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Key Text Performance Budgeting: Managing the Reform Process

Author: J Diamond
Date: 2003
Size: 29 pages (1004 KB)

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Summary

Over the last two decades, many OECD countries have reformed their budgetary processes from an inputs-based, command and control model to a more decentralised approach that focuses on outputs. The success of 'performance budgeting' has stimulated interest from many middle-income emerging economies. This working paper from the International Monetary Fund aims to improve the quality of IMF technical assistance to countries considering when and how to approach such reforms.

Performance budgeting can yield greater efficiency, effectiveness and quality of government agency outputs. Countries now approaching the IMF for assistance on budget reform are hoping to harness these gains. What advice can be derived from the OECD countries' experience? How can reform best be supported from the outside?

The fruits of performance budgeting clearly depend on the managerial capacity to make good use of the increased freedom and responsibility. Moreover, the process of changing from one budget system to another itself requires substantial managerial skill. Such leadership is in short supply, but experience shows that it does exist in most countries. These two questions of managerial capacity are key to the nature and timing of budget reform and must not be underestimated.

Reforms in three areas must be developed simultaneously in a coherent process: greater flexibility over the details of spending, greater certainty over medium-term funding, and pressure on agencies to improve results.
The latter requires a strong capacity and clear framework for assessing performance, for rewarding success and punishing failure.
The central actor in the reforms should be the budget office. Since this office will experience a loss of immediate power and control, safeguards and incentives must be structured so as to keep it on board.
Reform is an evolutionary process, not a revolution. Identify agencies best placed to benefit from reforms first; their experience should provide a positive example and catalyst for extending reform to others.
An enabling environment will contribute to success: fiscal and regulatory stability and transparency, quantitative and qualitative performance indicators, strengthened mechanisms for consumer feedback and redress.
Reforms must be sequenced properly: the management skills and information systems must be established, especially at agency level, before a devolved budget model is adopted.

When providing technical assistance (TA) to countries considering budget reform, more attention needs to be paid to the issue of management capacity. A possible checklist is provided to help IMF staff assess this, and includes the following points:

How deep and broad is the recognition that change is needed? Who are the agents of change, and how well established are they?
Does the country have the necessary fiscal, political and administrative stability to cope with change?
Can the government afford the up-front costs of change before any efficiency gains are derived?
Can existing fiscal and financial management systems cope with devolved accountability? Is the regulatory framework appropriate, or does it need strengthening or streamlining?
What is the general level of management capacity to implement reform?
Do people have faith in their country's governance? How are they empowered to demand better services from government?

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Source: Diamond, J., 2003, 'Performance Budgeting: Managing the Reform Process', IMF Working Paper 03/33, International Monetary Fund, Washington.
Author: International Monetary Fund, http://www.imf.org