Public Sector Governance and Accountability Series: Budgeting and ...

116 Alta Fölscher
them in a better position to penalize with confidence when spending agencies
inflate bids.
In developing countries, relegating budgeting for the bulk of spending
to incremental increases and reductions is also related to the presence of
resources from external development partners. Typically, a lot of attention
would be paid to the detail of relatively small items of expenditure, often
connected to development partners that bring in external resources, while
large expenditure issues remain unexamined. In practice, priority setting in
developing countries can be determined by the availability of donor funds,
rather than by overarching domestic priorities.
Typically, in developing countries, the budget is never examined comprehensively
but is made and approved in fragments. A significant form of
fragmentation is found in many developing countries, where public investment
or project-type spending and spending on routine government activities
are budgeted for separately in the investment (or development or
capital) and operational (or recurrent) budget, respectively. Although there
is some logic behind such a division—for one thing, it means that the risk
of one-off project funding becoming a permanent part of the base is
reduced—over time the criteria for funding activities under the development
budget or recurrent budget become blurred. The development budget
in many countries now includes both investment and operational funding;
the determining factor is not the type of spending, but rather the source of
funds. Earmarked donor funding is reflected in the development budget,
together with counterpart domestic funding and domestically funded
investment projects. Thus, agencies rarely budget comprehensively against
priorities for all available resources, and finance ministries are even less likely
to be able to consider spending bids systematically and rationally against
available resources.
Research by Tohamy, Dezhbakhsh, and Aranson (2006) shows that
higher inflation rates cause budgeting to be more incremental. In contrast,
higher future discount rates and persistent high deficits cause departures
from incremental budgeting. Of course, incrementalism is also an organizational
strategy by budget holders: if the base of spending is taken for granted
and new money is simply added, the result is a growing budget.
Since the 1970s, the cost of budgeting by an incremental line-item
approach has become clear. In industrial countries, the upward bias it caused
in spending, together with the underlying growth in government that it
fostered, resulted in unsustainably high deficits when macroeconomic conditions
became tight after the oil crises. In developing countries, the scarcity
of resources against high development needs puts in sharp profile the need