The rationale, objectives and approach to performance budgeting are set out in a strategic document such as an organic budget law or public financial management reform programme.
The interests and priorities of multiple stakeholders in the budget cycle are reflected in the objectives and design of the performance budgeting system.
Performance budgeting is championed by political leaders, with support from senior officials.
The introduction of performance budgeting is supported by regulations and guidelines.
OECD Good Practices for Performance Budgeting
Good Practice 1: The rationale and objectives of performance budgeting are clearly documented and reflect the interests of key stakeholders.
Rationale, objectives and approach
Performance budgeting is a malleable concept, with a wide range of potential benefits, but also substantial financial and opportunity costs. Figure 2 (above) illustrates the range of potential benefits and the extent to which countries feel that they have been met.
OECD countries’ experiences suggest that increasing transparency and parliament’s ability to engage are the most readily attainable objectives for a performance budgeting system, corresponding broadly to a “presentational approach”, while countries with longer experience have achieved improvements in accountability and allocation of resources corresponding to a managerial approach. Although in general performance budgeting has proved somewhat less effective as a tool for oversight and evaluation, or for creating a performance culture, these may be highly relevant objectives for some countries. For this reason, it is important that policymakers define their expectations and balance expected benefits against the costs of introducing a new budgeting system.
New Zealand’s 2013 changes to the Public Finance and State Sector Acts provide an example of a clear statement of objectives for the performance budgeting system (Box 1).
Box 1. New Zealand - 2013 changes to the Public Finance and State Sector Acts
The overarching framework for performance budgeting in New Zealand is set out in two main pieces of legislation; the Public Finance Act, which sets out how funding is authorised and the associated performance reporting requirements; and the State Sector Act, which sets out (amongst other things) the responsibilities of Chief Executives (the heads of government ministries).
Changes were made to these Acts in 2013 to:
Get the system as a whole to be better at delivering results by breaking down “silo” behaviours; by making "responsiveness to the collective interests of government" an explicit responsibility of departmental chief executives; and creating new multi-category appropriations to provide an overarching umbrella for different funding streams.
encourage better services/value for money through the greater ability of chief executives to delegate functions and powers in order to support closer partnering with others to improve services
strengthen leadership at the system, sector and agency levels by establishing a clear role for State Services Commissioner in oversight of state services and development of senior leaders, and expanding departmental chief executives’ responsibilities to include stewardship and financial sustainability
support more meaningful information so that Parliament and the public can more easily see what taxpayers’ money has achieved, and how agencies are progressing against priorities; through greater emphasis on reporting what is intended to be and has been achieved; lifting the strategic focus of statements of intent; and greater emphasis on flexible reporting arrangements.
Source: New Zealand Treasury (2018)
Interests and priorities of key stakeholders
The interests of different stakeholders will give the performance budgeting system its character and focus. In a number of countries, e.g. France and Australia, the national legislature played an important role in instigating reforms, demanding better information on what their vote was delivering in the terms of services to citizens. In other countries, e.g. the United Kingdom the initial impetus came from the centre of government, which sought a means to ensure that the budget aligned with their electoral pledges to citizens. In some countries e.g. the United States, performance budgeting was conceived as more of a managerial tool, to improve outcomes, focusing programme managers’ attention on service delivery and performance. Over time, countries may revise their priorities and expectations. For example, recent changes made by Australia (Box 2) have focused on encouraging management use of performance data, while in the Netherlands (Box 3) the focus of recent legislation has been on accountability for results.
Box 2. Netherlands - Accountable Budgeting reform
The “Accountable Budgeting” reform was introduced in the 2013 budget documents and targeted some of the more persistent problems encountered with regard to performance budgeting in the Netherlands. These problems included the limited usefulness of budgets and annual reports for financial analysis and unclear accountability for results, especially with regard to policy outcomes. The changes introduced were designed to enable more detailed parliamentary oversight of spending as well as to enhance internal control by the Ministry of Finance and line ministries. To achieve this, more detailed financial information was presented following a uniform classification of financial policy instruments and categories of organisational expenses. In addition, the use of policy information (performance indicators and policy texts explaining policy objectives) had to meet stricter conditions concerning the precise role and responsibility of government. The reason for this shift was that performance information in the old budgets had become more aimed at legitimising funding and compliance than in providing useful insights for oversight or to learn and improve. The use of performance information for the latter purposes does not necessarily happen in a cyclical, annual way and is more likely to occur following multi-year ex post evaluation. For this reason, the lessons from evaluation gained a more prominent place in budget documents.
Source: de Jong, M., I. van Beek and R. Posthumus (2013)
Key stakeholders include the Ministry of Finance (which is normally the lead agency in implementing the reforms), the President’s or Prime Minister’s office, the legislature, line ministries and the supreme audit institution. A good design process should involve consultation with all these stakeholders. Balancing the needs and concerns of the various stakeholders may involve and trade-offs between different interests and objectives. There are inherent tensions, for example, between parliament’s desire to hold the executive accountable and the executive’s wish to give increased budget flexibility to achieve performance goals.
Political and bureaucratic support
Introducing performance budgeting is a multi-faceted reform that involves a culture change as well as process changes. Success requires both political leadership and committed technocratic support from civil servants. Experience from OECD countries indicates that purely technocratic efforts will have limited impact, especially in respect of more difficult decisions, for example changes in cross-ministerial and cross-policy allocations, and on changes in delivery modalities for public services to enhance efficiency and service quality.
For officials, performance budgeting often represents a radical change of mind-set, moving the focus of attention away from compliance with rules and fulfilment of the budget, and towards outcomes, efficiency and flexible use of funds to achieve results. Establishing a performance culture requires a political commitment to hold senior officials and ministers accountable for results. This requires clear signals from political leaders that performance is important and political backing for tough decisions on changes in resource allocation, reforms of service delivery systems and empowerment of programme managers.
The Canadian government provides a good practice example of an accountability framework. The Management Accountability Framework (MAF) establishes common expectations for management performance and is the basis for accountability between departments/agencies and the Treasury Board (see Figure 3). The MAF can be viewed through three lenses: as a vision for good management, establishing a framework for accountability; as a process (assessment, engagement, dialogue and reporting); and as an analytical tool to identify strengths and weaknesses within departments and across government. Through the MAF, departments are evaluated against a set of indicators and measures that assess, among other things, the quality of management, resources and results structures; the capacity to undertake and use programme evaluations; and the overall quality of reports to Parliament. Discussions between senior officials identify management priorities, a process that draws attention to issues in a structured way that can lead to improvement.
Figure 3. Canada Management Accountability Framework
Source: OECD Public Governance Reviews: Estonia and Finland, Fostering Strategic Capacity across Governments and Digital Services across Borders, 2015
It is also very important to reward performance with both specific goals for departments as well as providing incentives towards improving performance for the government as a whole. Performance reforms that are strongly associated with a political agenda may be disrupted by a change of government, for example in the United Kingdom when the New Labour government’s system of public service agreements was abandoned.
Regulatory basis for performance budgeting
The basic budget law or regulations define the basis for budget appropriations and the form in which the budget is presented for adoption by the legislature and changes to such laws and regulations provide a strong foundation for performance-based budgeting. A strong form of legal commitment is that budget appropriations are based on programmes and that the budget approved by parliament includes performance indicators and targets. A weaker form of regulation would require that information on programmes and performance is provided to the legislature as supplementary budget information.
Performance budgeting may be incorporated either within legislation on performance, or in legislation limited to the budget process. An example of performance oriented budget legislation is France’s LOLF (Loi Organique relative aux Lois de Finance) of 2001. A good practice example of general performance legislation incorporating changes in the budget process is Australia’s Public Governance, Performance and Accountability Act (PGPA) of 2013.
Box 3. Australia’s Public Governance, Performance and Accountability Act (PGPA)
Australia’s PGPA Act merged and refined previous financial management laws and introduced the concept of performance into legislation governing public agencies. The Act has the following objectives:
To establish a coherent framework of governance and accountability across all commonwealth entities
To establish a performance framework across commonwealth entities
To require the Commonwealth and Commonwealth entities to:
Meet high standards of governance, performance and accountability
Provide meaningful information to parliament and the public
Use and manage public resources properly
Work co-operatively with others to meet common objectives
To require Commonwealth companies to meet high standards of governance, performance and accountability
The law clarified the duties of accountable authorities and officials, empowered entities to eliminate red tape around using and managing money; required all commonwealth entities to have 4-year corporate plans linked, where appropriate, to key priorities of the government; and required all commonwealth entities to prepare an annual performance statement.
Source: Australian Government, Federal Register of Legislation (2013)