This article was first published in the October 2011 edition of Accountancy Futures journal
Outcome-based budgeting enables governments to link resource allocation to results. Following the 2008 global financial crisis, it is critical for them to improve the link between policy outcomes and budgets.
Public services are often charged with so-called wicked, intractable problems that have no obvious solution. Often these problems, such as anti-social behaviour and the rehabilitation of offenders, need to be managed by several agencies working together towards jointly agreed outcomes.
Adding budgeting to the equation makes the link between resources and what public policies seek to achieve. As the Centre for Social Justice puts it: ‘Allocating funds to programmes on the basis of their effectiveness is not simply a question of financial responsibility.
Outcome-based government means focusing on those initiatives that change people’s lives: tackling causes rather than simply treating symptoms.’
However, outcome-based budgeting is rarely practised. In times of growth, governments focus on how to distribute the increment, whereas in harder times the focus is on the allocation of scarce resources.
The message from a recent UK National Audit Office report paints a picture of poor financial management in UK government departments, with little evidence of strategic approaches to public expenditure.
Despite initiatives to extend flexibility, departments are subject to tightening measures that encourage spending within the fiscal year and discourage carry-overs in departments that only add financial considerations at a later stage, resulting in a tenuous link between policy and resources.
Also, cuts are top-sliced rather than structured, with little focus on long-term savings.
In many countries, budgeting is input-based and involves allocating monies to different types of spending on an annual basis. This process ends in a rush at the end of the fiscal year, with little thought as to how the current year’s activities relate to programmes stretching over several years.
Additionally, public services are delivered to a greater or lesser extent in a political environment, and, all too often, politicians seek to align policy cycles with political cycles. This process does little to encourage sustainability and financial planning for public services, nor effective planning nor evaluation.
Despite this, initiatives have proliferated to reform budgetary processes to develop closer links between budgets, programmes and performance. This thinking was developed for production-based environments in the private sector, and has been adapted for social and service-based programmes in the public sector.
Many budgetary reform initiatives can be traced back to the US. In the 1950s, the Rand Corporation experimented with Programme Planning and Budgetary Systems (PPBS), which sought to allocate resources to policy programmes. This enabled resource inputs to be linked to programme objectives viewed over the lifetime of the programme. This approach was of interest to the federal government, where it was introduced in the Department of Defense.
The concept of accountability has moved on from a search for financial rectitude and due process, to one that embraces performance and results.
This conceptual shift is best understood with an example from foreign aid. Aid programmes have been criticised for failing because there has been too much emphasis on accountability to donors rather than to recipients.
In recent years, several OECD countries, including the UK, US and New Zealand, as well as the wider international aid community, have made moves towards so-called results-based management, where the focus is on which results are achieved in terms of outputs and outcomes, in return for inputs. This required a number of questions to be addressed, such as:
- What do we mean by outputs and outcomes?
- How they relate to each other?
- How do we determine the relationship between inputs and outputs?
Outputs are things that organisations produce, while outcomes are seen as impacts on society. The former tend to be more immediate whereas the latter are often realised in the longer term. Moving the focus to outcomes involves a shift of thinking, which needs cultural change and new skills for policymakers, managers and finance specialists.
Today, market mechanisms are used to purchase services from a range of internal and external suppliers. This raises the question of how to monitor and evaluate the performance of service providers and how to reward them.
In the US, the 1998 Workforce Investment Act (WIA) seeks to increase occupational skills attainment by participants and to increase their employment, retention, and earnings capacity. The act is managed by the US federal Department of Labor and funds are given to the states where Workforce Development Councils, led by business interests, manage the funds and allocate them to regions in the state. The programme measures are implemented by employment and training agencies, which purchase services from external providers.
In England and Wales, government seeks to use the private and third sectors to provide employment programmes through the Flexible New Deal, with 80% of its service provided through a ‘stable core of reliable providers’. The policy does not prescribe what activities providers undertake but, instead, rewards providers when jobseekers return to work.
More recently, the Ministry of Justice proposes to apply a similar approach to its rehabilitation programmes for offenders, rewarding private and third-sector providers through a system of payment by results. The proposal seeks to give providers the freedom to innovate in new forms of service delivery to achieve outcomes at the level of the individual offenders. They would then be rewarded by payment for results.
Elsewhere, the European Commission (EC) is considering the reform of the European Social Fund to use external providers to provide employment services. This complex reform involves the EC working with member states, which, in turn, commission the services of external providers which deliver commissioned services and are rewarded for achieving results.
All three examples raise important issues, from how to define outputs and outcomes to the relationship between them and resource implications. Outcomes are often defined as ‘impacts on society’ but can be defined at a number of levels. For example, a jobseeker might return to work after completing a training programme. This may involve defining what constitutes a return to work, for example, what constitutes appropriate work for a given client and for how long. Policies such as this are not delivered in a vacuum and there could be other factors at play.
Factors in the wider environment: The state of the local labour market may affect the likelihood of a jobseeker finding employment. This may mean that potential providers of services will bid for more lucrative contracts in buoyant local labour markets rather than those with long-standing structural unemployment.
Changes in the policy itself: Public policies are not static. They have life cycles and are subject to politics, policy change or changing funding regimes. This may make it hard to evaluate whether a particular intervention contributes to a long-term impact on society.
Changes in other policies: Policy change elsewhere may affect the policy in question. For example, in England the introduction of the Work Capability Assessment is leading to more people with health issues being deemed fit for work. The effect of this is that providers will need to allocate resources and work with target groups with greater barriers to employment than was previously the case.
Defining outcomes: The policy-planning process involves making choices about setting of goals and ways to achieve them. Local agencies may be subject to mandates set at a higher level but new localist agendas may allow agencies to choose how to achieve them.
Reliability of performance data: Rationalist techniques for decision-making require accurate and timely data and the resources to analyse the data. The US experience of the WIA showed problems of unreliable and sometimes manipulated data.
Setting appropriate time horizons: A policy-programme outcome entails a longer-term effect, such as the promotion of educational and lifetime opportunities through the provision of free school meals. Problems of linking outputs to outcomes exist here.
Managing contractors: Many of the problems in dealing with and managing contractors experienced in the WIA programmes are reflected in the experience of the UK Department for Work and Pensions. It found problems in using contractual mechanisms to determine the behaviour of contractors.
Rewarding performance: The link between payment and results raises questions about what constitutes a result and how and when contractors are rewarded. Organisations can define contract specifications that reward outputs delivered, milestones reached or results achieved. Outputs, such as the number of school meals served, may be observable, but they do not constitute a result. Rewarding outcomes is based on a judgment that the intended impact on society has been achieved.
Outcome-based budgeting and policymaking makes significant demands on the intellectual and skills base of policymakers, managers and financial professionals. It has the potential with a strong evidence base to make public service delivery more rational and more productive in the sense of achieving desired outcomes. However, one must never ignore the political factors with both large and small 'p's' and the pressures for decisions that meet the demands of external priorities. Governments should refresh their thinking on outcome-based budgeting, learning the lessons from the past.
Dr Aidan Rose is a freelance consultant specialising in public service management and education. His particular interests are the reform of public services in the UK and eastern Europe. Most recently he helped make the EC’s Social Fund outcome-orientated.