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Key Text The Basic Budgeting Problem: Approaches to Resource Allocation in the Public Sector and their Implications for Pro-Poor Budgeting

Author: A Fozzard
Date: 2001
Size: 52 pages (231 KB)

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Summary

How should governments decide which activities to prioritise in the budget? This paper from the Overseas Development Institute explores attempts to resolve this basic budgeting problem over the last 60 years in various countries. Resource allocation decisions in the public sector may be guided by economic analysis and technical theory, but ultimately have to rely on political processes.

Various guiding principles have been proposed as the basis for public sector resource allocation decision making and techniques developed to use them. These include measures of relative effectiveness (of different interventions), cost-benefit analysis and distributional impact analysis (measuring the impact of public spending on equity). None provide an all-embracing theory of budgeting; the problem is multi-dimensional and has to be tackled simultaneously from various perspectives.

Budget theories and their application to reforms of public financial management are reviewed, drawing on examples from both developed and developing countries.

Considerable progress has been made in the development of analytical techniques that support the appraisal of public expenditure decisions. There is however limited scope for their practical application.

A combination of different techniques is more powerful than individual use. Spending decisions are then subject to an analysis of the underlying rationale for public intervention, relative costs and benefits of alternative interventions and the distributional impact of spending.
Application is simpler in analysing interventions within a particular sector; owing to information constraints application in higher-level, inter-sectoral/ programme allocation decisions is more problematic.
Practical application of the principle of citizen preference to guide expenditure is problematic, as most representative systems do not necessarily generate socially efficient outcomes.
Budgetary allocation decisions are not automatically transformed into budgetary outcomes; resource allocation is also determined by budget execution. The budgeting process as well as the analysis of expenditure policy and resulting resource allocations therefore must be addressed.

Technical analysis of budgetary allocation problems is insufficient; analysis and subsequent reform of the political process surrounding decision-making is necessary for more efficient resource allocation.

Various studies highlight the importance of institutional role play and politics in determining resource allocations, but do not offer solutions. Institutional economics approaches demonstrate the importance of transparency in the budget process. This overcomes information asymmetries that allow vested interests in legislature, government and bureaucracy to divert public resources for private ends.
Independent oversight bodies, e.g. audit institutions and independent statistical authorities, are important guarantors of transparency and a means of ensuring compliance in the executive. These can exert pressure on governments to improve public expenditure management practice and deliver the desired resource allocation outcomes.
Donor instruments for reform must not focus exclusively on public expenditure management systems; broader institutional and governance concerns also need to be addressed. A framework focusing on the relationship between and within public institutions, incentives generated by institutional structures and their implications for budgetary behaviour is required.
Ultimately citizens have to be the driving force for reform. Donors can assist through investing in public information, through independent media and strengthening of advocacy groups and oversight bodies.

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Source: Fozzard, A, 2001, ‘The Basic Budgeting Problem: Approaches to Resource Allocation in the Public Sector and their Implications for Pro-Poor Budgeting’, Centre for Aid and Public Expenditure, Overseas Development Institute, London
Author: Adrian Fozzard , a.fozzard@hotmail.com
Overseas Development Institute (ODI), http://www.odi.org.uk/