WHY BUDGETS MATTER: THE NEW AGENDA OF PUBLIC EXPENDITURE MANAGEMENT New Thinking on Budgets and Aid

Recent years have seen dramatic shifts, in theory and practice, both in the area of public sector management and reform, and in the area of development assistance. The ideas and practices of the ‘New Public Management’ have reshaped thinking about public policy and management both in developed and in developing countries. The restructuring of public services in order to enhance their efficiency, with the introduction of more competition and private market discipline into public administration, was meant to transform bureaucratic culture and promote more open, accountable and resultsand citizen-oriented governments. New Zealand, the UK, Sweden and others led the way among developed countries. And many of these ideas, despite some voices of concern, were introduced in civil service reform initiatives in many developing countries. In the area of budgeting as well, the focus shifted from the ‘due process approaches’ of conventional budgeting to a wider agenda of ‘Public Expenditure Management’, which highlights the importance of the complex web of actors and institutions involved in the budget process, and of linking expenditure with measurable results in terms of outputs and outcomes (Box 1). Development assistance has also seen major shifts in thinking and practice in the recent past. From the Jubilee campaign for debt cancellation and the HIPC initiative to the Comprehensive Development Framework and PRSPs, from harmonisation efforts among donors to the Monterrey pledges for increasing aid flows, there are many signs of a new approach to development assistance. This new approach is based on a number of principles of good behaviour on the part of donor agencies, which should form the base of future aid relationships. They include: • Country leadership and ownership: Donor processes, procedures and eventually objectives should be subordinated to those of the recipient country. • Capacity building for the long term: Donors need to work in a way that builds the capacity of recipient governments in a sustainable manner, neither simply filling short-term gaps nor over-using limited existing capacity. • Harmonization and simplification: Transactions costs facing government need to be reduced by limiting duplication, and coordinating and simplifying the demands made by donors. • Transparency and information sharing: This implies the full disclosure by donors of their resource flows and practices, in formats that are compatible with government cycles and systems. • Predictability of resources and conditionality: Without predictability of resources and the simplification of conditions, implementing policies and delivering services becomes extremely difficult. • Subsidiarity: Decisions within and between donor organisations need to be delegated to the level that is best for aligning aid with country systems. On the operational side, country-led strategies have been promoted for guiding poverty reduction efforts, behind which donors should align. Sector programmes and budget support are placing new emphasis on coordination, complementarity and integration with government systems and procedures. For this reason budgets, and public financial management systems in general, have received increasing attention. As public expenditure becomes the privileged means for delivering services and reducing poverty levels and an ever greater percentage of aid funds flows through national budgets, concerns about efficiency, transparency and accountability in the budget process are bound to grow. Medium Term Expenditure Frameworks, computerised financial management systems and results-oriented budgeting are among the innovations that donor agencies have tried to promote in developing countries to improve the performance of public expenditure management systems.