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January 11, 2008

Does Performance Budgeting Perform?

Posted by Holger van Eden

39378341Performance Budgeting in OECD Countries,” a recent publication of the OECD’s Budgeting and Public Expenditures Division, reviews the experiences of eight OECD countries (Australia, Canada, Denmark, Korea, Netherlands, Sweden, United Kingdom, United States) that have introduced performance information in the budget process over the past decade. The book is available in hard-copy and e-book versions at the OECD Online Bookshop (click link above).

The main author of this publication, OECD senior economist Teresa Curristine, discusses extensively the question of whether 'performance budgeting performs,' and not surprisingly, the answer is not that clear. There are many approaches to introducing performance budgeting reforms, and many reasons for doing so. As with many complex public reforms, the results are usually rather nuanced.

The short and cynical answer by the casual reader is perhaps “No, it doesn’t”, or not “Not enough, given the effort”, or “Not yet, even after many, many years of implementation.” The many nuances in this book do clarify that performance-based reforms can work in certain circumstances, but do leave interested governments a bit in the dark on what road to take in their country in further developing performance budgeting.

Contents

The book consists of two parts: an introductory section which summarizes the development and gradual adoption of various forms of performance budgeting, and ends with suggested guidelines for countries implementing the reforms; and, eight case studies of OECD country experience. More than 75 percent  percent of the OECD membership now includes performance information in their budget documents. In the more advanced OECD countries the process of introducing performance information into the budget process has been going on for more than 30 years; in the US perhaps twice as long as that.

In the introductory part of the book, the author distinguishes between three types of performance budgeting systems.

  1. A "presentational" variant, where performance information is used in budget documents for informing parliament and the general public. This variant can include performance targets that make the government’s policy objectives explicit, but there is essentially no link to funding, to allocative decision-making, or to the budget process, nor is there an intention that this is the case. Its impact is mostly indirect. Through “naming” the objectives and targets of government agencies and their performance, they would be “shamed” into action in one way or the other. While this use of performance information is prevalent in a number of countries, one could wonder if such systems are really a form of performance budgeting, as no direct link with the budget process is evident. This variant plays an important role in countries whose main aim is to increase transparency and accountability of  government policies.
  2. A performance-informed budgeting variant, that in fact would include most national systems. Performance information can be used by program managers to improve operational efficiency, it can affect allocative decision-making by cabinet and parliament in aligning expenditure with political priorities, and it can influence aggregate fiscal discipline by identifying ineffective programs that could be targets for cancellation. The use of performance information in this broad category is, however, not systematic. Many other factors can override performance information in budgetary decision-making, and in fact as the publication painstakingly details it usually does. And,
  3. A Direct or formula linked performance budgeting variant, that provides a strong rule-based link between performance and funding availability. Its use has, however, mostly been limited to the Health and Education sectors. Interestingly the author stresses that automatic or systematic linkages of performance information to the budget process usually don’t work. Even in the Health and Education sectors, with quite homogeneous service delivery, such systems have led to accusations of a decreasing quality of services, game-playing by agencies to maximize funding, and perverse incentives in providing the required outputs to the general population. Such criticisms seem somewhat overweight in this publication, given the substantial impact these systems have had on expenditure trends that have otherwise proven extremely difficult too contain, especially in the Health sector.

Comments

The extensive introductory section, written by Ms. Curristine, gives a an excellent and very nuanced overview of what the main performance budgeting systems try to achieve, what their focus has been, how they have been implemented and gradually refined, to what extent performance budgeting is in fact in fact linked to the budget process in OECD countries, and most interestingly perhaps what the overall impact of performance budgeting has been on public financial management. This section, which ends with “OECD Guidelines on Designing and Developing Budget Systems that use Performance Information”, could well be used as very useful background material for any training course on the topic.

The second part of the book consists of eight country cases written by Ministry of Finance officials of respective countries. The chapters disappoint somewhat due to their very  descriptive nature. A more critical review of national experiences would have been more satisfying and insightful. The OECD sometimes has member countries evaluate each others system. An outsiders perspective might have made more interesting observations for understanding the relative strengths and weaknesses of these national systems.

In general, the book is quite gloomy about the impact of performance budgeting. Much money has been spent by governments, and much time used in implementation, but the hard facts indicating success are hard to find. In the most interesting chapter in the book the author discusses systematically the impacts, benefits and ongoing challenges of performance budgeting. In improving operational efficiency, allocative decision-making, and aggregate fiscal discipline, the evidence is largely anecdotal and not very persuasive. “Much of the annual budget process in many OECD countries remains incremental, and inputs still play a significant role” is one of the author’s conclusion. Another is “it is....difficult to pinpoint systematic use of performance information on a government-wide scale by ministries and agencies to improve operational efficiencies. 

If that is really the case, the continued stubborn efforts of governments to introduce performance budgeting systems seems hard to explain. Are governments just imposing a ritual exercise upon their bureaucracies that impact workload but have no major impact on the operation of government? That question is not really answered satisfactorily. It might be an issue of measurement, as indeed is noted in this publication. The activities of government are so varied and complex that the impact of adding performance information to the planning and budgeting processes of government is hard to measure. In general, one could say that of course economic reforms are often a leap of faith.

Especially for developing countries, a clearer answer on this question would be useful as the costs involved in introducing performance budgeting systems are not trivial. A consequence of not having a strong vision on what works and what does not -- which the book does not seem to have -- is that the guidelines on designing performance budgeting systems are overly nuanced. "Centralized systems should take care to include the views of agencies, while the Ministry of Finance should play an important role in decentralized systems." Much of the suggested guidelines are in this vein. Such advice, and also the advice that there is not one best country system to follow, still leaves the question open on where to go and what type of system to develop. Despite these criticisms, this publication is an important contribution to the expanding literature on performance budgeting.    

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