ied. From the 1970s, the need for containment of fiscal deficits through tightened
fiscal management, pre-occupied the economists. In the 1980s, the management approach
came to be prevalent which included a corporate type of financial management within an
overall framework of accountability
A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation - it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.
1 The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of ZBB is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.
es “The process of budgeting is inherently an exercise in political choice – allocating scarce resources among competing needs and priorities – in which performance information can be one, but not the only factor underlying decision
Firstly, even though performance targets are being developed, they are actually kept separate from the budget not only in South Africa, but also in countries like Malaysia, Singapore, and in most US States, “which undermines their legitimacy,” • Secondly, in the South Africa case, as regards performance information, “outputs are confused with inputs and outcomes remain unconsidered.” Targets appear to have been technocratically identified which therefore lack real world value. Targets are not spelt out in detail making actual measurement unlikely. • Thirdly, and the most important point is that even when effective targets are provided, the budgets in South Africa and many other nations moving toward this kind of system fail to specify who should be accountable for their results, and who should hold them accountable. “Very little thought appears to have been given to the process of institutionalizing political or accountability for the targets identified in their budget”
2 Attempts are continuously being made to overcome as many of the shortcomings as possible. A good example is the trend in OECD countries. The common elements of the budgetary reforms in OECD member countries are:12 i. medium-term budget frameworks; ii. prudent economic assumptions; iii. top-down budgeting techniques; iv. relaxing central input controls; v. focus on results; vi. budget transparency; and vii. modern financial management practices.
Budgeting has traditionally operated on a bottom-up principle. This means that all agencies and all ministries send requests for funding to the finance ministry. These requests greatly exceed what they realistically believe they will get. Budgeting then consists of the Finance Ministry negotiating with these ministries and agencies until some common point is found. This bottom-up system has several disadvantages to it. First, it is very time consuming and it is essentially a game; all participants know that the initial requests are not realistic. Second, this process has an inherent bias for increasing expenditures; all new programmes, or expansion of existing programs, are financed by new requests; there was no system for reallocation within spending ministries and there were no pre-set spending limits. Third, it was difficult to reflect political priorities in this system as it was a bottom-up exercise with the budget “emerging” at the end of this process. This manner of budgeting is now being abandoned and replaced with a new top-down approach to budget formulation. This has been of great assistance in achieving fiscal consolidation. The starting point for the new system is for the government to make a binding political decision as to the total level of expenditures and to divide them among individual spending ministries. This decision is made possible by the medium-term expenditure frameworks which contain baseline expenditure information, i.e. what the budget would look like if no new policy decisions were made. The political decision is whether to increase expenditures for a high-priority area, for example education, and to reduce expenditures, for example defence programs. Only the largest and most significant programmes reach this level of political reallocation. The key point is that each ministry has a pre-set limit on how much it can spend. Once this decision is taken, the Finance Ministry largely withdraws from the details of budgetary allocations for each ministry. The Finance Ministry concerns itself only with the level of aggregate expenditure for each ministry; not the internal allocations. “Each minister is his own Finance Minister,” is the saying in some countries. Each ministry has a total amount and it can freely reallocate that money among its various agencies and programmes. This has several advantages to it. It serves to hamper creeping increases in expenditures as new policies are funded by reallocations from other areas within the ministry. It creates ownership in the respective ministries for the actions that are taken. Decisions are also better informed as spending ministries are in the best position to judge the relative merits of their programmes. The role of the Ministry of Finance is to verify that the offsetting cuts to finance new programmes are real.
Cash and accruals represent two end points on a spectrum of possible accounting and budgeting bases. The cash end of the spectrum has traditionally been applied by Member-countries for their public sector activities. In recent years, there has been a major trend towards accruals end of the spectrum in Member-countries. About half of Member-countries have now adopted accruals to one degree or another. This is a very rapid migration; it was only in the early 1990s that the world’s first accrual basis financial statements and budget were produced by a government (New Zealand).
ii. Sound financial management is the responsibility of all government departments/ agencies: Maintaining financial prudence, discipline and accountability, while Strengthening Financial Management Systems Public Finance Management - Concepts and Core Principles 20 21 at the same time, ensuring prompt and efficient utilization of resources towards achieving organizational goals is the responsibility of all government agencies/ organizations and not only of the Finance wing/Finance Ministry. iii. Medium-term plan/budget frameworks and aligning plan budgets and accounts: Medium-term plan/budget frameworks attempt to bridge the gap between the short-term time horizon of annual budgets with the medium-term objectives of the schemes and programmes of government. Even when there are mediumterm frameworks like five-year development plans, there is need for aligning the annual budgets explicitly with the plans and with the accounting mechanisms so that there is a clear ‘line of sight’ between the medium term developmental plan and the annual budget exercise. iv. Prudent economic assumptions: The economic assumptions that underline the budget have to be prudent and accurate in order to ensure that the budgetary estimates do not go haywire. The tendency to be overly optimistic has to be avoided. v. Top-down budgeting techniques: There is need to shift from the traditional bottom up approach to budgeting to a top-down framework where the desired outcomes should point to the resources required which should be allocated thereafter at the macro level sector-wise. This in turn would lead to focus on outputs and outcomes rather than on inputs and processes. vi. Transparency and simplicity: The budget documents should be simple and easy to comprehend and be available in the public domain. Also the procedures involved in operating the budget and release of funds should be simple. Suitable financial management information systems need to be developed in order to ensure that all transactions are captured and ultimately made available for public scrutiny. vii. Relaxing central input controls: Government agencies need to be given greater operational autonomy and flexibility by consolidating budget items and decentralization of administrative and financial powers. viii. Focus on results: Accountability in government needs to shift from compliance with rules and procedures to achievement of results. This is all the more necessary with relaxed central input controls. There should be emphasis on ‘value for money’. ix. Adopting modern financial management practices: Modern financial management tools like accrual accounting, information technology, financial information systems etc. need to be used to improve decision making and accountability. However, care needs to be exercised to ensure that a congenial environment is created and adequate capacity is developed before adopting new practices. x. Budgeting to be realistic: Unless the projections made in the budget are reasonably accurate, the budgetary exercise loses credibility.
A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation - it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.
1 The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of ZBB is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.
es “The process of budgeting is inherently an exercise in political choice – allocating scarce resources among competing needs and priorities – in which performance information can be one, but not the only factor underlying decision
Firstly, even though performance targets are being developed, they are actually kept separate from the budget not only in South Africa, but also in countries like Malaysia, Singapore, and in most US States, “which undermines their legitimacy,” • Secondly, in the South Africa case, as regards performance information, “outputs are confused with inputs and outcomes remain unconsidered.” Targets appear to have been technocratically identified which therefore lack real world value. Targets are not spelt out in detail making actual measurement unlikely. • Thirdly, and the most important point is that even when effective targets are provided, the budgets in South Africa and many other nations moving toward this kind of system fail to specify who should be accountable for their results, and who should hold them accountable. “Very little thought appears to have been given to the process of institutionalizing political or accountability for the targets identified in their budget”
2 Attempts are continuously being made to overcome as many of the shortcomings as possible. A good example is the trend in OECD countries. The common elements of the budgetary reforms in OECD member countries are:12 i. medium-term budget frameworks; ii. prudent economic assumptions; iii. top-down budgeting techniques; iv. relaxing central input controls; v. focus on results; vi. budget transparency; and vii. modern financial management practices.
Budgeting has traditionally operated on a bottom-up principle. This means that all agencies and all ministries send requests for funding to the finance ministry. These requests greatly exceed what they realistically believe they will get. Budgeting then consists of the Finance Ministry negotiating with these ministries and agencies until some common point is found. This bottom-up system has several disadvantages to it. First, it is very time consuming and it is essentially a game; all participants know that the initial requests are not realistic. Second, this process has an inherent bias for increasing expenditures; all new programmes, or expansion of existing programs, are financed by new requests; there was no system for reallocation within spending ministries and there were no pre-set spending limits. Third, it was difficult to reflect political priorities in this system as it was a bottom-up exercise with the budget “emerging” at the end of this process. This manner of budgeting is now being abandoned and replaced with a new top-down approach to budget formulation. This has been of great assistance in achieving fiscal consolidation. The starting point for the new system is for the government to make a binding political decision as to the total level of expenditures and to divide them among individual spending ministries. This decision is made possible by the medium-term expenditure frameworks which contain baseline expenditure information, i.e. what the budget would look like if no new policy decisions were made. The political decision is whether to increase expenditures for a high-priority area, for example education, and to reduce expenditures, for example defence programs. Only the largest and most significant programmes reach this level of political reallocation. The key point is that each ministry has a pre-set limit on how much it can spend. Once this decision is taken, the Finance Ministry largely withdraws from the details of budgetary allocations for each ministry. The Finance Ministry concerns itself only with the level of aggregate expenditure for each ministry; not the internal allocations. “Each minister is his own Finance Minister,” is the saying in some countries. Each ministry has a total amount and it can freely reallocate that money among its various agencies and programmes. This has several advantages to it. It serves to hamper creeping increases in expenditures as new policies are funded by reallocations from other areas within the ministry. It creates ownership in the respective ministries for the actions that are taken. Decisions are also better informed as spending ministries are in the best position to judge the relative merits of their programmes. The role of the Ministry of Finance is to verify that the offsetting cuts to finance new programmes are real.
Cash and accruals represent two end points on a spectrum of possible accounting and budgeting bases. The cash end of the spectrum has traditionally been applied by Member-countries for their public sector activities. In recent years, there has been a major trend towards accruals end of the spectrum in Member-countries. About half of Member-countries have now adopted accruals to one degree or another. This is a very rapid migration; it was only in the early 1990s that the world’s first accrual basis financial statements and budget were produced by a government (New Zealand).
ii. Sound financial management is the responsibility of all government departments/ agencies: Maintaining financial prudence, discipline and accountability, while Strengthening Financial Management Systems Public Finance Management - Concepts and Core Principles 20 21 at the same time, ensuring prompt and efficient utilization of resources towards achieving organizational goals is the responsibility of all government agencies/ organizations and not only of the Finance wing/Finance Ministry. iii. Medium-term plan/budget frameworks and aligning plan budgets and accounts: Medium-term plan/budget frameworks attempt to bridge the gap between the short-term time horizon of annual budgets with the medium-term objectives of the schemes and programmes of government. Even when there are mediumterm frameworks like five-year development plans, there is need for aligning the annual budgets explicitly with the plans and with the accounting mechanisms so that there is a clear ‘line of sight’ between the medium term developmental plan and the annual budget exercise. iv. Prudent economic assumptions: The economic assumptions that underline the budget have to be prudent and accurate in order to ensure that the budgetary estimates do not go haywire. The tendency to be overly optimistic has to be avoided. v. Top-down budgeting techniques: There is need to shift from the traditional bottom up approach to budgeting to a top-down framework where the desired outcomes should point to the resources required which should be allocated thereafter at the macro level sector-wise. This in turn would lead to focus on outputs and outcomes rather than on inputs and processes. vi. Transparency and simplicity: The budget documents should be simple and easy to comprehend and be available in the public domain. Also the procedures involved in operating the budget and release of funds should be simple. Suitable financial management information systems need to be developed in order to ensure that all transactions are captured and ultimately made available for public scrutiny. vii. Relaxing central input controls: Government agencies need to be given greater operational autonomy and flexibility by consolidating budget items and decentralization of administrative and financial powers. viii. Focus on results: Accountability in government needs to shift from compliance with rules and procedures to achievement of results. This is all the more necessary with relaxed central input controls. There should be emphasis on ‘value for money’. ix. Adopting modern financial management practices: Modern financial management tools like accrual accounting, information technology, financial information systems etc. need to be used to improve decision making and accountability. However, care needs to be exercised to ensure that a congenial environment is created and adequate capacity is developed before adopting new practices. x. Budgeting to be realistic: Unless the projections made in the budget are reasonably accurate, the budgetary exercise loses credibility.
