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Connecting Evaluation and Budgeting

(Originally published in June 2014, on the blog of the World Bank Independent Evaluation Group (IEG)).
There is great unexploited potential for evaluation to improve the quality of government budgeting that many ministries of finance are just now beginning to tap into. In countries such as the Netherlands, France and the United States efforts are currently underway to reinforce evaluation, and to connecte it systematically to budget preparation.  At the same time, efforts to strengthen the link between budgeting and evaluation continue in those rare countries like Canada which never lost sight of the connection. My recent IEG working paper – Connecting Budgeting and Evaluation – focuses on these efforts, and on what needs to change in both budgeting and evaluation to bring the two together.

It is increasingly understood in the budgeting community that evaluation has an important role to play in the search for budgetary savings.

Identifying Ineffective Spending

With public finances in many countries extremely strained in the wake of the global financial crisis, the need to make tough choices about how to spend limited public resources is inescapable. Even those governments which are not engaged in "austerity" policies face much tighter budgetary constraints. If these governments are to have any capacity to respond to high-priority new spending pressures, they must be able to critically examine and make cuts to "baseline" expenditure in areas where that spending is ineffective, a low-priority or inefficient. This has led to the rapid development of "spending review" mechanisms designed to systematically review existing expenditure programs and business processes to identify savings options.

In recent years, a number of countries have conducted spending reviews as an instrument for large cuts, such as the UK’s 2010 Comprehensive Spending Review.  It would, however, be a major mistake to see spending reviews only as a means of wielding the axe to the public sector. Spending reviews need to become an integral part of the regular budgetary process, so as to increase the fiscal space for important new spending by pruning away the dead wood in baseline spending.

The spending reviews conducted in the wake of the global financial crisis have mostly been "rough and ready" processes, and have not been informed by quality information on the effectiveness of existing programs. This is where evaluation comes in. Ministries of Finance increasingly understand that good spending reviews depend on the quality of the public expenditure analysis which underpins it, and that evaluation has a major role to play in helping to guide the identification of appropriate savings options.
Parallel with this is a growing understanding that evaluation has a pivotal role to play in performance budgeting, which is about the systematic use of performance information to improve the quality of budgeting and funding decisions. At the government-wide level, one of its most important objectives is to improve "allocative efficiency" – that is, to help ensure that limited resources are allocated to the areas which are going to deliver greatest benefits to the community

Analyzing Indicators

The problem is that performance budgeting is often perceived to be exclusively concerned with the use of performance indicators in budgeting. The result is that many OECD governments have packed budget documents with thousands of, not necessarily pertinent, performance indicators. These governments are then disappointed with the failure of these indicators to make much difference to budgetary decisions. A key reason for this is that indicators alone often provide only partial information about the effectiveness and efficiency of expenditure. Most outcome indicators are heavily affected by so-called external factors. It is necessary in many cases to subject indicators to significant analysis in order to tease out the real performance story. Expressed differently, assessing program effectiveness usually requires not only looking at the outcome indicators, but the use of tools such as impact evaluation and program logic analysis.

Performance budgeting is therefore increasingly being more correctly viewed as the systematic use in budgeting of performance information generally – not only of indicators, but of evaluation. Evaluation has been a "missing link" in the attempts to realise the performance budgeting goal of truly connecting performance and resource allocation decisions.

Evaluation as a Budgeting Tool

Although in many OECD countries there has been relatively little evaluation effort over recent decades, there are exceptions. In Canada and the United Kingdom, many evaluations have been, and continue to be, carried out. The problem is that, by and large, the focus of most evaluation has been upon policy and management improvement, rather than on informing budget decision-making. This has meant that most evaluation reports are not very useful to budgeters. To realize its potential as a budgeting tool, evaluation  also needs to change.  This is something which the Canadians recognized several years ago, and which led them to develop a new government-wide evaluation policy. A similar shift may be underway in the UK at present, following an excellent report by the National Audit Office which commented extensively on the limited budgetary use of evaluations and on the need to improve the quality of evaluations.

The growing demand from budget decision-makers for better information to support tough decisions about where to spend and where to cut represents a huge opportunity for evaluators to increase the scope of their contribution to good public management. This is an opportunity which should be seized with open arms.
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