Budgeting for results

• Author: Jack Diamond
• Position: IMF Fiscal Affairs Department
• Pages: 158-160

Page 158

Over the past two decades, most advanced economies have fundamentally restructured their budget management systems to strengthen the link between resource allocation and desired results. This new approach has also attracted attention in many middle-income and emerging market countries. But are they in a position to implement performance budgeting?

A recent IMF Working Paper examines how advanced economies successfully implemented performance budgeting and explains what other countries need to know to emulate them. One crucial lesson: management skills are key.

Traditionally, countries managed their budgets in a highly centralized fashion. They created a set of policy objectives-albeit usually poorly articulated with little quantification-and then allocated resources to meet these objectives. The focus was on the resources being distributed and on the centralized control and compliance devices that ensured that resources reached their intended destinations. Typically, however, there was little follow-up to see whether spending departments actually performed as expected.

But, beginning in the United States, and spreading to nearly all them by the early 1980s, advanced economies began to rethink how they managed their budgets.

They experimented with allowing greater flexibility in return for a new emphasis on performance and accountability.

Just what did that mean in terms of managing budgets? Within a hard budget constraint, performance budgeting gave spending agencies greater scope to access and use funds, largely by allowing them to reallocate funds between types of resources that had previously been controlled as line-item expenditures. Unnecessary constraints on resource management were removed, and agencies and managers were granted greater freedom to make operational decisions. Spending agencies also gained greater certainty that the funds they needed wouldPage 159 be available. In many advanced economies, the shift to performance budgeting was accompanied by more medium-term budget planning. Typically, three- or five-year budget frameworks replaced the customary one-year fiscal targets.

But this greater freedom and predictability came with strings attached: agencies and managers were held more accountable for outcomes. Performance budgeting was expected to pay off in greater efficiency and effectiveness.

The transition to performance budgeting also reflected a growing...