Does PFM need to be rebuilt?

Contemporary public financial management (PFM) is, according to an emerging school of thought, in a parlous condition and needs a complete rebuild. I disagree.

An influential recent formulation of the views of this school of thought can be found in the 2020 report Advice, Money, Results (AMR). This report issues a challenge to contemporary PFM practice that cannot be left unanswered.

Before starting, we need to acknowledge that there is undoubtedly room for improvement, including in the form PFM technical assistance to developing countries. But the fact remains that PFM has over past decades developed an impressive toolkit of highly relevant good practice models for fiscal policy formulation, budget preparation, budget execution, public investment management, debt management and a range of other areas. Implementation strategies have also progressed enormously.

To the new critics, however, a recognition of room for improvement is not enough. They believe that PFM is rotten from the foundations up and needs complete rebuilding.

The foundations of modern PFM lie in three basic objectives of public finance – formulated by the World Bank in the 1990s – which PFM aims to support, namely:

1.      Aggregate fiscal discipline

2.      Allocation of resources in accordance with strategic priorities

3.      Efficient and effective use of resources in the implementation of strategic priorities.

The new critics believe that this formulation of public finance objectives is flawed and needs to be completely reworked. They consider that many of the good practice institutional models that PFM has developed are inappropriate. Many of the critics go even further and challenge the basic idea of good practices, as embodied in instruments such as the Public Expenditure and Financial Accountability (PEFA) assessment tool. They argue that national contexts are so enormously variable that few generalizations can be made about good practice.

In a just-completed working paper, I review Advice, Money, Results in detail and find it to be an unpersuasive document. AMR presents a critique which claims that PFM neglects expenditure reprioritization, is biased towards fiscal austerity, and is value-laden and neoliberal. None of this is true. AMR also presents an assessment of the standards-based approach to PFM – as embodied in PEFA – which is too negative and fails to sufficiently credit the benefits of the approach.

AMR contrasts what it refers to as the current “closed” PFM discipline with a new “open” PFM which it favors. However, the nature of this so-called “open” PFM is vague and lacking in operational specificity. The main recommendations of the report are for more review, evaluation and data-gathering, and there is nothing concrete about how we should change our advice or implementation strategies. The result is a report which is of very limited value as a guide to practice.

Advice, Money, Results is, unfortunately, a missed opportunity. It misses the opportunity to provide a credible and informed critique of what’s wrong with current PFM practice and to present a constructive way forward.

PFM is certainly not perfect. In my view – which I know is shared by a large number of PFM practitioners – there are two major areas that require ongoing work. One is refinement of the technical design of the institutions in the PFM toolkit: as good as this is overall, there are certain areas where bad ideas prevail or where the hobbyhorses of particular disciplines (e.g. accounting) have too much influence. The other is better tailoring of institutional design to the circumstances of particular developing countries. For example, while medium-term budgeting is indeed good practice that most countries in the world should adopt – at least, those that already have reliable short-term budgeting – the concrete form that it takes should be significantly different in most developing countries from that in advanced countries.

Recognizing that there is room for improvement should not, however, blind us to the considerable achievements of past decades in building an impressive toolkit of institutions and implementation strategies. We should beware of “throwing the baby out with the bathwater” when thinking of future directions for public financial management. 

Read the working paper Radically Reshaping PFM? A Review of “Advice, Money, Results”

3 thoughts on “Does PFM need to be rebuilt?

  1. Marc
    I really enjoyed this blog.
    PFM is a complex and multi-faceted subject area, it demands attention, review, and renewal but is too important to abandon or rebuild fundamentally. As a CIPFA accountant I get criticism from economists but stick by the holistic principles of the CIPFA Whole System Approach to PFM.

  2. Thank you for going through the AMR piece with such care. I commend your patience.

    There is a generational aspect to this debate perhaps – the three levels are not necessarily owned by those who came into this field after their development. What seemed to many of the originators (I would say a bit more widely shared than suggested by you and by AMR) to be self-evident about the nature of the three levels was shown by AMR not to be self-evident at all. But not being self-evident and not being correct are quite different things. In AMR (as you point out) and elsewhere, the three levels appear to be misunderstood. If the re-examination and reconsideration leads to a deeper understanding and ownership of what emanates from that then that is a positive thing.

    I find it a little peculiar for you here and in your handsome book to dismiss the relevance of accountancy – here as a ‘hobbyhorse’ and in your book as ‘boring’ (p.6). I suppose ophthalmologists or cardiologists may dismiss podiatry as a hobbyhorse or as boring, but I know where I would go if I had sore feet. Notwithstanding the common foundations between accounting and economics, the two disciplines would benefit from more mutual recognition of what each brings. Recognition requires respect to start with. The parallel co-existence of accountancy and economics approaches may be contributing to the slow progress being made on many fiscal issues.

  3. PFM needs to be an instrument for change not merely a way to tighten the screws. For example, the Treasury Single Account, emasculates participatory government and decentralization via delegation. PEFA has no causality and no commonality. It is an empty diagnosis with no prescription. SO WHAT? WHAT NEXT?

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