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

What Would an Ideal Public Finance Management System Look Like? 375
have difficulty improving allocative efficiency. In its simplest form, allocative
efficiency means a government spends money on the right things.
But what is right depends on (a) the priorities of society and (b) the cost
of programs and activities needed to meet those priorities. The first
element, the setting of priorities, is largely a political process, and because
the preferences of politicians and bureaucrats need not coincide with
welfare-enhancing objectives, the outcomes—and as a consequence
service delivery—may and often do fall short of what is desired.
Technical efficiency is commonly presented in the literature as the level 3
outcome. It relates to the efficient and effective use of resources in implementing
strategic priorities. Common measures here include audit
results of service provision costs. The degree of operational efficiency
is predominantly influenced by the budget execution process. Implementation
of programs, activities, and projects occurs as budgets are
executed. But implementation is plagued by two fundamental problems:
(a) principal-agent relations and (b) the government as monopoly provider
of public services.
There is an argument that different kinds of PFM systems and processes
are required to achieve the goals at the different levels. Although some implications
of this argument are overly rigid, 15 it provides a useful framework for
thinking about the way in which the ideal look of a PFM system is necessarily
contingent on the challenges facing a government. Figure 11.4 shows this
argument in simple form.
Figure 11.4 introduces the idea of four levels of PFM system development—as
related to the three-level goals noted above:
Level 0 is that in which PFM systems are informal and weak. There is limited
accountability, little transparency, weak discipline, and poor budget
quality. Budgets are informal and unreliable, and there is an overall lack
of fiscal discipline. The major concern is to control deficits and restore
PFM system integrity.
Level 1 systems are characterized by a high degree of regulation and
control, and they focus on entrenching fiscal discipline. Systems entrench
control and a disciplined, reliable budget—what could be called “critical”
PFM systems—but there is little attention to spending quality. There is
an ex ante control focus, whereby rules are set in a detailed fashion at the
start of a budget process and managers cannot depart from them. Compliance
is the order of the day. The budget is formal and reliable, but it is
not very strategic.