This third chapter of ‘Managing Government Expenditure’ provides the general principles for budget systems and expenditure classification in developing countries. Different approaches to budgets and expenditure will reflect the experience, culture and administrative capacity of different countries. Better policy formulation, public expenditure management (PEM) and performance are achieved by focusing budget formulation on results and policy objectives; allowing spending agencies more flexibility in management; and developing instruments for measuring performance.
Over ambitious reforms can be risky and countries must consider the technical and institutional constraints to change. The creation of ‘separate entities’ for service provision can encourage corruption and become extra-budgetary funds. For an overall budget assessment recurrent and development budgets must share an expenditure classification whilst having separate appropriations.
Cash-based budgets satisfy the need for expenditure control and budget administration, but must be supplemented by instruments to assess and control forward commitments and the fiscal impact of policy decisions. All government expenditures should be classified along the same standards and allow reporting along international standards. Other findings are:
- Performance/programme budgeting is poorly linked to administrative structures, resulting in complexity, lack of ‘ownership’ and loss of accountability.
- Whilst accrual-based and output budgeting can encourage performance-oriented spending, their implementation requirements are heavy and considered unsuitable for developing countries.
- When used with an input-oriented approach to budget formulation and detailed expenditure controls, traditional line item budgeting can hinder performance and programme prioritisation.
- With a hard financial constraint, the appropriate degree of budget flexibility depends on the country’s context, particularly its governance system and accountability regime.
- For the differing needs of policy-making, reporting and budget management, expenditure must be classified by the following categories: (1) Function, (2) economic and object, (3) administration, (4) fund, and (5) programme and activity.
To allow incremental reform statutory laws for appropriations should avoid excessive detail, with procedural guidance provided by administrative law. Developing countries should focus on consolidating their cash budget, improving the tracking of appropriations and improving their accounting system. Other implications include:
- Developing countries should not abandon cash-commitment-based appropriations.
- Traditional line-item budgeting, including appropriate economic classification, provides for macroeconomic stabilisation and safeguards public resources. However, excessive detail and rigidity can lead to inefficiency and disempowerment.
- The budget presented to the legislature must show responsibilities in programme management and policy choices among programme and/or sectors.
- An annual budget framework that is insufficient for resource allocation and distorts management should be supplemented by procedures for multiyear commitments and expenditure estimates.
- Some form of performance orientation can be introduced without resorting to performance/programme budgeting that can prove costly and counter-productive.
- A clear distinction between current and capital expenditure is needed for analysis, transparency and policy decision-making.
