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

Budget Methods and Practices 117
for spending to be closely aligned with priorities. In short, during the past
three decades, budgets have ceased to be a complementary tool whose
primary functions are to deliver on government’s financial objectives and to
ensure fiduciary accountability. Today there is a much better realization that
they are at the heart of policy making and the only real avenue to translate a
country’s developmental goals into results. This realization has resulted in
several efforts to change budget methods and practices. Although the
approaches differ, they have in common an effort to move budgets out of the
realm of satisficing and into a framework of making an effort to seek optimum
outcomes. Muddling through is no longer sufficient.
One consideration behind efforts to improve budgeting methods and
practices is the argument that a chain of principal-agent relationships
includes the potential for agency problems (Leruth and Paul, 2006: 4). The
relationship between finance ministries and spending agencies is a typical
agency problem, subject to hidden information and hidden actions. The
agreement to fund agencies also is contractual in nature: the spending
agency is required to produce a specific level and quality of output in return
for receiving funding. Other principal-agent relationships in the budget
process are between parliament and the executive, between political heads
of spending ministries and officials, between the center of a spending ministry
and programs or institutions, and between the central government and
subnational governments in decentralized systems.
The prospect of using agents’ or spending ministries’ own self-interest to
overcome information asymmetry has generated new thinking about how to
approach the budget process. A combination of incentive alignment and the
traditional hierarchical coercive mechanisms of monitoring and sanctioning
has become the staple of many budget reform programs.
Another influential factor in efforts to address the institutionalized
incremental nature of budgeting arose out of the consensus in the 1960s
that although a rational model was preferable as a model for making policy
and budget decisions, the incremental model best described the actual
practice of decision making in governments (Howlett and Ramesh 1995:
137). An idealized, rational policy-making process consists of rational
individuals and institutions following sequential steps of establishing
goals for solving problems, exploring alternative strategies for reaching
those goals, setting out the significant consequences of each goal, and,
finally, selecting the option that best solves the problem or solves it at least
cost. Doubts about the practicality of the rational model resulted in the
development of Yale University political scientist Charles Lindblom’s
incremental model, which portrayed public policy decision making as a