From Line-item to Program Budgeting - Opening the 'black-box' of spending
Posted by Bill Dorotinsky
A perennial question of annual public budgeting for Ministries of Finance and legislatures, and the general public, is "What are we getting for the money?" It is the proverbial "black box" of annual spending, where funds are allocated by traditional line-item budgets to agencies, but there is no sense of what the money actually achieves. While under line-item budgeting, budget offices know what inputs are being purchased, there is no clear indication of what activities, purposes, or objectives -- or ultimately outputs or outcomes -- are being purchased, or how government policies translate into spending. A common first step for many countries towards opening the black box of spending is to adopt a program classification of spending, and introduce program budgeting. A program classification is often thought of as a first step in introducing a performance orientation into the budget process.
While sounding like a very dry, technical exercise, the reality of successful introduction of program budgeting is more complex, involving elements of change management across government. Various governments across the globe have been introducing program budgets over many decades, including within the past decade in Russia, Brazil, and more recently, the Republic of Korea (RoK). A recent book by the Korean Institute of Public Finance and the World Bank, From Line-item to Program Budgeting (John Kim, Editor; Seoul, 2007), summarizes some key lessons from the global experience, and offers practical advice to countries embarking on this journey.
The book was prepared to help guide the introduction of program budgeting in the RoK and to capture lessons of program budgeting that would benefit any country taking this path, and therefore includes both RoK specific and more general lessons on program budgeting. For example, Chapter 2, entitled 'Paths Toward Successful Introduction of Program Budgeting in Korea,' by Dr. Allen Schick, Bill Dorotinsky, Dong Kim, Feridoun Sarraf, discusses
- the over-all architecture of current public financial management (PFM) reforms such as the medium-term expenditure framework (MTEF) and program budgeting, and how these fit together
- the conceptual basis of 'program budgeting'
- the evolution of Korea's PFM system, current reform efforts, and remaining challenges, and
- principles for successful implementation of program budgeting in Korea.
Chapter 3 is a more detailed discussion of introducing program budgeting in Korea, with a case study of the Korean Ministry of Environment. Chapter 4 goes into much practical detail on budget classification, and how program classifications fit with other types of budget classification (e.g. economic, functional, administrative). Though most of the book is in English, there is a final Annex in Korean.
In addition to practical guidance on program design and classification, the book includes practical advice on the process of introducing program budgets for maximum impact. Some of the key points, while perhaps obvious to some, are drawn from mistakes made in many countries over many years, and include:
- An effective program budgeting system cannot be developed centrally by the ministry of finance alone. Program budgeting is not simply about changing the way a budget is presented, but about changing the way policy officials, the public and government staff think of the government, how they plan, manage and budget. Each line ministry and agency needs to engage in the process of developing a program structure for their budget. Line ministry management and staff---not consultants---must undertake the work. This also implies that a country should not simply import a program classification from another country and try to adopt it.
- Programs need to be within ministries. One failure of past reforms had been in centrally developed program structures where the program cuts across many ministries, as no one agency or organization is responsible for achieving program objectives, no one manager is accountable for results. This flaw reduces some of the clarity and increased managerial accountability that can arise from clearer linking of activities, funds, and objectives.
- Direct costs need to be allocated to programs. To be of full use, a program needs to connect the inputs with the objectives of spending, which cannot be done if significant portions of spending are not related to the programs. This does not mean one must adopt full accrual accounting or activity-based costing. But it does mean having some ability to allocate costs to programs on a reasonable basis so that the full costs of each program are reflected with the program.
- The program concept should integrate recurrent and capital budgets. The concept of a program---activities leading to a common purpose or objective ---necessitates thinking in terms of a production function. All inputs leading to the output or outcome need to be taken into account. This will entail direct labor, money (for indirect costs) and capital.
The book should be a useful reference for countries embarking on program budgeting, with practical guidance on how to design and implement it, as well as for students of PFM generally and of Korea's PFM system and reforms.