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Zombie Ideas in Public Financial Management

Zombie ideas – the term Paul Krugman coined for ideas that make no sense but refuse to die – are not confined to economics. There are also a few to be found in the field of public financial management. A particularly widespread zombie idea in PFM is the proposition that the setting of hard ministry budget ceilings is good budgeting practice. Many PFM advisors have preached this dogma to developing countries for decades, undeterred neither by the fact that none of the countries concerned have successfully implemented this advice, nor by the reality that what they are advocating is not what advanced countries do.

The essence of this dogma is the proposition that hard ministry ceilings should be set early in the budget preparation process without any prior opportunity being given to spending ministries to present formal proposals for new spending initiatives.

Let’s be more precise, with the help of a little background. There is wide agreement that it is good practice for budget preparation to be divided into two key stages. The first is what is often called the “strategic” phase, key elements of which should be decisions on the aggregate fiscal parameters of the budget and broad priorities for the budget. After that, the second stage commences with the issuance by the ministry of finance of the budget circular, based on which ministries prepare and submit their proposed budgets.

What proponents of the dogma are asserting is that expenditure ceilings should be set for each ministry during the strategic phase. Ministries should be notified of their ceilings in the budget circular, and should then prepare and submit their detailed budgets based strictly on the ceilings they have been given – with no deviations tolerated.

Advocates of this schema justify their rejection of “bottom-up” input into decisions on ministry shares of the overall budget in the name of top-down budgeting. The hard ministry ceilings dogma is, however, a travesty of the idea of top-down budgeting. It is also unrealistic and antithetical to basic principles of good expenditure prioritization.

Think about it. What is implicit in the dogma is the idea that the cabinet – the council of ministers, if you prefer – should get together during the strategic phase and make a firm decision about how much each ministry gets without the benefit of any formal civil service analysis of spending ministry proposals. It’s hard to think of a better recipe for ill-informed, half-baked budget decision-making. The allocation of budget resources would be made even more political, reflecting to an even greater extent the relative power of ministers in the cabinet. Bureaucratic rationality would take a huge hit.

I don’t know of any advanced that routinely organizes its budget preparation process in this way. Nor am I aware of any developing country where this model has been made to work.

Yes, the use of ceilings is the essence of top-down budgeting. But not ministry ceilings. The basic idea of top-down budgeting is that budget preparation must be framed by an aggregate expenditure ceiling which is set in the strategic phase of the budgeting process. But this is a ceiling for total government expenditure. There is nothing in the doctrine of top-down budgeting, properly conceived, which says that this aggregate expenditure ceiling should be split up into ministry ceilings in the strategic phase of budget preparation, without any prior opportunity for spending ministries to present formal new spending proposals. In a well-designed top-down budgeting process, the precise allocation of the aggregate ceiling between ministries will emerge only in the second stage of the budget preparation process, reflecting careful analysis of major competing new spending proposals – something I’ve discussed in detail elsewhere.

It is quite reasonable to hold that deliberations in the strategic phase of budget preparation should inform the subsequent allocation between ministries. It makes sense that ministers should at that stage discuss the major expenditure-side challenges facing the government and articulate any broad priorities which they wish to inform budget preparation. For example, if the government is faced with a crisis within the health system, ministers might decide that finding additional resources for health will be an important priority for the budget. But this doesn’t mean that at this stage the government decides the precise quantum of extra money it is going to allocate to the health ministry – or to any other ministry. That decision should only come later.

What ministries can be informed of at an early stage in the budget preparation process is their budget baselines (adjusted as the government sees fit). But a baseline is not a ceiling.

I and some others have been attacking the hard ministry ceiling doctrine for years. But I sometimes feel that we have had precious little impact. Only very recently I was depressed to read a report prepared by EU-funded consultants for a country I have been advising which contained a particularly crude version of this unfortunate doctrine. This sort of stuff does considerable damage, both in sending PFM reform programs off in dead-end directions and wasting significant amounts of money.

All this makes me wonder whether there is any effective strategy for tackling the influence of zombie ideas. One thing is clear: bad ideas should be robustly attacked when they first raise their heads, before they can become so deeply rooted to acquire zombie status. Another reason why we need more and better debate in the PFM domain.

1 thought on “Zombie Ideas in Public Financial Management

  1. Omits to recognise the importance of sound bookkeeping supported by financial discipline in recording including coding. Without a sound basis for budgets, strategic budgeting and departmental budgets are based on slippery sands

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