Public expenditures according to performance--based budgeting.

Donath, Liliana ; Milos, Marius

1. INTRODUCTION

The experiences of several countries reveal that implementing a budgeting approach based on performance may be difficult (Afonso et al., 2008). This difficulties occur even though, there are very many reforms promoted by governments and political parties. The issues which should be defeated imply resistance towards organization changes, obtaining on time data connected to economic performance, the bottlenecks concerning the avoidance of creating wrong incentives (Smith, 1995) and not less important the methodology for measuring the degree of public performance (Curristine, 2005). This explains the fact that very few countries have completely implemented PBB and, if this procedure exists, it has been adopted usually only for some areas of public spending (mainly health and the higher education). Also countries that institutionalized PBB to the highest degree focus mostly on taking into account performances, and not direct budgeting according to performances (Donath & Milos, 2008).

2. USED METHODOLOGY

The analysis concerning the manner in which the European Union member states use a budgetary procedure relying on performance measurement is founded on data provided by OECD and the World Bank. The main results are summarized in figures 1 to 4. The budgeting based on performance is used in 20 member states of the European Union according to the information offered by the above mentioned international financial institutions. Member states may use evaluation reports, different manners for measuring performance, references to performance targets or benchmarking techniques (Figure 1) in order to analyze the performance of the government, but just a few member states use all these tools together. Especially benchmarking is not very wide spread. Most countries use composed indicators for performance measurement, showing on one hand the difficulties regarding the finding of some appropriate indicators for each single sector (health, education, defense, public order, economic affairs etc) and, on the other hand, they try to avoid the use of such indicators that might hide the benefits of fiscal policies which were considered as the main goals when budgeting. This is the reason for which we state that at least two conditions are necessary when measuring the performance of a public sector. These refer to the methodology of judging performance and also to the authorities who are responsible for delivering the expected performance.

Special performance indicators may be built for each public sector like health (life expectancy, infant mortality rate, number of cured diseases, days spent in hospitals), education ( number of teachers, number of graduates from primary, secondary or tertiary school),public administration (number of days for starting a new business, corruption level) etc. It is also important to compose these single indicators and obtain a performance indicator for each sector and then even for the whole public sector. The effects of public spending are also different depending on each single sector and certain sectors may influence more or less the performance of the whole public sector. During the last years, when the financial policies of the European Union were settled, it was highlighted that a concentration of the public spending in areas that stimulate the economic growth corroborated with a more efficient use of public funds are main determinants for enhancing the economic growth. The strategy adopted in Lisbon regarding the economic growth and employment refers also to the ways in which states spend public money. It has been widely accepted that public investment (capital expenditures) is definitely enhancing economical growth (Arpaia & Turini, 2008).

The formal responsibility for setting out the performance targets belongs to the relevant minister or to the government as a whole in most EU member states (Figure 2). Only Austria and Denmark state explicitly the administrative manager of the ministry concerned as being officially liable for setting out goals. In most countries, the minister of finance is involved informally in setting out performance targets, alone or in collaboration with each single ministry concerned. In Great Britain, the Prime Minister and the Chancellor in the ministry of finance share the responsibility for setting out performance targets. Regarding accomplishing established objectives, in most countries, the relevant minister for a sector is responsible for fulfilling these tasks, except for Poland where the person responsible is the prime minister and Denmark where the general manager of the government is liable for this. In Finland, the relevant minister and agency manager are both responsible for fulfilling the objectives as the ministry and the agency act as partners in a previously signed agreement.

The authorities using most frequently the budgeting based on performance are the Central Budgetary Authority, the Ministry of Finance or the ministry concerned (Figure 3). They take into account the performance targets that are available at the time of setting out the budget. Within the national parliaments, using performance objectives is less frequent. However Finland and France and, to a lower degree Slovakia and Sweden, take into account performance objectives within budgetary working groups of the parliament. If considering to what degree the budget is set out according to the performance objectives, the European Union member states have very different practices. Some of them involve performance target levels for all expenses (FR, SK, SE), while others do not use any performance target level at the time of setting the budget (AT, DK, LU, PL, SI).

When analyzing the consequences, penalties and costs due to missing the established performance targets, it is confirmed the weak correlation between budgeting relying on performance and allocating funds (Figure 4). Generally, in the 20 member states considered, a budget diminishing takes place very rare (just in 25% of the cases missing the performance target, the budget has been diminished).

Other disciplinary penalties, such as lowering salaries or negative consequences for future carrier regarding the responsible employees, are used also rarely. A closer surveillance under the form of a more intense monitoring is the most frequent consequence used in 50% of the circumstances when the performance targets are missed.

3. CONCLUSIONS

Given the difficulty of connecting directly the performance measurements to the budgetary allocations, using some more complex indicators (composed indicators) is a key element in evaluating programs and sectors. Although most countries use a budgeting form that mentions performance, and public decision makers focus more or less on facts concerning the performance, in most cases there is still no direct connection between performance measurement (clear indicators) and the budgetary allocation. The structure of the governmental expenditures has been studied in great detail and the particular experiences of several countries offer the necessary hints regarding the effects of public expenditures and also clues for better public financial policies. Performance based budgeting should determine a focus on those expenses which stimulate growth.

Within all member states, the relevant ministries are the ones developing or authorizing most types of assessments. Involving the legislative power in initiating assessments takes place rarer and it is limited to a few countries (LU, NL, PL, FI, EL and FR).

In the 20 member states considered, a budget diminishing takes place very rare. This happens even though performance targets are not always reached. Disciplinary penalties, such as lowering salaries or negative consequences for future carrier regarding the responsible employees from the public sector, are used also rarely.

4. REFERENCES

Afonso, A.; Schuknecht, L. & Tanzi, V. (2006). Public sector efficiency. Evidence for new EU Member States and emerging markets, ECB Working Paper, No. 581, ISSN 1725-2806

Arpaia, A. & Turrini, A. (2008). Government expenditure and economic growth in the EU: long-run tendencies and short-run adjustment., European Economy--Economy Paper No. 300, ISSN 1725-3187

Curristine, T. (2005). Performance information in the budget process: Results of the OECD 2005 Questionnaire, OECD Journal on Budgeting; Vol. 5, No. 2; pp. 87-131, ISSN 1608-7143

Donath, Liliana & Milos, M. (2008). The prerequisites of public sector performance: governance and effectiveness, Annals of University of Oradea, Vol.3, No. 17, pp. 222-227 ISSN 1582-5450,

Smith, P. (1995). On the unintended consequences of publishing performance data in the public sector., International Journal of Public Administration, No. 18, pp. 277-310, ISSN 0190-0692

Fig. 1. Type of performance information

 Number of responses

Evaluation reports 13
Performance measures 12
Performance targets 11
Benchmarking 5

Source: OECD, 2007

Note: Table made from bar graph.

Fig. 2. The responsibility for setting out the performance
target levels.

 Formally In practice

The relevant minister 13 13
The Cabinet 7 4
The adm. head of the relevant ministry 2 8
The Minister of Finance 0 8
The Prime Minister 0 1

Source: OECD, 2007

Note: Table made from bar graph.

Fig. 3. Taking budgetary decisions

 Average index

The Central Budget Authority 3,3
The responsible minister 3,1
The Minister of Finance 3
The Cabinet 2,4
The chief executive 2,2
Members of the Budget Committee 2,2
Members of sectorial committee 1,8

Note: The frequency ranges between 1=almost never (0-20%)
and 5--almost always (81-100%)

Source: OECD, 2007

Note: Table made from bar graph.

Fig. 4. Consequences of not fulfilling the performance target

 Average Index

More intense monitoring 2,8
Pay reduction 1,9
Budget reduction 1,7
Programme elimination 1,5
Future career opportunities 1,4

Source: OECD, 2007

Note: Table made from bar graph.