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Outcome Budgeting

While the adoption of outcome budgeting by the union government is a step in the right direction, important lessons from the experience in developed countries and India's own work with performance budgeting need to be incorporated into the government's initiative.

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Outcome Budgeting

Moving beyond Rhetoric?

While the adoption of outcome budgeting by the union government is a step in the right direction, important lessons from the experience in developed countries and India’s own work with performance budgeting need to be incorporated into the

government’s initiative.

HARNITA CHOWDHARY

O
utcome budgeting has been claimed as a major budgetary reform. It involves a movement beyond inputs and outputs towards outcomes, concerning a macroanalysis of results, accomplishments and impact. It is a “preexpenditure instrument” that seeks to educate and involve external stakeholders on government goals, accomplishments and the costs of achieving these results. But important lessons learnt from developed nations as well as the Indian story of performance budgeting need to be incorporated.

On February 28, 2005, the union finance minister, P Chidambaram in his budget speech promised to put in place a mechanism to measure the development outcomes of all major programmes. He said “I must caution that outlays do not necessarily mean outcomes. The people of the country are concerned with the outcomes.” This announcement undoubtedly signalled the right intentions of the government to carry the baton forward. However, we surely tend to ask whether we will be moving beyond mere rhetoric.

Outcome budgeting is ultimately an extension of the performance budgeting base of over 30 years, which however has still not really become a reform in the true spirit and sense of the word. De facto we are still following the outdated administrative budgeting. In order to develop an insight into the basic functioning of budgeting systems in government and the lacunae thereof, one must perforce have some idea of these systems of budgeting (especially as they exist till date in India).

Let us begin with an overview of the traditional budget.

Traditional BudgetTraditional BudgetTraditional BudgetTraditional BudgetTraditional Budget

Most of us are aware and in fact take a great deal of interest in the conventional budget presented by the FM in the Parliament every year. This budget (which was first presented in India by James Wilson in 1859) is aptly termed as the administrative budget “as it lives by, through and for the mere administrative purpose of the government” [Sengupta 1990]. It is a product of history, not of logic. It was not so much created as evolved [Wildavsky 1978]. In fact, it is indicative of a mindset that solely focuses on inputs, on line-itemisation and on control out of the triumvirate requirements of the budgetary system of control, management and planning.

This system was suitable so far as the state did not extend its activities very much beyond the police or security functions. However, as India attained independence and the challenge of a socioeconomic transformation of the nation loomed large before the policy-makers, it became clear that this system, which had spread and taken roots like a giant banyan tree, suffered from obsolescence – of time, function and purpose. It had developed a sort of “budgetocracy” – a habit of looking at the lines and items and not at the results, a habit of cutting a budget, and of justifying a budget and a habit of control and management without the use of analytical techniques. Hence, three lags came to characterise the system – a recognition lag, a decision lag, and an implementation lag.

Surprisingly, this system is still our budgetary mainstay, in spite of the fact that India is poised for a “take-off” in most other fields. Nevertheless, it cannot be denied that the policy-makers had also realised these deficiencies way back and had turned towards performance budgeting, which came as a “breath of fresh air to those working within an archaic system of financial management” [Doh 1977].

Performance BudgetingPerformance BudgetingPerformance BudgetingPerformance BudgetingPerformance Budgeting

In 1953, Dean Appleby conducted the first study on the relevance of performance budgeting to Indian conditions. In 1968, the Administrative Reforms Commission submitted a landmark report titled ‘Finance, Accounts and Audit’, which in fact forms the blueprint for the further extension of the system of performance budgeting. Beginning with the presentation of the first performance budgets at the centre, for four ministries and some organisations under them, for the year 1968-69, gradual though steady progress has been achieved both extensively and intensively in the movement towards performance budgeting in India. Presently many state governments like Tamil Nadu, Kerala, Uttar Pradesh, etc, have been preparing performance budgets for a number of departments and more than 40 performance budgets are being prepared at the centre in addition to the conventional administrative budgets. However, what precisely do these performance budgets represent and what is their importance in the present Indian scenario? This question needs to be addressed.

The performance system of budgeting, also variously termed as output budgeting, shifts the focus from inputs to outputs and end-results. Assessment is made of the direct relationships of inputs to outputs through the media of activities. It is sought to establish whether the spending of a specific quantum of inputs is worth the outputs directly resulting from it. The management orientation thus becomes paramount here. Performance budgeting takes into account the mutual relationship between the flow of financial resources and the physical targets and thereby reflects

Economic and Political Weekly June 24, 2006 the organisational structure of the institution implementing the budget. It thus represents a fruitful blending of three techniques, namely, management by objectives (MBO), “financial and cost control” and “physical performance control”.

The overall attempt is to meet the dynamic needs of the government and transform its budget from an annual document to a comprehensive management system. Though the basic procedure remains the same as in the administrative budget, performance budgeting emphasises the implementation and evaluation stages with a stress on the physical aspects too. It involves a modification of the classification, accounting, workload and organisational aspects. However in India, even till date the performance budgets are merely conversions of the administrative budgets into performance type of budgets. While the formal elements are in place, the system suffers from neglect and its penetration of decision-making is patchy and superficial. Thus in the words of Briones it has largely been “a reform of mere form, not substance” [Toye 1981].

It is against this backdrop that one has to see the latest endeavour of the government of India in the form of outcome budgeting.

Outcome BudgetingOutcome BudgetingOutcome BudgetingOutcome BudgetingOutcome Budgeting

In order to measure the development outcomes of all major programmes/ schemes initiated after the announcement of the union budget, the government, in consultation with the Planning Commission, released the outcome budget for 2005-06 on August 25, 2005. In this document the various ministries/departments have set out targets of intermediate outcomes pertaining to plan expenditure in measurable terms. From 2006-07 an outcome budget for non-plan expenditure is also scheduled and over a period of time it would replicate the budgetary process in terms of intended outcomes.

The outcome budget is basically a preexpenditure instrument to realise the government’s vision through clearly defined outcomes, which will lend greater transparency to the budgetary process. It can be seen as a more advanced form of budgetary scrutiny, which would provide more detailed information about progress towards meeting the executive’s spending priorities. At present, budget scrutiny is mainly concerned with inputs (the amount of money that is being allocated to a specific department for a specific purpose in the forthcoming year) and outputs (the products of public bodies, for example, the number of children taught in schools or operations performed in hospitals). Outcomes can be seen as benefits resulting from outputs, which correspond to the ultimate aims of a government. For example, the output of health expenditure may be more doctors, but the outcome of that expenditure may be to improve the overall health of the nation. The emphasis is on shifting the focus from mere “release of funds” (outlays) to “actual utilisation for intended purposes” (outcomes).

Chidambaram has stressed the “involvement of community/target groups/recipients of the service, with easy access and feedback systems” as one of the important steps in the “conversion of outlays into outcomes”. He has also called for the

Economic and Political Weekly June 24, 2006

“meaningful involvement” of all the ministries, state governments, local bodies, panchayati raj institutions, self-help groups, etc, in critical decision and implementation processes of the schemes [Gopalakrishnan 2004].

The mindsets of government officials are expected to change to become more outcome, i e, result-oriented, over and above outlay-oriented. They will be forced to do some macro and creative thinking each time they prepare a budget. Converting outlays into outcomes will require ensuring the flow of the right amount of money at the right time to the right level with neither delays nor parking of funds and effective monitoring and evaluation systems.

Moving beyond RhetoricMoving beyond RhetoricMoving beyond RhetoricMoving beyond RhetoricMoving beyond Rhetoric

Given the above, the present stage in the Indian budgetary pilgrimage seems logical. In fact, the pendulum has moved back in most developed nations as well (including the US and the OECD countries) towards performance budgeting and outcome budgeting. But this is the point where we need to exercise caution. Important lessons are to be learnt from both the foreign experience as well as our own usage, in case we want the reform to really deliver both in terms of spirit as well as substance.

Over the past decade, US state governments have experimented extensively with performance-based budgeting. The basic conclusion reached is that the political environment becomes critical. Legislators are more likely to cite performance measures when they align with constituent interests and if they are involved in creating them. Further, recognising the limits of performance-based budgeting, US state governments have taken other steps to improve performance [PREM 2003]. The perspective has been widened to include strategic goals as well as performance measures and been termed as outcome budgeting. From a survey administered to budget and finance officers, analysts, and auditors working in federal, state and local governments in the US it was however found that there was a lack of an agreement about the conceptual definition of outcome budgeting across government levels, which was impeding its implementation. Furthermore, the elements of outcome budgeting, as understood across government levels, differed from the ones embodied in the ideal framework of an outcome budgeting system. It was found that an outcome budgeting system requires: (1) a strategic plan,

  • (2) an annual performance plan, (3) an annual performance report, and (4) a programme evaluation. Performance audits may or may not be required and there is no requirement for a multi-year budget. Finally, line-managers are not granted lump sum allocations to manage as they think best, nor are individuals or group participants given meaningful incentives. These incentives include (1) an individual’s pay dependent upon either an individual’s or work group’s performance, and (2) retention of savings by a budgeted unit such as an organisation or programme if the unit achieved the savings in the previous year. However, the last part of the normative model has been challenged by other studies [Nyogi et al ].Consonant results have been found in various OECD countries as well. Campbell (1997) noted that outcomebased budgeting systems result only when performance measurement has been fully integrated into the budget process.
  • In India, performance budgeting unfortunately is yet to be integrated within the main system. The major issues related to its success can be categorised as (1) issues associated with its introduction, (2) handicaps relating to its implementation, and
  • (3) problems concerning analysis and evaluation.
  • Issues Associated with Its Introduction

    Here it has been recognised that adequate hybridisation is required together with sincere and competent support beginning at the political leadership level and right down the line in order to overcome the economic-psychological and the politicalbureaucratic inertia and resistance.

    Handicaps Relating to ItsImplementation

    The first step lies in identifying appropriate and adaptable functional categories which are not too broad or inconsistent. The next major problem arises in the establishment of proper work units to measure activities. In fact the absence of proper measures of workload is the Achilles heel of performance budgeting. Unless suitable norms and yardsticks are developed, performance budgeting will be like a castle built on quicksand. This problem is heightened for areas such as project design, surveys, research, and foreign affairs, etc, which defy standardisation. In the Indian system itself nothing substantial has been done in this direction and standards of performance are often seen to be based on historical records as against a scientific study of the measurement of the level of performance. Furthermore, a reorientation of the accounting system is needed and a supplemental accountancy system developed for accounting of performance in physical terms. Another imperative for implementing performance budgeting is the requirement of a suitable information system for comparing the total output, total input and rate of performance against the standard incorporated in the budgets. This information should be in addition to the normal budget control statements. Sadly, in Indian conditions the progress in this area is not satisfactory because of lack of proper integration. Another point of difficulty so far as putting the system into operation is the pattern of control. Output control needs to replace input control and more reliance will need to be placed on internal controls. Also the budgetary details will have to be reduced and besides budgeting other measures of control and tools will have to be developed and used.

    Finally, the new system requires proper training and acquisition of skills by the needed human power. While it is true that considerable efforts are being devoted in India to provide training, the programmes are not as extensive as they should have been. There were cases where workers at operational levels were trained but those at the policy levels were neglected, and vice versa. Furthermore, implementing the new procedures required for performance budgeting put additional burdens on the budget office already constrained by deadlines. Thus, what is required is that those responsible for framing personnel policies should ensure that suitably skilled and experienced staff is available, adequate periods of overlaps are insured when the staff are replaced and the career developmentof civil servants is rationally planned. The present policies characterised by expediency and inconsistency should be aptly reviewed.

    Problems Concerning Analysisand Evaluation

    The first issue here is that the expenditure classification used in Indian performance budgets is typically institutional. This needs rectification. Secondly, the indictors of performance in Indian performance budgets are sadly inadequate. Further, the claim that the combination of financial and physical

    Economic and Political Weekly June 24, 2006 data is sufficient for the assessment of performance is seen to be lacking conclusiveness. Hence, a fully spent-up allocation alongside figures showing that physical achievements are exactly on target could be a result of an over/under pitching of the physical or financial targets. On the other side, a project may have been well planned and well managed despite the fact that it failed to fulfil its physical or financial targets. The discrepancies may be due to a general price rise or due to newer, more efficient methods of working. The third analytical problem arises from the fact that Indian performance budgets have remained more or less static since their introduction. Like an abbreviated version of each department’s obligatory annual report, Indian performance budgets embody description and not analysis of the projects that generate government development expenditure. In fact, they have become an excuse for “information overload”.

    However, having come so far with performance budgeting, and having built up with training and experience a degree of understanding of its potential, concerted efforts should be made to realise the potential to serve as a base for outcome budgeting. The lessons from the developed countries should also be taken into context. Logically, the three documents, the administrative budget, the performance budget and the outcome budget together would definitely impart a much more complete picture of what has been achieved on the outlays made each year. The government would begin with clearly defining its objectives and macro-goals and then go on to detailing financial and physical targets and at the end evaluation of what has been achieved. Thus overall efficiency and effectiveness would become the keywords together with ensuring discipline at the working end and transparency at the receiving end.

    Thus we may conclude that, like other budgeting reforms, outcome budgeting is a tool and not a panacea. Whether it is manageable universally and does not become a mere stopover depends largely on the skill, imagination, energy and strength of purpose of the user.

    m

    Email: harnita.c@gmail.com

    ReferencesReferencesReferencesReferencesReferences

    Doh, J C (1977): ‘Conceptual Framework of an Integrated Approach to Budgeting for the ESCAP Countries’, International Review of Administrative Sciences, 42(2), p 39.

    Gopalakrishnan, R (2004): ‘Outcome Budgeting of SSI Ministry’, The Hindu, August 28.

    Nyogi, Mwabilu L, Gerald J Miller and Marc Holzer: ‘Outcome Budgeting: Conceptual Definition’, Howard Unversity, Washington DC and The State University of New Jersey, Newark.

    PREM (2003): ‘Performance-based Budgeting: Beyond Rhetoric’, Poverty Reduction and Economic Management, World Bank,

    Number 78, February.

    Sengupta, A K (1990): Government Budgeting in India, Print House India, Lucknow, p 9.

    Toye, John (1981): ‘Public Expenditure Reforms in India and Malaysia’, Development and Change, Vol 12, pp 124-25.

    Wildavsky, Aaron (1978): ‘A Budget for All Seasons? Why the Traditional Budget Lasts’, Public Administration Review, Vol 38, November-December, p 501.

    Economic and Political Weekly June 24, 2006

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