CONTEXT AND ISSUES IN BUDGET REFORM

The best examples of current reform efforts represent a substantial departure from past
efforts. The new wave recognizes the key weaknesses of past reform efforts, in particular the
failure to address the relationship between control and performance and the incentives for
performance in the full range of formal and informal budgeting, decision making, and
management rules (restraints and flexibilities). Just as budget reform cannot by itself be the
sole driver of improved performance - the budget is embedded in the decision making and
management practices of government - neither will performance improve sustainably in an
environment where the budget system gets in the way of the broader reform effort.
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Key lessons about the what and how of budget reform can be derived from the
experience of over 100 years of reform across the full spectrum of countries. They are as
follows:
1. It is important to consider at the outset the deficiencies of the particular budget system.
In what sense is it performing below expectations?
2. Within the basic functions of budgeting - control of public resources, planning for the
future allocation of resources, management of public resources - budget systems
involve many subfunctions, all of which influence the three levels of budgetary
outcome. These subfunctions include policy making, conflict resolution,
communicating, accounting, macroeconomic direction, program selection, evaluation,
and aid management. A reform program may address one or more of these issues, but
it must take account of the linkages between all of them. Particular dimensions require
attention:
a. Budget systems cannot be bought fully assembled off the shelf. They are
processes that continue to develop, not solutions for all time. They are also
systems linked to other systems, particularly political and managerial. If these
systems are deficient, it is unlikely that the budget systems will deliver sound
budget outcomes, particularly at levels 2 and 3.
b. Budgetary basics have to be understood. Budget systems include a wide range
of basic supporting services, including accounting, budget examination,
estimating, forecasting, monitoring, and evaluating. If these components are
not adequate, the budget system is unlikely to perform well. Poor performance
occurs when budgets do not come out in time to influence events, contain
unrealistic assumptions, are made and remade throughout the year (implicitly or
explicitly), contain flagrant opportunities for corruption, or are simply fictions.
Such circumstances require patient diagnosis, detailed analysis of how moneys
are released, spent and accounted for, restructuring of organizations, institution
building, and careful consideration of objectives and methods. The fault will
more often lie not with the basic budget systems themselves, but with the
environment in which they operate.
c. Budget systems face certain intrinsic problems, including:
the relationship between macro and micro levels;
the balance between long- and medium-term commitments and flexibility
to meet exigencies;
differences in outlook between budget personnel and program and
planning staffs related to background, values and functions.
d. Budget systems are communication systems, conveying signals about behavior,
prices, priorities, intentions, and commitments. Budget reforms should take
particular account of effective communication, a two-way process that facilitates
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bringing the full range of stakeholders into the reform process. Particular
attention needs to be paid to donor relationships.
e. Where foreign aid is significant, particular attention needs to be paid to aligning
donor practices with the reform effort. As a minimum, all donor support to
government should be incorporated in the budget.
3. Budget reforms do not implement themselves. A detailed implementation strategy
needs to be built into their design, but it must build in flexibility to learn and adapt. No
known reform effort has specified at the outset all the elements of the ultimate reform
program.
4. Budget systems, however capable, are not self-contained. In particular, they are
adversely affected by multiple, converging uncertainties, political instability, vulnerable
regimes, wars, entrenched patterns of expenditure, donors, severe inflation, and
structural imbalances between expectations and resources. The budget system must
be built to cope with these realities, but be aware of self-inflicted uncertainties or
rigidities (including those associated with donor practices).
5. Improving the information base to aid decision making is a crucial ingredient of reform,
but incorporating more analysis into budgetary decision making does not automatically
lead to better decisions. Apart from the problems of quantifying and measuring
performance, such information rarely leads to a single clear policy choice. Policy
choice is essentially political, and strengthening decision making requires a recognition
of the multitude of factors that bear on decisions.
6. Building a greater performance orientation into a budget system is not simply a matter
of implementing the latest tool or technique. Excessive expectations are often raised
about the capacity of these tools and techniques to contribute to, even replace, central
resource allocation decisions. Such costs and techniques are much more likely to
contribute to improvement in resource use at the line agency level. In the end,
performance-oriented tools and techniques will only deliver where the central processes
of resource allocation, budgeting, and financial management change to support and
require a performance orientation at the agency level. Equally important are personnel
management and structure of government that provide incentives for improved
performance.
7. Budget reform is not a choice between leaving the unreformed system in place or
adopting a new budgeting approach lock, stock and barrel. Many of the concepts of
zero-based, performance, or program budgeting can be incorporated slowly into a
traditional budgeting system. Performance depends on a proper balance between
restraint and flexibility. This means that reform must work towards putting in place
hard, but predictable, budget constraints while providing decision makers with the
authority they require to do their jobs.
Specific tools, techniques, structures, and subsystems must support these basic
institutional arrangements. Concerns with these apply equally to the tools and
techniques targeted in chapter 1 (program, performance and zero-based budgeting)
and to current techniques and tools such as output budgeting, performance
measurement and, even, accrual accounting. The current tools and techniques have
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been shown to work in a number of developed countries (although unqualified success
with comprehensive performance management systems remains elusive). New
Zealand has had significant success with these particular tools and techniques, but as
Allen Schick has noted, the lesson for other countries is “Getting the Basics Right,” not
universal applicability (Box 4 in Introduction).
8. Reform takes time and persistent effort - it is more a pilgrimage than a destination. The
important factor is not so much the specific tool that is used for budget reform; it is the
institutionalization of the principles underlying the tool.
CURRENT INITIATIVES IN BUDGET REFORM
The 1980s and 1990s have seen a new wave of budget reform. Reformers in OECD
countries and, in increasing numbers, in middle income, developing countries and economies
in transition, are stressing changes in budget systems that contribute to better public sector
performance. A key message of this handbook is that sustainable reform, whether it be
comprehensive or concerned only with one component of the system, will be built by
considering all three levels of budgetary outcomes and the broader political, social and
economic environment. This change in emphasis is illustrated in the current guidelines on
Public Expenditure Reviews for the Africa Region (Box 5.1).
Reform designed to put in place an effective PEM system and process along the lines
discussed in this handbook conjures up visions of comprehensive and broad-based reform
initiatives. However, resistance to comprehensive approaches is common. This concern
needs to be addressed when discussing approaches to implementing budget reforms. Skeptics
argue that a disadvantage of the comprehensive approach is that it involves a longer time
horizon than more narrowly focused initiatives. They also argue that governments (and
donors) are often unable to sustain an initiative of comprehensive scope and extensive length.
In addition, they cite environmental weaknesses such as closed financial markets and
uncertainty of resource flows over the medium term. For these reasons, they claim aggregate
fiscal discipline cannot be achieved, or a short-term focus to budget decision making has to be
continued.
However, these are not valid reasons. A sailor who wants to get from Cairo to Punta
Arenas does not give up on his medium-term objective because a sudden storm hits him. He
will have built a boat to withstand violent storms and will have taken on board extra provisions.
Evidence shows that there are many more examples of failed reform efforts where the
approach has not been comprehensive, and the initiative has addressed only parts of the
problem. Where comprehensive reform efforts have failed, it has mainly been because of poor
analysis of the underlying problem. But, comprehensive reform will involve a longer time
horizon than will component reforms.
Much of the skepticism about comprehensiveness might lie in a misconception of what
is meant by the term. Comprehensiveness is not about trying to do everything at once. Rather,
it is about taking a holistic approach to diagnosing the problems, understanding all the
interlinkages and evaluating the institutional impediments to performance, and then finding the
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most appropriate entry point to launch a phased reform process. Phasing can be fast or slow,
depending on country conditions, and could eventually expand to become comprehensive