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On the Use of Budgetary Norms as a Tool for Fiscal Management

Author: J Alm and J Martínez-Vázquez
Date: 2002
Size: 39 pages

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Summary

The use of expenditure (budgetary) norms is important in the formulation of budgets, representing a change in focus from budget costs to outcomes. But using these tools is a highly technical and complex process that is often not fully understood by key officials and stakeholders. How are norms constructed, and what can be learned from countries using these tools?

A paper from the Andrew Young School of Policy Studies, Georgia State University USA, looks at this aspect of fiscal management. Firstly, techniques for assessing expenditure need are outlined as the basis of constructing norms. Activity Based Costing separates costs within an organisation, and assigns them to specific programmes. Analysis By Structure looks at the components of an organisation and how expenditures across different areas contribute to common objectives. Cost Driver Analysis identifies which branches of an organisation generate what costs. Next the process for constructing the norms is delineated. Experiences in Western Europe, transition economies, North America, and Asia are compared. Norms across countries vary widely in complexity and transparency.

The study finds that there is a trade-off in the methods used to construct expenditure norms. Approaches based on easily attained factors are simple to apply, straightforward, and transparent but generally don’t give a true picture of underlying costs. Sophisticated methods do give an accurate picture, allowing budget equalisation, but are very complex and generally not transparent. Other conclusions drawn are:

There is no single best approach to constructing expenditure norms. Countries will make different choices depending on demographic and political characteristics, national ethos, policy objectives, and level of development.
There is a general tendency for countries to adopt simpler approaches, even though the equalisation benefits are not as good as for complex systems, as they are more transparent and easy to manage.
A fundamental difficulty with the measurement of expenditure level for any service category is that it is inherently subjective. Thus the concept of a ‘standard’ level of service is unclear.
Expenditure needs assessment can help in moving budgetary processes to being targeted at achieving outcomes rather than outputs.
However, outcomes may have multiple causes some of which may be unrelated to implementing agency’s activities, and thus assessing needs on the bases of performance or objectives is difficult.

The measurement of expenditure norms is an inherently difficult task. DFID will have to support and facilitate effort, judgment, and cooperation across the various levels of administration in beneficiary governments. Other policy pointers include:

Care must be taken in choosing a system, as it will have significant impact on local and regional administrations.
The UK system is very accurate, but highly complex and opaque. It is recommended by the authors that more limited approaches based on easily obtained data are chosen, as they are more easily understood and managed.
Transparency is required in setting expenditure norms and needs a clear legal framework and public availability of information. From the Australian case there is a strong argument for using an independent authority to achieve this.
Some equalisation elements need to be present to ensure political support.

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Source: Alm J. and Martínez-Vázquez, J., 2002, 'On the Use of Budgetary Norms as a Tool for Fiscal Management', Andrew Young School of Policy Studies, working paper 02:15
Author: Jorge Martínez-Vázquez , ispaysps@gsu.edu
Andrew Young School of Policy Studies, http://www.gsu.edu/~wwwsps/