What is Performance Budgeting?

Omar L. Castañar

Performance budgeting (PB) is a system that uses performance information in

allocating, spending, and managing government's financial resources. Governments
adopt PB to improve spending prioritization and to increase the efficiency and
effectiveness of public expenditure.

Performance information refers to outputs and outcome targets, costs for delivering
these targets, and assessments of effectiveness and efficiency of expenditures in
attaining objectives. Outputs refer to the goods and services that a government agency
or ministry produces, such as roads, schools, and healthcare services. Outcomes are the
impacts of the outputs. For example, an outcome of a road project is interconnectivity.
An indicator for interconnectivity could be the reduction in travel time between two
cities. Both outputs and outcomes are considered to be objectives or results.

PB is considered a reform that improves upon traditional budgeting. Traditional or line-

item budgeting allocates funding through costs of inputs (e.g., staff, equipment,
supplies) regardless of the ability to meet performance goals. In traditional budgeting,
the focus is on how much each line-item costs and how fast the funds can be spent.
Outputs and outcomes are not considered in this form of budgeting.

In PB, policy-makers allocate funds across sectors, ministries, and projects based on the
results that will be delivered on each level. This link between funding and results is
crucial in PB. But there are three variants of PB based on how strict this link is1, namely:

1. Presentational performance budgeting presents performance information in the

budget documents. Indicators and targets do not influence the allocation of the
budget. This is the simplest form of PB.

2. Performance-informed budgeting indirectly links resource allocation to past and

expected results. Policy-makers use other factors alongside performance
information in determining the allocation.

3. Direct performance budgeting uses specific mathematical formula to determine

the amount of funding per budget item. This is the strictest form of PB.

Aside from allocating funding based on expected results, governments also use PB in
managing how the budgets are spent. In traditional budgeting, Ministries of Finance

1
Performance Budgeting in OECD Countries (Paris: OECD, 2007), 21.
have more strict control at how line ministries implement their budgets. Line ministries
are restricted from deviating from the details of their annual budgets. On the other
hand, a PB system may allow greater flexibility in spending by allowing line ministries
to reallocate funds across different spending items that deliver the same objective or
result.

In PB, Ministries of Finance may also enter into performance agreements with line
ministries. A performance agreement binds an implementing agency and its personnel
to specific output and/or outcome targets. In most cases, these agreements are coupled
with an incentive system that financially rewards employees when their ministry
achieves the targets in their performance agreements.

A government that implements a PB system needs a robust way of generating,

analyzing, and reporting performance information. Hence, PB is usually packaged
together with reforms in the IT system of the Ministry of Finance or the government
as a whole. The use of technology is critical in keeping up with the information
requirements of a PB system.