Budgeting and Performance Management in the Public Sector

Sara Giovanna Mauro

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000422405
• Edition: 1
• Topic: Economía
• Subtopic: Finanzas públicas

Public sector management and accounting scholarship has witnessed enormous change over the last four decades. Several reform paradigms have become well-known and disseminated worldwide, under acronyms such as NPM – New Public Management, NPG – New Public Governance, and PV – Public Value. At the start of a new decade, questions arise as to what will come next. This book reviews and investigates the key components of NPM, NPM and PV, and discusses what lies beyond these acronyms. It analyses the claimed benefits and drawbacks of each of the three paradigms, using reviews of the pertinent literature, as well as a raft of case studies. The integration of theoretical and empirical insights contributes to a better understanding of what has changed and what has remained the same over the years.

Specifically, this book stands out in its use of performance measurement and budgetary lenses to explore the multidimensional processes of reform and change in the public sector. By focusing on the crucially important transformations that have occurred in the field, reviewing several paradigms and analysing different practices from a longitudinal and comparative perspective, the book will be essential in guiding students and scholars of public management and accounting.

1 New Public Management and its heritage

1.1 The heritage of NPM: Performance meanings and practices

1.1.1 NPM: What is beyond the acronym?

NPM, which stands for New Public Management, is the label attached to a set of ideas which had become a reform package designed to transform public bureaucracies to improve public service efficiency and effectiveness and introduce flexibility. The ‘loose term’ of NPM (Hood 1991, 3) has been coined to represent and group the reforms adopted by public sector organizations since the 1980s. In the United States, those significant changes in the public sector were marked in the book Reinventing Government by Osborne and Gaebler in 1992, which became a reference point for those interested in reforming public sector organizations.

NPM has been inspired by multiple theoretical perspectives. Institutional perspectives and the principal–agent theory have, over time, confirmed the most popular approaches used to analyze NPM reforms (Talbot 2010; van de Walle and Groeneveld 2016), but several other perspectives, such as public choice theory, management theory, classical public administration, neoclassical public administration, property rights theory, and transaction-cost economics (Gruening 2001; O’Flynn 2007), have influenced NPM. These theoretical approaches differ and may contribute to explain the different elements of NPM. For instance, the principal–agent theory is evident in the NPM elements concerning the separation between purchasers and providers of services and the establishment of contractual relationships to deliver service, while the public choice theory is evident in the emphasis put on private sector provision (O’Flynn 2007).

This variety of theoretical approaches beyond NPM has stimulated the emergence of different ideas and reforms that are usually grouped under the NPM label, partially being the source for the variation of these reforms across countries. Further, the variation in how NPM is adopted and implemented across countries can be ascribed to the different politico-administrative regimes which influence the choice of the reforms and their feasibility (Pollitt and Bouckaert 2011). Accordingly, it is possible to distinguish between countries more open to NPM ideas, the Anglo-Saxon countries, and those less open to it, such as the continental European states of Belgium, France, Germany, and Italy. Apart from the differences across contexts, a ‘claim to universality’ (Hood 1991, 8) exists and can be detected in the key components of the paradigm (see Box 1.1).

BOX 1.1: The elements of NPM

According to Hood (1991), the doctrinal components of NPM can be summarized in the following manner:

1. Hands-on professional management
2. Explicit standards and measures of performance
3. Greater emphasis on output controls
4. Shift to disaggregation of units in the public sector
5. Shift to greater competition in the public sector
6. Emphasis on private sector styles of management practice
7. Emphasis on greater discipline and parsimony in resource use

The NPM reform movement assumes that private sector management frameworks and practices can be employed to improve the efficiency and effectiveness of the public sector (Stiglitz 1989). Therefore, NPM can be said to introduce managerialism in public governments, which is visible in the emphasis placed on performance. Public sector organizations are expected to work under ‘competition’ within a ‘market’, thereby being forced to control their outputs and improve their performance. According to a neo-liberal approach, the private sector represents the best and only means to good performance. In this vein, the NPM movement introduces institutional reforms that are designed to increase decentralization and externalization. Decentralization implies the transfer of responsibilities and tasks among levels of governments, referring in particular to the delegation of activities away from the central government. The redefinition of roles and tasks is determined by the need of increasing efficiency and effectiveness in the delivery of public services. Externalization refers to the transfer of responsibilities and tasks outside of government, assigning activities to other organizations different from public administrations. In such a context, the government’s role shifts from one of producer (rowing) to one of regulator (steering), and managers are recognized as having additional flexibility and responsibility to manage.

In the spirit of NPM, there is high trust in the market and this leads to identifying in private sector actors those suitable for delivering public services. This calls for measuring and controlling the activities of public organizations through accounting techniques (Hood 1995). The need for controlling these activities has created an audit explosion to the extent that society assumes the traits of an ‘audit society’ (Power 1997), where financial and non-financial dimensions are checked and audited. A cultural shift towards quantification and control over results has led to what has been defined as ‘accountingization’ (Power and Laughlin 1992). This implies a new means of interpreting accountability, whereby accounting plays an instrumental role and becomes visible to the extent that accounting information significantly shapes how certain systems should work (Kurunmaki et al. 2003). Public sector accounting is recognized as the key tool to make the public sector quantifiable and managerial (Lapsley 2009; Olson et al. 1998). This may suggest that the advent of NPM has represented a golden age for public sector accounting research (Steccolini 2019), supporting its growth. The significant role played by accounting-based financial management techniques has led to consider financial management as a key technical component of NPM (Olson et al. 1998).

Taking into account the previous different issues, the label of NPM is indicated to be an inclusive term which embraces ideas regarding the need to reinvent the government by making it results-oriented, customer driven, and competitive (Osborne and Gaebler 1992). The reforms inspired by NPM are hence concerned with different dimensions of public sector organizations, such as their structure, governance systems, human resource management, and finance and accounting systems (see Table 1.1 for a few examples). An important accounting issue in the public domain concerns the budgeting process, which has been the object of specific reforms in the spirit of NPM, as will be discussed in the next chapter (see Box 1.2 for an overview of public budget).

Table 1.1 NPM reforms

Governance	People	Accounting and auditing
Separation of politics and administration Decentralization Outsourcing Privatization Agencification	Freedom to manage Professional management (incentives) Performance pay	Accrual accounting Performance budgeting Performance audit Accountability for results

BOX 1.2: What is public budget?

A public budget can be intended as a plan expressed in quantitative (monetary) terms (Budding et al. 2015), whereby public sector organizations define the resources to be used in a given period for realizing certain programmes by forecasting revenues and expenditures for that period. In Rubin’s (2010) view, ‘Public budgets describe what governments do by listing how they spend money’ (1).

The process whereby a budget is made is defined as budgeting. This term can be used to indicate the entire budgeting cycle, referring to when the budget is formulated and approved, and also to its execution and reporting (Saliterer et al. 2017). The budgeting cycle hence includes several phases, such as budget formulation, approval, execution, and auditing.

There are multiple functions that a public budget fulfils throughout its cycle, and these have been classified and labelled differently by scholars over time. For instance, they can be classified as follows (Budding et al. 2015):

1. Planning function
2. Control function
3. Coordination and communication functions
4. Motivation function

Similarly, they can be grouped into the following (Schick 1966):

1. Planning function
2. Management function
3. Control function

The planning function is of primary importance and concerns the definition of objectives and programmes, the allocation of resources, and their subsequent authorization. The allocation of (limited) resources implies choices among alternatives, and this is the essence of budgeting (Rubin 2010). The old question of ‘On what basis shall it be decided to allocate X dollars to activity A instead of activity B?’ (Key 1940, 1138) is still at the heart of budgeting theory in the search for a mechanism whereby allocative decisions can be made. In fulfilling this function, the political nature of the public budget clearly emerges since allocative decisions are influenced by political priorities, stakeholders’ preferences, and power positions. Consequently, the budget represents the plan that should guide public organizations’ activities, and the budget allocations reflect the priorities over which negotiations among various actors have been incurred. As a planning tool, the budget is oriented towards the future, and the time horizon is traditionally one year but it may be even longer (Mussari 2017).

The management function concerns the execution of the budget and the control function concerns the oversight of the use of resources. Public budgets need to be real and accurate since, in principle, all spending must be within the limits indicated in the budget (de Vries et al. 2019). This underlines the technical nature of this document. By setting the budget, politicians authorize responsible politicians or managers to spend a certain amount of money on specified items/activities (Budding et al. 2015). Accordingly, the budget becomes an authorizing document, which is used as a control tool to guarantee that resources are spent consistently within the budget. The budget can also be used to assign objectives to managers and make them accountable for the results achieved. It can then be employed to communicate the results to the legislature and external stakeholders by addressing accountability requirements. In this regard, the managerial nature of a budget emerges more clearly with its use as a tool to make managers accountable for the use of public resources and the achievement of results. Therefore, the budget can be used to coordinate the relevant activities, communicate the goals to be achieved and resources to be used, and motivate managers by setting targets linked to performance evaluations.

In light of this set of different functions and the multidimensional nature of a budget as a technical, political, and managerial tool, it is possible to affirm that the public budget (and budgeting) is built on negotiations among different actors (Wildavsky 1964). Both politicians and managers are required to carefully reflect on and discuss the resources to be spent and the goals to be achieved. Several participants with different priorities, interests, and power take part in these negotiation...