May 2007 IGPB

Budgeting in EU Member States

The United Kingdom Experience in the field of Spending Review,

the experience of France in the field of

State budget review based on objectives

and the experience of some EU countries (summary)

By the IGPB: Mr. Biagio Mazzotta

Mr. Fabrizio Mocavini (Office XVII)

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Over the past few years, a growing number of European Union Member States

focused their State budget and public accounting study and analysis efforts on looking

for systems that may take into due account two aspects that have now become crucial

and necessary in public administration: reaching results and a rational use of public

resources.

This document, that was drafted using information from and experiences of the

State General Accountant Department in the field of International Relations activities,

outlines the scenario of the most recent and interesting innovations introduced by some

States, such as the "Spending Review" in the United Kingdom and the "Loi organique"

in France, as well as a schematic comparison between and a summary of budget and

“performance measurement” systems implemented in Germany, Spain, Denmark,

Sweden, and the Netherlands.

The Department study, analysis and research activity, of which this documents

represent the first concrete result, will continue and will be further developed with the

aim of building a useful base for reflection and comparison that will be crucial for

Italy's future budget reform.

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Index

United Kingdom – Spending Review applied to Public Services agreements in the UK.. p. 3 France – The performance-based approach: strategy, objectives, indicators…………… p. 15 The Netherlands – Budgeting and Performance measurement (summary)………………. p. 35 Denmark – Budgeting and Performance measurement (summary)………..………………. p. 43 Germany – Budgeting and Performance measurement (summary)………..………………. p. 51 Spain – Budgeting and Performance measurement (summary)………..…………………… p. 55 Sweden – Budgeting and Performance measurement (summary)………..………………… p. 59 References ………………………………………………………………………………………….… p. 63

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UNITED KINGDOM United Kingdom – Spending Review applied to Public Services

agreements in the UK

The English term "performance” indicates the product, yield or results of actions performed by a government, an organization, a unit or a simple individual with respect to a specific purpose. Therefore, it represents the fulfilment, implementation, attainment and achievement of said purpose. In some cases it can also be represented by the services provided, that is the way in which actions are performed.

Introduction The use of performance measures in budget cycle and management has been of great importance in the framework of Public Service Agreements (PSAs). PSAs, coordinated by the Treasury Department, set out aims, targets and efficiency savings achieved by the various Departments against the employed resources. This document focuses on the United Kingdom situation since 1998 until the present; it provides a general overview and highlights the main successes achieved and the lessons that have been learned in this field. The United Kingdom Government is currently (April 2006) carrying out a Comprehensive Spending Review (CSR) that will be completed in 2007. This process will lead to the completion of a fundamental budget and public spending review model. Description of the “performance system” Through the Comprehensive Spending Review in 1998, the United Kingdom Government reorganized the public spending and performance management framework with the aim of supporting a sensible and efficient medium- and long- term spending planning. This reorganization was based on some cornerstones:

o greater stability of three-year spending plans to enable Departments to plan ahead and manage public services on more stable foundations;

o a clear-cut separation of capital spending forecast from current expenditure forecast to ensure that short-term needs do not draw upon investment expenditure;

o gradual introduction of resource accounting and planning to improve expenditure planning and control and to increase incentives for efficient assets management;

o introduction of Public Service Agreements that, for the first time, define measurable targets for the full range of objectives indicated in the Government public expenditure planning.

The explicit aims of the 1998 Comprehensive Spending Review were the following:

o re-allocate financial resources to fundamental priorities; o change policies in order to better spend public money;

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o ensure better “team work” between and amongst Departments to improve the services supplied;

o eliminate unnecessary, useless and superfluous spending. The reasons for drafting Public Service Agreements Considering the complexity of Government activities, it is useful to take into account input, output and outcome relationships that emerge when carrying out said activities. Inputs are the resources contributing to production and delivery. This term includes labour, tangible assets and Information Technology systems (e.g. doctors, nurses, equipment, etc.). Outputs are end products, or goods and services, produced by an organization and delivered to users (for example, the number of supplied medical treatments or of surgical operations). Outcomes represent the impact or consequence of the Government activity on the community or individuals and are generally represented by what the organization is trying to achieve (for example, longer life expectancy or better health).

Figure 1 shows interconnections between resources, inputs, outputs and outcomes.

Figure 1 – Context of performance Public service performance principles Public Service Agreements are based on four fundamental principles (Chapter 1 of 2002 Spending Review White Paper):

o clear general objectives (outcome-oriented) fixed by the Government at national level;

o decentralization of responsibilities to the subjects who supply public services, with maximum level of flexibility and discretion, ensuring time or that the needs of local communities are met;

o independence and efficacy of the accounting review and inspection activity to improve the responsibility level:

o transparency of the achieved results, with better information on performance at a local and national level.

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Why set targets Targets give a clear sense of direction and priority to service delivery agents and, if used wisely, they provide a focus for delivering improved services. As a part of a performance-based management system, they also provide a basis for monitoring what is working and what is not, to ensure that good management practices are spread and rewarded, and that poor performance can be tackled and opposed. The publication of regular reports on the progress attained against targets contributes to increase the accountability level toward citizens. Public Service Agreement Format The current format for PSAs is based on five fundamental features:

o a first-level aim, established by the department top management; o second-level objectives, setting out in broad terms what the department is trying to

achieve; o performance targets, defining clear SMART outcome-based goals(1) for most

objectives; o an efficiency target for each department, focused on improving the efficiency or

"value for money" (a good price-quality ratio) of the key elements of its activity; o a statement of who is responsible for the delivery of these targets (usually the

relevant Minister).

Figure 2 – The current Public Service Agreement format (Public Service Agreements) Legal and Institutional Framework The performance system has not been defined in specific laws or regulations, although all departments must report on the performance level attained to the Treasury Department (HM Treasury). Furthermore, the Government has committed to report on performance to Parliament every two years.

1 The acronym SMART stands for Specific, Measurable, Achievable, Relevant and Timed

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Involvement There are no legal requirements for departments to develop performance measures or conduct evaluations, although all departments have been required to develop and commit to a Public Service Agreement and all departments have participated in the Spending Review process. The PSA performance framework has been outlined by the Treasury with particular and rigorous attention paid to performance measures and evaluations. The Treasury has worked in close collaboration with the Prime Minister’s Office and with the Office of Government Commerce. Scope Performance measures based on Public Service Agreements cover a considerable portion but not all of public expenditure. Target-setting is not possible for all areas of government spending (for example, where final outcomes or products and services are difficult to measure) although the objectives, that is second-level objectives (see Figure 2) are intended to capture the entire activity of the department. There are currently approximately 110 targets (third-level objectives), down from around 600 that had been identified in 1998. The upcoming Spending Review will take a comprehensive, rather than a partial, approach to performance budgeting (budgeting by program or by objective). This approach will be inspired by an ambitious and far-reaching “value for money” (good price-quality ratio) program aimed at finding and allocating the necessary resources to address the long-term challenges that will shape the next decade. This will involve further development of the areas that were identified as part of the 2004 Independent Review of Public Sector Efficiency as well as a set of zero-based reviews of departments’ expenditure to assess its effectiveness in delivering the Government’s long-term objectives. Whereas past spending reviews have traditionally focused on allocating incremental increases in expenditure, the process of setting new long-term objectives in the Comprehensive Spending Review (CSR) – with many past objectives achieved and supporting programs and spending potentially available for reallocation – provides an important opportunity for a more fundamental review of the balance and pattern of expenditure within and across departments. 10 years after the first Comprehensive Spending Review, the aim of these zero-based reviews is to renew each department’s baseline expenditure to reflect changing priorities.

Measurement and Assessment of Results Setting Goals So far, during the Spending Review process, departments have proposed and subsequently agreed their Public Service Agreements with the Treasury. Each individual department is accountable for its own Agreement. Excluding exceptional circumstances, PSAs remain valid until the next Spending Review.

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Performance measures – outputs and outcomes Theoretically, targets should specify the impact or consequences that the Government activity should have on communities or individuals: they should therefore specify what the government is trying to attain (for example, longer life expectancy or better health). However, it is important to recognize the influence of other factors on the overall outcome. As a result, it may not always be clear how much of a positive or negative change in an outcome may be attributed to a specific factor. For example, a public health initiative may not produce the desired influence on life expectancy due to other factors linked to individuals' lifestyle. Moreover, measuring outcomes in public sector activities may be highly difficult: for instance, some outcomes may become measurable long after goods and services are supplied by the government (this holds for the public health example above). As a result, in some cases it may be more realistic to use goods and services to measure performance, provided that quality considerations are taken into account when quantifying goods and services and that the linkage between these goods and services and the expected outcomes are clear. Much emphasis is currently placed on the need to measure the success achieved in terms of change on the ground: real and effective improvements for people who use public services (for example, improved turnaround of patients in hospital Accident and Emergency departments, less frustrating motorway journeys, a more sustainable rural economy). Evolution of Public Service Agreements Public Service Agreements (PSAs) were first introduced in the 1998 Comprehensive Spending Review (CSR) which set approximately 600 performance targets for 35 areas of Government. However, most targets set in 1998 focused on goods and services or processes rather than on the impacts and consequences that Government activities may produce on communities or individuals. With the 2004 Spending Review, the number of targets was reduced to around 110. The three spending reviews in 2000, 2002 and 2004 have introduced a revised format for PSAs, a more considered approach to joint targets, and supporting documents to the PSA architecture in the form of technical notes. Technical notes are detailed documents which set out how PSA targets are defined and how the targets can be judged as met (or otherwise). Setting targets Choosing the right targets Targets should be used carefully. In setting targets, it is important that a manageable number of priorities is given. The current set of Public Service Agreements contains around 130 targets for 20 departments (an average of less than 7 targets per department). Targets should be focused on the impact and consequences produced by the Government activities on communities or individuals and should meet the SMART criteria (Specific, Measurable, Achievable, Relevant and Timed). It is also important that a target represents a real measure of success: if the target is achieved, there must be a noticeable difference in the quality of the public service being delivered or in the environment or a different

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impact on expenditure programs. Finally, and perhaps most crucially, it is essential that a target be defined in such a way that it can be "cascaded" down through the delivery chain, and that it makes sense at the local level. Information about performance is part of the Spending Review negotiations between the Treasury and the individual departments, although there has been no pre-determined, mechanistic relationship between past performance and resource allocation. The Treasury is actively involved in the development of performance information and Technical Notes are now part of Spending Reviews. Over time, a growing number of departments have acquired greater capacity of developing effective performance information systems. This capacity has been supported by the Treasury and other expert bodies, including the National Audit Office. Incentives and Reporting Enhancing accountability

One of the key elements of a Public Service Agreement is the statement of who is responsible for delivery. Usually the relevant Minister (or Ministers, in the case of joint targets) is accountable for the delivery of the Agreement and for performance against the targets therein. Since the beginning of the 1990s, the Departments have accounted for their performance in the field of public services annually in departmental reports, published in spring. The reports set out expenditure plans and performance, including tables summarizing how the department is staffed and supplied with financial resources to achieve objectives. These reports are used and accessible to Parliament, Parliamentary Committees and the public. Departments must account for the reliability of their performance information to Parliament and data systems are validated by the National Audit Office. This system of biannual reporting puts the United Kingdom at the forefront of implementing reforms to put performance reporting and accountability in practice. Sanctions and rewards There are no direct sanctions for ministers or departments who do not achieve their Public Service Agreements. PSA performance is regularly reviewed and ministers are held accountable for such performance to the Cabinet of Public Service and Expenditure (chaired by the Treasury Secretary of State) and to the public through the publication of ad hoc documentation. Furthermore, previous departmental performance is taken into account when considering allocations in Spending Reviews. Decisions about remuneration of senior officials in departments are increasingly influenced by the department's performance against its Public Service Agreement. The Treasury will be looking at departmental performance against Public Service Agreements in the context of the Comprehensive Spending Review (CSR). This will require an in-depth review of the budget and pattern of public expenditure. To define such review, it will be necessary to take stock of what has been done so far and identify what further steps are needed to meet the challenges and opportunities of the decade ahead. Through this process the Government will set out new objectives and priorities for the

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Comprehensive Spending Review period and beyond, with allocations set accordingly for each department. However, there is no mechanistic relationship between the proportion of targets from previous Spending Reviews that a given department meets and the expenditure that will be allocated to said department. Challenges and lessons learned Challenges: Delivery Almost all Public Service Agreements have now a well-established delivery plan. The key challenge from now until the end of the current Spending Review period in 2008 is therefore implementation: delivering concrete changes in UK public services encapsulated in PSA targets. Achieving this objective and creating irreversible change require ambition, focus, urgency and clarity. Measurement Within this framework, ensuring that each department has access to high-quality, robust, timely performance data is crucial. This will help the Government relate resources to concrete outcomes to the benefit of communities. Greater attention should be paid to the following; considering measurement issues at the target setting stage; careful consideration of data quality and related issues during the life cycle of an individual target; enhancements to management to ensure consistency in data collection; further investment in measurement systems and improvements in disseminating data “weaknesses”. Incentives Consulting with staff working at key stages in the delivery chain is important for understanding how to create the right incentive system to “reward” the use of performance information for management and budgeting purposes. Failure to gain support of key staff who are directly involved in delivery can lead to problems with perverse incentives and gaming. Relevance It is important to ensure that national targets remain relevant also at the local level: delivery agencies on the territory and other local partners are to continue to see national targets as a priority.

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Decentralization Focusing on outcomes and on the impact on communities enables decentralized decision-making and allows departments and agencies to decide what mix of outputs is best for achieving the expected final outcome. Local involvement In many cases local authorities and agencies work side by side to deliver products and services. If performance management is to be successful, local organizations should be consulted on how performance will be managed and what outcomes can be achieved at the local level. At the same time, full legitimacy of the central Government in setting national minimum standards should be allowed and recognized. Lessons learned and impact: What others think of the Public Service Agreement There has been much interest in the UK’s framework for public service reform, at both domestic and international level. The Parliament, whilst identifying some concerns and weaknesses within the framework, has recognized the need for performance measurement to play a significant role in improving public services. The National Audit Office has endorsed the PSA framework, saying that “the introduction of Public Service Agreement targets, and in particular the move to outcome-focused targets, is an ambitious program of reform which puts the United Kingdom among the leaders in performance measurement practice”. The UK Government’s approach, oriented to outcome and performance measurement in public service delivery has generated much international interest. Over the past few years, the Treasury has received visitors from more than 40 countries and international institutions, including officials and representatives from governments, academic bodies, the IMF and the European Commission. Description of the “performance system” One of the main criticisms of the PSA framework is the excessive number of targets fixed for the public sector. Whilst the PSA framework itself sets an average of around 6-7 targets per department, there are often other targets and measurement frameworks (operating within departments and not managed by the Treasury) within which local delivery agents are held accountable. These include Best Value Performance Indicators, which are a system of common performance measures that allow relative comparison of Local Authority performance across the full range of services delivered. It is important to consider the impact of “cascading” targets through performance measurement and assessment systems and identify how these impacts might be lessened by adopting a more accurate and careful approach.

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Spending Review: further considerations The main benefits of a Spending Review (SR) systems are:

o stimulate politicians to ask more questions in the budget process stage; o (Agencies and Departments) have more information on the basis of existing

expenditure o Allow political leaders to lead administrative bureaucracy to review the status quo

and its considerations on basic choices.

According to the concept that Allen Schick expressed in 1990: “The budget process may be organized to facilitate or complicate the task of cut-making. It can make politicians aware of the financial implications of their choices or it may hide them; it may speed up or delay expansion program expectations.. “ Basically, a good SR system implies that the Government pay more attention to the spending status and to the need to review issues that would otherwise remain untackled. How to apply a Spending Review system The international experience suggests that the good functioning of a SR system should go through three phases, requiring that the political and the administrative powers share the framework and the outcomes:

o the first phase requires that the Cabinet sets out the overall strategy; o the second phase concerns in-depth analyses and reviews; o the third and last phase requires that SR data be used to allocate resources.

Various Types of Spending Review: Practical examples: The horizontal policy reviews focuses on cross-border political issues (of the various Departments) and it is also known as cross-analysis/review. This type of SR is often used to examine political choices on mandatory expenditure or transfers between departments. It can be retrospective, meaning that it may identify expenditure limits, or prospective to affect future decisions on resource allocation. Being a cross-review, it implies that agencies are also actively involved in the process. In some States there are SR coordinating institutions. Concrete examples of this type of SR are found in New Zealand, UK and the Netherlands. Between 1984 and 1988 the Australian Government applied this type of SR technique to reallocate welfare-related interventions. The Departmental zero based review is another departmental technique aimed at clarifying whether programs/projects are still topical or relevant, priorities are correct, departments are implementing the right programs in the best possible manner. There are numerous example of this review. And also in this case the more interested countries are the United Kingdom, Australia, New Zealand and Sweden. This technique is not suitable for mandatory expenses. Being a very comprehensive technique, it is useful to respond to political or tax crises. It focuses on total program expenses with the aim of making cuts based on re-set

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departmental targets and priorities. Local agencies are accountable for this type of review, although Central Agencies and the Cabinet identify the Review parameters and targets. The Departmental program review is a specific department (Ministry) technique. Its coverage is more limited but it has a greater level of detail. It is performed to ensure continuous efficiency, efficacy (or equality) assessment of programs or intervention areas. Horizontal management reviews. In UK this technique was applied to investment spending, in Canada to IT spending. Within the budgeting process, this system allows for efficiency savings or getting resources directly from departments to implement recommendations of providing different solutions that departments may implement. Departmental management reviews can be applied to re-organize or re-define an agency in order to better implement the same programs. Involving the whole organization system. Various examples of this type of SR have been found in UK and New Zealand. Conclusions Since 1998, when it was first introduced in the UK public administration, the target framework has made much progress Each subsequent Spending Review has enhanced its architecture. The Comprehensive Spending Review will deliver further innovative changes. The table below shows some specific moments in the process leading to the Spending Review and its improvement over time.

Date Event March 1997 Blair commits the future Labour Government to rigorous tax

parameters including aggregate expenditure limits, as the Tories had already previously done: state deficit, debt reduction and two fiscal management “golden rules”. Furthermore, Blair sets an ambitious political agenda including a significant increase in public investments. Financing for the new policies must be obtained through a global spending review.

June 1997 Blair presents his first budget statement: the beginning of the first Comprehensive Spending review (CSR).

March 1998 The economic and financial Stability Code is introduced. It provides that the Treasury should set public finance objectives and produce continuously updated reports aimed at showing that objectives are achieved. A 5-year deficit plan is established.

11 June 1998 The economic and financial strategy report introduces a three-year spending cycle. This document:

o sets out a new long-term control regime to be enforced from 1999-2000;

o breaks down the 1998-1999 expenditure into Department Expenditure Limits (DELs) and Annually Managed Expenditure (AME); These two types of expenditure represent the basis for developing the subsequent three-year expenditure plan;

o presents the financial framework for the next three years as the basis to improve CSR.

July 1998 CSR results are published. The review results as well as a detailed

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expenditure management plan for the next three years are provided. The report describes the Departments’ expenditure plans for the 1999-2000 to 2000-2001 period. The report includes the following:

o the department’s expenditure limits for the 1999-2000 to 2000-2001 period and the expenditure allocation plan;

o the department’s political priorities and three-year expense allocation plans in compliance with the total expenditure limits fixed in the DEL;

o departmental investment strategies (DIS) for each Department; o Public Service Agreements establishing objectives, products

and efficiency targets for each program area. October 1999 The second SR cycle begins. The focus is now shifted from the

departmental review to a cross-department review. 15 cross-cutting reviews were carried out in the October 1999-July 2000 period aimed at focusing on some issues….to ensure that the spending reviews really reflects the Government’s priorities. Departmental Performance Plans are reviewed in the same period. Significant efforts are made to improve the PSA performance indicator quality; to this purpose, a second set of indicators is developed. The Treasury manages and guides this process and provides the documentation that illustrates the process itself which, unlike CSR, is not intended as a zero-base review of all spending plans.

March 2000 The expenditure limits for the next three-year cycle expenditure limits are set in the final balance and budget documentation. The Treasury calculates the figures for the new plan by reviewing the expenditure limits fixed in the previous three-year 2001-2002 DEL plan.

July 2000 The 2000 Spending Review is published. It fixes the expenditure limits and the resource allocation plan for the 2001-2002 to 2003-2004 three-year period.

November 2000 The new Public Service Agreements are published.

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FRANCE The performance-based approach: strategy, objectives, indicators

Preamble

The Loi organique relative aux lois des finances (LOLF) of August 2001 introduced new rules for preparing and implementing the budget of France. The aim of the new approach is to move from a resource-based to a result-based approach. The aim is to concentrate the debate on budget on the objectives and on the cost-effectiveness of public policies thus avoiding, as it happened in the past, to focus on quantitative variations in appropriation amounts without systematically linking said variations to expected results and actual revenues. The shift of focus to performance presupposes that performance can be measured objectively (LOLF, Article 51: “…State actions are presented having regard to related costs, objectives pursued, actual results and results expected in the years to come, measured by using precise indicators...."). In this framework, what information should be provided to Parliament? How are strategies, objectives and indicators for each program to be defined? How can public service management by objective be made widely applicable? What controls will be made on this information? The Parliament votes the budget in the light of the objectives proposed by the Government and the results for which the Government is accountable to Parliament which, in turn, examines how the budget is implemented and managerial performance is measured. Consequently, both Parliament and the Finance and Budget Ministers must clearly define the nature and content of the expected information. This document aims at facilitating communication between all parties involved in the budget process and avoiding misunderstandings. The final objective is certainly an ambitious one: ensuring that taxpayers’ money is used properly. La Loi organique relative aux lois de finances LOLF, a 2001 law, includes the State budget new rules that first came into force during the 2006 fiscal year. Under the new rules, Parliament shall provide Ministers with “overall budgets”. Ministers, in turn, will set objectives and define indicators for measuring results in order to make public spending more efficient in the budget decision-making process (at Government and Parliament level), and in the internal management of Agencies. 1. From a resource-based to a result-based approach As of 2006, the State budget will be voted by “end purpose” in the form of overall budgets. The information attached to the budget act will give an account of the results expected and obtained.

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A budget organized around the purpose of expenditure The State budget has three levels:

o approximately 40 “missions” outlining the main areas of state policy. These are budget units voted by Parliament that correspond to the main political areas. The Parliament approves the budget at mission level, thus emphasizing the purpose of public policies. Missions are proposed by the Government and Parliament may change the allocation of expenditure between programs within a mission.

o approximately 150 “programs” defining responsibility for policy implementation.

Each program comprises a coherent set of actions and is entrusted with a program coordinator appointed by the Minister concerned. Each program is characterized by a strategy and a number of objectives coupled with specific indicators.

o approximately 500 “actions” defining program purposes in detail. Actions represent

the level of detail where expenditure is planned and monitored and provide information about the use of budget resources.

A results-oriented budget Information about performance goes beyond a mere description of the consumption of resources or the volume of activity. This information shows how, within the framework of allocated resources, the effectiveness of policies or the quality of public services can be increased at the best possible cost. Rather than adopting solutions primarily consisting of increasing resources, the aim is to focus the “minds” of decision-makers, managers and public servants on how state-funded policies are actually framed and on how to improve the choice of levers. Result-based management should not therefore be confused with objective-based budgeting. The latter involves first setting the desired (end and intermediate) targets and then quantifying the budget appropriations needed to achieve them. This is difficult for two reasons:

o appropriations are made between different programs within an overall amount determined beforehand according to the current state of public finance and macro-economic considerations;

o there is no direct and unequivocal link between budget appropriations and

performance objectives (for example, better socioeconomic conditions or better service quality may be achieved with the same amount of resources, by simply improving the way resources are used or by allocating them better).

_____________________________________________________________________ Reliability, accountability and transparency in the field of services result from the Declaration of the Rights of Man and the Citizen of 26 August 1789: Article 14. All citizens shall have the right to ascertain, by themselves or through their representatives, the need for public contribution, to consent freely, to watch over its use, and to determine its rate, taxable base, collection and duration. Article 15. Citizens have the right to ask public officials to account for their administration.

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2. Parliament votes the budget according to precise objectives to which the Government is committed

With the 2006 budget bill, Parliament will have a more accurate, systematic and organized view of the strategic objectives and results of State policies, that will be presented in the annual performance plans attached to budget bills. The Parliament will thus be able to assess consistency between budget options and priority objectives. Defining priorities is a first step towards improving the effectiveness of public spending. Each program’s strategy and the objectives derived from it are decided upon the initiative of the relevant Minister with the help of the program coordinator. The objectives are approved during the budget preparation procedure and discussed by Parliament as part of the budget approval procedure. The Government and Parliament need precise input from the departments involved which, in turn, will shape their choices by collecting feedback from the players directly involved in institutional activities. The choice of objectives must necessarily take into account previous results. There are no foregone financial conclusions to be drawn from results: if results are poor, should resources be cut or increased? For the same level of resources, can the outcome be improved by reviewing how policies are framed or implemented? 3. Agencies are steered according to expected program results Budget-associated objectives are strategic objectives: limited in number, they state the expected effects of state policies, the required quality of public services and how the resources used by Agencies can be optimized. These objectives leave Agencies with considerable leeway as to how to achieve the objectives themselves, since they do not define in detail what actions are to be taken or the amount of resources to be used. The Agencies themselves, through the mechanisms specified in the “overall budgets”, will decide the best ways of achieving the strategic objectives. Within this context and given the long chain of command in State, the point where political responsibility gives way to managerial responsibility is crucial. Program coordinators represent the link between these two levels of responsibility: they help define strategic options under the authority of the relevant Minister and are responsible for their operational implementation. The strategic objectives set by the political authorities are transferred to the administrative apparatus by means of performance-based mechanisms. Consequently, civil servants are in a position to directly manage their activities in a way that helps achieve the strategic objectives defined at the political level. 4. The relevance and quality of performance-related information is controlled Parliament Members of Parliament will analyze and comment the information set out in annual performance plans and in annual progress reports. This information is extremely important and help Members of Parliament assess the management program quality and the

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relevance of the underlying objectives. On that basis, Members of Parliament may in some cases propose amendments designed to move appropriations between programs in the same mission. Special rapporteurs appointed by the Finance Committee will continue to monitor the budget implementation in the various national provinces. In its evaluation and control work, the Finance Committee can verify how information about performance is collected and presented, with the help of specific input if necessary. The work of the Committee will also help determine the reliability, quality, and durability of the sector and the use of performance indicators associated with each program. Program coordinators may also be called to Parliament hearings to account for the results achieved with the resources allocated to them. State Audit Office The State Audit Office controls the correct use of the funds managed by public bodies. The LOLF provides that the State Audit Office must draft an annual report on the results of budget implementation in the previous year and on the related accounts. In this report, the use of resources by task and program will also be analyzed. In the future, the State Audit Office will therefore examine programs and performance. In its annual work on budget implementation, the State Audit Office will examine the consistency and reliability of the information contained in budget documents, focusing on discrepancies between objectives and results. Interdepartmental program audit Committee The Government is responsible for the consistency and quality of budget bills with regard to the criteria laid down under the LOLF on budget documentation. The Government concluded that programs and the related information needed to be approved as part of the administrative preparation of the State budget before it is put to the vote of Parliament. Therefore it created an Interdepartmental Program Audit Committee to audit the quality of the information and analysis contained in the annual performance plans and in the annual progress reports associated with ministerial programs and the management methods used to translate the Agencies’ programs into actions. The Committee is chaired by an inspector general of finance and its members are chosen from the inspection and audit services of the various departments. The Committee is responsible for carrying out two types of audits:

o an initial audit, before programs are started, and on each main phase; o a post-implementation audit on the basis of program implementation data.

The quality criteria of the initial audit relate to the consistency of the program scope, program objectives, the associated indicators, the information systems producing the indicators, the action plans chosen to meet the objectives, the network guiding systems and the management control systems for monitoring resources and costs. The post-implementation audit quality criteria will focus on the reliability of numerical results and the guarantee that observation on discrepancies between goals and results is objective and exhaustive.

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Upon concluding its work, the Committee will issue a document containing an opinion based on the audit report and on the response to the report itself from the department concerned. 5. The strategy, objectives, indicators approach A) How to define and present a strategy associated with a program A.1. Presenting the strategy is essential to understanding the choice of objectives Defining a strategy comes before defining objectives and indicators. Presenting a strategy provides an opportunity to explain the overall consistency of the chosen objectives and justify their choice. Some programs fall within so-called across-the-board policies: although pertaining to different departments, they share the same purposes. These policies are coordinated by a minister, appointed by the Prime Minister, who is responsible for producing an across-the-board policy document which brings together the strategic objectives contained in the various annual performance plans. The chosen strategy must be presented as an outline, structuring the objectives materialized around a few guidelines and should be clearly and concisely worded.

State Tax and Local Public Sector Strategy A tax strategy could be organized around a core priority which consists in encouraging taxpayers to voluntarily comply with their tax obligations and in two complementary directions, the first being to adapt tax management to the users' needs (aimed at preventing errors and encouraging the acceptance of tax policies), the second being to ensure equal treatment for all citizens on tax matters. A third direction concerning productivity gains should also be included.

STRATEGY STRATEGIC OBJECTIVES

Promote compliance with tax obligations

Encourage taxpayers to voluntarily comply with their tax obligations.

Better meet users’ expectations

Use new technologies to make it easier to file tax returns and pay withholding taxes. Provide users with a reactive service. Offer SMEs a one-stop shop in the tax administration for all matters.

Ensure equal treatment for all citizens on tax matters

React rapidly to any failure in filing tax returns and pay withholding taxes. Tighten up enforcement measures for the most serious tax frauds.

Increase productivity Cut tax management costs.

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Education Strategy An education strategy could include objectives in three areas: the socioeconomic effectiveness of the education system (the knowledge and skills acquired by pupils, their future professional integration and the reduction of social inequalities arising from their parents’ backgrounds); the quality of daily management (for example, providing temporary supply teachers); optimizing system resources (for example, reducing differences in the number of pupils per class in identical contexts).

A.2. An in-depth reflection for defining a strategy Formulating a strategy involves a considerable amount of work that cannot be repeated every year: an in-depth evaluation of the implemented policy, international comparison through meetings and exchange of experiences with operational staff in other countries to know alternative ideas about operational and organizational methods, etc. A.3. A strategy with a long-term time frame Choosing a strategy is a decisive factor when structuring the policies pursued and organizing the Agencies concerned. It is therefore important that such strategy should remain stable over time and that strategic considerations should cover a time span of several years (three to five). However, framing a long-term strategy does not question the principle of an annual budget. B) How to define strategic objectives The choice of strategic objectives must meet certain criteria. B.1. General characteristics of the chosen objectives Highly selective objectives

Objectives should clearly define State priorities and should be few so as to ensure the budget's overall clarity and effective policy implementation. Ideally there should be no more than six objectives per program. Therefore, strategic objectives do not necessarily cover the entire scope of a program.

Choosing objectives that represent essential aspects of a program

The chosen strategic objectives apply to elements that are essential to the running of the program. They should relate to the most resource-intensive actions or should concern policy issues that are deemed to be most important. Some objectives will be attached to the program as a whole; others will be attached to specific actions within the program.

A well-balanced choice of the objectives should meet the expectations of citizens, users and taxpayers

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The choice of objectives must be such as to reflect three aspects of performance in a well-balanced way.

Socioeconomic effectiveness objectives meeting citizens’ expectations

These objectives bring about concrete changes to the economic and social environment and to ecological, health and cultural areas. They do not indicate what the Government does (that is its inputs), but rather the impact of what the Government does (that is, its socioeconomic outputs).

Service quality objectives that affect users

Users can be external (users of a public service) or internal (the agencies supported by the programs).

Management quality objectives that affect taxpayers

These objectives aim at increasing public service outputs for the same level of resources or using fewer resources for the same level of output. It is preferable not to link socioeconomic outcomes with resources so as to draw a clear distinction between socioeconomic effectiveness objectives and management efficiency objectives.

Here are some examples of the three categories of strategic objectives: State tax actions, local

public sector tax and financial management program

National police and gendarmerie programs

Socioeconomic effectiveness (citizens’ point of view)

Encourage taxpayers to voluntarily comply with their tax obligations. React rapidly to any failure in filing tax returns and pay withholding taxes. Tighten up enforcement measures for the most serious tax frauds.

“Increase the crime-solving rate" “Internal Security Act of 29 August 2002).

Service quality (users’ point of view)

Use new technologies to make it easier to file tax returns and pay withholding taxes. Provide users with a reactive service. Offer SMEs a one-stop shop in the tax administration for all matters.

Improve reception of the public in police and gendarmerie stations.

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Management efficiency (taxpayers’ point of view)

Cut tax management costs.

“Gear police and gendarmerie staffing levels to demographic trends and crime patterns” “Stop using police officers and gendarmes for jobs that are not strictly linked to security”. “Internal Security Act of 29 August 2002).

It is essential to strike a balance between the three categories of objectives, especially as the expectations of citizens, users and taxpayers do not always spontaneously converge. If the purposes of a given program concern all three points of view, it is essential that Parliament, as guarantor of public interest, ratifies the objectives pursued for each one. Not doing so could produce undesiderable results. For example, for a given level of resources, greater socioeconomic effectiveness could be achieved to the detriment of service quality. A program combining budget, accounting, logistics, IT, assets and human resource management functions could have the following objectives:

o no socioeconomic effectiveness objectives; o a service quality objective (service provided to internal users): improving computer

application availability; o a service quality objective (service provided to external users): reducing supplier

payment time; o a management efficiency objective: cutting personnel management file costs.

A choice of objectives consistent with those of related programs

Coordinating the objectives of programs that are part of the same mission or of the same across-the-board policy leads to the choice of identical, complementary or common objectives.

The general road safety policy concerns several programs

Identical objectives: an objective in the national police program could concern the effectiveness of breath analyzer tests; an identical objective could be assigned to the gendarmerie program for its specific remit. Complementary objectives: an objective in the national police program could concern the effectiveness of speed limit controls; an objective in the national road network program could concern a reduction in the number of black spots. Common objectives: a reduction in the number of casualties could be a common objective to all programs under the general policy.

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B.2. Intrinsic characteristics of the chosen objectives Clarity

The objective should be stated in a way that is simple, precise and easy to understand for everyone.

Achievement of objectives and program activities

Achievement of the objective must be ascribable, exclusively or primarily, to the activities of the program it is linked to. In contrast: objectives that can only be achieved through far-reaching changes in the socioeconomic environment should be set aside. Objectives whose impact is to distant or that are governed by causes other than the program actions should not be chosen.

Urban policy (social and territorial equity program)

The objective of reducing unemployment in poor urban areas cannot be assigned to such program, since unemployment depends on many different factors. Conversely, the program could have an objective of reducing differences in unemployment between underprivileged districts and other districts in the same urban area.

Objectives that a mainly attributable to players who are not involved in the program should also be rejected.

The objective of “reducing smoking-related deaths”

The reduction of smoking-related deaths is the result of preventive actions under the prevention and public health program as well as of curative treatments provided by the health system. The objective cannot therefore be set for the public health and prevention program since it does not reflect exclusively that program action. The objective of cutting tobacco smoking is better suited to this program. An objective measurable by figures

An objective is an accurate and tangible indicator of the expected results from actions to achieve the program purposes. Therefore, an objective must be measurable and include one or two indicators based on past and future figures (targets).

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Indicators should always be quantitative even when they relate to qualitative objectives. Two indicators can be used to measure the quality of reception in a public service:

o the percentage of users who are satisfied with the various aspects of the offered

service; o the percentage of phone calls for which a precise answer has been given.

Each objective is associated with one or more indicators.

C) What indicators for strategic objectives? An indicator measures the achievement of the predefined objective as objectively as possible. It is therefore necessary to know previous years’ results and to set targets for future years. Targets must be placed in a time horizon of five years and forecast results should be announced, whenever possible, for each year and not merely for the final target year. Target values are determined with greater clarity through managerial dialogue between the program coordinator and the Agencies. A good indicator should be:

o relevant, so as to assess the obtained results; o useful; o reliable; o verifiable.

How to define indicators to assess the obtained results? An indicator should be consistent with the objective The chosen indicator must have a strong and logical link with the identified objective. It must be an instrument that specifically measures the achievement of the objective. Here are some examples of indicators that can be used to measure the achievement of different types of objectives:

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Objective Indicators Examples Statistical data from surveys HIGHER EDUCATION AND

UNIVERSITY RESEARCH PROGRAM. Employment rate of new graduates. STATE TAX ACTIONS AND LOCAL PUBLIC SECTOR TAX AND FINANCIAL MANAGEMENT PROGRAM. Percentage of income tax and VAT returns filed on time. Rate of taxpayers’ spontaneous payment of tax at the due date.

Socioeconomic effectiveness.

Statistical data from internal management systems.

BUSINESS DEVELOPMENT PROGRAM. Success rate of subsidized projects.

User satisfaction rate measured by surveys

ALL PROGRAMS. Percentage of users saying they are satisfied with reception conditions

Objective quality parameters such as: deadlines, reactivity, reliability, availability, etc.

ALL PROGRAMS. Percentage of users receiving an answer to their correspondence before a defined limit date. Percentage of phone calls receiving a precise answer.

Service quality.

Rate of compliance to quality standards

ALL PROGRAMS. Percentage of agencies reaching the target standard.

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Objective Indicators Examples

Unit cost expressed by the ratio of resources used against activities carried out or services rendered

STATE TAX ACTIONS AND LOCAL PUBLIC SECTOR TAX AND FINANCIAL MANAGEMENT PROGRAM. Average cost of managing a large business tax dossier.

Percentage of management costs expressed by the management costs-managed resources ratio.

SUNDRY PROGRAMS. Percentage of expenditure on support functions in relation to total program resources

Distribution of resource indicators

SCHOOL PROGRAMS. Percentage of pupils in classes with less than ten pupils and percentage of pupils in classes with more than 40 pupils. STATE TAX ACTIONS AND LOCAL PUBLIC SECTOR TAX AND FINANCIAL MANAGEMENT PROGRAM. Percentage of tax audits resulting in tax penalties and/or proposals for prosecution. ACCESS AND RETURN TO EMPLOYMENT PROGRAMS Percentage of priority groups in an employment policy measure.

Targeting indicator, expressing the allocation of resources or activities against program priorities.

RESEARCH PROGRAMS Percentage of priority disciplines. NATIONAL POLICE PROGRAM Percentage of active police officers assigned to active policing duties.

Good use of potential indicator, expressing whether available resources are used in accordance with their purpose. SCHOOL PROGRAMS

Activity rate of supply teachers.

Management efficiency.

Cost overrun indicator in relation to an initial projection.

ALL PROGRAMS. Percentage of cost overruns on a building project.

Rate of financing of an activity through the sale of services or other non-State resources.

ALL PROGRAMS. Cost-sharing contributions as a percentage of revenues over total financing.

An indicator must relate to a material aspect of the expected result

The indicator or indicators associated with an objective must relate to an essential, substantial and important aspect of the expected result and not to a marginal aspect which gives a partial account of the result.

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An indicator must provide the basis for expressing a judgment

Leaving aside its logical link with the objective, an indicator should provide the basis for assessing the improvement in the situation to which the objective relates and for measuring the real performance. Some advice on this point: absolute value indicators should be handled carefully because there is a risk that they may depend on an incontrollable context.

The total number of income tax and VAT returns filed on time is more likely to increase rather than decreasing if the total number of returns increases. Consequently the figure, unlike the rate of timely returns, does not provide a basis for assessing the efficiency gain.

When an absolute value indicator is chosen, a corresponding value scale should also be given. In practical terms, it is essential to give past values and a target values so as to put an indicator into prospective;

The number of online income tax returns is not informative per se. One cannot say whether the volume of returns is too high or not high enough on the basis of that figure alone. In contrast, the figure becomes informative when it is compared with the target value and past results. The number of tax assessments carried out as a result of controls is not informative in itself. One cannot say whether the volume of tax assessments is too high or not high enough on the basis of that figure alone. In contrast, the figure becomes informative when it is compared with the target value and past results. Measured data must be rigorously quantified.

A complete cost calculation can be justified when the management of a diversified set of resources is at stake. Management cost reduction can be pursued paying attention to the ratio of the number of taxpayers liable to income tax to the number of jobs allocated to tax management and collection. However, if the productivity gain is due to computerization, it is better to include IT costs under total costs.

“Scatter” indicators should be preferred to average value indicators.

To measure improvement in compliance with a time limit, the percentage of cases in which the time limit is exceeded by a time that is deemed particularly abnormal is more representative of the quality of the service provided than the average processing time. For example, the percentage of users receiving a reply to their correspondence within one month is more relevant than the average response time. An indicator must not produce effects opposite to the required ones. An indicator should not be such as to induce behaviors that are intended to improve the indicator and deteriorate the desired results. One means of neutralizing possible perverse effects is to couple a second indicator with the first one so as to produce an overall balance.

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In order to measure the objective of reducing the length of court proceedings, the single indicator of the average length of cases completed during the year produces perverse effects. Since this indicator takes into account only completed cases, it could also mean that old cases were not dealt with rapidly since preference had been given to those on top of the "pile". A second indicator, such as the average age of pending cases as of December 31, should therefore be used to counter such perverse effects. C.1. How to guarantee usefulness of indicators An indicator should be provided at regular intervals

An indicator should be provided at regular intervals. Under exceptional circumstances (for example, because of the high cost of conducting a detailed survey of a population of beneficiaries), the indicator may be produced at less frequent intervals.

An indicator should lend itself to comparisons over time, in space and between players

An indicator must enable comparisons aimed at assessing the results obtained: comparisons over time (progress made from one year to another), in space (comparisons between territories) or between different players. Comparisons are a way of benchmarking the results obtained and of identifying best practices and options. International comparisons are particularly useful to make “preventive” diagnoses.

The service quality parameters of the action plan “Making taxes easier” (percentage of users receiving an answer to correspondence within one month and to emails within 48 hours, percentage of phone calls receiving a precise answer, etc.) are comparable between all Departments of the General Tax Directorate and the Public Treasury. Between these two networked administrations, comparisons are made between groups and units having comparable characteristics. Indicators common to the police and gendarmerie can make it easier to compare results (for example, crime-solving rates). An indicator should be immediately used by the agencies concerned

An indicator is useful only if, once produced, it is immediately analyzed by the operational managers involved and used to inform and guide management decisions. Therefore indicators must be used primarily in internal program management and then to prepare strategic decisions.

An indicator should be immediately comprehensible or clearly explained

The content of the indicator must be immediately comprehensible or clearly explained even if this means simplifying measured data.

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In the area of taxation, when an attempt is made to shorten response times for the correspondence sent by citizens, it is technically possible to measure the percentage of answers sent in less than one month, 2 months, 3 months, 4 months, 5 months, 6 months. To measure service quality, it is sufficient to select one of these time segments (for example the percentage of users receiving an answer in less than one month) as a service quality indicator. In a user satisfaction survey, the category of answers deemed to be most significant may be chosen as an indicator. For example, when respondents are asked to answer the question “Are you satisfied with the reception” with “Very satisfied”, “Rather satisfied”, “Not satisfied”, “Not satisfied at all”, the chosen indicator may be the percentage of very satisfied or rather satisfied users.

Composite indicators obtained by weighing different variables or based on complex assumptions and models are not easy to understand for non-specialists and should therefore be avoided.

An indicator of social alienation among young people in disadvantaged urban areas that consisted in calculating the weighted average of crime rate, school drop-out rate and unemployment rate for young people would not be immediately comprehensible because it combines very different concepts. C.2. How to construct reliable indicators An indicator should be durable and independent of organizational imponderable factors

The way information for the indication is collected must not be affected by organizational changes. The existence of central structures devoted to performance information processing, such as a management control unit, may guarantee durability.

An indicator should be absolutely reliable

An indicator’s reliability is an essential selection criterion. Reliability is based on the certainty of the measurement system and on absence of bias or limited extent of known bias.

Certainty of the measurement system

Unreliable manual counting or manual counting in addition to routine talks should be avoided. An indicator should be as far as possible extracted automatically from a management system or derived from surveys conducted by internal or external specialist organizations. In the latter case, the survey method should comply with specific rules (nature of the questions asked, sample of respondents, etc.).

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Absence of bias or limited extent of know bias

As a matter of principle, a good indicator should be free of bias. However, a given indicator may be chosen despite its bias, provided that any bias is limited in scope and clearly identified.

Two indicators are used to measure the objective of cutting waiting lists for local authority housing: the average waiting time for housing allocated during the year, and the average age of the backlog of pending applications as of December 31. These figures include applications from households already in local authority housing who wish to move. Following a survey, the percentage of such applications is estimated to be relatively stable. Therefore, despite the existing bias, the indicator can still measure achievement of the objective. An indicator should be drawn up at a reasonable cost

The indicator should be obtained at a cost proportional to the usefulness of the information provided. Automatically extracting the data needed to measure indicators from management applications is a good way of cutting management costs and increasing reliability.

Ensure that indicators can be verified and audited

Indicators must be documented in such a way that inspectors from Department, the interdepartmental account committee, the State Audit Office and parliamentary rapporteurs can verify the relevance and quality of the information provided. Agencies must therefore describe in detail in a fact sheet how the indicator has been prepared and the role plaid by each player in its production. It is recommended that these fact sheets should be published on departments’ web sites.

D) The annual performance plans and reports transmitted to Parliament. For each program, departments should present summary performance reports to Parliament: ex ante annual performance plans (on the occasion of the initial budget act) and ex post annual performance reports (on the occasion of the budget review act). Plans and reports, as their names suggest, are performance-related documents, setting out strategic objectives, their related indicators as well as other useful information to understand the main program activities. Annual performance reports are structured in a similar way as annual performance plans and show variance between forecasts and results for each item. Description of the program and actions

The content of the program and actions is first described in the annual performance plan. This description includes the following:

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the public interest purposes pursued, namely how appropriations are used, the sphere of action, and the beneficiaries; the way the agencies involved in the program are organized; the main action instruments, the main activities, the legislative and regulatory framework, and the tax policy related to the program. This concise information about the agencies’ activities sheds light on the information about program objectives described in subsequent annual performance plans. Annual performance plans and reports are separate from the agencies’ own annual reports that provide more detailed information about their activities.

6. Presentation of strategy, objectives and indicators. Presentation of strategy

The strategy is described in the annual performance plan. It is given in a summary format and is structured around a small number of guidelines and indicated the chosen objectives.

Presentation of objectives

Each stated objective is followed by a commentary aimed at:

o justifying the choice of the indicator(s) associated with it, o commenting on previous results; o explaining the choice of the target, o mentioning the main levers of action envisaged for achieving the objectives.

Presentation of indicators

Each stated indicator is followed by:

o a table showing the previous results and targets, for expected results; o data sources, o where relevant, methodological information.

Each indicator mentioned in annual performance plans and reports is described in great detail in a fact sheet that is updated by the program coordinator and made available to Parliament and audit bodies.

Zero-base budgeting

Information related to the program strategy, objectives and indicators is not sufficient to explain how the amount of budget allocations has been calculated. This specific piece of information is provided in annual performance plans and reports under the section devoted to zero-base budgeting that, among other things, explains the amount of appropriations with reference to volumes of activities or services provided and to their average unit cost.

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THE NETHERLANDS Budgeting and Performance measurement (summary)

The role of Parliament In the Dutch State budget system, Parliament has full and complete power to amend the budget proposal presented by the Government, however the latter is not obliged to resign in case amendments are made. Generally, the Dutch Parliament approves the budget proposal presented by the Government with minor changes. In the Dutch system there is no general debate on budget policies prior to the presentation of the Government’s budget bill. The Parliament votes directly on specific appropriations (without first voting on the total amount of revenue and expenditure in the budget) and approves the total amount of expenditure in one appropriation law. The Dutch Parliament does not have a Budget Commission. All budget-related matters are dealt with by the sector-specific commissions with the support of a Technical Budget Commission. The Dutch Parliament votes on mandatory expenditures in the same way as it votes on other expenditures. Budget documentation The reflection on the modernization of the budget process and documentation in the Netherlands began with a parliamentary proposal in 1997. In 1998, the report of the working group on the quality of financial documents, that was set up to assess the quality of financial documents, recommended the inclusion of a general overview on policy, business operations and financial resources in the budget documentation. The implementation of this recommendation led to focus on the definition of policies through concrete, and possibly measurable, objectives. A later working group developed a new budget scheme based on policy and objectives that represented a radical break with the traditional approach based on expenditure appropriations. Even the layout of the document was revised in order to better reflect the annual budget results, thus allowing to assess government policy through the systematic comparison between the budget and the annual report. Essentially, the new structure of budget documents was designed to answer these questions: “What do we want to achieve? How are we going to achieve it? How much will it cost?”. The purpose of this structure is to highlight the relationship between means and resources. The "Policy agenda” section is the most political element of the budget as it discusses the political priorities and financial consequences of proposed policy. This section also represents the link to the government program and the Budget Memorandum. Policies are linked to Budget articles: each Minister manages an average of 10 Budget articles. The articles have been reduced to 140, down from the 800 of the previous system. In the new structure, each budget article is broken down into objectives and includes performance details as well as evaluation studies. At the current state of the budget revision process no method is available for measuring efficiency thus, when this word is used in connection with policies and/or objectives, it means that a program has been launched for the identification of the indicators.

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Policy objectives are specified with a good level of detail and policy target groups and the corresponding periods are identified. In particular, objectives also include expected policy outcomes and, if possible, the corresponding performance indicators. In practice, it is often difficult to translate expected outcomes into concrete objectives in terms of (let’s take, for example, the social cohesion objective). All financial details (expenditures and revenues) of a policy field are presented in a single overview called “The budgetary consequences of policy”. All ministries provide this information, although the level of detail differs greatly. In general, most ministries show expenditures at the level of operational objectives and some then further subdivide expenditures per operational objective to show the relationship between performance and funds. All ministerial budgets include the distinction between program expenditures (which often include price and volume details) and general expenses. Budget documents include a table called “Budget flexibility”. This table indicates to MPs if there is any room for maneuver for the liabilities that have not yet been legally perfected. In practice, however, the table contains extremely technical information that is not easily understandable by those unfamiliar with this field. The compilation of this table is very complex even for the ministries. The section on Assumptions in calculating effects (critical factors) describes the key variables for the success of each policy. However, the way these variables contribute to the implementation of a specific policy (for example, economic development) and/or objective is seldom discussed. This is due to the fact that it is often not clear why, and when, certain instruments/measures will contribute to achieve the targets. Budget documents also include the following sections:

o Business operations: information on standards for internal control of finances and infrastructures, including possible risks and the corrective measures to be taken;

o Agencies: in the budget of each ministry, agencies are discussed in both the explanatory notes to the policy articles and the section on agencies;

o Motions and promises: the budgets include an annual report on the state of the implementation of the programs of the single ministers. However, no additional monitoring takes place, and this information does not include proposed legislative amendments;

o Responsibility: this section aims to answer the question “is the Minister directly and/or indirectly responsible for the results to be obtained?”. In view of the discrepancy between the policy agenda and the policy report, it will be difficult for a minister to indicate where his or her responsibility ends. This situation leads to the formulation of vague objectives. Anyway, Parliament considers the distinction into direct and indirect responsibility to be of limited value.

The structure and content of each ministerial annual report mirrors that of the Budget, the policy report being the only exception. As already mentioned, the budget describes the objectives to be achieved and the measures to be taken in the budget year, and usually gives some insight into the policy agenda and the policy articles in a long-term perspective. The long-term perspective is primarily found in the policy agenda. In fact, it focuses on long-term issues, such as the ageing of the working population, for example. Basically, the guiding principle in the policy agenda is “Where are we going in the long run?”. The annual report looks back on the previous budget year, thus it focuses on the short-term and does not take into account the correlation between recent developments in policy priorities and long-term objectives or trends. In contrast to the policy agenda, the policy report is often limited to a one-year time frame.

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The budget documentation presented to Parliament also includes, for the majority of expenditure programs, non-financial performance data. In addition, for some expenditure programs, performance information includes the so-called performance targets, objectives that identify specific results that can be achieved over a shorter period of time than that required for broader objectives (goals). In-year reporting The Dutch system requires the monthly and quarterly publication of financial accounting reports and they include a clear comparison between actual and forecasted budget results for the period under review (month or quarter). This information is provided at aggregate whole-of-government level, at ministry level, at agency level and at program level. Accounting and budget classification systems The budget that is approved by Parliament is prepared on Cash basis with the exemption of a number of specific operations that are reported on an accrual basis (interest expenditure and pension expenditure for employees). A move toward full accrual accounting is now being considered. Expenses are classified by function (Defense, Health, Education etc.) according to the GFS/SNA classification and by policy objectives. Economic and administrative classifications are not provided. Public sector accounting rules are set by the Ministry of Finance. Managerial flexibility Dutch central State Administrations receive one appropriation for operating expenditures. Transfers between capital investments or transfer programs (pensions etc.) and operating expenditures are possible and must be approved by the Ministry of Finance. However, it is possible to automatically carry over to the following budget year unused appropriations for operating costs (salaries) and investments. Reserve funds The Dutch annual budget includes a small central reserve fund for unforeseen expenditures (0,5% of total expenditures) that is normally fully used by the end of the year. Information on outcomes and outputs In the budget system of some Dutch public institutions, a number of outcome and output objectives are detailed in the main budget documents that are submitted to Parliament. In addition, there is an annual report on the performance of government programs that shows the results of the previous year compared to the budget and this report is an integral part of the financial statements. In the Netherlands, expenditures are directly linked to a number of output and outcome objectives.

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Policy efficiency This chapter discusses the question of whether Policy Budgets and Policy Accountability have contributed to the efficiency of policy (which is the broader objective). Originally, this was not the primary goal but was the natural link between objectives, instruments and resources. Policy budgets and Policy Accountability seek to establish this link by answering to the three questions: What do we want to achieve? What will we do to achieve it? How much will it cost? At first there was a certain optimism that this would have directly generated greater efficiency but, as it has turned out, it is almost never possible to directly measure the effects of policy, and thus its efficiency. Positive effects of Policy Budgets and Policy Accountability on policy efficiency of policy therefore do not result from the measurement of effectiveness, but from more clearly formulated objectives, and from showing how policy instruments are expected to contribute to an objective. How well reasoned are the policy documents? Although the budget approval process often generates a certain amount of debate, objectives are not logically correlated to instruments. The relationship between the various elements is often unclear: it is seldom formulated and then only in general terms. An objective might be inconsistent with some other objectives and consistent with others and, nevertheless, hardly any objective is formulated in terms of results. In practice, it is never immediately clear how the measures are related to the objectives. Frequently, instruments are held to be objectives. Moreover, objectives, albeit well formulated, do not clearly specify how government intends to achieve them. If performance data are present and well-defined, they often involve process-related efficiency or they are provided in abstruse terms. Therefore they seem to have no connection to policy or they are completely off the mark. Policy budgets and policy accountability: results-oriented budgeting The interviews carried out during the evaluation phase show that Policy Budgets and Policy Accountability have helped ministries adopt a result- oriented work method. The role of policy objectives has grown. The budgetary cycle is more closely attuned to the cycle of planning and control. This trend is growing and will extend to other administrations. Within the ministries, greater emphasis is being placed on questions ‘what do we want to achieve?’ and ‘what are we going to do to achieve it?’. In practice, however, objectives are still formulated without the support of adequate instruments or are based on overly optimistic scenarios. For example, if less funding was available to achieve the objectives, this would not lead to their downward adjustment! Policy and information evaluation Policy Budgets and Policy Accountability aims to promote the efficiency of policy not only through a better budget structure but through evaluation studies as well. Evaluation studies revolve around efficiency: what contribution will government policy make, or has it made, to achieving an objective, and what costs does this entail? Evaluation research therefore does not focus on the question of whether an objective has

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been achieved – this notion is expressed in the accounting given in the annual report – but rather on the long-term effects of implemented policies. Within evaluation research, a distinction is made between ex post and ex ante evaluation studies. In ex post evaluations, the effects of policy are charted and compared to the costs, so that policy efficiency can be measured. In ex ante evaluations – before a policy measure takes effect – an estimate is made of the expected effects and costs, and then compared to possible alternative policy measures. The best known ex ante evaluation tool is the cost-benefit analysis. In the Netherlands, policy evaluation is an integral part of Policy budgets and Policy accountability since 1/1/2002 when the Performance Data and Evaluative Studies Regulation (RPE) came into effect. This Regulation is and integral part of the Dutch Government Accounts Act that stipulates that Ministers are responsible for the efficiency and efficacy of policy as well as for operating results and that they must analyze the effects of these policies and transmit the results to the Netherlands Court of Audit. The Act also indicates that the Minister of Finance may draw up common rules to this effect. The RPE pursues two key objectives:

o guaranteeing the evaluation function within the central government o guaranteeing the quality of policy information.

Ex post evaluations The RPE defines ex post evaluations in the following way: a systematic study of the effects of existing policy, the manner in which policy is implemented and/or the costs and quality of the products and services supplied. Evaluating the impact of a policy or of its absence is very difficult: usually experiments or econometric studies are performed to determine the effect of the absence of that policy. The key requirements that have to be met to ensure the quality of evaluations are:

o legitimacy o reliability o accuracy o usefulness.

Ex ante evaluations The RPE defines ex ante evaluations as a systematic study of the expected costs and benefits of possible policy alternatives. The two most important provisions in the RPE in the area of ex ante evaluation studies are:

o For every new policy, or every policy change, it is compulsory to examine whether an ex ante evaluation is useful and whether it ought to take place. According to the RPE, when policy objectives are added or changed, a new policy is introduced;

o The abovementioned analysis must be documented in the budget.

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Guaranteeing reliable policy information In order to assess the quality of the information provided, a monitoring system needs to be set up in which the criteria of legitimacy, reliability and usefulness - as stated in the RPE - are effectively implemented. Take the criterion of usefulness, for instance. Making this criterion operational leads to the following types of questions with which to assess the usefulness of the information provided:

o Are evaluation studies, performance data, third party information and graphic present in the annual report? If not, has the reason of their omission been explained in the annual report?

o Have all the results of evaluation studies, performance data, third party information and all graphic data that have been used during the budget debate been included in the annual report?

o Is the information that has been presented understandable for the Dutch Lower House? In other words, is it clearly structured? Does it contain many technical terms? Are the data comparable over time? If not, are changes (e.g. in the method of measurement) clearly specified?

o Have the graphs in the annual report been presented in the same format as those in budget?

These questions are undoubtedly useful to assess available information. Obviously, the practical application of the other criteria is much more difficult. The question is: how can the quality of information be determined through legitimacy or reliability criteria? In particular, while the reliability of financial information is easier to assess, the reliability of political information is much a more complex matter. Guaranteeing a reliable estimate of the social effects of policy requires good researches, good techniques and good data. However, even if these circumstances are met, there is still an area of uncertainty. In the end, the number of policy evaluations has increased enormously. In his 1977 report entitled ‘Does policy have any effect’, Hoogerwerf observed that practically nothing had been done to study policy effects. In 1992 Leeuw again observed that still too little had been done in the field of evaluations. However, the scenario has changed dramatically and currently around 250 evaluations are performed each year. It is improbable that this is the result of the RPE, but it is rather the product of a series of laws and regulations that have come into effect. These norms have shaped the evaluation function and their objective is to record policy efficiency. The RPE has not yet contributed to this objective. It uses a strict definition of ex post evaluations and this entails an extremely high standard: the measurement of the real effects of policies. The general impression is that policy evaluation is a very important and potentially a very valuable tool, but its current role in the policy process is still marginal. The goals set by RPE are very ambitious but difficult to fulfill. In the case of ex ante evaluations, just a few have been performed so far and if we carefully observe their characteristics it is clear that they do not comply with the strict definition provided by the RPE because efficiency was not a standard aspect of the studies. In fact, these studies are insufficient in quantity and sometimes useless. Some experts have identified and suggested a series of points that have to be addressed in order to improve the evaluation function: more significant evaluations, clearer policy objectives, a greater guarantee of impartiality of the evaluations and improving the quality of reporting.

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DENMARK

Budgeting and Performance measurement (summary)

The role of Parliament In the Danish budget system, Parliament has full (and complete) power to amend the budget proposal presented by the Government, however the latter is not obliged to resign in case amendments are made. Generally, the Danish Parliament approves the budget proposal presented by the Government after making substantial changes. In the Danish system there is no general debate on budget policies prior to the presentation of the Government’s budget bill. The Parliament votes directly on specific appropriations (without first voting on the total amount of revenue and expenditure in the budget) and approves the total amount of expenditure in one appropriation law. In the Danish Parliament, a single Budget Committee deals with all budget-related matters while sectoral committees may formulate recommendations that, however, are not binding for the Budget Committee. The Danish Parliament votes on mandatory expenditures in the same way as it votes on other expenditures. Budget documentation The Government presents a single document to Parliament that includes both aggregate and summary budget estimates. This document contains a comparison of the expenditure proposed in the Budget with the actual expenditure for the previous fiscal year and a projection of expenditure for the next three fiscal years. However, no ex post comparison is made between projected expenditure in future years and the actual expenditure in those years. The budget documentation presented to Parliament also includes, for the majority of expenditure programs, non-financial performance data. In addition, for some expenditure programs, performance information includes the so-called performance targets, objectives that identify specific results that can be achieved over a shorter period of time than that required for in broader objectives (goals). In-year reporting The Danish system requires the monthly and quarterly publication of financial accounting reports, and they include a clear comparison between actual and forecasted budget results for the period under review (moth or quarter). This information is provided at aggregate whole-of-government level, at ministry level, at agency level and at program level. Accounting and budget classification systems The budget that is approved by Parliament is prepared on Cash basis with the exemption of a number of specific operations that are reported on an accrual basis as, for example,

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interest expenditure and pension expenditure for employees. Proposals to extend accrual accounting are currently being considered. Denmark uses Cash accounting also for the consolidated budget of the Public Administration, except for some particular transactions. Expenditures are classified by nature (interests, salaries, transfers etc.), according to the distinction between operating and capital expenditures, by organization and by policy objectives. Functional classifications are not used. Public sector accounting rules are set by the Ministry of Finance. Managerial flexibility Danish public institutions receive one appropriation for operating expenses. Transfers between capital investments or transfer programs (pensions, etc.) and operating expenditures are not permitted. However, it is possible to carry-over unused appropriations for operating costs (salaries, etc.) and for investments from one year to another. The Danish system allows public institutions to borrow against future appropriations for operating or investment costs within a 2% limit. Mandatory expenditure In Denmark, mandatory expenditure accounts for approximately 54% of total annual appropriations. Every year, the Danish Parliament approves the appropriations for mandatory expenditure and, during the fiscal year, deviations in expenditure from original estimates are automatically funded. The proposals for amendments to mandatory expenditure programs are normally presented by the Government and approved by Parliament (usually with minor changes). Reserve funds The Danish annual budget includes a small central reserve fund for unforeseen expenditures (2% of total expenditures) that is normally fully used by the end of the year. Performance management system The performance management was introduced in the Danish central government in 1992 as a supplement to an input-oriented budget system. The PMS system has since been developed and refined to include instruments that promote coherence and enhance the efficiency of the system. These instruments include performance contracts (1992), chief executive contracts (1995), annual reports (1995), controller units in departments (1996), the Danish Quality Award (1997) and a performance related pay system (1997). Today, the performance management system is widely implemented in central government, and performance contracts are used in all ministries as well and in all their subordinate agencies.

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The performance management system is an element of the expenditure control policy. As did other OECD Member countries, Denmark’s public sector was developed during the 1960s and 1970s. In the early 1980s expenditure limits were introduced into the budget system. At the same time, budget-holders were given increased autonomy in budget and resource management, in particular in personnel resources management. Total expenditure limits proved effective in reducing increases in overall public spending. However, they did not result in large-scale improvements in effectiveness, efficiency, and the ability to allocate resources in accordance with political priorities. This was predominantly due to the fact that the input-oriented system in the way that was conceived neither served as the basis for government discussion nor provided incentives to reduce costs or improve quality. Starting from 1990, in addition to spending limits, each Ministry was asked to focus on the objectives to be achieved with the allocated resources. The implementation of results-based management was intended to serve the following purposes:

o improve the ability of political decision-makers to prioritize among the main government objectives;

o it was anticipated that focusing on output would improve the quality of government services;

o the system was expected to improve efficiency by compensating budget imbalances between departments and agencies.

The Ministry of Finance was in charge of the implementation of the results-based management system and therefore participated in all negotiations between Departments and agencies on targets, roles and responsibilities. The initial involvement of the Ministry of Finance was necessary to shape the reform and to develop a more useful model for performance management. Now the process is left to the relevant parties (Ministries and Agencies), leaving the Ministry of Finance the responsibility of formulating guidelines and modernizing the performance management system. In the first stage of the implementation of the system, the Ministry of Finance applied the Performance management system exclusively to multi-year agreements and therefore introduced incentives at the agency level to encourage them to undertake the reform because, at the time, participation was on a voluntary basis. Many agencies and departments decided to voluntarily participate in the reform and, after some initial difficulties, the Ministry of Finance found the appropriate examples to illustrate the usefulness and the benefits of the performance management system for the public administrations. In the end the strategy adopted by the Ministry of Finance for the implementation of this innovative system has proven quite successful. Today, every Ministry and its subordinate agencies use the performance-based system as an integral part of their management system. The first performance management instrument used in Denmark was performance contracting (figure 1)

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Figure 1

Introduced in Denmark in 1992, performance contracts (PC) are written agreements between departments and agencies defining targets and required results for a given period of time. Agency performance contracts are formulated on the basis of political priorities, mission statements and budget limits. Targets are agreed between departments and their subordinate agencies, which formulate a draft proposal. Performance targets relate to both internal and external dimensions of agency operations, meaning:

o Internal dimension, productivity processes upon which personnel and, in general, resource management targets are set;

o External dimensions, requirements related to the quality of services provided to the public.

There are no mandatory requirements regarding the format of performance contracts. Instead, the Ministry of Finance and the Agency for Governmental Management have published guidelines facilitating the definition of the general framework of the contracts. Other instruments support Ministries to identify measurable and achievable Targets. There are no specific sanctions laid out in the performance contract for target underachievement and failure to meet obligations. However, the use of performance pay provides a clear incentive to fulfill the contract obligations. Performance contracts usually have a four-year duration and can be revised annually to reflect changes in priorities or in the availability of resources. The Chief Executive Performance Contract (CEPC) is a one-year agreement between the Permanent Secretary of Ministry Department and the Director General of a subordinate agency. Like performance contracts, CEPCs contain targets and expected results; they are set on the basis of the PCs of the hierarchically superior structures and of a directive of the

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Ministry of Finance specifying which objectives should be prioritized the following year. If the contractual obligations are fulfilled, the Director General receives a bonus. The Ministry of Finance proves the guidelines for the assistance in the use of CEPCs. As a supplement to the PCs, many agencies use Internal Performance Contracts. In these IPCs, aggregate performance targets are broken down into specific requirements for each section and unit in the agency to ensure that each employee feels responsible and accountable for achieving results and outcomes. Internal performance contracts are the result of agreements between the Director General and the Head of each section/unit. Performance reports are produced annually to provide information on resource use and target achievement. These reports are sent to the various Ministries and they in turn present them to Parliament. Controlling of results To ensure performance control, controller units (controllers) have been established in every department. The activities of these units include efficiency analysis, quality assessment, internal and external benchmarking, user satisfaction evaluation and the implementation of management information systems. Consequently, controlling is an important instrument in correcting information imbalances between Departments and agencies. Future challenges As is also the case in many other OECD Member countries, the aging of the population will increase the working age population in the years to come. Demographic change will pose problems in managing the demand for public services in the future. To avoid tax increases or service reductions, means must be found to achieve substantial cost savings. Public sector efficiency becomes key and human and operating resources need to be efficiently reallocated. The Performance Management system is expected to be an important driving force for change. To achieve this objective, however, adjustments in the Performance Contract framework must be made. To meet these challenges, the Ministry of Finance is considering a number of changes in its performance management concept, such as:

o a clear link between financial and performance indicators; o focus on outcome instead of output; o reduction of operation costs.

Performance indicators In the Danish budget system, a number of public institutions distinguish between outputs and outcomes. A set of output and outcome targets are specified in the main budget documents presented to Parliament. In addition, there is an annual report on the performance of the majority of government programs that compares actual performance to plan and this report is an integral part of the financial statements. In Denmark,

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expenditures are not directly linked to output and outcome targets. The administration is currently evaluating the introduction of cross-ministry targets. Performance indicators were introduced in the Danish public administration in the early Nineties. After a ten-year period, a number of weak points were identified: a) there were too many targets and they were difficult to measure; b) targets were related to the internal business of the organization (IT systems development, work processes, competence development); c) targets not were not prioritized; d) there was a lack of connection between strategic targets (director contracts) and performance targets (performance contracts). In 2003 “efficiency strategies” were introduced and they defined a set of “mandatory” policies, such as performance management, tenders, procurement, performance measurements for the services provided to citizens, and a number of “voluntary” policies, such as mission and vision and the structure of departmental areas. The new performance indicators involve:

o a focus on goods and services provided to citizens by the public administration (output) and on the effects and consequences that goods and services provided to citizens by the public administration have on the community (outcome);

o merging performance contracts with director contracts; o linking a portion of the salary of the Director Generals to the performance (the

results) of the Agencies; o setting a limited number of measurable output; o a focus on cost distribution; o the review of the targets (specific and general) specified in the annual reports; o the creation of a link between the different administrative reforms.

The structure of the indicators requires to specify the mission and the vision, output targets and measures, contract period and reporting requirements as well as the results that the Directors have to achieve. Target Categories:

o Case processing time: time needed to process one case. o Productivity: the relationship between production and production factors (output

and input) in an organization. For example, “decision costs” or “decisions per worker per year”.

o Output: production and production size. For example, “number of examined cases”, “number of released publications”, “number of inspections per year”.

o Quality: the level of harmony between citizens/users expectations and the perception citizens/users have of the processes and the outcomes of the activity of a public body, also in terms of the professional standards of processes and outcomes.

Examples of case processing targets Danish Competition Agency:

o “The average case processing time must not exceed 6 months”;

Danish Health Agency:

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o “An average case processing time for new drugs and new vaccines of 210 days in 95% is deemed satisfactory”;

Danish National Archives;

o “Documents/conventional registrations: preparation for delivery – 79 hours per standard case”

Examples of productivity targets

Danish Competition Authority: o “The 2004 productivity target is at least a 2% increase in current services

compared to 2003” Danish Maritime Authority:

o “3% unit cost reduction” Danish Tax Court:

o “Average annual productivity increase of the Tax Court of 2,5%”

Examples of output targets

Danish Industry and Trade Agency: o “We expect an average number of new users per month of 600. This would lead

to 7.200 new users who have to be added to the previous total of 11.200 by the end of 2004”

Danish Medicines Agency:

o “At least 230 controlled medicinal products is deemed a satisfactory result” Examples of quality targets

Danish Institute of Statistics: o “The overall satisfaction level of the users is (on a 1 to 5 scale)”

Danish Social Security Institute: o “The formal quality level (correct decisions) is 90%”

Examples of other Targets

Danish National Health Office: o “Preliminary analysis on the possibility of producing a professional health

publication”

Danish National Library Authority o “The Authority, in collaboration with the libraries, prepares a proposal for a

national strategy on Internet services”

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GERMANY Budgeting and Performance measurement (summary)

The role of Parliament In the German budget system, Parliament has full and complete) power to amend the budget proposal presented by the Government, however the latter is not obliged to resign in case amendments are made. Generally, the German Parliament approves the budget proposal presented by the Government with minor changes; anyway, in budget-related matters, the Lower House is preeminent over the Upper House. In the German system there is no general debate on budget policies prior to the presentation of the Government’s budget bill. The Parliament votes directly on specific appropriations (without first voting on the total amount of revenue and expenditure in the budget) and approves the total amount of expenditure in one appropriation law. In the German Parliament, a single Budget Committee deals with all budget-related matters while sectoral committees may formulate recommendations that, however, are not binding for the Budget Committee. The German Parliament votes on mandatory expenditures in the same way as it votes on other expenditures. Budget documentation The Government presents a single document to Parliament that includes both aggregate and summary budget estimates. This documents contains a comparison of the expenditure included in the Budget with the actual expenditure for the two previous fiscal year and a projection of expenditure for the next three fiscal years. However, no ex post comparison is made between projected expenditure in future years and the actual expenditure in those years. The budget documentation presented to Parliament does not include performance data. In-year reporting The German system requires the monthly publication of financial accounting reports, however, they do not include a comparison between actual and forecasted budget results for the period under review. Accounting System and Budget Classifications The budget that is approved by Parliament is prepared on Cash basis but additional accrual basis information is planned to be presented in the coming years. Germany uses cash-basis accounting for the consolidated budget of the Public Administration and the gradual introduction of accrual system is currently being investigated as well. Expenditures are classified by nature (interests, salaries, transfers etc.), according to the distinction between operating and capital expenditures and by function (Defense, Health, Education etc.) according to COFOG. Public sector accounting rules are set by the Ministry of Finance.

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Managerial flexibility German public institutions receive separate operating expense appropriations. The Ministry of Finance can authorize transfers between appropriations. Transfers between capital investments or transfer programs (pensions, etc.) and operating expenditures are permitted under specific conditions. However, it is possible to carry-over unused appropriations for operating costs (salaries, etc.) and for investments from one year to another. Performance indicators: one example 1. The resource management system of the Ministry of Foreign Affairs Management accounting was introduced in the FFO (Federal Foreign Office) in 2000 with the purpose to clearly identify the resources that are allocated to each foreign policy sector. It provides foreign policy and resource planning managers with detailed information on the cost of each unit, both for the Berlin headquarters and for the diplomatic missions abroad. 2. Performance management (Principles, Responsibility, Feedback, Audit, Evaluation) Given that two-thirds of the financial resources are spent on the missions abroad and that political capacity largely depends on the efficacy and efficiency of the work of the embassies and consulates, special attention was paid to the optimization of the coordination between the Berlin headquarters and the missions abroad. Therefore, the FFO focuses its efforts on improving the decision process regarding the targets of the missions abroad, which is one of the key instruments for the management of internal resources that can also be used to plan and manage the resources that are allocated for the missions abroad. The “target agreement” creation process involves the following steps: Targets and priorities are proposed by the responsible regional unit. The Ministry, the Head of the Division and the Head of the Mission discuss the targets (political, economic, cultural targets, etc.). Once an agreement has been reached, the targets are set in writing by the responsible regional unit. The target agreement must include:

o German interests in the host country; o situation and targets (political, economic, cultural, legal and consular affairs,

organization and administration); o the definition of the activities designed to achieve the targets; o the use of cost-based accounting and target-based accounting data to support the

targets and the control process. The Head of the Mission submits an annual report to the Minister on target achievement levels (output, plausibility of outcomes) and proposes supplementary and derivative targets and future activities that modify and further develop the targets that were originally agreed upon.

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Once modified, the targets are managed by the appropriate regional unit and have to be agreed upon by all interested responsible units. After the final approval by the Minister, the new agreement is notified to the Head of the Mission.

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SPAIN Budgeting and Performance measurement (summary)

The State budget system Until the approval of the Constitution of 1978, the Spanish budgetary policy corresponded to the so-called “revenue budgeting” practices although Spain was a relatively wealthy country. Among other consequences, this policy provoked rigidity and maintained a tight control on spending. In 1970, with the introduction of the “Development Plan”, an effort was made to introduce programming and goal-setting. An Inter-ministerial Commission on development and evaluation was created and worked in coordination with other units. The required evaluations were performed only the administrations whose investments were mainly of financial nature (e.g. public works, agriculture) and thus more easily measurable. Furthermore, there was a lack of correspondence between the estimated project costs included in the proposals and the costs specified in the budget. Personnel costs were not allocated in the budget according to the department in which civil servants worked but to the department paying their salaries. Between the early 1970s and the late 1980s, public expenditure as a percentage of GNP in Spain nearly doubled reaching the average level of industrialized countries, while budgetary policy and financial management ability did not develop as quickly. At the end of the 1970s, budgeting was described using the following points:

o allocation of resources was incremental and involved negotiations on additional requests for the following year;

o the main interest for budget holders was in the execution phase which was essential for being considered an “effective” manager and for obtaining further credits in the future;

o financial control implied formal compliance with public accounting rules; o parliamentary control of budget execution was based on the rules of the Court of

Auditors Until 1980 the Ministry for Finance was concerned with overall expenditure control. Budget formulation was just an exercise in calculation since evaluation and policy planning were absent from budgetary practices. In 1977, a new Budget Act set out the main guidelines for budgetary reform. The Constitution of 1978 laid out the structure of modern budget management that was completed and integrated over the years by subsequent laws and regulations. In 1982, the Ministry for Economy and Finance asked Expenditure Departments to submit their forecasts. By the end of the 1980s, the emphasis of budgetary reform had shifted from budgetary format to budgetary process. At the beginning of the 1990s, the intention of the Ministry for Economy and Finance was to modify budget rules to encourage the adoption of a budgeting for results system and promote multi-lateral negotiations to better integrate the roles of the various actors in the system. The recently approved Budget Stability Laws (2001) represent the government’s willingness to consolidate a period of budget discipline started in 1996. In this way, the Spanish Government was able to control public deficit and aggregate expenditure.

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Today, after the reform of 2001, the Spanish budget system is regulated by two general laws that were introduced in December of that year (Budget Stability Laws), one for the general government and another for other levels of government. Those laws have incorporated the necessary provisions to ensure the compliance of the Spanish system with the accounting systems of EU Member States (due to the requirements set by the European Union). These laws are based on four key principles:

o Stability (deficits are exceptional cases and budget balance has to be pursued); o Long-term projection (employ a medium-term perspective); o Transparency (provide sufficient information to the various stakeholders); o Efficiency (ensure the connection between the aggregate budget level and the

public expenditure level).

These laws contain two key innovations: first, in the first four months of the year, the government sets the objectives for the three following years both for the central administration as well as for the whole public sector in general; second, the government fixes the ceiling for non-financial expenditures (i.e. personnel, rent, investments, goods and services etc.) for the following three years in order to prevent unforeseen expenditure increases. At the beginning of the year, the Government sends the agreement on stability objectives to Parliament for debate and approval together with the macro-economic forecast scenario. At the same time, the Ministry of Finance presents the corresponding long-term revenues and expenses forecast. The budget process The budget process starts with the presentation of the main framework and general budget policy by the Ministry of Finance to the Council of Ministers at the beginning of the year. Before the end of January, government objectives on budget stability are agreed and transmitted to regional and local governments through the Council of Fiscal and Financial Policy and the National Council of Local Government. These Councils provide the link between the central government and local authorities. The Ministry of Finance prepares proposals for budget and stability objectives and limits on spending aggregates based on gathered information and sends them to Parliament. By the end of April, the Spanish Parliament should approve the proposals or reject them and send them back to the Council of Ministers. The role of Parliament In the Spanish budget system, Parliament does not have the full and complete power to amend the budget proposed by the Government, in fact it can only propose amendments that do change the total deficit/surplus set by the Government (for example, it may introduce new expenditures but only if it reduces others or approves new revenue sources so that there is no net change in total deficit/surplus). The two Chambers have a different role: the Lower Chamber enjoys pre-eminence in budget matters and has the power to amend the decisions of the Higher Chamber. If Parliament rejects the budget bill, the Government is not obliged to resign, i.e. it is not a

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vote of confidence. The Spanish Parliament generally approves the budget bill presented by the Government with minor changes. There is no formal pre-budget debate in the Spanish Parliament prior to the presentation of the Government’s budget proposal. Parliament first votes on the total amount of revenue and expenditures in the budget and approves them in one appropriation law before it votes on specific appropriations. In the Spanish Parliament, a single Budget Committee deals with all budget-related matters while sectoral committees may formulate recommendations which, however, are not binding for the Committee. The Spanish Parliament votes on mandatory expenditures in the same way as it votes on other expenditures. Budget documentation The Government presents two separate documents to Parliament, one for aggregate and the other for summary budget estimates. The budget documentation presented to Parliament also includes, for the majority of expenditure programs, non-financial performance data. In addition, for some expenditure programs performance information includes the so-called performance targets, objectives that identify specific results that can be achieved over a shorter period of time than that required for in broader objectives (goals). In-year reporting The Spanish system requires the monthly publication of financial accounting reports, however, they do not include a comparison between actual and forecasted budget results for the period under review. This information is provided at aggregate whole-of-government level, at ministry level, at agency level and at program level. Accounting system and budget classification The budget that is approved by Parliament is prepared on Cash basis. Spain uses Cash basis accounting for the Public Administration consolidated budget. Expenditures are classified by nature (interests, salaries, transfers etc.), according to the distinction between operating and capital expenditures, by organization, by function (Defense, Health, Education etc.) and by policy objective. Public sector accounting rules are set by the Ministry of Finance. Managerial flexibility Spanish public institutions receive two appropriations for operating expenses: one for salaries and one for other expenditures. There can be transfers between the two appropriations within the limits of legal restrictions. Transfers between capital investments or transfer programs (pensions, etc.) and operating expenditures are not permitted nor is it possible to carry-over unused appropriations for operating costs (salaries, etc.) and for investments from one year to another.

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The Spanish system does not allow public institutions to borrow against future appropriations for operating or investment costs. Mandatory expenditure In Spain, mandatory expenditure amounts to approximately 72% of the annual budget. The Spanish Parliament appropriates funds for mandatory expenditures every year and, during the fiscal year, deviations in expenditure from original estimates are automatically funded. Amendments to mandatory expenditure are usually requested by the Government and approved by Parliament (normally with minor changes to the Government proposal). Reserve funds The Spanish annual budget includes a small central reserve fund for unforeseen expenditures (0.9 % of total expenditures) that is normally fully used by the end of the year. Information on outcomes and outputs The Spanish budget system does not distinguish between outputs and outcomes. A number of output and outcome targets are specified in the main budget documents presented to Parliament. In addition, there is an annual report on the performance of the majority of government programs that compares actual performance to plan and this report is an integral part of the financial statements. In Spain, expenditures are not directly linked to output and outcome targets. There have been many attempts to reform the performance system and introduce criteria to measure and evaluate the results of public managers and the first satisfactory results were achieved only during the 90s. Anyway, the major cause of the lack of success of the result-oriented budget can probably be found in the discontinuous political commitment.

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SWEDEN Budgeting and Performance measurement (summary)

The role of Parliament In the Swedish budget system, Parliament has full and complete power to amend the budget proposal presented by the Government, however the latter is not obliged to resign in case amendments are made. Generally, the Danish Parliament approves the budget proposal presented by the Government with minor changes. In the Swedish system there is no general debate on budget policies prior to the presentation of the Government’s budget bill. Parliament votes directly on the specific appropriations (without first voting on the total amount of revenue and expenditure in the budget) and approves the total amount of expenditure in one appropriation law. In Sweden, a single Budget Committee deals with the budget aggregates while sectoral committees deal with appropriations for each respective sector. The Swedish Parliament votes on mandatory expenditures in the same way as it votes on other expenditures. The budget system reform: Performance and flexibility During the 80s the Swedish budget system underwent significant reforms. Flexibility and performance have been the keywords of these reforms. Flexibility in the use of resources means that government agencies can autonomously decide how much they will spend for example on salaries, rents, traveling etc. Previously there were detailed regulations for these matters. Agencies are also free to negotiate the salaries of their employees and can act autonomously on the market to acquire the necessary operating resources. Further flexibility is provided by the possibility of carrying over unused appropriations from one budget year to another or even borrowing against future appropriations. As regards performance, there has been a clear shift in focus from the resources used to performance. Thus, the result of the activities of the agencies is more important than the resources used for those activities. The result can be described both in terms of output (goods and services) and in terms of the effect on the system. The flexibility and the focus on performance are linked to an increase in accountability for financial and operating results and the annual report is a very important tool in this respect. From 1993 all government agencies have to submit annual financial and performance statements on an accrual basis. The budget process The last reform of the public accounting system introduced the new budget process in 1996. It requires the identification and setting of a ceiling on central government total expenditure. The ceiling is then broken down (Spring Fiscal Policy Bill) for 27 expenditure areas. These detailed expenditure areas constitute the general framework of the Budget Bill that is presented to Parliament in September. Parliament votes first on the total expenditure and then on the single appropriations. This means that in order to increase an appropriation it is necessary to identify how the increase is to be financed, i.e. what appropriation(s) in the expenditure area should be reduced.

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After the budget is approved by Parliament in mid-December, the Government is authorized to execute the budget and mandates the agencies to fulfill their assigned duties. The dialogue between the Agencies and the Government is obviously crucial because the Agencies have to submit their financial proposals/requests for financing their institutional activities to the Government by March 1 of each year. Lastly, for the implementation of the budget, Agencies are assigned targets and budgets based on their planned activities. All this information is enclosed in the documentation of the State Budget. Budget documentation The Government presents a single document to Parliament that includes both aggregate and summary budget estimates. This document contains a comparison of the expenditure proposed in the Budget with the actual expenditure for the previous fiscal year and a projection of expenditure for the next three fiscal years. An ex post comparison will then be made between projected expenditure in future years and the actual expenditure in those years. The budget documentation presented to Parliament also includes, for the majority of expenditure programs, non-financial performance data. In addition, for some expenditure programs, performance information includes the so-called performance targets, objectives that identify specific results that can be achieved over a shorter period of time than that required for in broader objectives (goals). In-year reporting The Swedish system requires the monthly publication of financial accounting reports and they include a clear comparison between actual and forecasted budget results for the period under review. This information is provided at aggregate whole-of-government level and at ministry level. Other reports In Sweden, the Government publishes a preliminary Budget report for the discussion on the general budget policy and on aggregate expenditure policy. Financial management system – Accrual Accounting The budget approved by Parliament and the public sector consolidated budget are prepared on Accrual basis. Expenditures are classified by nature (interests, salaries, transfers etc.), organization, policy objectives and function (COFOG). Public sector accounting rules are set by the Ministry of Finance. Managerial flexibility Swedish public institutions receive one appropriation for operating expenditures.

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Transfers between capital investments or transfer programs (pensions, etc.). However, it is possible to carry-over unused appropriations for operating costs (salaries, etc.) – up to 3% - and for investments from one year to another. The Swedish system allows public institutions to borrow against future appropriations for operating costs within a 3% limit and within a 10% limit for investment costs. Mandatory expenditure In Sweden, mandatory expenditure amounts to approximately 61% of the annual budget. The Swedish Parliament appropriates funds for mandatory expenditures every year and, during the fiscal year, deviations in expenditure from original estimates are automatically funded. Amendments to mandatory expenditure are usually requested by the Government and approved by Parliament (usually without amendments). Reserve funds The Swedish annual budget includes a small central reserve fund for unforeseen expenditures (0.5% of total expenditures) that is not normally used. Information on outcomes and outputs In the Swedish budget system, all public institutions distinguish between outputs and outcomes. All output and outcome targets are specified in the main budget documents presented to Parliament. In addition, there is an annual report on the performance of the majority of government programs that compares actual performance to plan and this report is an integral part of the financial statements. It is worth noting that output and outcome targets are formulated independently of organizational boundaries, i.e. they are cross-cutting targets.

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References

1. OECD Performance information in the budget process: results of OECD 2005 Questionnaire – Final report.

2. United Kingdom - Draft Case Study: “The UK Government’s use of Performance Information in Management and Budgeting and the Public Service Agreement Framework” OECD, Paris, 2-3 May 2006 by Zafar Noman.

3. United Kingdom - Measuring the performance of government department NAO – 2001.

4. United Kingdom – contribution by Mr. Simon Anderson (National Audit Office) – July 2005.

5. France – contribution by Mr. Brice Lannaud (Minefi) – July 2005. 6. France – The performance-based approach: strategy, objectives, indicators –

Minefi June 2004. 7. The Netherlands – contribution by Mr. Raphael Debets (Ministry of Finance) –

July 2005. 8. The Netherlands - Policy Budgets and Policy Accountability: Evaluation

Lessons from practice: Interministerial Consultations for Financial and Economic Affairs (IOFEZ) - December 2004.

9. Denmark – contribution by Mr. Ian Halvdan Hawkesworth (Ministry of Finance) – August 2005

10. Denmark - The quality of public expenditure – challenges and solutions in results focused management in the public sector - Kristian Thorn and Mads Lyndrup - OECD paper.

11. Germany - contribution by Mr. Robert Linke (Federal Foreign office) – August 2005.

12. Spain – Budget for results in Spain: Lessons learned after two decades of reform by Mr. Edoardo Zapico Goni - OECD paper.

13. Sweden – Accrual accounting in Swedish central Government - ESV 2001. 14. Institution for effective expenditure review: Lesson from International

experience – Mrs. Joan Kelly - February 2007.