Performance Budgeting in Public Finance | Meaning, Features, Scope and Conditions for Success

Performance Budgeting in Public Finance 

Meaning, Features, Scope and Conditions for Success

Performance Budgeting

Performance budgeting is generally understood as a system or technique of presentation of public expenditure in terms of functions, programmes, performance units, i.e. activities, projects etc, reflecting primarily the government output and its cost. The focus in a performance budgeting is basically different from that in the conventional budgets. The two approaches differ in their scope and context. Under the performance budgeting, emphasis is shifted from the budget as a means of accomplishment to the accomplishment itself. If concerns itself primarily with the objectives aimed at by the government rather than with the outlays incurred on several projects. According to U. S. Bureau of Budget, “A performance is one which presents the purpose the objectives for which funds are required, the cost of the programmes proposed for achieving those objectives and quantitative data measuring the accomplishment and work performed under each programme.”

Under performance budgeting system, the overall budget is divided into functions based on the major purpose of government and then subdivided into programme and activities, funds being granted for doing a specific quantity of work. Performance budgeting implies that the budget statement should indicate the actual achievements expected by a Ministry over a period of time from certain amount of expenditure. It forces attention on the size and cost of programme to be implemented.

Procedure for Performance Budgeting

Objectives of each program are ascertained clearly and then the resources are applied after specifying them clearly. The results expected from such activities are also laid down. Annual, quarterly and monthly targets are determined for the entire organization. These targets are broken down for each activity center. The next step is to set up various productivity or performance ratios and finally target for each program activity is fixed. The targets are compared with the actual results achieved. Thus the procedure for the performance budgets include allocation of resources, execution of the budget and periodic reporting at regular intervals.

The budgets are initially compiled by the various agencies such as Government Department, public undertakings etc. Thereafter these budgets move on to the authorities responsible for reviewing the performance budgets. Once the higher authorities decide about the funds, the amount sanctioned are communicated and the work is started. It is the duty of these agencies to start the work in time, to ensure the regular flow of expenditure, against the physical targets, prevent over runs under spending and furnish report to the higher authorities regarding the physical progress achieved.

In the final phase of performance budgetary process, progress reports are to be submitted periodically to higher authorities to indicate broadly, the physical performance to be achieved, the expenditure incurred and the variances together with explanations for the variances.

The main features of performance budgeting are as follows

1. It helps the management to regulate its each and every activity according to predetermined standards of performance, targets and objectives.

2. It is not only an estimate of future needs but goes beyond that and- includes functions, programmes, activity schemes and time schedules to help effective and economic allocation for the programmes.

3. It lays great stress on the management of organisational structural and overall policy, personnel, financial, etc. from traditional to dynamic one.

4. It is not merely a projection of trends and targets but planning the business from grass root level to top level on rational thinking and forecasting.

Conditions for Success of Performance Budgeting

The main conditions for success of performance budgeting are given below:

1)      Work Measurement and Application of Performance Standards: The first and the foremost condition for the performance budgeting is the installation of work measurement and the application of performance standards within the administrative machinery. Determination of suitable standard should be based on a complete understand of the nature of the work and past records of similar work. Any standard so derived should be quite tentative, allowing for deviation.

2)      Record Keeping along Functional Lines: The second condition for the performance budgeting is the establishment of record keeping along functional lines. Such reports would indicate the variance between budgeted and actual cost.

3)      Integration of Budgeting and Accounting Classification: The third condition for the success of performance budgeting is an adequate and proper accounting support. Basically, there must be integration of budgeting and accounting classifications.

4)      Proper Classification of Public Expenditure: The fourth condition for the success of performance budgeting is the proper classification of public expenditure. There are two types of cost: (i) Capital cost, and (ii) Operating cost. A capital cost is an expenditure for the acquisition, construction or improvement of fixed assets, such as, land, building, plant, machinery etc. On the other hand, an operation cost is an expenditure other than capital cost which is incurred in carrying out a specific programme or activity.

5)      Organization of Programme Management: The fifth and final condition for the success of performance budgeting is the establishment of improved organization and programme management so as to take full advantage of the data made available through performance reporting.

Scope of Performance Budgeting In India

The pattern of existing budgetary system in India has been designed mainly to ensure legislative accountability and accounting scrutiny. Its main object is to ensure that the moneys are raised and disbursements made by the public authorities in accordance with the schemes duly sanctioned by the respective legislatures. The conventional budgets are framed by the respective ministries/departments. The conventional budget is accountability-oriented and is intended primarily to facilitate itemized financial control. However, it is not sufficient. The budget should also reflect and reveal as to what was planned and to be done in terms of physical targets, the output to be aimed at or services to be provided as envisage in the development plan and what has actually been achieved both in financial and physical terms. More specifically, by having a common classification for both the plan as well as the budget, the instrument of budget could be made an operational document for carrying out the plan objectives. The adoption of performance budgeting in India will help in placing in the proper perspective the cost and benefit of development schemes like River Valley Projects, Rail, and Roads Development, Industrial Development Schemes etc. Thus, there is full justification and scope of performance budgeting in India. The administrative Reforms Commission’s Study Team on Financial Administration has also recommended the implementation of the system of performance budgeting in India. The Estimates Committee in its 20^th Report suggested that “the performance-cum-programme system of budgeting would be ideal for a proper appreciation of the scheme and outlays included in the budget, especially in the large development activities.”