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

244 Salvatore Schiavo-Campo
applied to investment expenditures because of the difficulty of halting a
project that is already launched, even when it is noncore. Indeed, depending
on the political interests involved, noncore projects may in practice chase out
core projects. (The preparation of the investment budget is discussed later in
this chapter.)
The Need for a Hard Constraint
Giving a hard expenditure constraint to line ministries from the beginning
of budget preparation favors a shift away from a wish list mentality. As discussed
in detail later in this chapter, annual budget preparation must be
framed within a sound macroeconomic framework and should include a
top-down stage, a bottom-up stage, and an iteration and negotiations stage.
It is at the top-down stage that the hard expenditure constraint, or ceiling,
should be communicated by the ministry of finance to all spending agencies;
it is the most effective way of inducing them to confront the hard choices
early in the process.
Bad Practices in Budget Preparation
The absence of a hard expenditure constraint at the start of the process,
which forces early decisions, will invariably lead to one or more of a number
of dysfunctional practices in budgeting.
Incremental Budgeting
Life itself is incremental. And so, in large part, is the budget process, which
has to take into account the current context, continuing policies, and
ongoing programs. Except when a major shock is required, most structural
measures can be implemented only progressively. Carrying out every year
a zero-based budgeting exercise covering all programs would be an expensive
illusion. At the other extreme, instituting a mechanical set of changes
to the previous year’s detailed line-item budget leads to very poor results.
In that scenario, the dialogue between the ministry of finance and line
ministries is confined to reviewing the different items and to bargaining
cuts or increases, item by item. Discussions focus solely on inputs, without
any reference to results, between a ministry of finance typically uninformed
about sectoral realities and a sector ministry in a negotiating
mode. Worse, the negotiation is seen as a zero-sum game and is usually not
approached by either party in good faith. Moreover, incremental budgeting