Posted by Eivind Tandberg.
A common criticism of performance and program budgeting efforts is that they lead to budget planning systems that are mechanistic, overly complex, and overloaded with useless data; and that performance data have little or no impact on actual decisions. Many critics compare performance-oriented budget mechanisms to the planning models developed by Soviet central planners, and claim they are equally useful (or useless). Is there any truth to this claim? This blog provides a brief discussion of the claim in relation to three specific dimensions of performance budgeting: the historical roots, the concepts and the practical implementation of these concepts.
Performance budgeting, under the original designation of program budgeting, was pioneered in the United States in the 1950s, and applied quite widely in OECD countries in the 1960s and 1970s. This form of program budgeting is clearly inspired by centralized planning. This was a period when governments believed that they could plan and manage the development of societies in great detail, and that it was important that they do so.
Not surprisingly, 1960s' program budgeting attempts were not particularly successful, partly for the same reason that the Soviet planning model proved to be inadequate. Some countries produced elaborate sets of programs, documents and indicators, but the process was often mechanistic and decoupled from actual decision-making. Even more importantly, managers had limited opportunities and incentives to implement the programs in a way that produced the programmed results. In model language: the systems were often over-determined. Civil service management was hampered by a number of rigidities in deploying resources and managing personnel; tracking of indicators and results was not well developed; and there were few explicit rewards or sanctions related to results. Managers often perceived the program budget efforts as a passing fad, and paid little attention to it.
Modern Performance Budgeting
There was limited progress in performance budgeting for several years. However, during the 1980s some countries began introducing approaches to performance budgeting that addressed the shortfalls of the initial program budgeting efforts. This was part of a broader renewal of public sector management aimed at improving performance and accountability, by reducing rigidities and micromanagement and providing much stronger incentives for managers and staff to improve performance.
This new approach to performance budgeting was clearly different from Soviet-style central planning (and from the initial forms of program budgeting). Table 1 provides a cursory, simplified comparison of some key elements of the two approaches.
Table 1: Comparison of Concepts
Soviet central planning | Performance budgeting | |
Time frame | 5 years | 3 – 4 years, rolling |
Coverage | Whole economy | Government |
Production function | Explicit, detailed | Implicit, conceptual |
Key data | Inputs, activities, outputs | Inputs, outputs and outcomes |
Decision-making | Model-based, “scientific” | Political compromise |
Objective | Maximize physical production (social welfare) | Improve efficiency of government spending |
Perceived key challenges | Lack of computing power, data availability | Lack of enabling framework, limited incentives |
Reasons for failure | Lack of incentives, inadequate feedback loops | Too early to say |
There are obviously many views regarding the reason the Soviet system failed, but most analysts agree that the lack of incentives was one major factor. The inability of the system to process its own results and to use these results to adjust plans and objectives is another important feature. The classical example is the country with a 5 % annual growth objective, where the finance minister after four years of 3 % growth declares (with a straight face) that the country will have to grow 14 % in the last year of the 5-year program.
Which Form of Performance Budgeting Do Countries Actually Implement?
A number of countries around the world, including many developing countries, are attempting to improve the performance of their government sectors, and performance budgeting is often seen as an important aspect of these efforts. This is a very worthwhile objective, but one that often is difficult to achieve. One key question is: are countries primarily (and successfully) pursuing modern forms of performance budgeting, or are the reforms more similar to the type of program budgeting that was introduced in the 1960s?
The results are obviously mixed. However, when reviewing performance reform efforts in different countries, the following weaknesses are quite common:
- Many reform efforts are quite mechanical and ritualistic. There is little attention given to the quality of budget programs and indicators.
- Program and indicator definitions tend to focus on inputs and activities, and to some extent outputs. In many countries there are few examples of well-defined programs with clear outcome objectives and coherent indicators.
- Countries often retain detailed line-item budgets, effectively giving line managers little authority to manage their budget to meet objectives as efficiently as possible.
- Other rigidities are also prevalent, including on staffing decisions such as hiring and firing.
- Promotions and pay often continues to be based on seniority, giving very little financial incentives for good performers.
- Performance tends to have little or no influence on budget decisions. In many cases performance information is not even available or presented in a coherent manner when budget decisions are taken.
Conclusion
While many countries attempt to introduce modern forms of performance budgeting, as pioneered in countries like New Zealand, Australia and the UK, there are indications that many of them end up with schemes that are more similar to the failed program budget efforts in OECD countries during the 1960s. If this is correct, there may be good reasons to rethink and adjust ongoing performance budget reform efforts in these countries.
