NAO: transition to performance-based budget should not be rushed

Toomas Mattson | 11/5/2008 | 12:19 PM

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TALLINN, 5 November 2008 - According to the NAO, the government is not ready to implement the allocation of state budget funds on the basis of expected results instead of the current agency-based funding. Although such budget arrangements could be a long-term goal, the current budgeting practice does not support quick transition.

For years, the government has illustrated the draft budget with information on the objectives of government actions. The purpose of providing such information is to explain objectives pursued by means of state budget funds. The list of objectives is broken down by the areas of activity of the ministries. The annual State Budget Act, however, does not assign funds for achieving the objectives pursued – it provides funds for covering the expenses of agencies, broken down by expenditure types. In February this year, the government discussed the proposal of the Minister of Finance to draft the state budget on the basis of the results declared by the ministries. The government failed to adopt a decision in favour and remained expectant.

NAO Director of Audit, Juhani Lemmik stated: “The idea of allocating funds from the state budget on the basis of expected results is attractive, but requires hard work to allow assessing whether the results were actually achieved.”

In the course of the audit, the NAO made several observations, which imply that before changing the budgeting principles the Ministry of Finance and the other ministries need to do a lot of work to establish the necessary conditions for performance-based budgeting. In addition, the Parliament must be involved in the debates concerning the changes since its role transforms changes considerably along with the changes in budgeting: supervision over government activities can be exercised by requiring better target-setting from the government, justification of measures necessary to achieve these targets, and an overview of the relationship between targets and funds. Currently, the Parliament has been rather inactive in debates on these issues.

The major problem has been the fact that it has not been possible to estimate Estonia’s state budget revenue accurately enough. This means that it is difficult to prepare plans for more than one year, since the amount of potential revenue available is not known. Consequently, setting objectives for a period exceeding one year is complicated. The National Budget Strategy for 2009-2012 where the government sets out those agreed long-term objectives did not contain any revenue forecasts beyond the financial year 2009.

The NAO detected that the ministries and the government are still only looking for the appropriate classification for describing the expected results. Performance-based budgeting requires the classification of performance data and the objectives of the government agencies to be stabilized – otherwise it will be impossible to assess whether the objectives were achieved and funds were used purposefully. Also, it is important that the government’s management report to the Parliament would set out information on the achievement of all planned objectives (incl. those not attained) unambiguously, transparently and in an even manner. Ultimately, it is important that each agency would know its role in facilitating the goals set by the government or a ministry so that the management procedures would contribute to their attainment and that all progress would be publicly reported.

In a thematic debate in the Parliament on 14 November 2007, Mihkel Oviir, the Auditor General said: “When reforming, we must be level-headed and measure and set goals only for activities and results which are measurable and which can be subjected to criteria. It is obvious that transition to performance and accrual-based budgeting must not give rise to artificial criteria. In this regard, we must be careful so as no to engage in absurdity.”

Preparations for transition to a new budgeting system can simultaneously entail improvement of the existing system. The NAO made a recommendation to the Minister of Finance that the Parliament should be provided with an overview of the budgetary sustainability perspective of the state for the next 10-15 years. At the moment, the Parliament is not aware how the statutory obligations of the state will affect its financial position in the future. Plus, for more than a half of the legislation it adopted, the Parliament did not have management information on their impact on the budget.

”A situation where there are problems highlighted by the auditors and, additionally, the Ministry of Finance makes major internal structural changes, is not the opportune moment for implementing an extensive budgetary reform,” said Juhani Lemmik, Director of Audit of Audit Department I. “We believe that the Ministry should reinforce the team dealing specifically with budget changes and thereafter the ministries and agencies for testing the suggested changes should be selected, and only then should it be decided whether the changes in the budgetary system are appropriate.” He added that we should promptly engage in issues which are practicable. These include, for example, the more detailed specification of statutory commitments in the explanatory memorandum to the state budget, developing a template of the said explanatory memorandum, and using IT solutions for processing budget information and making it accessible.

Since that state budget is firstly a policy document and secondly an instrument for financial management, the government should more effectively involve the Parliament in the development of budgeting principles. Interviews with the MPs conducted during the audit indicated that several MPs are unhappy with the current process of preparing and the form of presentation of the state budget. However, for the time being, there is no appropriate co-operation method for learning more about budgeting and, on the other hand, suggesting their ideas and solutions to the government.

The Minister of Finance agreed to most of the recommendations made in the audit report, implying, although without further explanation, that there alternative solutions to the problems outlined. What matters is that the Ministry of Finance intents to continue the experimental projects for the development of financial management in line with the NAO recommendations.

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: [email protected]

  • Posted: 11/5/2008 12:19 PM
  • Last Update: 9/14/2015 9:21 AM
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