Performance budgeting is a system that uses performance information for the allocation, spending, and management of a government’s financial resources. Governments adopt performance-based budgeting to improve spending prioritization and to increase the efficiency and effectiveness of public expenditure.
Performance information refers to outputs and outcome targets, costs for delivering these targets, and assessments of effectiveness and efficiency of expenditures in attaining objectives.
- Outputs refer to the goods and services that a government agency or ministry produces, such as roads, schools, and healthcare services.
- Outcomes are the impacts of the outputs. For example, an outcome of a road project is interconnectivity. An indicator for interconnectivity could be the reduction in travel time between two cities. Both outputs and outcomes are considered to be objectives or results.
Performance budgeting is considered a reform that improves upon traditional budgeting. Traditional or line-item budgeting allocates funding through costs of inputs (e.g., staff, equipment, supplies) regardless of the ability to meet performance goals. In traditional budgeting, the focus is on how much each line-item costs and how fast the funds can be spent. Outputs and outcomes are not considered in this form of budgeting.
Performance Based Budgeting
In performance-based budgeting, policy-makers allocate funds across sectors, ministries and projects based on the results that will be delivered on each level. This link between funding and results is crucial in PB. But there are three variants of performance budgeting based on how strict this link is, namely:
- Presentational Performance Budgeting presents performance information in the budget documents. Indicators and targets do not influence the allocation of the budget. This is the simplest form of performance budgeting.
- Performance-Informed Budgeting indirectly links resource allocation to past and expected results. Policy-makers use other factors alongside performance information in determining the allocation.
- Direct Performance Budgeting uses a specific mathematical formula to determine the amount of funding per budget item. This is the strictest form of performance based budgeting.
Managing Public Expenditures
Aside from allocating funding based on expected results, governments also use performance budgeting in managing how the budgets are spent. In traditional budgeting, Ministries of Finance have more strict control over how line ministries implement their budgets. Line ministries are restricted from deviating from the details of their annual budgets. On the other hand, a performance-based budgeting system (such as FreeBalance’s Government Performance Management (GPM) modules) may allow greater flexibility in spending by allowing line ministries to reallocate funds across different spending items that deliver the same objective or result.
In performance budgeting, Ministries of Finance may also enter into performance agreements with line ministries. A performance agreement binds an implementing agency and its personnel to specific output and/or outcome targets. In most cases, these agreements are coupled with an incentive system that financially rewards employees when their ministry achieves the targets in their performance agreements.
The Role of Technology in Performance Budgeting
A government that implements a performance budgeting system needs a robust process for generating, analyzing and reporting on performance information. Hence, performance budgeting is usually packaged together with digital transformation reforms and the implementation of an integrated financial management information system (IFMIS) within the Ministry of Finance or the government as a whole. The use of technology is critical in keeping up with the information requirements of a performance budgeting system.