Governments worldwide face increasing demands for transparency, accountability, and effective resource allocation. In addition, trust in our public institutions is a pillar of effective public governance (OECD, 2024). To address these challenges, performance budgeting has emerged as a transformative tool, reshaping how governments manage public resources by linking funding to measurable outcomes. By shifting the focus from inputs to results, performance budgeting not only ensures a more efficient allocation of funds but also strengthens national evaluation capabilities within the machinery of government. In this blog, we explore the significance of performance budgeting, how it works, and why it is crucial for building robust evaluation systems.
What is performance budgeting?
Performance budgeting is the systematic use of performance information—such as goals, outputs, outcomes, and indicators—to inform budget decisions. It shifts the traditional budgeting process from a focus on inputs (“how much funding is needed?”) to a results-oriented framework (“what can be achieved with this funding?”). This approach encourages transparency and accountability, allowing government officials, legislators, and the public to see not only how resources are allocated but also the impact those allocations have on achieving specific outcomes.
Performance budgeting is not a one-size-fits-all system. Countries adopt varying approaches depending on their governance structures, development priorities, and institutional capacities. According to the OECD performance budgeting framework (OECD, 2019), performance budgeting can be categorized into several approaches, ranging from “presentational” performance budgeting, which involves reporting performance data separately from the budget to “performance-informed” budgeting, where performance data directly influences budgetary decisions. Last but not least, direct “performance budgeting” is where a direct link between results and resources is established, usually implying contractual-type mechanisms that directly link budget allocations to the achievement of results, with budgetary responses to over or under-achievement of performance objectives.
Why is performance budgeting key for National Evaluation Capabilities (NECp)?
National evaluation capabilities refer to a public administration country’s ability to evaluate the performance of its programs and policies. These capabilities are essential for effective governance, ensuring that public funds are used efficiently and that government interventions deliver tangible results. Performance budgeting plays a critical role in building and strengthening these capabilities for several reasons:
- Enhanced accountability and transparency
One of the core tenets of performance budgeting is the requirement for clear, measurable objectives tied to budget allocations. This increases transparency, allowing stakeholders to evaluate whether public spending is delivering the intended results. By embedding performance metrics into the budget process and plans, governments create a culture of accountability where decision-makers are held responsible for achieving specific results.
- Improved decision-making within the Machinery of Government (MoG)
Performance-informed budgeting provides decision-makers with the information they need to make more strategic funding decisions. Instead of allocating resources based on historical patterns, budget decisions are informed by performance data, enabling governments to prioritize programs that demonstrate measurable success. This data-driven approach not only optimizes resource use but also strengthens national evaluation systems by creating a feedback loop where performance data informs future planning and budgeting cycles.
- Capacity building for evaluation
Performance budgeting requires governments to develop and maintain robust systems for collecting, analyzing, and reporting performance data. This necessitates capacity building in areas such as data management, research and evaluation and reporting. Governments that invest in these capacities are better equipped to evaluate the effectiveness of their programs and adjust them as necessary. Over time, this builds a culture of continuous learning and improvement within the machinery of government, reinforcing national evaluation capabilities.
- Creating incentives for performance improvement
By linking budget allocations to performance outcomes, performance budgeting creates powerful incentives for government agencies to improve their performance. Ministry and agencies that consistently achieve their objectives are more likely to receive continued or increased funding, while those that underperform may face budget reductions. This results-oriented approach encourages innovation, efficiency, and a focus on results across the public sector, further strengthening capable evaluation systems by fostering a results-driven culture.
In the context of performance budgeting, the budget formulation process incorporates not only financial planning but also the use of performance information, which is generated from evaluation studies. This approach links budget allocations to measurable outcomes, fostering a culture of accountability and continuous improvement within the Machinery of Government. Here’s how capable national evaluation systems influence each step of the budget formulation process:
Setting budget guidelines and priorities
When establishing guidelines, governments must integrate performance data from previous budget cycles to inform the new set of priorities. Evaluation and impact evaluation reports inform which sectors or programs have demonstrated the most performance and impact and should receive more attention as part of management for results and/or continued or increased funding. Budget guidelines are thus shaped not only by policy goals but also by the expected results of various programs, challenges faced, risks, and appropriate mitigating strategies, all informed by evaluation studies and other instruments of the accountability function, such as reviews, performance audits, and financial and compliance audits. Ministries are encouraged to align their requests with performance targets, ensuring resources are directed toward initiatives with clear, measurable outcomes.
Revenue forecasting: Linking revenue to performance expectations:
Governments' forecast revenues require a clear understanding of how resources will translate into specific results and outcomes. Performance budgeting requires revenue forecasting to consider both available resources and the expected returns on investment for different programs based on evaluation insights. Revenue forecasting may incorporate historical performance evidence generated by previous evaluation studies to anticipate the potential impact of budget and fiscal policies on revenue generation, considering factors like improved tax collection efficiency and fiscal plate or economic growth driven by well-performing sectors.
Performance expenditure planning
Ministries and departments are generally required to submit not only financial requests but also detailed performance targets and metrics that shall justify their expenditures as part of performance budgeting. Evaluation evidence from previous programs becomes a critical input in determining whether continued funding is warranted from both the executive review and budget allocation and legislative oversight done by the parliamentarians and relevant budget committees.
Instead of focusing solely on inputs (e.g., how much funding a program needs), like under the Zero Base Budgeting System (ZBBS) and Planning, Programming, Performance Systems (PPBS) introduced in the late 60s and 70s, or expenditure planning is centered on what activities or outputs can be achieved with the requested funds. Under performance budgeting, Policies and Programs need to demonstrate higher effeteness and better performance, generating more internal incentives (demand) for evaluations.
Budget negotiation and review
During the review phase, the central budget authority (Ministry of Finance, Treasury, and alike) uses performance evaluations to determine the effectiveness of past programs and policies and engage in negotiation with line ministries and agencies. This evaluation evidence is critical in determining whether to increase, reduce, or maintain funding levels for specific programs or policies. Ministries and agencies with strong performance records, as demonstrated by evaluations, are more likely to receive funding increases. Conversely, programs that fail to meet performance targets or show their continuing relevance and coherence with other programs and policies and impact may face budget cuts or be subjected to enhanced scrutiny.
Budget consolidation
The consolidated budget document includes not only financial allocations but also performance targets for each ministry or sector. This transparency allows stakeholders to see both the financial resources allocated and the expected outcomes, creating a results-oriented budget. In a performance budgeting system, the national budget highlights anticipated results and performance metrics, making the allocation of resources directly linked to expected outcomes rather than based on historical allocations.
Approval by Legislature and appropriation
Legislators and their relevant budget and sector committees can assess budget proposals focusing on performance data. They review evaluation findings to understand whether previous funding delivered expected results and whether the proposed budget will achieve its stated goals. During the approval process, evaluation reports play a key role in legislative debates, whether at the chamber or under legislative committees’ hearings. These reports provide evidence of the effectiveness of past programs and influence whether funding for specific initiatives is continued or reallocated.
Capable National Evaluation System
Incorporating capable national evaluation systems into the budget formulation process can not only transform the way governments plan and allocate resources but also contribute to learning and accountability, thus not only increasing trust toward public institutions but contributing to acceleration in achieving goals and SDGs. Rather than basing decisions solely on financial needs, this approach emphasizes results, holding ministries accountable for delivering measurable outcomes. Performance information generated by Evaluations plays a critical role at every stage, providing evidence for resource allocation, informing decision-making, and ensuring that public spending translates into tangible improvements for citizens.
