Balancing Control and Flexibility in Public Budgeting

A New Role for Rule Variability

Michael Di Francesco, John Alford

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9789811003417
• Topic: Economics
• Subtopic: Public Finance
• Index: Economics

This work explores how reshaping budget rules and how they are applied presents a preferred means of public sector budgeting, rather than simply implementing fewer rules. Through enhanced approaches to resource flexibility, government entities can ensure that public money is used appropriately while achieving the desired results. The authors identify public budgeting practices that inhibit responses to complex problems and examine how rule modification can lead to expanded budget flexibility. Through a nuanced understanding of the factors underlying conventional budget control, the authors use budget reforms in Australia to show the limits of rule modification and propose "rule variability" as a better means of recalibrating central control and situational flexibility. Here, policy makers and public management academics will find a source that surveys emerging ways of reconciling control and flexibility in the public sector. iv>

© The Editor(s) (if applicable) and The Author(s) 2016

Michael Di Francesco and John AlfordBalancing Control and Flexibility in Public Budgeting10.1007/978-981-10-0341-7_1

Begin Abstract

1. Introduction

Michael Di Francesco¹ and John Alford²

(1)

University of New South Wales (UNSW), The Australia and New Zealand School of Government, Sydney, NSW, Australia

(2)

University of Melbourne, The Australia and New Zealand School of Government, Melbourne, VIC, Australia

Abstract

This chapter introduces a neglected but core question in contemporary public management theory and practice: how can public budgeting be set up to balance the central oversight need for standardization and the local situational need for flexibility? It surveys how this tension is intensified by increasingly complex policy environments and tightened fiscal conditions. After noting the disappointing impacts of flexibility-oriented budget reforms over the last 30 years, the chapter outlines a new approach to conceptualizing budget control and flexibility, as well as the means by which budget-rule variability might strike a more sustainable balance.

End Abstract

In the field of management these days, ‘flexibility’ is usually regarded as a good thing. It contrasts with its assumed antonym of ‘inflexibility’ or ‘rigidity’. This is particularly true in the private sector, as leading business figures bemoan the inflexibility of labor markets or the rigidity of government regulation. But it also resonates increasingly in the public sector, as government organizations struggle to adapt to today’s more complex problems and more turbulent environments with what they see as yesterday’s sclerotic structures and processes. At least implicitly, these organizations are increasingly being called to account for how well they meet these challenges—most notably we hold them responsible for delivering outcomes mandated by the government. Enhancing flexibility is therefore seen as a means of enabling public organizations to meet their accountability for achieving results.

Budget systems, of course, are key means of operationalizing government accountability (Bandy 2015: 43–54; Funnell et al. 2012: 12–21, 42–64). They prescribe rules for the allocation, spending, accumulation, transferring, and accounting of public money, and breaches of these rules, when brought out into the light by the legislature’s committees, auditors, or the media, are seen more or less as betrayals of the public trust. In every government these rules are superintended through some form of ‘central finance agency’, whether Her Majesty’s Treasury in the executive-dominated parliamentary system of the UK or the Office of Management and Budget (OMB) within the Presidency of the intentionally fragmented separation-of-powers system in the USA (Guess and Leloup 2010: 8–30).¹

However, flexibility can also be contrasted in the public sector context with another concept of enduring significance: ‘consistency’. Its guiding value is the most common form of fairness—the equitable treatment of citizens—typically manifested in a focus on procedural fairness. This has been sustained historically through a cultural orientation, often unduly stereotyped, to ‘rule following’; more fundamentally it also rests on constitutional foundations, which are borne of the public’s expectation that their governments should be accountable to them for how they marshal and deploy the resources which citizens have bestowed on them, whether voluntarily or compulsorily.

But this attention to process increasingly jostles with organizational efforts to achieve results. Further, achieving results is often seen to be best facilitated by granting government bodies and their managers some level of autonomy—and, hence, flexibility—to determine and implement the most effective means to achieve mandated ends. These differing logics have always been present, but the relationship between them became even more salient with the rise of the New Public Management (NPM) from the start of the 1980s, which gave impetus to the shift from compliance-based processes to performance-based results, especially in relatively routine and high volume public sector tasks (Pollitt and Bouckaert 2004: 6–20; for the classic account see Hood 1991).

Now, however, the need for flexibility has burgeoned beyond the requirements of the managerialist routines, and indeed those routines are themselves being queried. One reason has been the emergence of more complex issues and increasingly turbulent environments, which collectively we will call ‘nonroutine problems’. In this context, budgeting and financial management processes in government are inevitably caught between contending institutional imperatives for responsiveness and consistency: the public’s expectations that the problems stemming from growing interdependencies and disruption will be addressed with the help of some flexibility, and the same public’s expectations that the resources used by government to tackle those problems will be managed efficiently and fairly (Behn 2001; Kettl 2009). More to the point, specific types of routines, such as budgeting and financial management rules and their purported rigidity, are quite commonly singled out as a—if not the—‘critical barrier’ for public organizations in terms of the operational agility required to respond collaboratively to complex problems (O’Flynn 2014: 4; see also McDaid 2012; Mitchell and Thurmaier 2011).

This is the subject of this book. Its core question is how can public budgeting be set up to balance the ‘central’ oversight need for standardization and the ‘local’ situational need for flexibility? In other words, can public budgeting be made more flexible without diminishing the capacity of government to ensure public money is devoted to the purposes it has mandated? There are, we believe, two important reasons why it is timely to ask the question. The first is to explain unrealized intentions. The period since the mid-1980s has been marked internationally by historically significant levels of public sector budget modernization. Under the aegis of the ‘new’ public financial management—and across both advanced and less developed economies—a broad range of interlocking fiscal control, budget management and financial accounting reforms have been prosecuted largely in the name of devolved resourcing and expanded managerial autonomy (Allen et al. 2013; Schick 2013). That budget processes continue to be perceived as one of the key ‘brakes’ on government flexibility is perplexing, and ultimately something of an indictment of the impact of these public management reform efforts.

The second motivation is about responding to extant fiscal pressures. Not least as a consequence of increased complexity—in this instance of global finance markets—many of the same governments who engineered budget modernization are now contending with the unprecedented fiscal legacy of the ‘Great Recession’ of 2008–2009. Faced with the prospect of imminent collapse in ailing banking systems, and the attendant risk of social and economic disorder, governments across the OECD, but particularly in the USA and the euro zone, were compelled to recapitalize financial systems on a massive scale, with serious impacts on their deficit and debt positions. The response, while in no way universal, has been an internationally sanctioned agenda of ‘fiscal consolidation’ (or ‘austerity’) that seeks to cut structural expenditures, such as entitlement-driven programs like social security (Posner and Blondal 2012: 11–17). Flexibility, of course, is not usually associated with the sharp budget contractions of austerity, which tends to be closely coupled with tight central control of financial inputs (Johansson and Siverbo 2014: 272). So, it has to be asked, if public sector reformers were unable to get traction on flexibility with devolved financial management in the comparatively buoyant fiscal age of the 1990s and early 2000s, are the prospects for doing so any brighter in the current highly distressed budgetary circumstances?

We think there remains considerable scope for a rebalancing of control and flexibility in key aspects of public budgeting. In part this is framed by the operational capabilities required to respond to greater prevalence of ‘nonroutine’ problems, whether they be exogenous (such as coordinating emergency responses to an economic crisis) or endogenous (as with customizing services to the increasingly segmented needs and preferences of the public). And, in part, it is framed by the policy imperatives residing in the current austerity, to better target fiscal consolidation and, within top-down ceilings, to entrust spending departments and managers with genuine authority to vary the way the reduced resources are applied (see, for example, OECD 2011: 1–2). From the point of view of a central finance agency, there are natural tendencies to see these types of outcomes as a zero-sum issue: there can be more flexibility and less control, or vice versa, but not both. As we will see, it is also true that budget modernization has sought to capitalize on opportunities to enhance flexibility while ensuring spending parameters are observed: in fact, the whole shift under NPM to give managers more of a say about how results are to be achieved within centrally imposed financial and performance limits can be understood precisely in these terms. However, as we shall also explore below, this form of budget and managerial flexibility struggles to relate to nonroutine problems.

The argument of the book proceeds in six parts. In Chap. 2 we introduce the lightning rod for enhanced flexibility in government: the rise of nonroutine problems and the apparent misalignment of public organizational structures and capabilities. Different and expanding forms of policy complexity and environmental turbulence are challenging public officials—elected and appointed alike—to become more collaborative, agile, and resilient in the way they respond to nonroutine problems. We survey the nature of these problems, and catalogue the most common forms of nonroutine responses. In Chap. 3, we narrow our focus to the role of public budgeting practices in hindering organizational responses to nonroutine problems; in particular, we illustrate how salient features of budgeting can inhibit the conditions for collaboration across government, and between government and nongovernment actors. To anchor this discussion, Chap. 3 sets out a working definition of ‘budget flexibility’, which we explain in multidimensional terms corresponding to the level of decision-making authority and, crucially, the scope for rule variability across the phases of the budget cycle. This sets the stage for a detailed consideration of budgeting and an interrogation of the push and pull of budget rules.

We commence Chap. 4 with a high level survey of the centrality of budgeting to organizational control, applying cross-disciplinary lenses to compare approaches to budgeting in the public and private sectors (a contrast that is not nearly as great as commonly supposed). This presages a revisiting of the traditional model of public budgeting and financial management—which emphasizes control of and accountability for financial inputs—so as to better understand why its practices and cultural orientation remain so prevalent in government. In doing so, we develop a taxonomy to characterize general ‘budget rules’ that delineate budget execution tasks in the public sector, and seek to explain how they operate through key properties of control. To illustrate this, we focus on two of the most prominent rules, the ‘annuality’ and ‘purpose’ of spending. We then describe what high flexibility might look like for each of the budget rules, and speculate on what the implications are for sustainable rule modification. Our context is primarily the political institutions, norms and practices of Westminster-style parliamentary systems, such as Australia and the UK, but we contend that the taxonomy has much broader application and relevance.²

Chapter 5 of the book integrates the taxonomy and the dimensions of budget flexibility to provide an extended application of the framework to a discrete episode of budget modernization. The aim of this chapter is to illustrate how the trade-offs between control and flexibility have manifested themselves in practice. After surveying the features of NPM-inspired budget modernization in an international context, and specifically the design intent for ‘flexibility’ residing within these schemes, we apply the taxonomy by analyzing the impact of rule intera...

Table of contents

• Cover
• Frontmatter
• 1. Introduction
• 2. Nonroutine Problems and Flexibility
• 3. Flexibility, Inflexibility, and Budgeting
• 4. Budget Rules and Budget Flexibility
• 5. Budget Reform and Rule Modification
• 6. Calibrating Budget Flexibility and Control: A New Role for Rule Variability
• 7. Conclusion
• Backmatter