Strengthening Financial Management Systems | Famous Books for UPSC Exam (Summary & Tests) PDF Download

 Page 1


xxi
1 INTRODUCTION
1
1.1 One of the terms of reference of the Second Administrative Reforms c ommission is 
‘Strengthening financial management systems’ . It has been specifically asked to look into the 
following aspects of financial management systems:
“4. Strengthening Financial Management Systems
4.1 Capacity building in financial management systems at all levels of Governance, to 
ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and 
timely furnishing of necessary information / documents for this purpose.
4.2 Strengthening of internal audit systems, to ensure proper utilisation of funds for the 
purposes/outcomes for which they have been provided, and checking that unit cost of delivery/
outcome is as per benchmark developed for this purpose.
4.3 An institutionalised method of external audit and assessment of the delivery and impact 
of programmes. ”
1.2 c ollection of sufficient resources from the economy in an appropriate manner along 
with allocating and use of these resources efficiently and effectively constitute good financial 
management. Resource generation, resource allocation and expenditure management (resource 
utilization) are the essential components of a public financial management system. The TORs 
of the c ommission basically focus on expenditure management. Efficient and effective 
expenditure management calls for expenditure planning, allocation of resources according 
to policy priorities and good financial operational management and control. Good financial 
operational management focuses on minimizing cost per unit of output, achieving outcome 
for which these outputs are intended and enhancing the value for money spent. 
1.3 The commission is of the view that reforms in the financial management system are an 
integral part of the reforms in governance in general. Therefore, these reforms are critical in 
achieving the national development objectives. The financial management system is quite 
wide and encompasses resource mobilization, prioritization of governmental efforts, resource 
allocation, formulation of detailed plans, setting up information systems that assist decision 
x
Page 2


xxi
1 INTRODUCTION
1
1.1 One of the terms of reference of the Second Administrative Reforms c ommission is 
‘Strengthening financial management systems’ . It has been specifically asked to look into the 
following aspects of financial management systems:
“4. Strengthening Financial Management Systems
4.1 Capacity building in financial management systems at all levels of Governance, to 
ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and 
timely furnishing of necessary information / documents for this purpose.
4.2 Strengthening of internal audit systems, to ensure proper utilisation of funds for the 
purposes/outcomes for which they have been provided, and checking that unit cost of delivery/
outcome is as per benchmark developed for this purpose.
4.3 An institutionalised method of external audit and assessment of the delivery and impact 
of programmes. ”
1.2 c ollection of sufficient resources from the economy in an appropriate manner along 
with allocating and use of these resources efficiently and effectively constitute good financial 
management. Resource generation, resource allocation and expenditure management (resource 
utilization) are the essential components of a public financial management system. The TORs 
of the c ommission basically focus on expenditure management. Efficient and effective 
expenditure management calls for expenditure planning, allocation of resources according 
to policy priorities and good financial operational management and control. Good financial 
operational management focuses on minimizing cost per unit of output, achieving outcome 
for which these outputs are intended and enhancing the value for money spent. 
1.3 The commission is of the view that reforms in the financial management system are an 
integral part of the reforms in governance in general. Therefore, these reforms are critical in 
achieving the national development objectives. The financial management system is quite 
wide and encompasses resource mobilization, prioritization of governmental efforts, resource 
allocation, formulation of detailed plans, setting up information systems that assist decision 
x
making, having meticulous accounting systems and creation of robust internal and external 
accountability mechanisms. 
1.4 In the present Report, the c ommission has focused primarily on expenditure management. 
The commission studied various reports and literature on the subject. It also examined some 
of the best national and international practices and had consultations with experts on the 
subject. The c ommission organized a national workshop, jointly with the National Institute of 
Public Finance and Planning (NIPFP), to discuss various aspects of the financial management 
system in the government. The workshop was attended by officers of the Ministry of Finance, 
comptroller and Auditor General’s office, State Governments, faculty from the NIPFP and 
experts on the subject. The NIPFP also prepared a document on the subject which was useful 
for the commission in drafting this Report. Another study was commissioned on internal 
and external audit mechanisms. Besides, the commission discussed the subject with the State 
Governments during its visits to the States.
1.5 Though this Report was finalized in April 2009 and printed in May 2009, the 
c ommission would like to record its appreciation for the contribution made by  
Dr. M. V eerappa Moily in arriving at the conclusions. Before resigning from the position of 
c hairman, ARc on 31st March, 2009, Dr. Moily had played an important role in guiding 
the deliberations of the commission on this subject.
1.6 The c ommission is grateful to Shri Vinod Rai, c omptroller and Auditor General of India, 
for his valuable suggestions. The commission would like to thank Dr Govind Rao, Director, 
NIPFP, for organizing the national workshop and also for preparing a useful document for 
the c ommission. The c ommission would like to place on record its thanks to Shri V K 
Shunglu, former comptroller and Auditor General of India, who made very well reasoned 
suggestions for improving the system. The commission also places on record its thanks to all 
the State Governments for their help. The commission would like to take this opportunity 
to thank Shri I.P Singh, former Dy. c AG, who wrote a paper on the internal and external 
audit mechanisms. The commission is grateful to Shri R. Sridharan, Joint Secretary (SP) 
& Adviser (FR), Planning commission, for sharing his views on the subject and providing 
major insights. The commission is grateful to Shri c.R. Sundaramurti, controller General 
of Accounts and his team of officers for making a presentation before the commission. The 
commission is also grateful to Shri Naved Masood, AS&FA, Ministry of Health and Family 
W elfare, for his useful suggestions.
Strengthening Financial Management Systems 
2
PUBLIC FINANCE MANAGEMENT-CONCEPTS AND 
CORE PRINCIPLES
2.1 Definition of Public Finance Management
2.1.1 Public Finance Management (PFM) basically deals with all aspects of resource 
mobilization and expenditure management in government. Just as managing finances is a 
critical function of management in any organization, similarly public finance management 
is an essential part of the governance process. Public finance management includes resource 
mobilization, prioritization of programmes, the budgetary process, efficient management of 
resources and exercising controls. Rising aspirations of people are placing more demands on 
financial resources. At the same time, the emphasis of the citizenry is on value for money, thus 
making public finance management increasingly vital.
2.1.2 For a long time, financial management in developing countries was viewed as a process that 
enabled central agencies like the Ministry/Department of Finance to keep “spending agencies 
under control through continuous review and specification of inputs and verification of 
documents, submitted for payment. As an extension of this approach, financial management 
was viewed as being restricted to budget implementation, administration of payment systems, 
accounting and reporting in the states of funds received and spent. This approach with a 
long lineage continues to be prevalent even now, through a declining scale”.
1
 
2.1.3 Reforms in financial management have concentrated on taxation reforms, the use 
of government budget as a vehicle for economic development, through improved budget 
classification system, accounting system reforms etc. c ost-benefit analysis techniques were also 
applied. From the 1970s, the need for containment of fiscal deficits through tightened fiscal 
management, pre-occupied the economists. In the 1980s, the management approach came 
to be prevalent which included a corporate type of financial management within an overall 
framework of accountability. The overall assessment is that the system of financial management 
in developing countries has generally been slow in adapting itself to changing requirements. 
Basically, there has been a segmented approach to reforms. 
2.1.4 A review of the literature on public finance management shows that initially the term 
‘public finance management’ was defined quite narrowly and was confined to budgeting, 
accounting, monitoring and evaluation. But, it is now widely accepted that it includes taxation 
Page 3


xxi
1 INTRODUCTION
1
1.1 One of the terms of reference of the Second Administrative Reforms c ommission is 
‘Strengthening financial management systems’ . It has been specifically asked to look into the 
following aspects of financial management systems:
“4. Strengthening Financial Management Systems
4.1 Capacity building in financial management systems at all levels of Governance, to 
ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and 
timely furnishing of necessary information / documents for this purpose.
4.2 Strengthening of internal audit systems, to ensure proper utilisation of funds for the 
purposes/outcomes for which they have been provided, and checking that unit cost of delivery/
outcome is as per benchmark developed for this purpose.
4.3 An institutionalised method of external audit and assessment of the delivery and impact 
of programmes. ”
1.2 c ollection of sufficient resources from the economy in an appropriate manner along 
with allocating and use of these resources efficiently and effectively constitute good financial 
management. Resource generation, resource allocation and expenditure management (resource 
utilization) are the essential components of a public financial management system. The TORs 
of the c ommission basically focus on expenditure management. Efficient and effective 
expenditure management calls for expenditure planning, allocation of resources according 
to policy priorities and good financial operational management and control. Good financial 
operational management focuses on minimizing cost per unit of output, achieving outcome 
for which these outputs are intended and enhancing the value for money spent. 
1.3 The commission is of the view that reforms in the financial management system are an 
integral part of the reforms in governance in general. Therefore, these reforms are critical in 
achieving the national development objectives. The financial management system is quite 
wide and encompasses resource mobilization, prioritization of governmental efforts, resource 
allocation, formulation of detailed plans, setting up information systems that assist decision 
x
making, having meticulous accounting systems and creation of robust internal and external 
accountability mechanisms. 
1.4 In the present Report, the c ommission has focused primarily on expenditure management. 
The commission studied various reports and literature on the subject. It also examined some 
of the best national and international practices and had consultations with experts on the 
subject. The c ommission organized a national workshop, jointly with the National Institute of 
Public Finance and Planning (NIPFP), to discuss various aspects of the financial management 
system in the government. The workshop was attended by officers of the Ministry of Finance, 
comptroller and Auditor General’s office, State Governments, faculty from the NIPFP and 
experts on the subject. The NIPFP also prepared a document on the subject which was useful 
for the commission in drafting this Report. Another study was commissioned on internal 
and external audit mechanisms. Besides, the commission discussed the subject with the State 
Governments during its visits to the States.
1.5 Though this Report was finalized in April 2009 and printed in May 2009, the 
c ommission would like to record its appreciation for the contribution made by  
Dr. M. V eerappa Moily in arriving at the conclusions. Before resigning from the position of 
c hairman, ARc on 31st March, 2009, Dr. Moily had played an important role in guiding 
the deliberations of the commission on this subject.
1.6 The c ommission is grateful to Shri Vinod Rai, c omptroller and Auditor General of India, 
for his valuable suggestions. The commission would like to thank Dr Govind Rao, Director, 
NIPFP, for organizing the national workshop and also for preparing a useful document for 
the c ommission. The c ommission would like to place on record its thanks to Shri V K 
Shunglu, former comptroller and Auditor General of India, who made very well reasoned 
suggestions for improving the system. The commission also places on record its thanks to all 
the State Governments for their help. The commission would like to take this opportunity 
to thank Shri I.P Singh, former Dy. c AG, who wrote a paper on the internal and external 
audit mechanisms. The commission is grateful to Shri R. Sridharan, Joint Secretary (SP) 
& Adviser (FR), Planning commission, for sharing his views on the subject and providing 
major insights. The commission is grateful to Shri c.R. Sundaramurti, controller General 
of Accounts and his team of officers for making a presentation before the commission. The 
commission is also grateful to Shri Naved Masood, AS&FA, Ministry of Health and Family 
W elfare, for his useful suggestions.
Strengthening Financial Management Systems 
2
PUBLIC FINANCE MANAGEMENT-CONCEPTS AND 
CORE PRINCIPLES
2.1 Definition of Public Finance Management
2.1.1 Public Finance Management (PFM) basically deals with all aspects of resource 
mobilization and expenditure management in government. Just as managing finances is a 
critical function of management in any organization, similarly public finance management 
is an essential part of the governance process. Public finance management includes resource 
mobilization, prioritization of programmes, the budgetary process, efficient management of 
resources and exercising controls. Rising aspirations of people are placing more demands on 
financial resources. At the same time, the emphasis of the citizenry is on value for money, thus 
making public finance management increasingly vital.
2.1.2 For a long time, financial management in developing countries was viewed as a process that 
enabled central agencies like the Ministry/Department of Finance to keep “spending agencies 
under control through continuous review and specification of inputs and verification of 
documents, submitted for payment. As an extension of this approach, financial management 
was viewed as being restricted to budget implementation, administration of payment systems, 
accounting and reporting in the states of funds received and spent. This approach with a 
long lineage continues to be prevalent even now, through a declining scale”.
1
 
2.1.3 Reforms in financial management have concentrated on taxation reforms, the use 
of government budget as a vehicle for economic development, through improved budget 
classification system, accounting system reforms etc. c ost-benefit analysis techniques were also 
applied. From the 1970s, the need for containment of fiscal deficits through tightened fiscal 
management, pre-occupied the economists. In the 1980s, the management approach came 
to be prevalent which included a corporate type of financial management within an overall 
framework of accountability. The overall assessment is that the system of financial management 
in developing countries has generally been slow in adapting itself to changing requirements. 
Basically, there has been a segmented approach to reforms. 
2.1.4 A review of the literature on public finance management shows that initially the term 
‘public finance management’ was defined quite narrowly and was confined to budgeting, 
accounting, monitoring and evaluation. But, it is now widely accepted that it includes taxation 
2.3.1 The l ine item Budget
2.3.1.1 Budgeting is the process of estimating the availability of resources and then allocating 
them to various activities of an organization according to a pre-determined priority. In most 
cases, approval of a budget also means the approval to various spending units to utilize the 
allocated resources. In the early nineteenth century, government budgeting in most countries 
was characterized by weak accounting procedures, adhocism, little central control and poor 
monitoring and evaluation. In the late nineteenth century, line-item budgeting was introduced 
in some countries. Indeed line item budgeting which is the most common form of budgeting 
in a large number of countries and suffers from several drawbacks was a major reform initiative 
then. The line item budget is defined as “the budget in which the individual financial statement 
items are grouped by cost centers or departments. It shows the comparison between the financial 
data for the past accounting or budgeting periods and estimated figures for the current or a future 
period” 
3
2.3.1.2 In a line-item system, expenditures for the budgeted period are listed according to 
objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount 
a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed. A central authority 
or the Ministry of Finance keeps a watch on the spending of various units to ensure that the 
ceilings are not violated. 
2.3.1.3 The line item budget approach is easy to understand and implement. It also facilitates 
centralized control and fixing of authority and responsibility of the spending units. Its major 
disadvantage is that it does not provide enough information to the top levels about the activities 
and achievements of individual units. 
2.3.1.4 The weaknesses of the line item budgeting were sought to be remedied by introducing 
certain reforms. Performance budgeting was the first such reform.
2.3.2 Performance Budgeting
2.3.2.1 u nlike the traditional line item budget, a performance budget reflects the goal/
objectives of the organization and spells out performance targets. These targets are sought to 
be achieved through a strategy(s). u nit costs are associated with the strategy and allocations are 
accordingly made for achievement of the objectives. A Performance Budget gives an indication 
of how the funds spent are expected to give outputs and ultimately the outcomes. However, 
performance budgeting has a limitation - it is not easy to arrive at standard unit costs especially 
in social programmes which require a multi-pronged approach.
2.3.3 Zero-based Budgeting (ZBB)
and other resource mobilization, debt and cash management, budgetary process, accounting 
systems, information systems and internal and external audit. Thus, reforming the public 
finance system would entail several measures:
2
 
i. Improving the collection of revenue is critical. No country can be run properly without 
revenue. Moreover, tax can help to establish a government’s authority. T ax policy 
itself is increasingly limited by external forces: in a globalised world, governments’ 
choices are less about the tax rate than about the efficiency with which tax is collected 
and the reach of the tax net. Thus, the revenue services must be properly resourced 
and motivated to collect tax more efficiently.
ii. Debt and cash must be managed efficiently. In particular, sound principles for deficit 
funding should be established, efficiencies sought and proper risk management 
procedures introduced. Proper management of the government’s borrowing program 
will reduce the cost of funding.
iii. Effective planning and allocation of resources is key and government should develop 
and institutionalise planning processes at all levels of government. The budgeting 
process must be transparent and inclusive. There should be focus on outputs rather 
than on mere expenditure and related inputs, with strong accounting and reporting 
procedures. The office of the accountant-general must be properly resourced and funded 
to fulfil this function.
iv. Effective oversight and monitoring are crucial to sound governance and PFM reform. 
A well functioning PFM system must have clear rules on transparency and reporting, 
as well as enforceable sanctions for failure. Oversight should be established by internal 
mechanisms in the national treasury as well as external oversight by bodies like 
independent parliamentary committees, a public ombudsman, a free media and 
civil society, and an independent auditor-general.
2.2 Elements of Reforms in the Public Finance Management in Other Countries
2.2.1 The last few decades have witnessed large scale reforms in the public finance management 
systems in most countries of the world. These reforms include taxation, monetary and 
budgetary reforms. In line with its T erms of Reference, the c ommission has focused on 
budgetary processes and expenditure management in this Report.
2.3 Evolution of Budgeting
Public Finance Management - concepts and core Principles Strengthening Financial Management Systems 
Page 4


xxi
1 INTRODUCTION
1
1.1 One of the terms of reference of the Second Administrative Reforms c ommission is 
‘Strengthening financial management systems’ . It has been specifically asked to look into the 
following aspects of financial management systems:
“4. Strengthening Financial Management Systems
4.1 Capacity building in financial management systems at all levels of Governance, to 
ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and 
timely furnishing of necessary information / documents for this purpose.
4.2 Strengthening of internal audit systems, to ensure proper utilisation of funds for the 
purposes/outcomes for which they have been provided, and checking that unit cost of delivery/
outcome is as per benchmark developed for this purpose.
4.3 An institutionalised method of external audit and assessment of the delivery and impact 
of programmes. ”
1.2 c ollection of sufficient resources from the economy in an appropriate manner along 
with allocating and use of these resources efficiently and effectively constitute good financial 
management. Resource generation, resource allocation and expenditure management (resource 
utilization) are the essential components of a public financial management system. The TORs 
of the c ommission basically focus on expenditure management. Efficient and effective 
expenditure management calls for expenditure planning, allocation of resources according 
to policy priorities and good financial operational management and control. Good financial 
operational management focuses on minimizing cost per unit of output, achieving outcome 
for which these outputs are intended and enhancing the value for money spent. 
1.3 The commission is of the view that reforms in the financial management system are an 
integral part of the reforms in governance in general. Therefore, these reforms are critical in 
achieving the national development objectives. The financial management system is quite 
wide and encompasses resource mobilization, prioritization of governmental efforts, resource 
allocation, formulation of detailed plans, setting up information systems that assist decision 
x
making, having meticulous accounting systems and creation of robust internal and external 
accountability mechanisms. 
1.4 In the present Report, the c ommission has focused primarily on expenditure management. 
The commission studied various reports and literature on the subject. It also examined some 
of the best national and international practices and had consultations with experts on the 
subject. The c ommission organized a national workshop, jointly with the National Institute of 
Public Finance and Planning (NIPFP), to discuss various aspects of the financial management 
system in the government. The workshop was attended by officers of the Ministry of Finance, 
comptroller and Auditor General’s office, State Governments, faculty from the NIPFP and 
experts on the subject. The NIPFP also prepared a document on the subject which was useful 
for the commission in drafting this Report. Another study was commissioned on internal 
and external audit mechanisms. Besides, the commission discussed the subject with the State 
Governments during its visits to the States.
1.5 Though this Report was finalized in April 2009 and printed in May 2009, the 
c ommission would like to record its appreciation for the contribution made by  
Dr. M. V eerappa Moily in arriving at the conclusions. Before resigning from the position of 
c hairman, ARc on 31st March, 2009, Dr. Moily had played an important role in guiding 
the deliberations of the commission on this subject.
1.6 The c ommission is grateful to Shri Vinod Rai, c omptroller and Auditor General of India, 
for his valuable suggestions. The commission would like to thank Dr Govind Rao, Director, 
NIPFP, for organizing the national workshop and also for preparing a useful document for 
the c ommission. The c ommission would like to place on record its thanks to Shri V K 
Shunglu, former comptroller and Auditor General of India, who made very well reasoned 
suggestions for improving the system. The commission also places on record its thanks to all 
the State Governments for their help. The commission would like to take this opportunity 
to thank Shri I.P Singh, former Dy. c AG, who wrote a paper on the internal and external 
audit mechanisms. The commission is grateful to Shri R. Sridharan, Joint Secretary (SP) 
& Adviser (FR), Planning commission, for sharing his views on the subject and providing 
major insights. The commission is grateful to Shri c.R. Sundaramurti, controller General 
of Accounts and his team of officers for making a presentation before the commission. The 
commission is also grateful to Shri Naved Masood, AS&FA, Ministry of Health and Family 
W elfare, for his useful suggestions.
Strengthening Financial Management Systems 
2
PUBLIC FINANCE MANAGEMENT-CONCEPTS AND 
CORE PRINCIPLES
2.1 Definition of Public Finance Management
2.1.1 Public Finance Management (PFM) basically deals with all aspects of resource 
mobilization and expenditure management in government. Just as managing finances is a 
critical function of management in any organization, similarly public finance management 
is an essential part of the governance process. Public finance management includes resource 
mobilization, prioritization of programmes, the budgetary process, efficient management of 
resources and exercising controls. Rising aspirations of people are placing more demands on 
financial resources. At the same time, the emphasis of the citizenry is on value for money, thus 
making public finance management increasingly vital.
2.1.2 For a long time, financial management in developing countries was viewed as a process that 
enabled central agencies like the Ministry/Department of Finance to keep “spending agencies 
under control through continuous review and specification of inputs and verification of 
documents, submitted for payment. As an extension of this approach, financial management 
was viewed as being restricted to budget implementation, administration of payment systems, 
accounting and reporting in the states of funds received and spent. This approach with a 
long lineage continues to be prevalent even now, through a declining scale”.
1
 
2.1.3 Reforms in financial management have concentrated on taxation reforms, the use 
of government budget as a vehicle for economic development, through improved budget 
classification system, accounting system reforms etc. c ost-benefit analysis techniques were also 
applied. From the 1970s, the need for containment of fiscal deficits through tightened fiscal 
management, pre-occupied the economists. In the 1980s, the management approach came 
to be prevalent which included a corporate type of financial management within an overall 
framework of accountability. The overall assessment is that the system of financial management 
in developing countries has generally been slow in adapting itself to changing requirements. 
Basically, there has been a segmented approach to reforms. 
2.1.4 A review of the literature on public finance management shows that initially the term 
‘public finance management’ was defined quite narrowly and was confined to budgeting, 
accounting, monitoring and evaluation. But, it is now widely accepted that it includes taxation 
2.3.1 The l ine item Budget
2.3.1.1 Budgeting is the process of estimating the availability of resources and then allocating 
them to various activities of an organization according to a pre-determined priority. In most 
cases, approval of a budget also means the approval to various spending units to utilize the 
allocated resources. In the early nineteenth century, government budgeting in most countries 
was characterized by weak accounting procedures, adhocism, little central control and poor 
monitoring and evaluation. In the late nineteenth century, line-item budgeting was introduced 
in some countries. Indeed line item budgeting which is the most common form of budgeting 
in a large number of countries and suffers from several drawbacks was a major reform initiative 
then. The line item budget is defined as “the budget in which the individual financial statement 
items are grouped by cost centers or departments. It shows the comparison between the financial 
data for the past accounting or budgeting periods and estimated figures for the current or a future 
period” 
3
2.3.1.2 In a line-item system, expenditures for the budgeted period are listed according to 
objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount 
a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed. A central authority 
or the Ministry of Finance keeps a watch on the spending of various units to ensure that the 
ceilings are not violated. 
2.3.1.3 The line item budget approach is easy to understand and implement. It also facilitates 
centralized control and fixing of authority and responsibility of the spending units. Its major 
disadvantage is that it does not provide enough information to the top levels about the activities 
and achievements of individual units. 
2.3.1.4 The weaknesses of the line item budgeting were sought to be remedied by introducing 
certain reforms. Performance budgeting was the first such reform.
2.3.2 Performance Budgeting
2.3.2.1 u nlike the traditional line item budget, a performance budget reflects the goal/
objectives of the organization and spells out performance targets. These targets are sought to 
be achieved through a strategy(s). u nit costs are associated with the strategy and allocations are 
accordingly made for achievement of the objectives. A Performance Budget gives an indication 
of how the funds spent are expected to give outputs and ultimately the outcomes. However, 
performance budgeting has a limitation - it is not easy to arrive at standard unit costs especially 
in social programmes which require a multi-pronged approach.
2.3.3 Zero-based Budgeting (ZBB)
and other resource mobilization, debt and cash management, budgetary process, accounting 
systems, information systems and internal and external audit. Thus, reforming the public 
finance system would entail several measures:
2
 
i. Improving the collection of revenue is critical. No country can be run properly without 
revenue. Moreover, tax can help to establish a government’s authority. T ax policy 
itself is increasingly limited by external forces: in a globalised world, governments’ 
choices are less about the tax rate than about the efficiency with which tax is collected 
and the reach of the tax net. Thus, the revenue services must be properly resourced 
and motivated to collect tax more efficiently.
ii. Debt and cash must be managed efficiently. In particular, sound principles for deficit 
funding should be established, efficiencies sought and proper risk management 
procedures introduced. Proper management of the government’s borrowing program 
will reduce the cost of funding.
iii. Effective planning and allocation of resources is key and government should develop 
and institutionalise planning processes at all levels of government. The budgeting 
process must be transparent and inclusive. There should be focus on outputs rather 
than on mere expenditure and related inputs, with strong accounting and reporting 
procedures. The office of the accountant-general must be properly resourced and funded 
to fulfil this function.
iv. Effective oversight and monitoring are crucial to sound governance and PFM reform. 
A well functioning PFM system must have clear rules on transparency and reporting, 
as well as enforceable sanctions for failure. Oversight should be established by internal 
mechanisms in the national treasury as well as external oversight by bodies like 
independent parliamentary committees, a public ombudsman, a free media and 
civil society, and an independent auditor-general.
2.2 Elements of Reforms in the Public Finance Management in Other Countries
2.2.1 The last few decades have witnessed large scale reforms in the public finance management 
systems in most countries of the world. These reforms include taxation, monetary and 
budgetary reforms. In line with its T erms of Reference, the c ommission has focused on 
budgetary processes and expenditure management in this Report.
2.3 Evolution of Budgeting
Public Finance Management - concepts and core Principles Strengthening Financial Management Systems 
2.3.3.1 The concept of zero-based budgeting was introduced in the 1970s. As the name 
suggests, every budgeting cycle starts from scratch. u nlike the earlier systems where only 
incremental changes were made in the allocation, under zero-based budgeting every activity is 
evaluated each time a budget is made and only if it is established that the activity is necessary, 
are funds allocated to it. The basic purpose of ZBB is phasing out of programmes/activities 
which do not have relevance anymore. However, because of the efforts involved in preparing 
a zero-based budget and institutional resistance related to personnel issues, no government 
ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB 
are often used. 
2.3.4 Programme Budgeting and Performance Budgeting
2.3.4.1 Programme budgeting in the shape of planning, programming and budgeting system 
(PPBS) was introduced in the u S Federal Government in the mid-1960s. Its core themes had 
much in common with earlier strands of performance budgeting.
2.3.4.2 Programme budgeting aimed at a system in which expenditure would be planned 
and controlled by the objective. The basic building block of the system was classification 
of expenditure into programmes, which meant objective-oriented classification so that 
programmes with common objectives are considered together.
2.3.4.3 PPBS went much beyond the core elements of programme budgeting and was much 
more than the budgeting system. It aimed at an integrated expenditure management system, in 
which systematic policy and expenditure planning would be developed and closely integrated 
with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time 
given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS 
in the federal government in u SA did not succeed, although the concept of performance 
budgeting and programme budgeting endured.
2.3.4.4 Many governments today use the “programme budgeting” label for their performance 
budgeting system. As pointed out by Marc Robertson, the contemporary influence of the basic 
programme budgeting idea is much wider than the continuing use of the label. It is defined 
in terms of its core elements as mentioned above. Programme budgeting is an element of 
many contemporary budgeting systems which aim at linking funding and results. “The extent 
of ongoing influence of programme budgeting is partly obscured by a wide variety of terminology 
used today to refer to programme such as “outcomes” or output groups (Australia) and ‘Requests 
for Resource’ (UK)”.
4
2.3.4.5 In 1993, the u S congress enacted the General Performance Results Act (GPRA) 
to improve the effectiveness, efficiency and accountability of federal programmes, where 
agencies have to focus on programme results. GPRA requires agencies to plan and measure 
performance using the “program activities” listed in their budget submissions. So it is again 
performance through programme/activities. GPRA had a 7-year implementation time-frame, 
from the initial pilot projects to government-wide performance reports, incorporating feed-
back mechanisms. GPRA’s implementation approach also provided for a 2-year pilot project 
of alternative performance budget approaches in at least five agencies, with regard to their 
spending decision. GPRA aims for a closer linkage before resource and results. As a report of 
the General Accounting Report in Performance Budgeting states “In the sense, GPRA can be 
seen as the most recent event in al almost 50-year cycle of federal government efforts to improve 
public sector performance and to link resource allocation to performance expectation.”
5
2.3.4.6 The GAO Report states that the GPRA differs from prior initiatives in two important 
respects. First, past performance budgeting initiatives were typically implemented government-
wide within a single annual budget cycle; GPRA, in contrast defines a multi-year and iterative 
implementation process that incorporates pilot task and formal evaluations of key concepts. 
In this manner, GPRA increases the potential for integration of planning, budgeting, and 
performance measure, while guarding against the unreasonably high expectations that plagued 
earlier initiatives. Second, GPRA will face operating environments unknown to earlier reform 
processes, that is, persistent efforts have to be made to constrain spending.
6
 
2.3.4.7 But the GAO Report on performance budgeting also makes two important points 
when it talks of outcome oriented budget: (i) past initiatives demonstrate that performance 
budgeting is an evolving concept that cannot be viewed in simple mechanical terms. It states 
“The process of budgeting is inherently an exercise in political choice – allocating scarce resources 
among competing needs and priorities – in which performance information can be one, but not 
the only factor underlying decision, ” (ii) GPRA “states a preference for outcome measurements 
while recognizing the need to develop a range of measures, including output and non-
quantitative measures. Focusing on outcome shifts, the definition of accountability from the 
traditional focus on inputs, processes and projects to a perspective centered on the results 
of federal programs. However, the difficulties associated with selected appropriate measures 
and establishing relationships between activities and results will continue to make it difficult 
in many cases to judge whether changes in funding levels will affect the outcomes of federal 
programmes” .
7
 
2.3.4.8 The above points need to be kept in view by the reformers who are attempting to 
introduce `outcome’ budgeting in government budgeting. Since this is a challenging task, 
the experience of some other countries in this regard would be useful, for example, in South 
Strengthening Financial Management Systems Public Finance Management - concepts and core Principles
Page 5


xxi
1 INTRODUCTION
1
1.1 One of the terms of reference of the Second Administrative Reforms c ommission is 
‘Strengthening financial management systems’ . It has been specifically asked to look into the 
following aspects of financial management systems:
“4. Strengthening Financial Management Systems
4.1 Capacity building in financial management systems at all levels of Governance, to 
ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and 
timely furnishing of necessary information / documents for this purpose.
4.2 Strengthening of internal audit systems, to ensure proper utilisation of funds for the 
purposes/outcomes for which they have been provided, and checking that unit cost of delivery/
outcome is as per benchmark developed for this purpose.
4.3 An institutionalised method of external audit and assessment of the delivery and impact 
of programmes. ”
1.2 c ollection of sufficient resources from the economy in an appropriate manner along 
with allocating and use of these resources efficiently and effectively constitute good financial 
management. Resource generation, resource allocation and expenditure management (resource 
utilization) are the essential components of a public financial management system. The TORs 
of the c ommission basically focus on expenditure management. Efficient and effective 
expenditure management calls for expenditure planning, allocation of resources according 
to policy priorities and good financial operational management and control. Good financial 
operational management focuses on minimizing cost per unit of output, achieving outcome 
for which these outputs are intended and enhancing the value for money spent. 
1.3 The commission is of the view that reforms in the financial management system are an 
integral part of the reforms in governance in general. Therefore, these reforms are critical in 
achieving the national development objectives. The financial management system is quite 
wide and encompasses resource mobilization, prioritization of governmental efforts, resource 
allocation, formulation of detailed plans, setting up information systems that assist decision 
x
making, having meticulous accounting systems and creation of robust internal and external 
accountability mechanisms. 
1.4 In the present Report, the c ommission has focused primarily on expenditure management. 
The commission studied various reports and literature on the subject. It also examined some 
of the best national and international practices and had consultations with experts on the 
subject. The c ommission organized a national workshop, jointly with the National Institute of 
Public Finance and Planning (NIPFP), to discuss various aspects of the financial management 
system in the government. The workshop was attended by officers of the Ministry of Finance, 
comptroller and Auditor General’s office, State Governments, faculty from the NIPFP and 
experts on the subject. The NIPFP also prepared a document on the subject which was useful 
for the commission in drafting this Report. Another study was commissioned on internal 
and external audit mechanisms. Besides, the commission discussed the subject with the State 
Governments during its visits to the States.
1.5 Though this Report was finalized in April 2009 and printed in May 2009, the 
c ommission would like to record its appreciation for the contribution made by  
Dr. M. V eerappa Moily in arriving at the conclusions. Before resigning from the position of 
c hairman, ARc on 31st March, 2009, Dr. Moily had played an important role in guiding 
the deliberations of the commission on this subject.
1.6 The c ommission is grateful to Shri Vinod Rai, c omptroller and Auditor General of India, 
for his valuable suggestions. The commission would like to thank Dr Govind Rao, Director, 
NIPFP, for organizing the national workshop and also for preparing a useful document for 
the c ommission. The c ommission would like to place on record its thanks to Shri V K 
Shunglu, former comptroller and Auditor General of India, who made very well reasoned 
suggestions for improving the system. The commission also places on record its thanks to all 
the State Governments for their help. The commission would like to take this opportunity 
to thank Shri I.P Singh, former Dy. c AG, who wrote a paper on the internal and external 
audit mechanisms. The commission is grateful to Shri R. Sridharan, Joint Secretary (SP) 
& Adviser (FR), Planning commission, for sharing his views on the subject and providing 
major insights. The commission is grateful to Shri c.R. Sundaramurti, controller General 
of Accounts and his team of officers for making a presentation before the commission. The 
commission is also grateful to Shri Naved Masood, AS&FA, Ministry of Health and Family 
W elfare, for his useful suggestions.
Strengthening Financial Management Systems 
2
PUBLIC FINANCE MANAGEMENT-CONCEPTS AND 
CORE PRINCIPLES
2.1 Definition of Public Finance Management
2.1.1 Public Finance Management (PFM) basically deals with all aspects of resource 
mobilization and expenditure management in government. Just as managing finances is a 
critical function of management in any organization, similarly public finance management 
is an essential part of the governance process. Public finance management includes resource 
mobilization, prioritization of programmes, the budgetary process, efficient management of 
resources and exercising controls. Rising aspirations of people are placing more demands on 
financial resources. At the same time, the emphasis of the citizenry is on value for money, thus 
making public finance management increasingly vital.
2.1.2 For a long time, financial management in developing countries was viewed as a process that 
enabled central agencies like the Ministry/Department of Finance to keep “spending agencies 
under control through continuous review and specification of inputs and verification of 
documents, submitted for payment. As an extension of this approach, financial management 
was viewed as being restricted to budget implementation, administration of payment systems, 
accounting and reporting in the states of funds received and spent. This approach with a 
long lineage continues to be prevalent even now, through a declining scale”.
1
 
2.1.3 Reforms in financial management have concentrated on taxation reforms, the use 
of government budget as a vehicle for economic development, through improved budget 
classification system, accounting system reforms etc. c ost-benefit analysis techniques were also 
applied. From the 1970s, the need for containment of fiscal deficits through tightened fiscal 
management, pre-occupied the economists. In the 1980s, the management approach came 
to be prevalent which included a corporate type of financial management within an overall 
framework of accountability. The overall assessment is that the system of financial management 
in developing countries has generally been slow in adapting itself to changing requirements. 
Basically, there has been a segmented approach to reforms. 
2.1.4 A review of the literature on public finance management shows that initially the term 
‘public finance management’ was defined quite narrowly and was confined to budgeting, 
accounting, monitoring and evaluation. But, it is now widely accepted that it includes taxation 
2.3.1 The l ine item Budget
2.3.1.1 Budgeting is the process of estimating the availability of resources and then allocating 
them to various activities of an organization according to a pre-determined priority. In most 
cases, approval of a budget also means the approval to various spending units to utilize the 
allocated resources. In the early nineteenth century, government budgeting in most countries 
was characterized by weak accounting procedures, adhocism, little central control and poor 
monitoring and evaluation. In the late nineteenth century, line-item budgeting was introduced 
in some countries. Indeed line item budgeting which is the most common form of budgeting 
in a large number of countries and suffers from several drawbacks was a major reform initiative 
then. The line item budget is defined as “the budget in which the individual financial statement 
items are grouped by cost centers or departments. It shows the comparison between the financial 
data for the past accounting or budgeting periods and estimated figures for the current or a future 
period” 
3
2.3.1.2 In a line-item system, expenditures for the budgeted period are listed according to 
objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount 
a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed. A central authority 
or the Ministry of Finance keeps a watch on the spending of various units to ensure that the 
ceilings are not violated. 
2.3.1.3 The line item budget approach is easy to understand and implement. It also facilitates 
centralized control and fixing of authority and responsibility of the spending units. Its major 
disadvantage is that it does not provide enough information to the top levels about the activities 
and achievements of individual units. 
2.3.1.4 The weaknesses of the line item budgeting were sought to be remedied by introducing 
certain reforms. Performance budgeting was the first such reform.
2.3.2 Performance Budgeting
2.3.2.1 u nlike the traditional line item budget, a performance budget reflects the goal/
objectives of the organization and spells out performance targets. These targets are sought to 
be achieved through a strategy(s). u nit costs are associated with the strategy and allocations are 
accordingly made for achievement of the objectives. A Performance Budget gives an indication 
of how the funds spent are expected to give outputs and ultimately the outcomes. However, 
performance budgeting has a limitation - it is not easy to arrive at standard unit costs especially 
in social programmes which require a multi-pronged approach.
2.3.3 Zero-based Budgeting (ZBB)
and other resource mobilization, debt and cash management, budgetary process, accounting 
systems, information systems and internal and external audit. Thus, reforming the public 
finance system would entail several measures:
2
 
i. Improving the collection of revenue is critical. No country can be run properly without 
revenue. Moreover, tax can help to establish a government’s authority. T ax policy 
itself is increasingly limited by external forces: in a globalised world, governments’ 
choices are less about the tax rate than about the efficiency with which tax is collected 
and the reach of the tax net. Thus, the revenue services must be properly resourced 
and motivated to collect tax more efficiently.
ii. Debt and cash must be managed efficiently. In particular, sound principles for deficit 
funding should be established, efficiencies sought and proper risk management 
procedures introduced. Proper management of the government’s borrowing program 
will reduce the cost of funding.
iii. Effective planning and allocation of resources is key and government should develop 
and institutionalise planning processes at all levels of government. The budgeting 
process must be transparent and inclusive. There should be focus on outputs rather 
than on mere expenditure and related inputs, with strong accounting and reporting 
procedures. The office of the accountant-general must be properly resourced and funded 
to fulfil this function.
iv. Effective oversight and monitoring are crucial to sound governance and PFM reform. 
A well functioning PFM system must have clear rules on transparency and reporting, 
as well as enforceable sanctions for failure. Oversight should be established by internal 
mechanisms in the national treasury as well as external oversight by bodies like 
independent parliamentary committees, a public ombudsman, a free media and 
civil society, and an independent auditor-general.
2.2 Elements of Reforms in the Public Finance Management in Other Countries
2.2.1 The last few decades have witnessed large scale reforms in the public finance management 
systems in most countries of the world. These reforms include taxation, monetary and 
budgetary reforms. In line with its T erms of Reference, the c ommission has focused on 
budgetary processes and expenditure management in this Report.
2.3 Evolution of Budgeting
Public Finance Management - concepts and core Principles Strengthening Financial Management Systems 
2.3.3.1 The concept of zero-based budgeting was introduced in the 1970s. As the name 
suggests, every budgeting cycle starts from scratch. u nlike the earlier systems where only 
incremental changes were made in the allocation, under zero-based budgeting every activity is 
evaluated each time a budget is made and only if it is established that the activity is necessary, 
are funds allocated to it. The basic purpose of ZBB is phasing out of programmes/activities 
which do not have relevance anymore. However, because of the efforts involved in preparing 
a zero-based budget and institutional resistance related to personnel issues, no government 
ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB 
are often used. 
2.3.4 Programme Budgeting and Performance Budgeting
2.3.4.1 Programme budgeting in the shape of planning, programming and budgeting system 
(PPBS) was introduced in the u S Federal Government in the mid-1960s. Its core themes had 
much in common with earlier strands of performance budgeting.
2.3.4.2 Programme budgeting aimed at a system in which expenditure would be planned 
and controlled by the objective. The basic building block of the system was classification 
of expenditure into programmes, which meant objective-oriented classification so that 
programmes with common objectives are considered together.
2.3.4.3 PPBS went much beyond the core elements of programme budgeting and was much 
more than the budgeting system. It aimed at an integrated expenditure management system, in 
which systematic policy and expenditure planning would be developed and closely integrated 
with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time 
given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS 
in the federal government in u SA did not succeed, although the concept of performance 
budgeting and programme budgeting endured.
2.3.4.4 Many governments today use the “programme budgeting” label for their performance 
budgeting system. As pointed out by Marc Robertson, the contemporary influence of the basic 
programme budgeting idea is much wider than the continuing use of the label. It is defined 
in terms of its core elements as mentioned above. Programme budgeting is an element of 
many contemporary budgeting systems which aim at linking funding and results. “The extent 
of ongoing influence of programme budgeting is partly obscured by a wide variety of terminology 
used today to refer to programme such as “outcomes” or output groups (Australia) and ‘Requests 
for Resource’ (UK)”.
4
2.3.4.5 In 1993, the u S congress enacted the General Performance Results Act (GPRA) 
to improve the effectiveness, efficiency and accountability of federal programmes, where 
agencies have to focus on programme results. GPRA requires agencies to plan and measure 
performance using the “program activities” listed in their budget submissions. So it is again 
performance through programme/activities. GPRA had a 7-year implementation time-frame, 
from the initial pilot projects to government-wide performance reports, incorporating feed-
back mechanisms. GPRA’s implementation approach also provided for a 2-year pilot project 
of alternative performance budget approaches in at least five agencies, with regard to their 
spending decision. GPRA aims for a closer linkage before resource and results. As a report of 
the General Accounting Report in Performance Budgeting states “In the sense, GPRA can be 
seen as the most recent event in al almost 50-year cycle of federal government efforts to improve 
public sector performance and to link resource allocation to performance expectation.”
5
2.3.4.6 The GAO Report states that the GPRA differs from prior initiatives in two important 
respects. First, past performance budgeting initiatives were typically implemented government-
wide within a single annual budget cycle; GPRA, in contrast defines a multi-year and iterative 
implementation process that incorporates pilot task and formal evaluations of key concepts. 
In this manner, GPRA increases the potential for integration of planning, budgeting, and 
performance measure, while guarding against the unreasonably high expectations that plagued 
earlier initiatives. Second, GPRA will face operating environments unknown to earlier reform 
processes, that is, persistent efforts have to be made to constrain spending.
6
 
2.3.4.7 But the GAO Report on performance budgeting also makes two important points 
when it talks of outcome oriented budget: (i) past initiatives demonstrate that performance 
budgeting is an evolving concept that cannot be viewed in simple mechanical terms. It states 
“The process of budgeting is inherently an exercise in political choice – allocating scarce resources 
among competing needs and priorities – in which performance information can be one, but not 
the only factor underlying decision, ” (ii) GPRA “states a preference for outcome measurements 
while recognizing the need to develop a range of measures, including output and non-
quantitative measures. Focusing on outcome shifts, the definition of accountability from the 
traditional focus on inputs, processes and projects to a perspective centered on the results 
of federal programs. However, the difficulties associated with selected appropriate measures 
and establishing relationships between activities and results will continue to make it difficult 
in many cases to judge whether changes in funding levels will affect the outcomes of federal 
programmes” .
7
 
2.3.4.8 The above points need to be kept in view by the reformers who are attempting to 
introduce `outcome’ budgeting in government budgeting. Since this is a challenging task, 
the experience of some other countries in this regard would be useful, for example, in South 
Strengthening Financial Management Systems Public Finance Management - concepts and core Principles
Africa, where attempts have been made to introduce outcome budgeting, in the later half of 
the 1990s, with the introduction of the medium-term expenditure framework (MTEF). The 
South African government began restructuring its budget format to show the programmes 
towards which the departments were allocating funds. The question to be asked is how well 
have the reforms worked in introducing result-orientation into the budgeting process?. As 
an informed commentator puts it, the answer is less than sanguine for the following three 
reasons:
8
•	 F i rs t ly ,	 e v e n	 t hou g h	 p e rfo r m a nc e	 t a rg et s	 a r e	 b ei n g	 de v elo p e d ,	 t he y	 a r e	 act u a l ly	 k e pt	
separate from the budget not only in South Africa, but also in countries like Malaysia, 
Singapore, and in most u S States, “which undermines their legitimacy, ”
•	 S e c o n d l y , 	 i n 	 t h e 	 S o u t h 	 A f r i c a 	 c a s e , 	 a s 	 r e g a r d s 	 p e r f o r m a n c e 	 i n f o r m a t i o n , 	 “ o u t p u t s 	 a r e	
confused with inputs and outcomes remain unconsidered.” T argets appear to have 
been technocratically identified which therefore lack real world value. T argets are 
not spelt out in detail making actual measurement unlikely.
•	 Th i r d l y , 	 a n d 	 t h e 	 m o s t 	 i m p o r t a n t 	 p o i n t 	 i s 	 t h a t 	 e v e n 	 w h e n 	 e ff e c t i v e 	 t a r g e t s 	 a r e	
provided, the budgets in South Africa and many other nations moving toward this 
kind of system fail to specify who should be accountable for their results, and who 
should hold them accountable. “V ery little thought appears to have been given to 
the process of institutionalizing political or accountability for the targets identified 
in their budget” .
9
2.3.4.9 So programme budgeting by itself may not bring the outcome orientation. It is also 
difficult to make performance targets as part of the budget formulation process unless managers 
at various levels get involved in the budgeting process, involving prioritization of activities 
and resource allocation on that basis. 
2.3.4.10 These experiences make it clear that unless there are institutional reforms, like bringing 
in the ‘agency’ concept, where the heads of the agencies are made accountable for delivery of 
services in an efficient and effective manner, the reform in budgeting process would be difficult 
to implement. Only with these institutional changes would there be an inner compulsion 
within the organization to bring about changes in the budgetary process. The commission 
has examined the concept of executive agencies in its Thirteenth Report.
2.4 W eaknesses in the Budgetary Process
2.4.1 The W orld Bank after analyzing the budgetary processes of several countries came to the 
conclusion that government budgets generally have the following shortcomings:
“WEAKNESSES IN RESOu Rc E All Oc A TION AND u SE
10
 
W eaknesses that undermine public sector performance include:
i. Poor planning;
ii. No links between policy making, planning and budgeting;
iii. Poor expenditure control;
iv. Inadequate funding of operations and maintenance;
v. Little relationship between budget as formulated and budget as executed;
vi. Inadequate accounting systems;
vii. Unreliability in the flow of budgeted funds to agencies and to lower levels of 
government;
viii. Poor management of external aid;
ix. Poor cash management;
x. Inadequate reporting of financial performance; and
xi. Poorly motivated staff. ”
Many of the weaknesses in budgeting reflect the failure to address linkages between the various 
functions of budgeting. The following factors contribute to budget systems and processes that 
create a disabling environment for performance in the public sector, both by commission and by 
omission:
11
 
•	 A l m o s t	 e xc lus i ve	 f o cus	 o n	 in put s,	 wi t h	 pe r f o rman c e	 j ud g e d	 l ar g e l y	 in	 t e rms	 of	 spe nd in g	
no more, or less, than appropriated in the budget;
•	 I n p u t 	 f o c u s 	 t a k e s 	 a 	 s h o r t - t e r m 	 a p p r o a c h 	 t o 	 b u d g e t 	 d e c i s i o n 	 m a k i n g ; 	 f a i l u r e 	 t o 	 a d e q u a t e l y	
take account of longer-term costs (potential and real), and biases in the choice of policy 
instruments (e.g., between capital and current spending and between spending, doing, 
and regulation) because of the short-term horizon;
•	 A	 bot t o m -u p	 ap pr oac h	 t o	 bud g e t in g	 t h a t	 m e ans	 t h a t	 eve n	 i f	 t h e	 u lt ima t e	 s t an c e	 of	 fisca l	
policy was appropriate (and increasingly after 1973 it was not) game playing by both 
line and central agencies led to high transaction costs to squeeze the bottom-up bids into 
the appropriate fiscal policy box;
•	 A	 t e nd e n c y	 t o	 bud g e t	 in	 r e a l	 t e rms,	 l e ad in g	 ei t h e r	 t o	 pr e ss u r e	 o n	 a g g r e g a t e	 spe nd in g	
where inflation is significant (which was often validated through supplementary 
Strengthening Financial Management Systems Public Finance Management - concepts and core Principles
8
Mathew Andrews, (2005), “Performance Based Budgeting Reforms.” in Anwar Shah (ed) Fiscal Management, The W orld Bank,  p.32
9
Ibid
10
Handbook of public expenditure, 1998
11
Handbook of public expenditure, 1998