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June 27, 2019

OECD Good Practices on Performance Budgeting

Posted by Ivor Beazley[1]

Performance budgeting involves a shift in the focus of budgeting, away from management of inputs and towards a focus on the results of spending and the achievement of policy objectives. This represents a profound change in the character of the budget process, from a traditionally closed domain of budget specialists, focused on the numbers, to a more accessible, transparent and multi-disciplinary exercise, with greater involvement by the center of government, line ministries, the legislature and citizens.

While performance budgeting has been widely adopted by OECD countries, it has also been described by some as a “zombie” reform; one that moves forward seemingly undaunted by lack of obvious success. The recently published OECD Good Practices for Performance Budgeting presents a rather more optimistic picture.  Drawing on over a decade of accumulated experiences, shared by OECD member countries, and the results of multiple surveys, the Good Practices publication offers insights and practical examples of how countries can benefit from the approach while avoiding administrative overload.  This post highlights some of the shifts in thinking towards more nuanced and flexible approaches.

Performance budgeting (PB) should be thought of as one element of a broader performance management system, rather than as a separate reform initiative.  Coordination with related Public Financial Management (PFM)reforms including medium term budgeting, ex-ante program evaluation, and performance audit is therefore important.  Even more can be achieved by linking performance budgeting to broader performance reforms; strengthening links between strategic planning and budgeting; performance oriented human resource management; and performance monitoring and evaluation at the program level.

The design of the PB system needs to accommodate the interests and focus of key stakeholders.  For example, in some countries the main driving force comes from the center of government.  Typically, the center uses PB as a tool to ensure that political priorities are reflected in budget allocations, and that ministers and officials are held accountable for delivering results.  This points towards a PB system that emphasizes strong alignment between strategic planning and budgeting, reinforced by spending reviews, performance-based HR and performance reporting.  Parliaments have been key proponents of PB in many OECD countries.  They typically seek improved transparency about what public resources are used for and the results achieved, leading to more limited reforms focused on how  budget proposals and reports are presented.  Consulting a broad range of stakeholders and establishing clear objectives and priorities for PB, at the outset, is likely to increases the chances of success.  

In setting goals and managing expectation for PB it is important to keep in mind the inherent limitations of a performance-based approach.  Due to the essentially political nature of the budget, including the difficult task of taking resources away from established programs, performance and results will only ever be one factor in budget decision making.  However, a good performance budgeting system can increase the weight given to performance factors and promote greater use of evidence in policy making.  This again highlights the importance of complementary reforms.  For example, spending reviews have proved generally more effective than an annualized PB process for cutting spending on established programs to fund new priorities.

The good practices suggest incorporating flexibility into the methodology, rather than following a one size fits all approach. This approach could be characterized as “value added” and reflects that fact that the nature of the relationship between budget resources and outcomes varies widely across the range of government activities.  Where government is directly responsible for delivering services, e.g. building infrastructure or providing health services, it makes sense to monitor financial and operational performance intensively at programme level and below.  In contrast, in policy sectors such as foreign or economic affairs, the financial resources allocated to the ministry have a loose relationship to policy outcomes.  In such cases a simplified or “presentational” approach makes more sense, and the correct focus of budgeting should be the management of departmental costs. 

Finally, the Good Practices publication recognizes that managing the quality, quantity and flow of performance data is a continuous challenge. While the philosophy that “less is more” is generally helpful, the focus should be on meeting the varied needs of different users.  Dashboards, with a few key indicators, will likely satisfy the needs of ministers, for example, but managers need much more granular information to manage public services and major infrastructure projects, on a month to month or even day to day basis.  Modern information technology can provide new insights for decision makers through combining operational and financial data in new analytical reports, but experience suggests that making effective use of analytics depends on aligning management processes and incentives with performance.

Hopefully the Good Practices will provide new inspiration to countries that want to improve their performance budgeting systems, and useful guideposts to those starting the journey.


[1] Ivor Beazley is a Senior Public Sector Specialist at the World Bank

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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