budgeting (which, while emphasizing classification and performance aspects, did not lay any stress on the agency creation), and productivity contracts (primarily found in France and largely applied in dealing with the relationships with public enterprises), but was different from them in its emphasis on outputs, autonomy, and accountability for results within a specified budget. It thus went beyond the financial confines to the vital organizational aspects.
V. Commercial Accounting
The advocacy regarding the extended application of commercial type of accounting received an additional stimulus and indeed achieved a good deal of practical progress in the area. Hitherto, the opinions about the application of commercial type of accounting was drawn on almost ideological grounds. One view was that the public bodies were of a different kind in which there cannot be a bottom line that is equivalent to profits in the commercial sector. 1/ The other view, which was consistently advocated by those belonging to the accounting profession, was that the government systems were very weak in that some of them based on single-entry bookkeeping systems proved to be of limited usefulness in promoting financial consciousness in those responsible for the day-to-day management of finances, and that the systems were basically unhelpful in indicating the medium and long-term liabilities of the government. They add that the latter aspect was further exacerbated by the fact that the budget had only a limited focus of a year and as such tended to distort fiscal decision-making. 2/ The latter school favored the uniform introduction of double-entry bookkeeping as well as the introduction of accrual-based accounting in government. Although this type of advocacy was there in the 1950s and later decades, the experience of the 1980s shows that the introduction, or more appropriately, conversion of single-entry bookkeeping into double-entry bookkeeping took place surreptitiously and with little fanfare, while the introduction of accrual-based systems was accompanied by more detailed studies and governmental announcements, as well as by the establishment of autonomous boards to look into and regulate the government accounting standards.
In a number of developing countries, the switch to double-entry bookkeeping was achieved mostly through the conditionality attached to project financing by donors and lenders. The conditionality, which spans several areas, generally envisages that the project accounting and associated information feedback to the donors should be on a double-entry basis. As project outlays grew, the spread of double-entry bookkeeping became more extensive. While such accounting remains in some countries restricted to the projects (and in the process may have given rise to dual systems in governments), the important fact is that the areas where single entry systems are applied are getting smaller by the day. This process was also helped by the efforts to computerize the government accounts. Most of the available software in this regard is based on a general ledger system that in turn is based on a double-entry system. As for accrual, the experience of the 1980s illustrates a slight contrast to the experience of the 1970s, in that during that decade some governments (e.g., Netherlands and the United States) switched their budgetary systems from an accrual and obligational basis to a cash basis to facilitate coordination with monetary policy and thus macroeconomic management. In the 1980s, however, there was a recrudescence of accrual basis, this time through the insistence on the preparation of annual accounts on commercial principles and formats. In Australia, New Zealand, and the United States, accounting standards boards were set up to specify the accounting standards. According to the prevailing practices government agencies were obliged to prepare annual balance sheets, statements on uses and sources of funds, and income and expenditure statements. 1/ In addition, they were to show the incomes due, liabilities as well as contingent liabilities. These, it was expected, would provide a more balanced judgement on the financial status of the country. 2/ Although in the United States the accrual-based systems would be applicable only to accounts, in New Zealand they were extended to the budget as well. The intent behind the effort was to ensure greater accountability.
Accrual-based accounts were prepared in the United States for more than a decade on a supplementary basis intended for general information of the public. Available evidence does not suggest that these statements were either widely read or used for any policy purposes; the new changes, however, make the preparation of commercial type of accounts mandatory for all agencies.
VI. Extended Application of Market Principles
Although, as indicated earlier, the provision of certain public goods such as defense could not be subjected to the market principles, acquisition of a major part of the goods and services consumed by governments and utilized in the capital formation were traditionally governed by market principles. Thus, they were regulated by contracts and related procedures. During the 1980s and since then, however, there has been a more extended application of the market principles to the government activities in a three-fold way.
First, as an extension of the privatization principle that came into vogue during the early 1980s, most governments in the industrial world resorted to contracting out services to the private sector with a view to reducing the size of the public sector. Thus, a number of activities hitherto carried out by in-house facilities (and thus would have, in principle, contributed to higher costs through permanent employment and its associated benefit structure) were being contracted out through the solicitation and determination of open bids. In some cases, activities, including construction of roads, were hived off to the private sector so that they would be built by private investors, operated by them for an extended period, and then handed over to the public sector for continued operation. Extensive resort to contracting out had the intended effect both on public employment and on the financial control exercised. Employment shifted from the government to the auxiliary private sector that was mainly engaged in the provision of services that would have otherwise been provided by the public sector. In several cases, this contributed to the blurring of lines that hitherto separated public and private sectors. The nature of financial control exercised by the central agencies also changed in that it was no longer a relationship with another government agency but with an outside agency. This implied that countries had to move out of the arcane world in which they operated to a more open atmosphere in which the bidding process provided a window of opportunity for the public to ascertain the methods employed by governments to provide services. Moreover, the controls had to be more detailed in that quality and quantity of goods and services had to be specified to provide a sounder basis for monitoring and evaluation.
Second, efforts were initiated to break up the internal monopolies within governments themselves, and a new requirement of testability was imposed on the agencies. Hitherto, government agencies were obliged to obtain services from within in regard to, for example, printing, and could get those services from outside only when they were not available internally. 1/ Under the new system, however, budgetary allocations were made to the agencies on a more stringent basis, which in turn induced the agencies, within the managerial flexibility provided to them, to cut corners wherever that could be done. Thus, agencies which traditionally sold goods and services to other agencies had to survive a market test by competing with private sector companies. This market test forced the agencies to look within their two different roles as producers and consumers. 1/ The injection of this element in the provision of medical services, where doctors were given the option to choose any hospital depending on the cost advantage, was expected to result in greater compliance of the global budget ceilings while ensuring proper medical care.
Third, government agencies which hitherto provided some services regardless of the cost, were now expected to expand their services only if they had an outside market. Thus, forced by non-availability of funds from the budget, agencies (including meteorological and statistical organizations) started to look, while serving the traditional clientele, for outside finances and to selling their services in the market. This induced a fundamental departure from the past in that the market, hitherto an abstraction, became a living reality that not even an ostrich could avoid.
VII. Sectoral Controls
Normally controls are examined in terms of those applicable during the policy formulation stage, the administrative process relating to the recognition of liabilities and associated payments and those that aim at securing efficiency in the overall government operations. 2/ This is so in view of the belief that they have a uniform applicability regardless of the nature of the activity. Broadly, however, a variety of norms applicable to each sector have evolved and are intended, in their application, to supplement the general framework of controls. In some cases, more detailed controls reflecting the nature of the activity may be involved. An illustration is provided by the public works or construction agencies of governments that tend to have more specific and detailed controls than is the case with other agencies.
The important development in this area during the 1980s is the special attention that has come to be paid to the development of controls aimed at containing the growth of costs of medical care. During the last four decades, governments have come to provide an extensive safety net for the poorer sections of the community. The benefits so provided are both in cash and in kind, and cover, among others, unemployment, sickness and disability pensions, and retirement benefits, as well as health care, education, housing, and other social services. 1/ While outlays on all these sectors have been and are substantial as a share of government expenditures, the outlays on medical care in several countries have tended to register high annual rates of growth and have therefore received more attention. The increase in medical costs is the result of a multitude of factors ranging from the growth of elderly people (which is likely to persist) to the application of intensive technology and the prevalence of fraudulent practices. It is believed that the medical care could be provided either through the administration of a national health service (under which medical care is provided by the State--inclusive of the cost of most drugs) or the provision of benefits through insurance programs, or through the financing of benefits provided by privately owned hospitals and private physicians. The last type of transaction involves the high incidence of a form of moral hazard in that it involves a situation in which an insurance company or a government pays the whole or part of an individual’s bills and as a result neither the patient nor the doctor or the hospital where the care is provided have an incentive to economize. On the other hand, they have every incentive to increase the bills by including procedures that may have a peripheral value, or extending the hospital stay beyond what is considered essential or by adding medicines of questionable utility to the illness being treated. 2/ This phenomenon is also popularly known as the third-party payment problem.
The practice widely prevalent in most industrial countries involves reimbursement of actual expenses incurred in cases where hospitals are privately owned but are obliged to provide services to those seeking them. In other cases, hospitals are owned and operated by the governments and are completely funded by general revenues. In either case, however, the services are demand driven and are not influenced either by cost or by budget limitations. The physician places more emphasis on providing appropriate care and is not called upon to exercise any discretion aimed at economizing the budgetary outlays. This is not to say that a physician tends to be profligate. Rather, cost is a distant consideration and as such the physician’s judgement is unaffected by it.
Confronted then by increasing outlays on the one hand, and revenues that were growing at a slower pace, most governments resorted to a type of deliberate underfunding during the 1970s under the belief that demand driven social services could be reduced only when the recipients recognized the limits on such services. 1/ But this was considered to be a short-term remedy with limited success and as such there was an exploration for more substantive and structural measures.
Measures which cover the management and financial control aspects of medical care are of three types: (i) strengthening management structures; (ii) global budgets and ceilings; and (iii) introduction of market principles in the provision of services.
It was recognized that hospitals should be considered both a management center and a cost center. Accordingly, efforts made in the United Kingdom (which are being adopted in Italy, too), aimed at treating each major hospital as an autonomous decision-making center with a chief executive of its own. The executive, who would be responsible to a governing board or to the sponsoring ministry, would be aided by a well organized financial unit so that decisions could be taken in full recognition of the financial implications.
The hospitals were given global budgets to guide their services. The budgets were formulated on the basis of detailed costs for various types of hospital treated illnesses (diagnosis related groups (DRG) and costs of procedures undertaken by physicians. Toward the latter, an analysis known as Resource-Based Relative Value scale (RBRV as it is known in the United States) was adopted, under which the remuneration scale was determined for about 7,000 procedures. These approaches have been adopted for implementation, among other countries, in France, Germany, Japan, 2/ United Kingdom and the United States. In addition, with a view to enabling compliance with global budgets, lists of eligible medicines were drawn up and price controls of medicines were also enforced (e.g., France, Germany).
Finally, in the United Kingdom, the General Practitioners (or family physicians) were given the option to refer their patients to hospitals that had lower costs. This, in turn, provided a powerful stimulus to hospitals to compete with others, each one endeavoring to reduce the overall costs. This competitive atmosphere was expected to yield more enduring benefits to the administration and financial status of the whole medical care system. Together, these measures reflected the adoption of new management approaches that signified a radical departure from the past.
VIII. Deficit Reduction Packages
As the fiscal deficit expanded, governments in both industrial and developing countries took several measures aimed at containing it. These measures 1/ covered personnel restraint, sectoral cuts including frequent abandonment of newly initiated capital projects half-way through implementation, consistent underfunding of operations and maintenance expenditures, freeze of wages and other changes and across-the-board cuts. Very soon, however, the limitations of these measures became obvious and their overall contribution to limiting the deficit at a time when debt service outlays remained high and outlays on social services and related entitlements tended to exceed budget estimates consistently were far from significant.
In countries where the budgetary process is dominated by the initiative of the legislature, such as the United States, legislation was enacted containing Gramm Rudman-Hollings proposals. 2/ Very soon, even this legislation became suspect in terms of its impact on the budgetary deficit. More significantly, the legislation would appear to have contributed to widespread deceptive budget practices that had the effect of stimulating timid action and a kind of implied alliance between the Executive and the Legislative to circumvent the ceilings on outlays and deficits imposed. 3/ Thus, the very credibility of the process, which was ostensibly strengthened, came to be eroded and issues were raised about the capacity of governments to govern and manage fiscal policies.
The first priority in the situation as it developed toward the end of the 1980s was to restore the credibility of the budgetary process. The response to this came in three ways: additional ways leading to the enforcement of legislative self-denial, improvement of the budgetary process in countries with a less dominant role assigned for the legislature, and an overall review of the government processes to procure economies in expenditure.
In the United States, where a major part of the non-defense, non-debt service outlays goes to entitlements, the appropriate response would have been changes in the legislation aimed at either restricting the range of benefits or the eligibility for benefits. In the event, as decisive political action to change the fundamentals of entitlement programs was not found feasible, the alternative of imposing enforceable limits on outlays was envisaged. Thus, the Budget Enforcement Act of 1991 envisaged the introduction of a ‘pay as you go’ process under which an increase in outlays in some categories would be adjusted against reductions in other categories of expenditures or through additional mobilization of resources. As an integral part of this effort, an elaborate sequestration mechanism was introduced. Similar sequestration mechanisms were also introduced in Russia. 1/ These measures were expected, among others, to stem the tide that was steadily eroding the credibility of the fiscal management process.
In countries like Sweden, where the role of the legislature in the budgetary process is less dominant than in the United States, there was a recognition that the traditional way of preparing the budget was no longer appropriate to the new situation characterized by persistent high deficits. It was therefore decided to change the budgetary process by broadly dividing the budget into three blocks, with each block of departments receiving intensive scrutiny once in three years. Thus, the government as a whole would have been completely reviewed every three-year period. This approach was expected to provide an opportunity to the government to conduct a strategic review of the operations in the selected block and to determine not merely the scale of budget allocations, but, more important, which programs should be continued and in what form. In other industrial countries, efforts have been initiated to undertake fiscal consolidation--a euphemism to review both revenue and expenditure policies. Such efforts involve more policy than changes in the systems, techniques, and procedures.
While the above efforts continue, there has been also a widespread recognition that they might not be adequate to meet the needs and that larger measures were needed for the purpose. Such measures should aim at stemming the inertial growth in expenditures and at minimizing the widespread uneconomic practices in procurement, personnel practices and utilization of available technology. An initiative in this regard, waiting to be implemented, is to be found in the effort at “reinventing the government” in the United States (1993) that aims at a transformation of the way in which the government operates.
IX. Application of Computer Technology
The developments in computer technology as well as in the telecommunications world have had an immeasurably beneficial impact on the way in which budgets are formulated and monitored, and payments made to and by governments. These developments were not the result of any quest by the governments, although they were, with the usual speed associated with large organizations, receptive to the potential benefits of the new technology and the lower costs of operation implied in the process. To some extent, the application of the technology was made easier as it was recognized to be less of a political issue and more technical the choice of which is best left to the bureaucracy. The application was not by any means limited to the industrial world. Indeed, several developing countries, assisted by the public sector development loans provided by the World Bank, made massive investments in satellite and computer technology and in the establishment of national information centers. Some former CPEs also had well-developed computer systems in operation in the area of government accounts, much before their decision to reorient themselves to the market philosophy.
The budgetary process in most countries (including at the local level) is now computerized and budget submissions by the spending agencies are made either on an on-line basis or in floppy disks rather than in volumes of paper as was the case hitherto. Further, most of the statistical information that was generally furnished as an integral part of the budgetary process on personnel, assets and liabilities, and related aspects is no longer sent by the spending agencies as this information is already available in the computer. Thus, the new technology and its application has helped the abridgement of the hierarchical or lateral interdepartmental relationships in the government. As a spill-over benefit, it also helped restricting the period of time usually devoted to budget making.
Similarly, in regard to fiscal reporting, the introduction of on-line systems has helped the central agencies to have access to information even as transactions are being made. This type of simultaneous access at once reduced the time taken in obtaining information and in the related transaction costs. In addition, several countries have established detailed project information systems that permitted consistent monitoring of their progress. Even where on-line systems were not available and information was computer processed at a later stage, the new systems proved helpful in reducing the transmission lags.
The computer technology also facilitated the introduction of new and user-friendly payment systems. Traditionally, payments were made either through cash or check (or through book entries for interdepartmental accounts). The computer technology has, however, ushered in a more economical way through electronic transfers. These electronic transfers have become so extensive that in the former Yugoslavia nearly 80 percent of the payments (including tax payments to the government) were made through this medium. Relative to cash payments, which are labor intensive, time consuming, and expensive, electronic transfers are inexpensive, quick, and leave an electronic trail, facilitating audit and related surveillance. From the taxpayers’ point of view, too, this has proved helpful in minimizing perceived harassment and scope for corruption.
Further, in several countries, the electronic approaches were utilized to streamline procurement through the issue of purchase cards to selected officials to make local procurement of equipment needed by the agencies.
In sum, the new technology proved a significant handmaid in furthering the objective of the new management philosophy described earlier. Prior to this extensive use of the electronic technology, there was an impression that the pursuit of macroeconomic adjustment required centralization of many operations. This impression was not, however, a correct one. Indeed, there is no evidence either in theory or in practice to suggest that centralization is either necessary or conducive to the formulation and implementation of macroeconomic management. In fact, centralization beyond a point could prove counterproductive, too. To borrow a metaphor from the music world, pursuit of macroeconomic management is like conducting a symphony where each instrument (e.g., interest rates, money supply, budget deficits, balance of payments) has an assigned place and each one’s role is coordinated with others. The new technology permits the central agencies to monitor the actions of others in a more quantitative fashion while endowing the managers an integrated responsibility for planning, budgeting, and payments.
X. Limitations
The preceding discussion may give the impression that if only these advances are applied in the administration of a government, then they will have the capacity to address the issues that are now being faced and are likely to be encountered by many a government. The reality, as is to be expected, is different. It is, therefore, appropriate to consider the liability side of the picture. In doing so, some general considerations should be noted first.
The above elements which are at various stages of implementation have been taken from various countries. It would appear that as of now, these elements are best viewed as different strands of thought that are yet to be woven into a fabric with its own deliberate pattern of warp and woof. But, even as experience is being gained, some limitations of a fundamental type are being pointed out.
One major question relates to the applicability of a type of corporate culture (described above) to governmental activities. It is often pointed out that this corporate culture is more appropriate to the manufacturing world, where the organization tends to be small and is dominated by the concerns of the consumer (market share). Although this is not always the case in the private sector, given that conglomerates can be larger than some governments, it is argued that the absence of political agenda and the elaborate structures of accountability make the corporations different from a government. Here again, the argument would appear to lose some of its validity when it is recognized that corporations whose stock is traded in the market have their own type of accountability. There is no gainsaying the fact, however, that accountability and related decision-making in government are different from those of the private sector. The issue then is not a total application of the private sector practices, but to choose relevant elements of those practices, and adapt them to the requirements of government agencies (e.g., as was done in the United Kingdom at the time of the introduction of legislation leading to the conversion of government departments to agencies; see Lawson (1993). In fact, it would appear that increasingly the features common to private and public sectors are being given greater recognition and the areas of major organizational differences are becoming narrower by the day. 1/
A related criticism is about the applicability of the commercial accounting to government. The type of information brought up for consideration by a balance sheet is already available in a different form in governments, and thus the additional contribution made by a balance sheet is not noteworthy. While this is indeed so (and as such no major claims should be placed about the contribution of a balance sheet), the usefulness of a balance sheet lies in enabling a proper focus on the issue and permitting its consideration. Like many other areas, a balance sheet (although the culmination of a long accounting process) is only a wedge that pries open the areas that need to be looked into. Another charge against the balance sheet is that, viewed from the common person’s perspective (and thus the point of view of a legislature) it does not lend itself to easy comprehension. This charge gains additional weight in countries where the private sector is somewhat limited and the practice of publication of annual financial statements is even more limited. While the response of the public can never be fully predicted or taken to be in a stable form, this charge illustrates the need for an educational campaign aimed at taking the instrument closer to the public and making it more user-friendly.
It is also suggested that the type of improvements described earlier have been carried out more as an integral part of the restructuring of the public sector itself rather than purely as financial control improvements. In a way this illustrates the complexity of the situation and shows that the problem itself should not be viewed as a technical problem but as one that permeates throughout the length and breadth of government. It is now recognized that every act of the government has an immediate or medium-term impact on expenditures and as such affects the whole government. In turn, this requires that the problem of expenditure management be viewed as one of restructuring the public sector itself.
More specifically, each of the areas also needs to be examined so that the fault lines can be identified and addressed. The introduction of the new management philosophy requires, at a minimum, a degree of organizational sophistication and improved techniques of accountability. In turn, these are based on the administrative culture of the country. Most countries have traditionally had a highly centralized financial control that was based on two premises: control should be in the hands of the finance ministry (regardless of the context), and that most control should be exercised in the payment stages. Although the futility of these approaches has been proved time and again, the acceptance of the philosophy of decentralized administration and financial management had been very slow; indeed so slow, that it would appear that there are now two competing ideologies seeking a firm hold in governments.
In one sense, there is the traditional view, in another, there is the new wave of thought and experience that suggests, based on proven experience, that in large organizations such as the government, the successful implementation of any policy requires the active participation of all institutions (entrusted with implementation responsibility) in all the stages of management. Also, the periodic economic crises have tended to strengthen the hands of the centralizers. It is therefore recognized that the acceptance of the new philosophy involves the severing of connections with the traditions and stepping into a world that remains, from the point of view of a few, to demonstrate its superiority over the past. But then it can be argued that the effectiveness of the past patterns has been proven in most cases; the issue is one of choosing the alternative course of action, as well as the pace of conversion. The landscape of alternatives, however, is relatively barren and there is not much that is available other than the adaptation of decentralized management.
The introduction of the new philosophy would, however, have the potential of contributing to a proliferation of agencies reminiscent of the 1970s when public enterprises similarly dominated the fiscal scene. This could, in turn, contribute to a budget that is dominated by, in addition to the transfers to individuals under entitlement programs, to transfers to agencies. Such decentralization would have greater appeal if it is viewed as a preliminary stage in the eventual transfer of the agencies to the private sector. It could be argued that an agency which has adopted a full commercial attitude should gradually be delinked from the budget and eventually from the public sector. Meanwhile, it would be necessary to specify the control structures, which naturally would have to be drawn from the arms-length principle (financing provided by the government budget and day-to-day management left to the agencies within the overall ambit of parliamentary accountability--more reminiscent of the Morrison formula in the United Kingdom during the late 1940s and early 1950s in the then evolving relationship between government and public enterprises) between the agencies and the sponsoring or policy ministries. This detailed framework needs to be given additional attention.
As for commercial accounting, the issue is also one of the slow transmission of the practices of the commercial world to the public sector organization. In the commercial world, the principle and practices of management accounting that held sway during the 1950s through the 1980s has given way to new approaches. It is now pointed out that management accounting, which emphasized the computation of cost (that in turn is sought to be applied to the government agencies), was dependent on the personnel and inventory costs as the major elements that needed to be quantified. 1/ With the gradual transformation of the technological process, neither element is considered to be any longer significant. On the other hand, the new approaches, particularly what is known as CAM-I (computer assisted manufacturing--international), emphasize the measurement of costs in terms of time. 2/ While these advances are being made, the accounting standards that some want established in government agencies lay emphasis, as yet, on the agency accounting procedures and related accountability rather than cost measurement and management. It would appear that, with the introduction of the new management philosophy efforts should also be made to introduce techniques of accounting to permit the establishment of more precise cost standards. Indeed, accountability may be somewhat hollow in the absence of such standards.
While the introduction of market principles and testability is likely to foster competition among the government agencies, it does not necessarily contribute to reduced expenditure growth in the government. On the other hand, such testability provides more justification for the eventual privatization of these agencies.
The case for strengthened controls is, however, different in that it is subjected to more extended criticisms both for the issues that are addressed and those issues that are not addressed. Health controls represent an area where the human face of control emerges as more important, and given the choice between need and financial constraint, the former has to be given precedence. This feature, which is dominant in personal life, is also extended to the government. No government can continue to win confidence in the people, if the people are anxious about the approaches of the government in providing cost effective medical care. The latter involves the exercise of an ethical judgement which the medical practitioner is not trained to do, nor is there a core of accepted government directives which set the parameters for such an ethical judgement. Increasingly, this has become, apart from being a social and moral dilemma, a legal matter frequently subjected to judicial intervention. In the circumstances it is only fitting that the framework of controls does not seek to address an issue that has not so far been resolved by the society itself.
Even as a technical framework, it is often pointed out that the concept of global budgeting has become a kind of an accounting exercise that is internally ratcheted to a point where it becomes ineffective as a ceiling. Rather, it is viewed as an innocent annual rite of passage performed perfunctorily; on the other hand, if rigorously enforced, it works as a disincentive against further technological development. If the provider of the medical care is prevented financially from exploring the benefits of the new frontiers of medical research, then that research, it is argued, is bound to become slower and reach a stop even during the short term. This then could be a much larger price that society pays for not having allotted more resources for medical care. Moreover, it is suggested that when these global budgeting limits are lifted because of an improvement in government finances or owing to changes in priorities, the rate of expenditure growth would resume as if a coiled spring has been released.
Another facet of controls that appears to have minimal effect, relates to the incidence of fraud. Fraud, which was traditionally viewed as involving technical manipulation of rules or defalcation of funds by insiders, is now viewed as a phenomenon where the third party outside the government exploits the regulations to make substantial monetary gains. 1/ To minimize this, more regulations have been written, but experience suggests that there may be an inverse relationship between the number of regulations and the incidence of fraud.
It is also argued that the cost of control emerging from the new approaches is no longer a routine matter. Estimates of such costs in the United States range from 2 to 13 percent of the total outlay on medical services. While these estimates may leave a lot to be desired in terms of their technical consistency, and so forth, there is no denying that third party payments and the maintenance of information that would facilitate the costing of services have led to the establishment of a growing bureaucracy. Whether these costs are commensurate with additional benefits is, however, a different matter awaiting the verdict of the jury.
The deficit reduction packages offered a temporary solution but did not inspire confidence either in the spending agencies or in the wider public. The 1990 Budget Enforcement Act in the United States was implemented without invoking the sequestration procedures but was soon replaced by other legislation when the government changed. The application of sequestration procedures in Russia was, however, as noted earlier, ineffective, as it was overshadowed by the massive credits extended to state enterprises. The Swedish experiment is still in its infancy and since the introduction of the new procedure many supplementary measures aimed at reducing the welfare oriented payments had to be taken. As a technique, its promise remains to be fulfilled.
The introduction of computer technology was expected to provide facilities for the storage and quick retrieval of data, but, more important, it was expected to break old rules and create new ways of working. The former objective was generally fulfilled while the latter, experience shows, had not been up to expectations. This was primarily because the new technology was viewed as an auxiliary device supporting the existing processes rather than replacing the procedures. This inadequate fulfillment has less to do with any reluctance based on ideological considerations, but was more dependent on the availability of financial resources.
XI. Evaluation
Notwithstanding the preceding limitations and related and as yet short experience, it is appropriate that an objective evaluation of the new developments is made. Such an evaluation can be made at two levels: first, by accepting the parameters assumed by the new techniques and evaluating the results on that basis, and second, to formulate a more transcendental evaluation that goes beyond the parameters of the new developments. The latter involves the formulation of an answer to the more important question: Do these innovations or techniques address all the current problems adequately, and if the answer is in the negative, what are the problems that remain to be addressed? This aspect is considered in the following section. But the tentative answer is that these techniques do not address the current problems and that the immediate task may be one of a more precise identification of the issues and formulation of priorities for implementation.
From a more technical point of view of evaluation, five criteria may be specified: impact on the rate of growth of expenditures, efficiency in spending, reduced cost of control, greater accountability, and the transmission capability (as a built-in feature) so that the feasibility of applying these techniques to other countries may be considered. The results are summarized in Table 1.
Evaluation of Recent Changes in Expenditure Management
Evaluation of Recent Changes in Expenditure Management
| Category | Impact on rate of growth of expenditure | Efficiency in spending | Reduced cost of control | Greater accountability | Built-in transmission capability |
|---|---|---|---|---|---|
| New management philosophy | Negligible | Considerable scope | Very little impact | Substantial improvement | Dependent on the local institutions and related administrative culture |
| Commercial type accounting | Negligible | Negligible impact | No impact | Most significant feature | Can be easily extended to any country |
| Market principles application | Could have substantial impact depending on the areas of activities where these principles are applied | Promotes efficiency | Doubtful impact | Promotes greater accountability | Can be extended to other governments |
| Sectoral controls | Could slacken the rate of growth considerably | Promotes efficiency | Doubtful impact | Conducive to greater accountability | Can be extended to any government |
| Deficit reduction packages | Could slacken the rate of growth of expenditure | Doubtful | Doubtful | Negligible impact | Doubtful |
| Application of computer technology | -- | -- | Doubtful | Conducive to greater accountability | Can be extended to any government organization |
Evaluation of Recent Changes in Expenditure Management
| Category | Impact on rate of growth of expenditure | Efficiency in spending | Reduced cost of control | Greater accountability | Built-in transmission capability |
|---|---|---|---|---|---|
| New management philosophy | Negligible | Considerable scope | Very little impact | Substantial improvement | Dependent on the local institutions and related administrative culture |
| Commercial type accounting | Negligible | Negligible impact | No impact | Most significant feature | Can be easily extended to any country |
| Market principles application | Could have substantial impact depending on the areas of activities where these principles are applied | Promotes efficiency | Doubtful impact | Promotes greater accountability | Can be extended to other governments |
| Sectoral controls | Could slacken the rate of growth considerably | Promotes efficiency | Doubtful impact | Conducive to greater accountability | Can be extended to any government |
| Deficit reduction packages | Could slacken the rate of growth of expenditure | Doubtful | Doubtful | Negligible impact | Doubtful |
| Application of computer technology | -- | -- | Doubtful | Conducive to greater accountability | Can be extended to any government organization |
All categories of improvement have a positive impact on accountability, although, as is to be expected, the deficit reduction packages, in view of their poor implementation, have very little contribution in this respect. In so far as the impact on the rate of growth of expenditure and efficiency in spending is concerned, the experience offers a mixed picture in that the primary areas are those developments in the application of market principles, improvements in sectoral controls, and deficit reduction packages. Much is, however, dependent on the extent of application. These developments may not have had any measurable impact on the cost of control. In fact, extended application of sector controls such as the health sector could, in the short term, have an effect of increasing the cost of control, but that would be considered as a kind of investment for reducing the rate of growth of expenditure and for improving efficiency in spending.
More significantly, it would appear that if the criteria indicated in Table 1 are applied to the existing systems, their performance would be poor both in absolute and comparative terms. Thus, the new developments offer considerable potential for further advancement and for an eventual stable framework of effective expenditure management system.
The issue arises, as Lawson 1/ noted, that “if one country can do this, why not all of them?” or as the fictional character of Prof. Higgins, in Bernard Shaw’s “Pygmalion,” noted with firm conviction (even if in a tongue in cheek fashion) that what was good for Demosthenes should obviously be good for Eliza Doolittle. In other words, how can these developments be considered for adaptation in other countries that have the same problems, although the magnitude of problems differs from one country to another. Economists with a quantitative orientation tend to believe that some of these principles have a universality about them and as such should lend themselves to easy application in other countries.
Budget innovations often are, however, country and situation specific, or in any case formulated to treat the problems of a country and their exportability, experience shows, has never been a consideration. That said, it should be noted that there are several cultural, historical, and institutional factors that are unique to each country, which are real even if they are not quantifiable. These factors are broadly captured in the lexicon of public policy schools in the term “administrative culture” or in the parlance of economists as the factors contributing to x-efficiency or x-inefficiency.
The experience of the 1980s shows that notwithstanding common approaches in the application and utilization of modern technology, two features point to the need for a carefully formulated package of improvements uniquely suited to the features of each country. First, while governments look over their shoulders to follow what other countries are doing in similar situations, they are usually quick to identify the dissimilarities in the situation rather than similarities. They tend to believe that their problems are unique, and as such the solutions that worked in some other countries would not work in their situations. Second, even when the ideas of systems are transplanted (with very little adaptation), it would appear (as the experience of Italy with congressional budgeting, and India with performance budgeting shows), that they remain a separate stream remaining to be integrated with the traditional system. Thus, while the common nature of fiscal problems and the broad common contours of institutions in the countries should in principle foster a common expenditure management approach, in practice, however, there is often a national way of conducting the government operations. It is for this reason that there is no European or Asian way of expenditure management, although there is always an Italian or Indian way of management. 1/
Both of these factors emphasize the need for adequate preparation in applying the principles of the new techniques to a country with particular emphasis on indigenization.
XII. Issues Not Addressed
The issues that have not been specifically addressed by the innovations described above may be analyzed in terms of functional areas, administrative factors, geographical areas, or in terms of economic categories (such as developing and industrial countries). For this purpose, however, an eclectic combination is adopted and all factors are discussed depending on their importance.
A cursory glance at the public expenditures of many countries, regardless of their economic categorization, shows that expenditures have been growing at varying rates, reflecting the ageing population (and the benefits extended to them), development of costly technologies (particularly in the health, energy, and defense sectors), lobbying of vested interests (as democracies grow in number, the role of vested interests tend to dominate economic and fiscal decision-making), the innate desirability and the inherent need for many types of expenditures (outlays on defense, internal security, social and economic infrastructure), the natural and, as yet, not fully controlled desires of bureaucracies to expand their empires, and administrative and judicial services to seek and procure, generally regardless of costs, additional benefits annually (this aspect has been and continues to be analyzed by the Public Choice School) and associated factors. None of these factors are likely to disappear and become less important during the remainder of the century or early part of the next century. Some types of outlays are likely to grow faster in some countries than in others and thus the need for the application of differential controls would continue. This being the case, it would appear that some significant aspects of the growth in expenditures are not fully addressed by the range of improvements considered earlier. Although there are several of these areas, only five major areas are proposed to be considered. These are: (i) abandonment (or shedding the load) of existing programs; (ii) issues relating to mandatory and transfer payments; (iii) emergence of regionalism and the need for a coherent overall expenditure management framework; (iv) factors contributing to and the process of circumvention; and (v) legislative and executive relationships and who controls what. The sequential enumeration of these areas does not represent any implicit priorities, but is more reflective of the analytical convenience.
XIII. Abandonment
Two features would appear to have dominated the management of government finances during recent years. Although both of these features are somewhat traditional, their importance had come to receive added recognition recently. These refer to the failure to recognize the link between the provision of services by the state and the need to pay for them on the one hand, and the failure to abandon programs and projects after they cease to be of any productive use. As an integral part of the latter, governments have also been slow in recognizing the less costly methods of doing the same piece of work even when the options are obvious. 1/ The reasons for this neglect are several, some of them are factual while the others are more based on perceptions than hard facts. In the former category should be noted the tight time squeeze in the preparation of the budget where the preferred approach is to look at the increment (or decrement) proposed for the next year. Despite the availability of information, thanks to the computer technology, this aspect continues to be governed by myopic considerations. This is compounded by the perception that every program or project has already an established clientele and as such there is likely to be reluctance on the part of the legislature to give up any part of what is being done. In the circumstances, the executive wing of the government prefers the maintenance of the status quo and the uneconomic programs continue, gaining each year additional legitimacy by the sheer fact of existence.
It was partly in recognition of the above factors that efforts were made to force an explicit consideration of the impact of the above practices during the budgetary process. Thus, Sunset Laws, imposition of caps or ceilings on functional outlays (a sort of an envelope) and evaluation were introduced as measures that would induce the legislature and the executive to take a deeper look into past programs and practices. The effort of the Swedish government to introduce a triennial budget is also to be included in this category.
In retrospect, however, it would appear that the above group of approaches did not have the desired results. The Sunset Laws became in effect an opportunity to extend the laws for a further period almost on a routine basis. The ceilings, as noted earlier, did not address the fundamental or underlying factors of growth governing the dynamics of programs. Except in Australia and to a lesser extent in Canada, the ceilings proved to be short-term band aids. But the quick termination of some of these approaches (e.g., as in Canada in regard to envelope budgeting), revived hopes for the spending agencies that, if only they were patient and waited for a political change, business would return to normal practices (which it did). Evaluation became an instrument that was more extensively used by the statutory audit agencies than by spending agencies. Further, most of the efforts at containing mandatory expenditures were concentrated, in the industrial countries, in shoring up the financial status of the social security systems through revision of contribution rates rather than through any major change (until the early 1990s) in the scale of benefits.
In developing countries, the enforcement of cutback measures proved more problematic. The development programs, which were hitherto lauded as paths to economic salvation, could not suddenly be proclaimed as costly experiments with doubtful benefits. Thus, in the context, the natural bureaucratic element of self-defense had the better of the situation and cuts were made in the fringes rather than in substance. Meanwhile, however, aided by the financial comfort drawn from the privatization proceeds of the large public enterprises, governments continued in several cases their fiscal policies without major changes in the traditional programs. The brunt of adjustment fell on capital expenditures and on the public enterprise sector.
The experience of former CPEs reveals a different picture. Countries such as Algeria, China, former Soviet Union republics, and Vietnam, found it difficult to change their expenditure programs. Major progress was made, however, in some countries in privatization and, in any event, with the severing of the formal financial links between the government budget and the enterprises, the relationships shifted from the budgetary system to the banking system of the country. Here again, the traditional experience of the State as the promoter of economic activity and related value systems prevented any major change in the underlying principles governing the composition of public expenditures. In some countries, notably in Poland, and more recently in Russia, efforts have been made to reduce the heavy burden of subsidies.
The above experience suggests that the improvement in public finances cannot be limited to the reorganization of the public sector or to the frequent additional mobilization of resources through taxation. In the circumstances, governments may well be forced, as in the past, to look inward and to procure economies within their operations. Such economies are bound to be limited if they are envisaged in terms of changing the focus of some programs. More significantly, governments may have to abandon some programs that have outlived their usefulness, or have been found, through the extended application of market philosophy referred to earlier, to be uneconomical. If, however, the past experience is not to be repeated, it would be necessary to undertake a substantial strengthening of the expenditure management procedures. At a technical level, it would be necessary to make evaluation internal and obligatory. Such an evaluation, if it is to be effective, has to be linked with the budgetary process and each annual budget should indicate in detail the programs that are proposed to be abandoned and their effect on the budget. In order to restore credibility, such statements should be explicitly audited each year and the results of that audit should be made an integral part of the annual budget speech. It is also to be recognized that efforts within the government alone would not have the desired effect, unless they are supplemented by a critical evaluation of the government activities by the media, investors and the public.
XIV. Mandatory and Transfer Payments
Mandatory spending refers to those programs which are governed by formulae that are set in law and spending is not necessarily constrained in the annual appropriation and spending processes. These programs partly refer to transfer payments to other levels of government and the issues relating thereto are considered in the following section. The other mandatory programs refer to the vast range of benefits that have become a prominent feature of a welfare state and that have been aimed at ameliorating the social injustice that has accumulated over time. The medical benefits discussed earlier refer only to the more commonly recognized tip of the iceberg of these mandatory payments that range from maternity benefits, marriage benefits to a host of other practices that cover the day-to-day needs of a family recognized as being below the poverty line.
Despite the steady growth in mandatory spending in all types of countries, the control mechanisms aimed at regulating them followed the traditional principles of verification at the time of payment and to change the eligibility criteria during periods of financial crisis. Although more recently there was an attempt to enforce legislatively determined ceilings, their impact had not been significant. Meanwhile, however, as noted earlier, the medical services sector received more attention. The relative lack of action in regard to mandatory spending is to be attributed in part to the desires of legislature to provide benefits through the rule of law that is uninfluenced by the considerations of annual availability of funds. Thus, they become, along with salaries and interest payments, the first charge on available funds regardless of other needs. This, in turn, has induced an indifferent attitude in the executive wings of governments, particularly among budgeteers, in that they tended to view this as an area, where the initiative and even management is more within the legislative oversight. But, neither legislatures nor executives are known to admit errors in public policy. The result is a series of layers of benefits and an indifferent control structure that has neither been able to secure accountability or prevent massive fraud by the unscrupulous elements of society.
This, however, cannot be expected or allowed to continue. First, in the coming years, given the concerns for social justice which has become a rallying point for fiscal policies, there is likely to be an extension of social safety nets. Governments would be inclined to promote social security programs either as a part of government programs (even if organized outside the budget) or, as in Chile, organized in the private sector. While such social security programs are likely to earn financial surpluses in the short term (based on actuarial calculations) as a greater part of the population turns grey, the programs would look for financial relief from governments. Second, most benefits or services may be provided by nongovernmental agencies but financed by governments. This would emphasize the need for an expenditure management system that is more oriented to dealing with third party payments in a more effective manner, and third, even where services are provided by government agencies directly, as is the case with medical services in several developing countries, it is likely that costs, given the labor intensive nature of the services, would grow disproportionately to the services. In such a situation, the rallying demand would be for more effective expenditure management.
In view of the limited usefulness of the efforts so far made, there would be more pressures for more substantial and creative efforts aimed at strengthening the systems and operational controls. In making these efforts, four aspects need to be kept in view.
(a) Control systems would naturally cover all programs, but the unique features of each program should be taken into account. Such a recognition will allow a balance between the policy and the administrative aspects of a program. The legislation of the programs needs to be reviewed periodically to incorporate the benefits of evaluation. Moreover, the feasibility of incorporating trigger clauses that involve quick action if outlays in specified categories exceed specified ratios of the budget should be considered in preference to the sequestration at an aggregate level.
(b) The regulatory framework governing the payments should seek a balance between the zealousness of an administrator to specify the minutiae so as to secure uniform compliance and the desire of those at the receiving end to have more simple and comprehensive regulations. Experience shows that securing such a balance has never been an easy task but lack of action on this front is likely to prove more expensive than beneficial.
(c) The controls aimed at continuing fraud have not proved effective. While collusion between two parties cannot always be detected by the accounting and process oriented controls, it would appear that some programs (e.g., food coupons) can be better administered through the issue of electronic cards to the recipients. The cards leave a better accounting trail and leave themselves to more informed monitoring. Thus, a greater part of the expenditure management should consist of the application of the rapid advances in technology; and
(d) The governments should periodically publish the cost of financial controls and their effectiveness both to spur internal action and as a beacon light about governmental operations. The success of the control systems in regard to mandatory payments is partly dependent on the openness with which those controls are administered.
XV. Regionalism
The central, regional, and local financial relations in a number of countries have come under increasing strain during the last decade and in the early 1990s. The reasons for this strain are several and are to be found, in addition to the economic and financial factors, in the constitutional, legal, and political factors. Also, the emergence of a regional identity as a token of sub-level nationalism has contributed to this. These factors had to reckon with several efforts by the central governments to strengthen themselves both organizationally and financially for the ostensible reason that a more viable central government is essential for effective macroeconomic management of the country.
The strains and the fragility of the relationships can be illustrated from a number of experiences. In the United Kingdom, the financial relationships between the central and local government were subjected to a minimum of one legislative change per year during the 1980s. One of the major considerations in all these legislative changes was to provide more safeguards for the center and adequate means to control local operations. In Italy and Spain, a new level of regional governments was established in the 1970s and 1980s respectively, but the centralization of revenues and decentralization of expenditure responsibilities effectively contributed to a greater degree of regional dependence on the center. In the case of Spain, the creation of regions contributed to a new layer of government that functioned, for all intents and purposes, as a microcosm of the central government adding to the overall cost of administration.
In Italy, the macroeconomic targets for the central government were achieved partly at the expense of regional finances in that the scheduled transfer of resources had not taken place, forcing the regional governments to incur a growing magnitude of arrears in payment–a phenomenon now known as “hidden debt.” Also, several localities had gone bankrupt and in some cases their liabilities had to be taken over by the central government. In India, which had been a practicing federation for more than six decades, a recent study 1/ has pointed out that the devolution system had not effectively addressed the issue of equity or that of fiscal balance at the state level. In China, during recent years, the contract system that prevailed during a major part of the 1980s, generated regional practices which, while contributing to greater regional inequalities, were also often at considerable variance with the goals of the central government and sometimes contrary to the intentions of the latter. In the circumstances, evolving more durable financial relationships between the central and provincial governments became problematic. In the former Soviet Union republics, experience during the last two years suggests that the goals of macroeconomic stabilization were attained, if at all, partly at the expense of regional and local governments. The initial constitutions tended to transfer more expenditure responsibilities to the regions but not commensurate revenue resources. The regional response to this was to withhold the taxes collected from being transferred to the central government. Elsewhere, as in Ethiopia, regions endowed with the power under the new constitution to secede from the Union have ushered in a new era where technically the regions are on par, in several respects, with the central government.
The above cross section of experience, while buttressing the comment about the fragility of the existing relationships may well be the harbinger of developments in the future that have yet to take a coherent form. They also indicate the importance and need for continued and more rigorous efforts in three areas. First, there is, as it has been in the past, an urgency to achieve a greater congruence between revenue resources and expenditure responsibilities. A greater delegation of the latter, while centralizing the former would be contributing to regular tensions that may more than offset the perceived gains for macroeconomic stabilization. The devolution formulae should not only be seen as fair, but should be seen as the only fair means for distribution. This requires that distribution of resources should be governed by objective criteria determined by a quasi-judicial organization. Second, most regional and local governments in many countries do not as yet have well-developed expenditure management systems. The budgetary processes need considerable strengthening, if the developments described earlier are to be considered for application at these levels. Third, the pursuit of the goals of macroeconomic management in a decentralized context would require the development of a more sophisticated information network that would provide fiscal information on a regular basis to the policy-makers at the central level. The role of the central government would have to be seen more as advisory and providing guidance on the directions and content of improvement needed in the expenditure management system. Coordination should be promoted in place of command compliance.
XVI. Circumvention
If, as Shakespeare noted, action is eloquence, the experience of some countries also shows that governments are no less adept than individuals in exploiting the loopholes of law to gain temporary advantages. The budget law has never been precise or exhaustive and was more intended as guidance to administrative action than as a binding code of conduct that also involved the imposition of severe penalties in the event of violation. Although countries with civil law orientation paid more attention, by virtue of their tradition, than common law countries, to the preparation and observance of an organic budget law, it was always recognized that case law of experience was a better guide than the actual phrasing of law. Specifically, in regard to expenditure management, experience shows that when confronted with the need for observance or compliance of policy goals, governments may resort to dubious accounting practices that show a nominal observance of the policy goals. Since in the view of the public, the observance of the policy goals has its own unique standing as a popular measure for the evaluation of the fiscal policy of the government, the nominal observance passes off as compliance. Two illustrations in addition to the circumvention of the deficit reduction packages discussed earlier show support to this point.
As has been noted earlier, governments have, in several countries, tended to accumulate enormous arrears in payments in order to be within the specified borrowing limits. Thus, while technically observing the limits of officially recognized public borrowing, they are also indulging in a practice that, while not illegal, is also contrary to the rationale behind the limits on public borrowing.
In countries as disparate as Italy and Sri Lanka, there has been a common practice of recording expenditures as incurred (when they are not) and then showing them as deposits of the spending agencies in the accounts maintained with the Government. In Italy, the observance of public sector borrowing limits has been an important policy goal and when the limit is in sight, the spending agencies are under-issued their appropriations (in cash terms) and the remainder of the appropriations are treated as expenditures in the accounts, while showing them as deposits by the agencies in the treasury account of the ministry of finance. In Sri Lanka, too, the auxiliary deposit account of the government performs a similar function. Variations of this practice abound in other countries and these two instances should be considered, not as unique, but as fairly representative.
These practices imply a deliberate circumvention of the law and, more significantly, a lip service to public accountability. It implies that in fulfilling one policy parameter, other aspects may be sacrificed. This is a situation which suggests a variation of what is known as Goodhart’s principle to the effect that any measure may start being applied in practice than intended when that measure is perceived as an official target. 1/ Fiscal policy, however, has several anchors, and it is necessary to ensure that the others are not sacrificed in favor of the notional primacy of one goal. It is possible that this type of circumvention is undertaken with the approval or participation of the political leadership. The intent here is not to seek an apportionment of blame on the political leadership or on the civil service, but to illustrate the need for addressing the most important issue that arises: how to prevent the recurrence of similar circumventions, particularly in a context of decentralized management, where more powers and responsibilities are sought to be given to the senior echelons of a civil service.
Traditionally, the answers to this type of circumvention were two-fold. Those with an administrative orientation continued their faith in the imposition of penalties, while those of an economist orientation preferred the provision of incentives to ensure greater compliance. Both of these approaches, despite obvious limitations, continue to have a role in the future, too. Supplementing these approaches, however, there is also a need to provide more information to the public about the ways in which policy goals are being achieved. Departures from policy goals are by no means punishable offenses. But the adoption of any means to reach an end deserves to be identified and brought to the notice of the public. This requires not additional laws, but greater vigilance on the part of the audit and the legislature to prevent circumvention becoming an ingrained habit or a permanent feature of a nation’s expenditure management system.
XVII. Legislature and Executive
A vexatious issue over the years has been the relationship between the legislature and the executive. This issue gained greater importance as more countries are adopting parliamentary traditions. Countries in Eastern Europe, including the former republics of the Soviet Union, and Brazil and Chile are among those that have been making vigorous efforts during recent years to delineate the role of legislature in financial matters.
Although the development of the role of the legislature took many years, its control essentially covers three principles: (i) approval of policy and adequate provision of resources to carry on those policies; (ii) approval of changes in policies and changes in the allocation of funds; and (iii) a review of the financial and physical results obtained from the expenditures incurred. In applying these principles, there have developed a wide variety of practices. Thus, there are legislatures (e.g., in the United Kingdom) where the initiative in financial matters is mostly with the Executive. There are countries (e.g., United States), where legislatures have a more dominant role and responsibilities for formulation and management of budgets are shared between the legislature and the executive. There are also countries such as the former centrally planned economies where the role of the legislature or its equivalent is, in financial matters, relatively minor. Basically, however, the framework of relationships is viewed as one where the macromanagement is broadly with the legislature while the micromanagement or planning and implementation within the overall policy parameters specified by the legislature is with the executive. Although, in principle, the distinction between macro and micromanagement might appear to be conceptually clear, in practice, however, it is anything but that, and in practice there are transgressions by both into spheres somewhat unrelated to their allotted functions. These aspects have been the grist to the mills of constitutional courts and as such are not proposed to be covered here. But the broad experience suggests that the executive could not (and had not in many countries, as yet) fulfill the accountability tenet in terms of providing an account of not only how the moneys were spent, but the results achieved and the costs incurred in achieving them. In the absence of the adequate fulfillment of this tenet, legislatures tended to add more controls so that they could look into the details of management. Thus, in many countries, in addition to the usual responsibilities relating to the consideration and approval of policies, legislatures also took initiative to specify the personnel, their salaries, and numbers of posts, limits on the magnitudes of domestic and foreign debt and their repayment and on the funding arrangements for major projects. Elsewhere, with a view to minimizing the ability of the executive to change the content of programs, legislatures enacted extensive legislation that apart from being in excess of available revenues, restricted the ability of the executive to undertake adjustment in the programs when so warranted by considerations of macroeconomic management. The result in several countries is a legislative process that is believed to be long and cumbersome without adding anything to the effectiveness of countries. Equally, it should be recognized that in many countries legislatures feel, with some sense of justification, that they have often been reduced to the level of mute witnesses to situations where policies are approved by default, or without being aware of the full cost implications of those policies.
Two approaches have come into vogue to deal with the above issues. One relates to the kind of an implicit social contract arrangement between the government and the legislature (as in Australia and New Zealand), where the former agrees, in a contractual sense, to provide specified services and goods for the moneys appropriated. This approach is a logical extension of the techniques of performance budgeting advocated a few decades ago. It provides a bridge between the legislature and the executive and seeks to fulfill the third tenet described earlier.
A second approach is to have (in a variation of the Swedish practice described earlier) a biennial or triennial budget so that more time could be spent in examining which programs are actually working. The recent report of the Gore Committee in the United States has advocated the introduction of a biennial budget. 1/ Although similar suggestions were made in the past, they have not as yet been adopted and in any event, the outlook for the introduction of this practice does not inspire confidence. Both approaches, however, illustrate the need for a more detailed analysis of the relationships and reviewing them so that legislative intrusion does not reduce the flexibility and management autonomy, and the executive, for its part, does not engage in activities or resort to practices that reduce accountability, which apart from being the legitimate domain of the legislature is also a most important feature of the vibrant democratic functioning of the society. The issue is not one of establishing new institutions, but one of refining the existing practices and adapting them to the changing needs.
In sum, therefore, there is likely to be little respite for those engaged in the maintenance of the public expenditure management systems in the near future. The future success of these systems depends on the way in which details of the above aspects are addressed.
The preceding survey, although not comprehensive, illustrates the efforts that have been and are being made to develop responses at a legislative, systemic and procedural level to the changing requirements of expenditure management. These efforts had to contend with a slew of forces against them, such as the inexorable growth in expenditure and the perception that for every improvement made, there is a major slippage occurring somewhere in the vast range of government operations. The slippages may have occurred because of circumvention of the new policy mandate or not properly applying the systemic improvement. The reality of expenditure management requires a more specific recognition of the factors contributing to circumvention and the actual process of circumvention. Circumvention is not condonable even when it is an aberration and as a regular feature would be considered, in view of its long-term damage on the system, as reprehensible. If the benefits of the new approaches are not to be seen as illusory, then more efforts have to be devoted toward avoiding circumvention. If circumvention is to remain minimal, then it would be necessary to develop ethical standards that will have a moderating influence on those seeking circumvention. Further, the society (not the government) requires an enforcement mechanism that regulates the government. This, however, is a larger issue that is beyond the focus of the paper. 2/
It is to be hoped that these issues would be addressed with zeal in the future.
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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.
A more detailed discussion of these aspects is provided in Premchand (1993). See Appendix.
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 detailed discussion of the nature, anatomy and actual working of controls, as well as their limitations, see Premchand (1983, 1990 and 1993).
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.