This paper produced for the World Bank Institute outlines the concepts of public expenditure management (PEM), explaining how PEM supplements formal budgeting process rules with behavioural norms for allocating and controlling public expenditure. PEM seeks procedures that increase the probability of achieving preferred outcomes, and its three basic themes are aggregate fiscal discipline, the allocation of public resources in accord with strategic priorities and the promotion of efficient provision of services.
- Aggregate Fiscal Discipline – requires that spending (and other budget) totals be set independently of and before decisions are made on the various parts of the budget, and that these totals must be enforced throughout the fiscal year so that spending totals do not rise to meet demand. In this way PEM produces smaller deficits and less total spending.
- Allocative Efficiency- can be advanced only if informational demands are manageable, budgetary conflict is muted and spenders do not sabotage the priority setting and implementation process. Allocative efficiency devolves reallocative responsibility to sectoral ministers and officials, rather than having all reallocations made by central controllers. In this way, big decisions on strategic objectives and priorities are still made at the centre, but most adjustments, including cutbacks, are made by the responsible ministers or managers within the funds allocated to their sector or portfolio in the budget.
- Operational Efficiency- PEM bolsters operational efficiency by shifting the focus of spending control from inputs to outputs, and by decentralizing the management of operating resources. Hard constraints on running costs, output targets and audit or review of performance help encourage better operational efficiency.
The paper argues that budgetary predicaments in developing countries are fundamentally different from those in developed countries, and that prescriptions and processes appropriate for the latter may not produce good results in the former. Chapter 2 applies these three basic objectives of PEM to developing countries. In terms of policy relevant findings for allocative efficiency in developing countries, the paper states:
- Reprioritizing the budget requires a medium-term perspective that takes account of the future financial and programme implications of current budget decisions; the short-termism of developing countries hobbles their capacity to make efficient allocations.
- ‘Escapist planning’ must not go unrecognised – governments must not promise in a plan what they cannot afford in the budget.
- Distorted priorities – scarce resources are often spent on showcase projects while the budget underspends on human capital. One reason for this is that spending is closely correlated with political and economic development. A lack of robust political institutions muffles citizen demands for better services.
- ‘Enclave’ budgeting – one option is to ‘wall off’ social programmes with their own earmarked funds from the overall budget, and often external donors insist on this to prevent social programmes losing out in competition for public funds.
