You Want A Better Budget? Then You Must Ask For It.

Nepal is not alone among developing countries in being plagued by dysfunctional public expenditure management, widespread corruption and waste, and little accountability. One might argue that this is indeed why Nepal is poor. On the other hand, a country with fewer means can least afford all this. Overcoming this barrier, some countries have made remarkably rapid progress in raising the welfare of their citizens. Mauritius and Uganda may be the most impressive recent examples. There is no reason why Nepal could not join the ranks of these illustrious success stories.

Prompted by the recent fiscal difficulties, HMG is in the middle of a heroic effort to revamp the public spending system. This will not be easy, unless the citizens of Nepal themselves begin to take interest in this. The Government budget is too technical a matter for average citizens? It should not be, and in truth a good budget system requires little more than common sense. Besides, it is your money. If you don't care, who would?

What would a good budget system look like?

The purpose of public expenditures is to provide good public services, be it basic education, vaccinations, roads, or security. If you were running a government, what would you need to deliver good services? In short, three ingredients seem necessary. First, you need a sound strategy and a good plan, sector by sector. Second, you need money to implement those plans. Third, you need good public institutions to actually translate the money into public services. This typically means having an effective system of accountability so that public servants perform. A budget system is what pulls these ingredients together and actually deliver public services.

This means that a good budget system must have three attributes. It may help to think of this as three phases of budget formulation and implementation. To start, a realistic and binding budget ceiling must be set. This requires a good estimation of total government resources, including revenues, domestic borrowing, and aid from external donors. Without such a ceiling, and the will to live within that limit, you will either end up with an unrealistic spending plan (hence not enough money for all the projects and programs) or huge debt problems. This budget ceiling is often called a "hard budget constraint." In our personal life, most of us know the budget constraint is pretty hard and binding. Unfortunately, many governments "cheat," by printing money, borrowing too much, or even not paying bills on time. A good government would not.

Second, within a realistic budget envelope, hard-nosed decisions must be made to fund only priority items. Any attempt to fudge this and overload the budget will lead to insufficient funds later. This priority setting requires rigorous assessment and vigorous debate on the relative merits of competing demands, based on a sound sector strategy and plan for each expenditure item. This is where real "political" decisions (as opposed to technocratic decisions) must be made, trading off competing social and public priorities. (Here I mean "political" in the real sense, i.e., at the level of representatives of competing public interests.)

Third, once a realistic budget is drawn up, you need an effective system of monitoring and evaluation, as well as mechanisms for accountability. These are the things that typically make institutions effective, more than the availability of proper technical know-how or skills. Monitoring and evaluation are critical for holding people accountable for implementing the budget and delivering good services. They are also necessary to inform the future decisions on the relative effectiveness of different expenditure items.

One other thing helps to make the budget system work better. That is to think of the budget on a multi-year basis. Why? Because most government activities are not confined to one year. Many investments will take several years, and after the initial investment there will be need for operation and maintenance expenses. Most government programs will span many years. Therefore, in deciding to start a new project or program, one must think of the budget implications for not just the immediate year, but also the future years. A multi-year budget framework, in which annual budgets becomes relatively small adjustments, gives various government ministries and agencies much greater predictability of funding in future and hence the ability to plan sensibly. Another important reason for multi-year thinking is to widen choices. At any moment, the budget for the next year is fairly fixed. This is because the government cannot suddenly change the size of its workforce and much of investment for the next year is largely driven by all the past decisions. Thus, an annual budgeting process gives you little flexibility. However, if you look two, three years down, you will find much more flexibility, as some projects or programs will wind down and open space for new initiatives.

When you have a multi-year (typically a three-year) budget system that has the three key attributes described above, you will have a very respectable public expenditure system. The rest is mere technical detail, which most of us do not need to know. Such a system is sometimes called "Medium-Term Expenditure Framework," or MTEF. This is not a very descriptive name, because it focus too much on the multi-year dimension and fails to tell you that the whole point of this approach is improving public service delivery. Poor naming aside, this is the kind of public expenditure system that HMG is now trying to introduce.

Challenges for HMG

Although this system may seem so simple and nothing more than commonsense, implementing it in Nepal will not be easy. Many bad habits have developed. Bad habit number one is inflated budget ceilings. Bad habit number two is avoidance of hard choices, which is of course closely related to bad habit number one. Inflated budget ceilings are politically convenient because they allow people to avoid the pain of having to cut low priority items. Politicians seem to have abrogated their duty to make such difficult decisions. Rather they contribute to making the budget unrealistic by adding their "pet projects" to the ever-growing list of poorly-planned, and poorly-implemented projects. Bad habit number three is the neglect of accountability. Those who do not perform, and worse yet, who steal public resources, often go unpunished. So, all three attributes of a good budget system are lacking.. Nothing short of fundamental changes in behavior at both the political and bureaucratic levels will be necessary.

To overcome these obstacles and restore credibility to the budget system, HMG is focusing on two particular aspects. First, for the highest priority projects (called "P1"), the Ministry of Finance plans to guarantee release of the budget against achievement of agreed "output indicators." Establishing clear output indicators for each project (such as signing of contracts and construction of school buildings) and linking budget release to performance on the ground will be a significant step in improving the impact of the budget. Surprisingly, in the past, only the level of spending was tracked, rather than what the money actually did. The guaranteed full funding for P1 projects is also important for the integrity of the budget, because it will force the Ministry of Finance to adopt a realistic budget ceiling. (In the past many projects did not get full funding because the budget was inflated. This made it very difficult for those responsible for projects to plan properly. In turn, it made it impossible to hold those people accountable for project implementation as well, for they always had a perfect excuse of insufficient or unpredictable budget release.)

The other aspect HMG is focusing on is establishment of an effective monitoring and evaluation system. This is an absolute necessity for holding public servants accountable and ensuring good results from public spending. I am encouraged to see that the current thinking behind budget reforms includes strong emphasis on expenditure tracking, outcome monitoring, and public disclosure and audits with active civil society participation.

Citizen's role

These technical improvements, however, will not be enough. Many of the ills of the budget system stem from the politics of public spending. To quote the Public Expenditure Review (undertaken by the World Bank in 2000, "For any technical solutions to work effectively, the behavior of political leadership and political parties needs to change significantly. The key challenge in this regard is how to redirect the involvement and energies of the political leaders and political parties in a more constructive way to facilitate the development process and public resource management." I have often heard that with the restoration of democracy in 1990, public expectations soared beyond any reasonable chance of achievement. Politicians have simply pandered to these expectations by promising everything people wanted and more, without any regard to what HMG can afford. I have heard people say that these dashed hopes were exploited to devastating effect by the Maoists. While there may be some truth to this argument, I believe that much could have been done to manage expectations through transparency, information and a dose of realism. What the government, and more importantly political leaders, could perhaps have done better over the past years was to explain, in a timely and transparent manner, what resource were available, what areas needed priority funding, how those priorities were defined, and then also report the results and outcomes of those expenditures.

In fact, Nepal has an uncommonly progressive Constitution in that Article 77(2) requires the government to report whether state expenditures achieve stated objectives. It is about time this important aspect of the Constitution is respected. It is also about time the citizens of Nepal demand more sensible budget decisions and more responsible budget implementation. Ultimately, lazy citizens will only get a lazy government.