Does public finance need goals?
Recently, the public finance crowd has had a bit of a debate about the goals of PFM. In its draft Reimagining Public Finance (RPF) report, the World Bank team charts new ground in two important ways. First, it frames public finance as having four roles: (1) Commitment to feasible policy, (2) fiscal sustainability, (3) effective resource mobilization and distribution, and (4) performance and accountability in delivery. Being able to do these four things is how public finance contributes to government as a whole achieving outcomes. Second, the RPF team proposes that public finance reforms should be guided by an interest in outcomes (could be fiscal policy outcomes or outcomes in the education sector) and then work their way backward towards fixing the most urgent public finance bottleneck obstructing that outcome.
The RPF framework departs quite a bit from the previous generation of World Bank handbooks on the matter, now a good 25 years old. These postulated slightly different versions of three goals, often explicitly ranked in order of how fundamental they are: (1) aggregate fiscal discipline, (2) allocative efficiency, (3) operational efficiency (or, in short, the “three goals”).
A line of criticism has since developed that takes exception to RPF for straying too far from mainstream PFM. Some feedback is more entertaining than useful, noting that the RPF functions are “incorrect” and in any case “the problem with PFM is not the framework”. More importantly, the debate focuses on whether PFM can and should in some form include service delivery (in the sense of schools teaching children). Richard Allen notes that one needs to keep separate the financial implications of policy proposals coming from sector ministries and the underlying PFM agenda of the finance ministry. Marc Robinson insists that the mainstream approach to PFM, based on the three goals, is still sound. PFM reforms should be guided by them, on the assumption that a PFM system that performs better in terms of the three goals will benefit all sector ministries in turn.
This debate is important and overdue. The RPF team deserves credit for finally putting it prominently on the agenda, as do Richard and Marc for engaging with it thoughtfully and in writing. A working group hosted by NYU* a few years back, which included Allen Schick (author of the original PEM piece and doyen of our field), covered much similar ground.
I slightly disagree with both sides of the debate. My argument is twofold. First, there is not much of a point in debating PFM goals as such. PFM “systems”, such as they are, do not have goals. Second, successful PFM reforms are arguably always “results-driven”, and if actors like the World Bank cannot justify their PFM projects in terms of their results (which could be fiscal, or in sectors), then they’ll have a hard time holding on to their portfolio.
To the extent that there is a mainstream approach to PFM, it is due to PEFA. The PEFA framework in all its iterations refers to the three goals (labeled as, a bit ambiguously, “fiscal and budgetary outcomes”) and justifies its scope by the contribution the PFM system makes to the three goals. The better the various sub-systems in the seven pillars of PEFA perform, the more PFM contributes to the three fiscal and budgetary outcomes. However, the Campos and Pradhan paper (1996) that first articulated the three goals, was interested in “expenditure outcomes”. PEFA covers revenues and expenditures. Campos and Pradhan explicitly try to group different budgetary institutions by their relevance to fiscal discipline, expenditure prioritization and so on, which PEFA does not. Most of the underlying institutions for “technical efficiency” in Campos/Pradhan deal with civil service and public management questions, which are not part of PEFA.
A fiscal or a budgetary goal? (image by arbi lemzaouri)
Does it matter for technical efficiency as an outcome whether the underlying systems are in scope (as in Campos/Pradhan) or not (as in PEFA)? Does it matter for the three goals whether we are looking at public expenditure management or public financial management? Are fiscal and budgetary outcomes the same? While we’re on the subject, does it matter that the classical functions of fiscal policy (as per the Musgraves), allocation, distribution, stabilization, are not the same as those of mainstream PFM? I don’t think these are settled questions. No less an authority than the IMF’s Fiscal Affairs Department doesn’t think so either.
Furthermore, the framing of PFM as set out in PEFA and its contemporaneous handbooks is widespread, but not universal. The OECD, presumably reflecting the views of its member countries, continues to refer mostly to budgeting. Its ten principles of budgetary governance certainly capture the three objectives, but take a much broader perspective. In contrast, much of the academic literature that looks at fiscal or budgetary outcomes only considers one dimension: fiscal sustainability (or fiscal discipline). This is so not only because it is the most fundamental of the three, and because problems of fiscal discipline are of great interest to policymakers, but also because it is much more straightforward to measure.
Having a debate over the best frameworks and definitions is useful, if only to clarify and sharpen the thinking that went into them. But arguing over the goals of PFM is also a bit beside the point because PFM systems are tools that don’t really have a purpose on their own. PFM systems cannot be held accountable any more than a screwdriver. Actors are held accountable for the roles they play and the policies they pursue, in public finance as in other parts of government. Different actors can be, and usually are, stakeholders in shared government systems, and look at the same system from different perspectives.
A finance ministry may look at the PFM system and think it must maintain fiscal discipline more than anything else. A parliament might prioritize PFM’s ability to facilitate accountability. And a spending ministry might care most about the sufficient and reliable flow of funds. All of them are right from their point of view. However, only one actor (usually) is the administrative and political custodian of the system as a whole… and that’s the finance ministry. In mature political systems, there develops over time a careful balance between different actors and their interests that is expressed in the political and administrative rules and norms of public finance.
In a country like the UK or France, elections are lost and won over the performance over public services in health or education, as they are over debt and the deficit. However, after decades of working on the lower case financial management functions like cash, accounting and so on, these have become routine enough that their day-to-day running is heavily automated, delegated, and streamlined (sweeping overgeneralization with lots of caveats, especially in investment management). Most finance ministries in HICs are rightly concerned with fiscal sustainability first. Not only are public service issues primarily the concern of sector ministries, but to the extent that there are financial management issues impeding services, sector ministries have a lot of agency to fix them.
And this is where I see the real crux of the RPF and PFM goals discussion. In many LICs and MICs, there are public service problems that are either caused by or worsened by PFM problems that the sector ministry cannot fix and the finance ministry won’t fix. In those cases, the sector ministry is not really a stakeholder in the PFM system. And the finance ministry has, to put it crudely, other things to worry about than to help sector ministries spend more money. In such cases, the real question isn’t whether PFM includes public services. It’s whether finance ministries should take on a share in the accountability for services and the reforms to fix them. The answer to that question is unambiguously yes.
What would be the implications for PFM reforms and PFM TA if international funding became less mainstream and more outcome-oriented? PFM has certainly benefited from support often coming to countries as a packaged deal. System-wide assessments followed by a watering can of funding for budget, macro, accounting, audit and so on. Today, international assistance is under pressure everywhere, so some cutback is probably inevitable. Even though it’s early days, I would venture three predictions.
First, I suspect that reforms with a clear focus on fiscal sustainability will do fine and maybe even better than they do now. This is not only the primary concern of the finance ministry, but at a time of widespread worries about debt levels international attention won’t wane anytime soon. Reforms would have to show their value and persuade policymakers that they actually will contribute to fiscal sustainability. PFM experts shouldn’t be afraid of this scenario. Scrutiny and competitive pressure should lead to innovation, something to be welcomed.
Second, there is a real risk that some areas of PFM with less visibility and longer payoffs will suffer. There might be special offices for this and that, while the central budget office withers on the vine. That could be a real problem. But it would be for finance ministers, civil servants and experts to manage, and if you cannot justify your function to them, then maybe that’s too bad.
Finally, those results-driven reforms might actually work. Solving development problems is enough of a reward, of course. But a record of success would also help to improve the relationship between finance and sector ministries, drive more funding into the sector, and in time free the finance ministry to focus on longer term policy challenges that it cannot properly deal with when its staff are occupied by cash releases to public services on a daily basis.
Overly optimistic, maybe. But there are already examples of projects that link PFM reforms to public service results to suggest that this is neither impractical nor harmful to PFM.
* Disclaimer: I had a role in getting the NYU group set up, so I’m not an objective observer