TALLINN, 4 November 2024 – Auditor General Janar Holm handed over the annual report of the National Audit Office, which focuses on the state budget – the so-called activity-based state budget reform – to the Speaker of the Riigikogu Lauri Hussar earlier today. The National Audit Office points out that the current budgeting is artificial, impractical, and getting a clear picture of the state’s funds has become even more difficult.
Five years ago the state budget of Estonia began to be prepared as activity-based, because the Ministry of Finance promised that it would give the Riigikogu and the government a better tool for deciding on the state’s revenue, expenditure and options for cutting costs. The analysis conducted by the National Audit Office indicates that this has not happened. The state budget looks activity-based, but when applying for and deciding on state budget expenditure, ministries, the government or the Riigikogu do not focus on current or expected results. Also, the budget reform has failed to give a more detailed knowledge of where and why the now almost €20 billion per year is spent. Understanding how much, on whom and for what money is planned is complicated by errors in the budget explanatory memorandum.
“The main question isn’t whether the budget should be activity-based or not,” said Auditor General Janar Holm. “The budget can be based on this, that or the other. The experience of states shows that many of them use different elements simultaneously in their budgets. The main issue is the approach’s suitability, practicality, implementation capacity and skills. The state budget can be based on anything – as long as it gives a clear picture of to whom, how much and for what money is planned and the information provided is not erroneous."
The Auditor General added that although there are those who try to reduce the problems of the state budget to a mere secondary matter of form and trivialities, this is certainly not the case in reality. “To whom, how much and for what money is given from the state budget is a very, very substantive issue. Especially now, in tougher times, but not only, it’s necessary to understand where the money is spent. The state budget must allow for this. At present, it doesn’t. It’s also a substantive issue because the public must have an overview of what tax money is being used for. And also, because it’s the state budget that sets the limits on the use of money by the executive power and gives the possibility to check later whether the money was used for the intended purpose. The substantive question is not only how to increase state budget revenues, but also – and perhaps even above all – how the tax money is spent,” said Janar Holm.
A look at the state budget lines is still confusing because of the sheer number of errors. For example, the state budget and the explanatory memorandum sometimes give different information about how much money one or another area of government or performance area will receive from the state budget. The credibility of all the information in the explanatory memorandum to the state budget is questionable, as even the basic data in the explanatory memorandum are not in line with the information in the law. This also casts doubt on the relevance of other, more specific information in the explanatory memorandum.
For example, in the 2024 state budget, the budgets of 25 performance areas have been approved, but in 20 of these, the explanatory memorandum to the state budget allocates a different amount to the performance area than the budget itself indicates. According to the explanatory memorandum, the budget for the performance area “Environment” of the Ministry of Climate is bigger by €75 million than in the state budget. According to the explanatory memorandum, the budget for the performance area “Transport” is smaller by €70 million than in the state budget. The figures of the state budget and its explanatory memorandum in terms of investments match for seven of the 11 areas of government.
With the budget reform, the Ministry of Finance promised to focus on results and the ultimate goal instead of costs, to get better information in order to increase the efficiency of the use of money, and to improve the traceability of expenditure. Unfortunately, when allocating funds from the state budget, the Riigikogu and the government have not required ministries to report on the links between goals and results, at least in previous years. During the preparation of the state budget for 2024, financing decisions were made at the level of both ministries and the government by debating about traditional expenditure lines (for example, operating expenses or objects of investments), and not on the basis of the state’s objectives and metrics.
"The transition to activity-based budgeting five years ago was supposed to create a better understanding of where the state’s money is being spent, why it’s being spent there and not somewhere else, and what results are being sought,” said Auditor General Janar Holm. “Unfortunately, ministries confirmed that it’s very difficult to implement the activity-based mindset in the area of government, as budget decisions do not depend on this. According to the explanation of ministries, they do provide budget information in the required format, but the substantive connection between the money and the results described is minimal. The current state budget and budgeting implemented is an artificial construction that has been hyped, rather than a clear and effective tool for managing and monitoring the state’s spending.”
Although 13 out of every 100 euros of the state budgetary money in 2023 were not used, there is no interest in how leaving the money unused affected the targets and metrics set. This should be of interest in the case of a meaningful implementation of the activity-based budget. Whilst the government is grappling with a widening budget deficit, the amount of unused money in the ministries is also growing inexplicably. The €2.5 billion not implemented in 2023 is more than, for example, the combined expenses and investments of the Ministry of Defence and the Ministry of the Interior last year.
Areas of government generally do not analyse their budget implementation and money use on an activity basis. Although the ministries prepare a performance report to the Ministry of Finance every spring, because it is mandatory, they do not address the more specific links between how the use or non-use of money affected the goals and metrics of the area of government. The state budget spending decisions do not depend on performance reports of ministries. The exact reasons why such amount of money was not used, whether the ministries simply did not need the money, and the impact of the investments not made on the functioning and development of the state are not known.
With the budget reform, the Ministry of Finance promised better information to increase the efficiency of the state’s use of money, but the implementation of activity-based budgeting has so far not led to a consistent effort to identify and eliminate unnecessary expenditures and increase the efficiency of public authorities. The Ministry of Finance has removed itself from the preparation of the budget and the role of the assessor of the justification of expenditures, and has become a technical service provider for the budget process that collates requests of the ministries and submits them to the government.
The state budget is like a rolling snowball, the size of which is adjusted mainly by coefficients, not by motivating efficiency. However, savings achieved through campaigns and coefficients, without any real leadership, could mean that the same task of cutting costs with a ruler – to reduce one’s costs by a certain percentage – will be given to the public authorities that have already streamlined their processes as well as those that have not done it.
With the budget reform, the Ministry of Finance promised to make state budget expenditure easier to follow, but the reform has not improved the traceability and comprehensibility of state budget expenditure. The Ministry of Finance has made efforts to better visualise the state budget and make the explanatory memoranda more informative. However, it is still not possible to find unambiguous information covering all the expenditure, i.e. explanatory information in the explanatory memorandum on the expenditure lines (activities) in the state budget. . Taxpayers have the right to want the government to use the money it collects effectively, and to want their elected members of the Riigikogu to know what they are giving the government money for.
The understandability of the state budget depends on the information included in the budget documents being adequately explained and the context in which it is presented. Ensuring the understandability does not require more text for the explanatory memorandum and more attractive manners of presentations, but more accurate and correct figures on the content of expenditure lines in the state budget in one place; a clearer purpose of use for each expenditure and comparability of the planned expenditure with the expenditure made for the same purpose in previous years.
The traceability and transparency of state budget expenditure is complicated by the fact that budget-related communications and official explanations have not moved along with the changes in the form of the state budget and have remained in the time before the budget reform. According to the explanatory memoranda, the state budget expenditure that are cut and increased have not been mentioned at the level of the State Budget Act. For example, in recent years, various governments have set a political goal – and in many cases also publicly confirmed it – to freeze or even cut the operating costs of public authorities. At the same time, the operating expenses of public authorities at the level of the State Budget Act in programmes and activities have been indistinguishable from other expenses (except in the case of constitutional institutions). But something that is undefined cannot be frozen, nor can its use be guaranteed at a certain level.
As a more specific example, the ministries explained in the media and in the explanatory memorandum to the Act Amending the 2024 State Budget Act that they were saving mainly from the labour and management costs of 2024 to make the additional salary increase of teachers possible, but such costs are not specified or outlined in the state budget. There are activities in the state budget. For example, the Ministry of Regional Affair and Agriculture reduced the operating budget of 24 of its programme activities in order to contribute €400,000 to the salary increase of teachers. According to the explanations, more than half of the negative supplementary budget savings in 2024 also came from labour and management costs, for which the Riigikogu had to approve new budgets for as many as 136 programme activities. The explanatory memorandum of this document does not explain the impact on objectives and results.
Although the amounts were not large, the principles of activity-based budgeting should certainly require asking how giving money away affects the respective goals and results of the ministry. Such information cannot be found in the explanatory memorandum and may not be found elsewhere either.
This shows once again that financing decisions are still made at the level of both ministries and the government by debating about traditional expenditure lines, for example, operating expenses or objects of investments, and not on the basis of the state’s objectives and metrics. The problem with the implementation of the activity-based budget so far is its weak link with practical life and decision-making. Decisions in the state budget are prepared on activity-basis, but all of the preceding budget process, work and disputes are still based on traditional expenditure lines such as operating expenditure, investments, support, etc. In other words: in reality, the debate is about the salaries of teachers, not about the objectives and expected results of the performance area “Smart and Active Nation”.
Preparing the state budget in the self-regulatory way it is done now would mean unreasonable use of money, unnecessary work for the state, expenses and lost opportunities to motivate state institutions to efficiency. In order to use money more efficiently, it would be reasonable for the Riigikogu to rethink and decide, what kind of information it needs to discuss the state budget, what principles should be followed and the level of detail to which the government will be establishing limits on the use of money, and what kind of information prevails when budget choices are made. The government should demand this information from the Ministry of Finance and areas of government, and use it for decision-making.
Background
The move to activity-based budgeting is part of the state reform initiated by the government, which should help achieve a more effective and efficient performance of the state’s tasks, a higher quality of the provision of public services, a decrease in government spending and the number of employees, and a more flexible and less bureaucratic organisation of the work of the government sector.
According to a more precise definition by the Ministry of Finance, activity-based budgeting was introduced mainly to achieve three objectives:
- channelling money to achieve results;
- better information to increase the efficiency of the state (its use of money);
- easier traceability of state budget expenditure.
In the 2016 state budget, the money of the Ministry of Education and Research was for the first time set by performance areas and programmes, instead of the traditional cost view, as a pilot project. The area of government of the Ministry of Social Affairs was added in 2018, and the state budget for 2020 was already prepared fully according to the activity-based budgeting principle.
By approving the 2024 State Budget Act, the Riigikogu authorised the government to finance 17 performance areas, 40 programmes and 205 programme activities. The biggest share of the 2024 state budget will be allocated to the performance area “Welfare” (€5.7 billion), and the smallest share to the performance area “Estonian language and Estonianism” (€11 million).
The three programme activities with the largest budgets in 2024 are:
- design of the pension system and payment of benefits (€3.6 billion);
- reducing health inequalities and ensuring health insurance (€2.4 billion);
- active and passive labour market measures (€953 million).
The 2024 budget for the performance area “Security and National Defence” is €1 billion (source: Ministry of Finance).
Priit Simson
Communication Manager, National Audit Office
+372 640 0777
+372 5615 0280
[email protected]
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http://www.riigikontroll.ee/
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Posted:
11/4/2024 11:00 AM
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Last Update:
11/4/2024 1:00 PM
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Last Review:
11/4/2024 1:00 PM