Budget Methods and Practices

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Budget Methods and Practices

• Anwar Shah
• ashah_at_worldbank.org
• IIPA Workshop, New Delhi
• December 5, 2006

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Outline

• Budgetary Institutions and Processes
• Role of MOF
• Fiscal Rules
• Line Ministries
• Cabinet
• Parliament
• Presidential vs Parliamentary system of
  government
• Issues in budget formulation
• Macro-fiscal framework
• Comprehensiveness
• Multiyear budgeting
• Participatory budgeting potentials and pitfalls
• Performance Budgeting

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Outline .2

• Performance Budgeting
• What?
• Why?
• How?
• Conclusions

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Fiscal Framework

• Government s resource envelope, borrowing stance
  and spending priorities
• Short and medium term objectives
• Projections
• Need a macro model better done by a think tank
  rather than in-house

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Functions of Budgeting Systems

• Setting Priorities
• Planning
• Financial control over inputs
• Management of operations
• Accountability

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Types of Budget Classifications

• Functional policy analysis and comparisons
  (education, health, transport etc.)
• Organizational accountability, legal
  appropriations and budget execution, fiscal
  controls (administrative departments)
• Object compliance controls, internal management
  (employee costs, materials, utilities etc.)

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Budget Comprehensiveness

• What is to be included?
• What works against comprehensiveness?
• Tax expenditures
• SOEs
• Extra-budgetary and off-budget expenditures
• Earmarked funds
• External assistance
• Contingent and non-contingent liabilities
• Quasi-fiscal activities by central bank

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Implications of a segmented budget

• Fiscal discipline
• Allocative Efficiency
• Technical/operational Efficiency
• Integrity and Trust

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Medium Term Expenditure Framework (MTEF)

• Multi-year budgetary planning to link annual
  budgets with medium term priorities
• Three year rolling expenditure and revenue plans
• Baseline and forward estimates
• Annual reconciliations
• Considerations appropriate cost drivers and log
  framework for service delivery

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MTEF - PROS

• Important management tool for a review of
  government operations
• Predictability and certainty in planning and
  budgeting
• Detection of emerging fiscal issues
• Holding pork barrel politics at bay while
  supporting policy objectives
• Potential gains in efficiency
• Fiscal discipline
• Civic Dialogue on government priorities

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MTEF - CONS

• Costly paper exercise if dependence on
  unpredictable external finance
• Costly exercise with no real benefits if done
  mechanically using incrementalism without a
  serious look at government operations
• Costly if no framework for fiscal discipline
• Sense of entitlements
• Resistance to change even in the presence of
  major shocks
• Ineffective if no oversight by parliaments and
  citizens

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Participatory budgeting

• Merits
• Citizens review of government operations and
  priorities
• Bottom-up Government accountability
• Easier for Local governments
• Demerits
• Interest group capture
• High transactions costs
• Little impact when budgetary inflexibility
• Little use when it is used for window-dressing
  government programs and priorities

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History of Budgeting

• Early 1900s Line-item incremental budgeting for
  financial control
• Central agency for coordination of government
  spending
• Program budgeting in 1950s to link with planning
• Block vote budgeting in 1960s aggregate
  allocations
• Zero based budgeting in 1970s to set priorities
• Performance budgeting in 1990s to achieve
  operational efficiency and to improve
  accountability for results

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A comparative perspective on the two budgeting
approaches
Focus on Results
Focus on Control
Increased Managerial Discretion and less control
No Managerial Discretion
Managers are accountable for what and how they
spend on inputs.
Managers are accountable for what they achieve.
PB
Line-Item
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Zero-based Budgeting?

• ZBB refers to a budgeting system where every item
  of expenditure has to be fully justified again
  every year.
• Reality impossible to implement
• Developing country wages and salaries
  sometimes can reach 70 of the budget which is
  outside of the control of budget officials
• International Experience discontinued practice
• -- Impractical technique
• -- Too costly to administer

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Performance Budgeting What?

• A system of budgeting that presents the purpose
  and objectives for which funds are required, the
  costs of the programs proposed for achieving
  these objectives, and outputs to be produced or
  services to be rendered under each program.
• Strict Definition A system of budgeting that
  explicitly links each increment in allocated
  resources to an increment in outputs and
  outcomes.

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Transformation from Line-Item Budgeting to PB
Performance Budgeting
Allocation Decisions
Performance Management
Management and Planning Decisions
Measures and Report Performance
Program Budgeting
Programs
Objectives
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Performance Budgeting Paradigm
Budget Bottom-up
Performance Measurement
Top-Down
Impact
Mission
Strategic Goals (Medium Term)
Outcomes
Program Objectives Costs (Annually) P1 P2 P3
Outputs Cluster
Activities Targets Costs P1
P2 P3 A1 A2 A3
A1 A2 A1 A2 A3 A4
Outputs
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Performance Budgeting Results Chain Application
in Education
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Performance Measures Used in Performance Budgeting

• Cost Inputs/resources used to produce outputs
• Output Quantity and quality of goods and
  services produced.
• Outcome Progress in achieving program objectives
• Impact Program goals
• Reach People who benefit or are hurt by a
  program
• Quality Measure of service such as timeliness,
  accessibility, courtesy, accuracy
• Productivity Output by work hour
• Efficiency Cost per unit of output
• Satisfaction Rating of services by users

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Citizen-centered performance budgeting

• Budget format to follow closely service delivery
  format and also to include a performance report
  and net worth assessment
• Citizens charter and sunshine rights
• Citizen inputs in budget process to be formalized
  at all stages
• Formulation Town Hall meeting on the previous
  years performance and new proposals. Comments on
  Porto Allegre and Belo Horizonte, Bolivia
• Review and execution Formal process for
  complaints
• Post Compliance and feedback reports.

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Performance Management Framework is a
pre-requisite for the success of PB

• Letting managers manage operational flexibility
  and freedom few rules more discretion
• Making managers manage. Accountability for
  results. Contracts/work program agreements based
  upon pre-specified output and performance targets
  and budgetary allocations ? new civil service
  framework
• Activity based costing, accrual accounting,
  capital charging
• Subsidiarity principle
• Competitive service delivery and benchmarking
• Incentives for cost efficiency (including capital
  use)

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Performance Budgeting Why?
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Why pursue PBB?

• Enhance communication between budget actors
• Promote management in government agencies
• Improve public services delivery
• Facilitate more informed budgetary
  decision-making
• Achieve higher transparency and accountability

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Performance Budgeting How?

• International Experiences

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Theory to Reality
Diversification in Implementation
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Alternate approaches

• PB with Fuzzy New Public Management (Letting
  Managers Manage, competition, voice and choice,
  informal agreements) USA, Netherlands,
  Australia, Uganda, Mongolia, South Africa (small
  steps towards PB).
• PB with New Public Management (Making Managers
  Manage, stronger competition, voice and choice,
  formal contracts or agreements ) New Zealand,
  Malaysia (?), Singapore (?)

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Singapore Milestones to PB

• Pre 1978 Line Item Budgeting The emphasis was
  on inputs and input control.
• 1978 to 1989 Program Budgeting The emphasis
  changed to what had to be done and managers had
  more managerial flexibility.
• 1989 to 1996 Block Vote Budgeting More
  managerial flexibility. Line agencies were given
  larger blocks of appropriations within which they
  had the flexibility to reallocate without seeking
  central approval.
• 1996 Onwards PB The emphasis now is on
  outputs. Public sector managers are given more
  authority to improve performance in exchange for
  increased accountability.

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Singapore PB Framework

• Government departments managed as Autonomous
  Agencies
• Macro Incremental Factor
• Targets and output plans
• Funding linked to output levels
• Operational and financial autonomy
• Capital charging including office use,
  interdepartmental charging
• 3-year development block vote
• New Civil Service Framework

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U.S. Experience with PB State Governments
Source Melkers and Willoughby. 1998. Performance
Based Budgeting Requirements in State
Governments.
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U.S. Experience with PB State Governments

• line-item budget 27 states
• program budget 10 states
• Half-way to PB 10 states
• PB Michigan Texas

Source Hager, G. Hobson, A. June 2001.
Performance-Based Budgeting.
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(No Transcript)
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Texas State
Source Hager, G. Hobson, A. June 2001.
Performance-Based Budgeting.
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(No Transcript)
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Montgomery Country, Maryland 1
Source Office of Management and Budget,
Montgomery Country. Montgomery Measures Up! For
the Year 2002
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Montgomery Country, Maryland 2
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Montgomery Country, Maryland 3
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Fairfax County, Virginia Police Patrol Services
(1)
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Fairfax County, Virginia Police Patrol Services
(2)
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Fairfax County, Virginia Fire and Rescue (1)
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Fairfax County, Virginia Fire and Rescue (2)
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Fairfax County, Virginia Fire and Rescue (3)
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Conclusions

• Performance budgeting must be an integral element
  of a broader reform package to bring about
  performance culture. In the absence of an
  incentive environment for better performance and
  accountability for results, the introduction of
  performance budgeting will not lead to better
  performance.
• Managerial accountability must be on outputs and
  not on outcomes as the latter are influenced by
  external factors. Outcomes however should be
  monitored.
• Transparency of the budget and citizens
  evaluation of outputs helpful in improving
  budgetary outcomes.