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Sound Budget Execution for Poverty Reduction

Author: L Peters
Date: 2002
Size: 47 pages (250 MB)

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Summary

What are the problems with public sector budgeting in developing countries? How can budget processes be made more effective in reducing poverty? This background paper for the World Bank Institute addresses these questions using examples of successes and failures from Africa, Latin America, Australasia, and Indonesia. Effective transfer of public funds to government ministries and agencies is necessary in addition to sound budgeting to reduce poverty. Budget reform must be part of an integrated public sector reform agenda in the context of wider strategic development planning.

Efficient and effective public funding is essential for economic growth and poverty reduction. However, even the best designed budgets can be undermined by problems in spending funds. This is a particular issue for countries where there is poor tracking, monitoring and control of public expenditure. Diversion of budgeted funds from their intended purpose can be caused by a variety of systemic and environmental factors. These include; theft, deviations within and between government agencies, unauthorised diversions, cutbacks and deferrals by finance ministries. Sometimes divergences are justified, for example in the case of natural emergencies or epidemics. Usually they are caused by endemic weaknesses in public agencies, statutory frameworks, and oversight mechanisms. Further problems analysed by the study are:

• 33 per cent of Highly Indebted Poor Countries (HIPC) currently report significant differences between planned and committed budgets
• Poor budget execution results in poor outcomes for intended beneficiaries of government spending, with severest effects for the poorest members of society
• Top-heavy institutional arrangements result in funds being used to maintain bloated administrations rather than deliver services
• Only a few developing countries have been able to adapt institutional arrangements to tracking budgets in line with broader poverty reduction objectives
• Decentralisation presents particular problems because local governments usually lack capacity and are subject to unclear, un-harmonised and un-enforced expenditure rules
• Badly managed public procurement is a chief culprit of slow and incomplete public spending programmes.

Effective transfer of public funds to government ministries and agencies is necessary in addition to sound budgeting to reduce poverty. Budget reform must be part of an integrated public sector reform agenda in the context of wider strategic development planning. Coordinating Public Expenditure Management (PEM) and wider public sector reform requires four steps; ensuring reform ownership to maintain commitment, developing an appropriate institutional framework, gaining the commitment of the civil service, and finally implementing the PEM reform. Policy makers should note that:

• Developing countries face severe capacity constraints, and the above steps are likely to require long timeframes and significant resources
• Achieving initial success in a few pilot ministries may build acceptance of reform in the remaining ministries
• Serious disruption of the reform process can occur if PEM reforms and wider public sector reform are funded by different projects
• In many developing countries Parliaments do not have the means to exert enough pressure on the executive to correct poor budget management. Civil society should be engaged to bring increased public scrutiny
• Expenditure monitoring by donors is useful in countries where the legislature has limited oversight powers, or where the executive cannot get expenditure drift under control. A variety of tools have been developed by the World Bank and IMF

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Source: Peters, L., 2002, ‘Sound Budget Execution for Poverty Reduction’, World Bank Institute, Washington DC