Measures required to address the issues in Budgetary System and Implementation
- The assumptions made while formulating estimates must be realistic. At the end of each year the reasons for the gap between the ‘estimates’ and ‘actuals’ must be ascertained and efforts made to minimize them. These assumptions should also be subject to audit.
- The method of formulation of the annual budget by getting details from different organizations/units/ agencies and fitting them into a predetermined aggregate amount leads to unrealistic budget estimates. This method should be given up along with the method of budgeting on the basis of ‘analysis of trends’. This should be replaced by a ‘top-down’ method by indicating aggregate limits to expenditure to each organization/agency.
- Projects and schemes should be included in the budget only after detailed consideration. The norms for formulating the budget should be strictly adhered to in order to avoid making token provisions and spreading resources thinly over a large number of projects/schemes.
- The practice of announcing projects and schemes on an ad-hoc basis in budgets and on important National Days, and during visits of dignitaries functionaries to States needs to be stopped. Projects/schemes which are considered absolutely essential may be considered in the annual plans or at the time of mid-term appraisal.
(Source: 2nd ARC)
Measures required to address public sector performance:
The common elements of the budgetary reforms in OECD member countries (relevant to India) are:
- “Medium-term budget frameworks: Medium-term budget frameworks form the basis for achieving fiscal consolidation. They need to clearly state the government’s medium term fiscal objectives in terms of high-level targets such as the level of aggregate revenue, expenditure, deficit/surplus, and debt. They then need to operationalise these high-level targets by establishing hard budget constraints for individual ministries and programmes over a number of years. This lends stability and credibility to the government’s fiscal objectives.
By their very nature, high-level fiscal targets are set in a medium-term context. They aim to achieve a certain fiscal outcome over a number of years. Budgets are however enacted for a time period of one year, and are notorious for their short-term focus. This short-term time horizon is often criticised for impeding effective expenditure management; decisions on resource allocation are said to be made on an ad hoc or piecemeal basis with the implications of past and present decisions beyond the next year being neglected. This is not a new criticism. Medium-term budget frameworks aim to bridge this gap. Their successful implementation has been nothing short of a “cultural revolution” in governments.
- Prudent economic assumptions Deviations from the forecast of the key economic assumption underlying the budget are the government’s key fiscal risk. There is no single factor more responsible for “derailing” fiscal consolidation programmes than the use of incorrect economic assumptions.
Great care must be taken in making them and all key economic assumptions should be disclosed explicitly. Sensitivity analysis should be made of what impact changes in the key economic assumptions would have on the budget. Furthermore, a comparison should be made between the economic assumptions used in the budget and what private sector forecasters are applying for the same time period where practicable. The establishment of an independent body to recommend the economic assumptions to be used in the budget may be considered as well. All this serves to place safeguards against the use of unrealistic, or “optimistic,” economic assumptions
- Top-down budgeting techniques Budgeting has traditionally operated on a bottom-up principle. This means that all agencies and all ministries send requests for funding to the finance ministry. These requests greatly exceed what they realistically believe they will get. Budgeting then consists of the Finance Ministry negotiating with these ministries and agencies until some common point is found.
This bottom-up system has several disadvantages to it.
First, it is very time consuming and it is essentially a game; all participants know that the initial requests are not realistic.
Second, this process has an inherent bias for increasing expenditures; all new programmes, or expansion of existing programs, are financed by new requests; there was no system for reallocation within spending ministries and there were no pre-set spending limits.
Third, it was difficult to reflect political priorities in this system as it was a bottom-up exercise with the budget “emerging” at the end of this process. This manner of budgeting is now being abandoned and replaced with a new top-down approach to budget formulation.
This has been of great assistance in achieving fiscal consolidation. The key point is that each ministry has a pre-set limit on how much it can spend.
Once this decision is taken, the Finance Ministry largely withdraws from the details of budgetary allocations for each ministry. The Finance Ministry concerns itself only with the level of aggregate expenditure for each ministry; not the internal allocations
- Relaxing central input controls is another feature of successful fiscal consolidation strategies in Member countries. This is based on the simple premise that the heads of individual agencies are in the best position to choose the most efficient mix of inputs to carry out the agency’s activities. The end-result is that an agency can produce the same services at less cost, or more services at the same cost. This greatly facilitates fiscal consolidation strategies by mitigating their effects on services.
Relaxing central input controls operates at three levels.
First, the consolidation of various budget lines into a single appropriation for all operating costs (salaries, travel, supplies, etc.).
Second, the decentralisation of the personnel management function.
Third, the decentralisation of other common service provisions, notably accommodations (buildings). This can be seen as the public sector’s version of “deregulation.”
- An increased focus on results is a direct quid pro quo for relaxing input controls as described above. Accountability in the public sector has traditionally been based on compliance with rules and procedures. It didn’t matter what you did as long as you observed the rules. Now, when the public sector is deregulated, a new results-based system is needed to hold managers accountable. This is a fundamental change: holding managers accountable for what they do, not how they do it. Effectively implementing this is, however, very difficult in practice.
- Budget transparency The most effective manner for achieving that was simply to throw open the books and say to the public: “Look, things are really as bad as we told you, we’re not hiding anything.” This may sound a bit sinister at first, but in actuality it is government at its best: Being honest with citizens, explaining the problem to them in order for an understanding to emerge as to the best course of action to take.
This time period also coincided with increased attention being paid to good governance in general. The budget is the principal policy document of government, where the government’s policy objectives are reconciled and implemented in concrete terms. Budget transparency – openness about policy intentions, formulation and implementation – is therefore at the core of good governance agenda.
(Source: 2nd ARC)