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Use the Budget to boost performance

The budget process can and should support an increased focus on performance, whilst maintaining or improving fiscal control. It can provide Ministers with a strong lever for demanding better performance information, reflecting government’s strategy and priorities, and aligning resources (both new and current) with policy priorities.

The current budget process is strongly oriented on fiscal control and input management. It is possible to provide an enhanced focus on performance by undertaking spending and performance reviews, using indicative multi-year funding profiles and indexing baselines to make sure that resources are aligned with priority areas. The changes suggested below can be tailored to meet the operating needs of the incoming government.

Undertake spending and performance reviews

Current budget processes focus on incremental spending used to expand the scope of existing public services or introduce new services. There is also a need to review existing spending.

One approach would be to conduct periodic detailed spending and performance reviews in priority areas, focusing on how to best achieve government’s objectives. Such reviews would need to be conducted well in advance of the annual budget process so that the results could inform budget decisions. These reviews might cover a Vote, a group of Votes, cross-sectoral issues, or part of a major Vote. They would be substantial exercises and conducted as needed, but no more frequently than once every three years in a sector.

Indicative multi-year funding profiles

There is currently no systematic formal method for signalling new spending in a particular Vote or sector to provide for certainty of planning. Previous approaches in this direction have been fixed agreements – the funding is promised to a Vote or sector with little or no ability to review the quantum or timing of funding in light of changes to the fiscal environment, emerging priorities or performance in the Vote. We instead suggest an indicative multi-year funding profile where some of the funding is available only if policy, performance or fiscal expectations are met. The funding profile should include both existing funding and any new spending.

The use of indicative multi-year funding profiles opens up opportunities to more explicitly link future funding to performance, to support the development of policy in complex areas, and to assist the roll-out of major initiatives.

Using indicative multi-year funding profiles might create a loss of flexibility in fiscal management. To ameliorate this risk we would need to ensure the results the Government is seeking are clear, there are stipulated conditions, arrangements are reflected in chief executive performance reviews, and funding profile agreements are signed off at a high ministerial level – most likely Cabinet.

Indexation with built-in productivity expectations

For areas not covered by a spending and performance review, more standardised budget processes should be developed. One way to do this would be to formally introduce indexation of baselines. A substantial portion of government spending is already (formally or informally) indexed or has provision made for cost increases in the allocation process. For these reasons, wider use of indexation need not introduce new upward fiscal pressure. But it would create an opportunity to reduce ‘noise’ in the budget system and for the process to focus on the value of spending in priority areas to a greater extent than at present.

Recommendation

  • Use the Budget to boost performance through spending and performance reviews, multi-year funding profiles and indexation with built-in productivity expectations

Improve central agency support for Ministers

Central and sector agencies can support the success of the initiatives outlined above by developing a better system for sharing information about emerging performance problems in agencies and for dealing with them, and improving Crown entity performance through strengthening governance, departmental monitoring and engagement on entities’ strategic direction.

Central agencies can also improve alignment and use of performance levers that they hold such as:

  • strengthening (and enforcing) expectations on agencies’ collection and use of performance information to inform strategy, policy and resource allocation
  • ensuring that performance information from departments and Crown entities is presented in a relevant way for Ministers
  • providing assurance that policy objectives are being achieved, for example through central agency assessment of implementation of significant policies, and
  • working together to ensure levers such as the budget process, chief executive appointments and board appointments are aligned and used to best effect.

Recommendation

  • Require central agencies to better support Ministers by:
    • tailoring performance information for ministerial decisions
    • improving early warning and action on performance problems
    • setting expectations regarding Crown entity monitoring and performance information
    • improving alignment and use of central agencies’ performance levers
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