(Originally published 20 August 2013)
Top-down budgeting is today widely regarded as a key element of good budgeting practice, and with good reason. In its core sense, agreed by all, top-down budgeting calls for the budget preparation process to be framed by a hard aggregate expenditure ceiling – approximately speaking, a limit which applies to the totality of government expenditure. The aggregate ceiling should be set in a top-down manner, which means that it is set at the start of the budget preparation process prior to any consideration of “bottom-up” spending requests from spending ministries. It should also be hard in the sense that, once set, it is essentially not varied during the budget preparation process. Establishing and enforcing such an aggregate expenditure ceiling is today generally viewed as crucial to ensuring that aggregate expenditure does not grow faster than is consistent with government’s aggregate fiscal policy objectives, and in particular with deficits and debt discipline.
This pertains to aggregate expenditure ceilings. But what does it mean for the setting of ministry expenditure ceilings. This is where the consensus disappears. There is a school of thought which advocates the application of the top-down approach not only to aggregate expenditure, but also to setting budget allocations of individual ministries. In other words, individual ministry shares of the aggregate expenditure ceilings also should be set in a purely top-down manner before ministry spending requests are considered. During the preparation of the annual budget, these ministry ceilings should in this view be hard, with ministries either barred or heavily discouraged from presenting spending plans which breach the ceilings they have been given.
I have strongly critiqued this view of how ministry ceilings should be set in an article just published in the OECD Journal on Budgeting. While strongly endorsing top-down budgeting in its core sense of the use of hard aggregate expenditure ceilings, the article rejects the application of a simple top-down approach to the allocation of the aggregate expenditure ceiling between individual spending ministries. It argues against setting ministry allocations before ministries have the opportunity to formally present spending proposals.
The key problem with an entirely top-down process for setting ministry ceilings is that it can seriously undermine the pursuit of allocative efficiency by making ministry shares of the aggregate expenditure ceiling more rigid. Setting hard ministry ceilings before spending ministries have had the opportunity to present formal new spending proposals deprives the budget preparation process of an information input which is absolutely essential if government is to optimise the allocation of its limited resources. A completely top-down approach to setting ministry ceilings might appear to score high on the criterion of aggregate fiscal discipline. However, budgeting techniques should not be judged solely on this criterion, but also on the extent to which they promote improved expenditure effectiveness and efficiency. Microeconomic considerations should be given as much weight as macroeconomic ones.
In the light of this problem, the article outlines certain budget preparation techniques which can ensure that ministry allocations do not in total exceed the aggregate ceiling while at the same time preserving and enhancing flexibility in the reallocation of resources between ministries. In particular, it argues for:
- the use of the top-down approach to setting ministry baseline ceilings – that is, the component of their budget allocations designed to cover existing programmes and capital projects;
- the treatment of the available fiscal space – the funds available for new spending – as a government-wide new policy pool, to be allocated during the budget process taking into account ministry new spending proposals;
- the systematic scrutiny of ministry baseline expenditure via spending review to increase fiscal space through both efficiency savings and cuts to low-priority and irredeemably ineffective programmes.