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

Overview 7
Since the 1970s, the cost of leaving budgeting to an incremental line-item
approach has become clear in the form of unsustainable deficits and fiscal
crises. This realization has resulted in several efforts to make more rational
and strategic budget methods and practices. The development of principalagent
theory and theoretical frameworks around public policy decision
making has underpinned the shift in practice. Three early attempts to bring
better information and greater rationality to the budgeting table were initiated
in the United States at the federal level. Of these, one—namely, program
budgeting systems—was exported through the United Nations to developing
countries. None of these three attempts—program budgeting systems,
planning-programming-budgeting systems, and zero-based budgeting—
was successfully implemented, but they did set the stage for later systems that
follow the same tenets. Criticisms of these early systems include that they
produced huge amounts of paper to no effect and were implemented too
ambitiously without the necessary capacity. In addition, these comprehensive,
pure, rational methods ran into the cognitive limits of decision makers’
ability to consider all possible options and all relevant information. Further
innovations in budget practices located themselves on a spectrum between
incrementalism and pure, comprehensive rationality. To a large extent, modern
budgeting techniques do not operate on their own. Where they are
successful, they are linked to an overall approach to managing the public
sector, with the budget and its associated methods as a central process to
operationalize the approach. In this way, they are often linked to New Public
Management approaches. The shift from old public administration to New
Public Management has had fundamental implications. Traditional budgeting
practices focus on economy of inputs, financial regularity, and adherence to
procedure. New Public Management systems permit greater flexibility of
inputs and processes in return for greater emphasis on outputs and performance.
Countries focus their efforts on making clearer the links between
objectives, inputs, outputs, and outcomes; on developing mechanisms to
make the goal definition clearer; and on developing appropriate policy
management structures.
A parallel development in budget practice has been the widespread
shift from annual planning for one year ahead to budgeting for an extended
time horizon. A functional medium-term expenditure framework (MTEF)
offers opportunities to make budgeting practices compatible with incentives,
thus reducing the burden on the center of analysis and calculation.
MTEFs are often complemented by innovations in budget methods and
practices. These innovations are either process oriented mechanisms (for
example, running adversarial bidding processes) or cooperative mechanisms
of analysis, review, and forward planning. Recent years have also seen