Using Performance Information in the Budget Process in OECD Countries

1. Using Performance Information in the Budget Process in OECD Countries Teresa Curristine, Senior Economist Public Financial Management Division, Fiscal Affairs Department IMF

2. Overview and Objectives of Presentation 1. Definitions of Performance budgeting (PB) and basic requirements 2. Trends in development of Performance information (PI) in OECD Countries 3. Integrating PI into the budget process 4. Incentives for using PI in decision making 5. Benefits and Challenges 6. Lessons Learned

3. 1. Definitions and Basic requirementsWhat is Performance Budgeting? • Citizens are demanding that governments be made more accountable for what they achieve with taxpayers’ money • Move from “how much money can I get?” to “what can I achieve with this money?” • Performance Budgeting is concerned with the use of PI in the budget process and the allocation of resources • No single model -Many definitions and models

4. Performance Budgeting Categories

5. Basic Essential Requirements for Performance Budgeting • Establishment of strategic goals and objectives for government expenditure • Development of performance information to measure and evaluate the achievement of results. • Formal integration of performance information into the budget preparation process and budget funding decisions.

6. 2. Developing Performance Information in OECD and NON OECD countries • 75% of OECD countries include non-finance performance data in budget documentation • Non-OECD respondents approximately 50% of countries produce non-finance performance information • Long term trend: 40% of OECD countries working on outputs for over 10 years • Widespread trend: 75% of

7. Over 15 years of reform but constantly evolving – Recent Initiatives • Australia -Strategic Reviews2007 • Canada -Strategic Reviews2007 • The Netherlands- Fundamental policy Reviews 2009 • Sweden -Reform budget information2009 • USA- Government Performance Modernisation Act 2010

8. New Countries and New Initiatives • FranceLOLF -Full implementation 2006 • Korea - Program Evaluation2006 • Poland - Performance Budgeting 2006 • Mexico Performance Evaluation System (SED) - 2007 • Austria -Performance budgeting -2009

9. 3. Integrating PI into government-wide budget process • Changing the budget structure (e.g. Australia, the Netherlands, New Zealand and the United Kingdom, France) • Using PI in budget negotiations between Ministry of Finance (MOF) and spending ministries • Using PI in budget negotiations between spending ministries and their agencies

10. Budget negotiations between MOF and spending ministries • Presentational PB – No formal mechanism incorporating PI into budget process e.g. Norway, Sweden • Performance Informed Budgeting- PI informs budget allocation along with other information • PI for planning purposes – loosely linking planned performance to funding or performance results influence funding e.g. NZ , UK • Countries do not automatically link funding to performance • Weight give to PI depends on policy area, information available and political and economic context

11. % Of OECD countries using PI as part of budget discussions between MOF and spending ministries • 67% of countries use evaluations • 60% of countries use performance against targets

12. Examples of Use of PI Poland • In 2009 Length of express ways and motorways (in km)to be build 207,6. Expenditure in budget (in thousand PLN) 10 811 358 to achieve target Mexico • Based on results of impact evaluation expanded resources to program replacing dirt floors with cement floors and established goal to eliminate dirt floors by 2012.

13. Performance Information as part of ad hoc or systematic expenditure review exercises Netherlands • Fundamental policy reviews (2009 -) • Expert study groups (inside and outside the public sector) • Compulsory 20% reduction option Canada • Strategic Reviews (2007 - ) Assess all direct program spending. Examining whether programs are aligned with government priorities and are effective and efficient. • Identify the lowest priority and lowest-performing 5 per cent of programs (reallocations) and propose higher-priority, higher performing programs for reinvestment

14. Direct/Formula PB • Directly and explicitly links performance results to funding • Mainly applied in certain sectors and countries • Sectors – higher education and health (diagnostic related groups) • Requires clear and explicit output measures and information on unit costs • Issues with • Dysfunctional behavior and gaming in health sector- • Quality of service provision • Implications for control of aggregate financial control

15. PI in budget negotiations between ministries and their agencies • PI more often used by spending ministries • Agency performance agreements and contracts e.g. Australia, Netherlands, NZ and Nordic countries • Depending on flexibility in wider budget structure used to redistribute resources • Used to manage programs • Across and within countries wide variation in use of PI in decision making. • Depended on quality of PI, political pressure, and strong organizational leadership

16. 4. Incentives to motivate agencies to improve efficiency and performance • Financial rewards and sanctions • Increase or decrease financial and managerial flexibility • Public recognition

17. Financial Rewards and Sanctions • MOFs do not automatically or mechanically financial reward or punish agencies based on performance results • Exception Korea- announced a 10% budget cut for ineffective programs • Most MOF use PI as a signaling device and serves as a trigger to more closely monitor poor performing agencies • With poor performing agencies most common course of action to hold resources constant and review during the year

18. Factors influencing the use of PI in budgetary decision making • Process to integrate PI into the budget process • Quality of PI • Institutional capacity of MOF and spending ministries • Wider economic and political institutional structure and context

19. 5. The Opportunities • A greater focus on achieving results • A mechanism to set objectives and to monitor progress • A larger emphasis on planning • More information on • Government goals/priorities • How national programs fit in with goals • Actual results and performance • Improved transparency • Highlights policies and programs that work and those that do not work • Performance Informed budgeting

20. The Challenges • Integrating PI into the budget process in a systematic manner. • Measurement of outputs & outcomes • Improving the quality, credibility, relevance and timeliness of PI • Developing the capacity of the MOF and spending ministries • Resistance to change • Cross ministry co-ordination • Changing behaviour and culture of politicians and civil servants

21. 6. Lessons Learned • Contextual variables – No one “best” model. • A common whole of government planning and reporting framework • PI should be integrated into the budget process • Avoid government wide systems that tightly or directly link performance results to resource allocation • Improve the quality and independence of PI • Focus on outputs and outcomes (external targets and objectives) • Limit the number of targets • Be aware of perverse effects

22. (Continued) • Support of political and administrative leaders is vital • Reform approaches need to be adapted to evolving circumstances • Develop incentives to motivate civil servants and politicians to change behavior • Manage Expectations

23. Thank You