Posted By Khuram Farooq and Michael Schaeffer [i]
The traditional program budgeting structure is program, sub-program and activity. Can we simplify this structure? Is the ‘activity’ element of this classification really necessary? Why ‘activity’? The conventional argument is that ‘activity’ will be used to capture ‘projects’ or capital expenditures under sub-programs. This may be a valid explanation on paper. In practice, however, the concept of ‘activity’ has caused much confusion and difficulties during the implementation of program budgeting in several countries.
In Zambia, there were 3000 ‘activities’ under the Ministry of Health’s budget (FY 2011), with at least 5 subheads under each activity. This constituted around 15000 line-items! In Cambodia, there are 10,000 activities under the newly introduced program classification. This level of detail and complexity in the budget classification system is problematic on several counts, but the most fundamental issue is that it undermines the justification for moving to program budgeting.
One of the key justifications for moving to program or output based budgeting is that traditional budgets are too focused on details and inputs. Budget documentation is often voluminous with (sometimes) thousands of pages of tables detailing inputs for each of the budget entities. Performance based budget systems, on the other hand are designed to shift the focus from ‘inputs’ to ‘outputs’ or ‘programs’ - the services to be delivered by Ministries, the targeted results for these services, and the reporting on the these results. In this framework, accountability for the use of government resources (taxpayer’s funds) is separated so that:
This shift in accountability has been difficult in practice. The Ministry of Finance in various countries has been reluctant to give up their absolute control over detailed levels of inputs (often disguised as ‘activities’). The Line Ministries were tentative too, as often for the first time, they were being held accountable for service delivery performance.
Too often, the response to these fears has been to continue providing detailed input and activity data in budget documentation and centralized expenditure control processes. The level of detail has often been so overwhelming that it diluted and to some extent undermined the focus on key service results, the very reason for the shift to performance budgeting systems.
Many other drawbacks have been experienced with respect to using activity level detail in the budget process:
But how to reflect capital and recurrent expenditures under programs?
One of the arguments supporting the use of ‘activity’ under program classification is that it reflects capital projects under programs. This objective is desirable. However, it can be achieved without using ‘activity’ - through mapping of spending units and projects to programs and sub-programs. Every ministry has spending units, financed either through recurrent or capital budget allocations (or a mixture of both). The thousands of schemes and sub-schemes, in which politicians are typically interested, can be treated as spending units. Since a program or sub-program should include information on recurrent and capital expenditures, all spending units, including schemes, should be mapped to the program classification in order to aggregate recurrent and capital expenditures.
What about spending units that contribute to more than one program?
Sometimes, it is argued that activities help in allocating costs to respective programs when a spending unit contributes to multiple programs. A spending unit at the top of the hierarchy (Minister’s office) or at the periphery (e.g District office) would present this scenario. An agriculture officer in a remote district will be contributing to multiple agriculture programs, including agriculture productivity and market access. This is one of the difficult scenarios under program budgeting. Such a scenario could be dealt in one of the two possible ways:
The underlying theme of the above options is that every spending unit code should be mapped to one program or sub-program. Using above design options under a programmatic budget approach is significantly simpler than using activity. Under this approach, the Ministry of Finance can approve the budget at program and/or sub-program level, while further distribution of budget to the spending units could be left to the ministry and program managers as shown below (See Figure 1). Budget execution controls and expenditure recording should be done at the spending unit level, and associated economic classification.
Figure 1: Simplified approach to program classification
In sum, the introduction of activities in the budget classification system has created enormous difficulties in many countries. Many governments are grappling with these issues even after 15 years of experience with program budgeting. Eliminating ‘activities’ in the budget management system of these countries can simplify the process. Not only will the information duplicity be avoided, but the reforms will be refocused to the basic objectives of the program budgeting – achieving budget performance results.
[i] Michael Schaffer, Senior Public Sector Specialist, Governance Global Practice, World Bank and Khuram Farooq, Senior Financial Management Specialist, Governance Global Practice, World Bank.
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