Public Financial Management
The first step for any country to achieve its national development objectives is for the public sector to analyze its finances to determine the available medium- and long-term fiscal space to direct resources to its development priorities. Within the available fiscal space, the prioritization of government expenditures should then be guided by the government’s policy priorities and careful analyses that show the effectiveness and incidence of different government spending options. Though there are some developing and middle-income countries that have been successful in aligning their available budgetary resources with their stated policy objectives, the relationship between budget allocations and policy priorities is often much less direct.
It is not unusual for national development plans or strategies in less developed countries to end up as wish lists, rather than provide a realistic policy framework for prioritizing the public sector's scarce resources. Without a clear statement of government priorities, and typically without any analysis to what extent additional spending on any particular program will help achieve the government’s policy objectives, budget formulation processes are either reduced to an exercise of providing all government program with an equal, incremental increase in resources, or exposed to the whim of political forces.
The sound management of the public sector’s finances is a cornerstone of good governance and a pre-condition for efficient public service delivery and economic development. Yet, despite considerable efforts by international financial institutions and development agencies to improve public financial management (PFM) in developing and transition countries around the world, such as by introducing results-based budget planning, by making the budget process more transparent and inclusive, or by introducing integrated financial management systems, relatively little is known about the extent to which developing countries efficiently allocate their public finances in line with their stated policy priorities. Similarly, relatively little is known in most countries about the political economy of the decisionmaking processes by which budgetary allocations are made.
Many of the PFM tools the international PFM community currently uses were designed to assess the adherence of governments to specific PFM processes and procedures, but they provide limited or no guidance in answering whether public-sector finances are spent efficiently to achieve the desired outcomes. Although most budget documents provide a breakdown of spending by organizational unit and/or function, central or local government budget documents often do not provide the necessary level of detail that would allow stakeholders to trace the impact of spending decisions on specific service delivery outcomes. Similarly, few budget documents provide the necessary detail about the vertical allocation of resources (whether between different government levels or to subnational administrative tiers) to ensure that resources flow down to the local level where most public services are delivered.
As a nonpartisan policy research organization, the Urban Institute is recognized as a global leader in the analysis of public budgeting, tax policy, and the analysis of public-spending decisions across a range of policy areas and at all levels of government. Our broad technical experience has led us to conclude that instead of relying on a single tool, policymakers and practitioners—in the United States and around the world—should draw from a portfolio of tools to inform public budget choices and to effectively advance evidence-based policies. In addition, our involvement in real-world policy reform has taught us that fiscal policy reforms and budgetary decisions, though informed by evidence-based research, are first and foremost political decisions.
Several subthemes and topics define IDG's international expertise in this practice area. These topics within public-sector finance and intergovernmental finance are closely intertwined with IDG’s other practice areas (which include service delivery, inclusive governance, and urbanization and the role of urban local governments).
- The analysis of public expenditures and PFM Systems. A prerequisite for the design and implementation of effective policy (development) interventions is to have a solid understanding of the budget processes and financing mechanisms that fund the service or sector under consideration. Urban provides a wide range of fiscal policy analytical services, including assessments of public expenditures, public expenditure and financial accountability reviews, tax simulation modeling, and fiduciary risk assessments.
- Budgeting for Results. One of the most well-known ways to strengthen the link between budget expenditures and policy results is by the introduction of results-based or performance-based budget processes. The Urban Institute has been a thought-leader in performance-based budgeting in the United States and around the world.
- Supporting the reform of intergovernmental fiscal relations and the design and implementation of fiscal decentralization. Many developing and transitional countries recognize that the excessively centralized management of public finances often leads to an unresponsive public sector in which spending is inefficient (both in terms of allocative efficiency as well as technical efficiency). Urban has supported countries around the world in designing and implementing fiscal decentralization reforms, including improving the assignment of functional (expenditure) responsibilities; revenue assignments; the analysis, design, and implementation of intergovernmental fiscal transfers; and strengthening local borrowing arrangements.
- Strengthening local government finances. The Urban Institute has extensive international experience in the strengthening of local government finances, including the introduction of improved planning, budgeting and financial management systems at the local level, and the improvement of own source revenue collections and local borrowing practices.
Recent Urban research efforts within our "Public Financial Management" thematic area include
- The role of the Local Public Sector in achieving sustainable development: Does more spending at the local level result in better development outcomes?;
- Measuring Decentralization and the Local Public Sector: A Survey of Current Methodologies; and
- Improving Public Services and Achieving Sustainable, Inclusive Development: Development Assistance and the Role of the Local Public Sector.
Contact IDG info for more information about IDG's project activities and research on public financial management.