The Performance Budget originated in the Naval Organisation of USA, during and after the Second World War. Hoover Commission strongly recommended to the Government for its adoption in the Federal Budget too, which was accepted by the Government. Hoover Commission gave the definition of performance budgeting in the following words — “The Performance Budget is the budget based upon functions, activities and projects”. It is a financial document that seeks the implementation and control of government programmes through budget allocation. This is done by presenting the government operations in terms of programmes, activities and functions. The functional classification of the governmental financial operations helps to identify the public policies and objectives very clearly in the budget in concrete physical terms so that a direct relationship between the inputs and outputs could be identified and performance can be easily reviewed through clearly identifiable cost overheads.
The performance budget is prepared in functional categories viz. education, agriculture, health, family welfare etc. Each functional category is then divided into programmes. Each ‘programme’ is, thereafter divided into ‘activities’ which in turn are further subdivided into ‘projects’. For example the budget under the functional category of Education is prepared under the various programmes, namely, Higher education, primary education, secondary education, Non-formal education, etc. These programmes are sought to be achieved through ‘activities’ like National Literacy Mission, which in turn consists of Projects like operation Black Board, Adult Literacy, Vocational Education, etc. The budget, since prepared under the minor heads, which are actually a number of projects, reflects primarily the governmental output and its cost. The various stages in the formulation of a Performance Budget are as follows :
- As far as possible, an attempt is made to identify the objectives and these objectives of the individual programmes are clearly spelt out in quantitative and measurable terms.
- The long-term strategy and the short-term strategy for achieving the objectives are now analysed and possible alternative programmes are identified. Based on the analysis of costs and benefits involved with each of the alternative programme, the programme which is most suitable in overall economic and socio-political interests is selected.
- The programmes taken up for inclusion in the budget are now classified with reference to a classification system (which is a functional classification in this case). The idea behind the classification is to facilitate allocation of resources to the related programmes and to avoid duplication.
- The criteria for evaluating the programmes with reference to the objectives are evolved; when the budget is ready in the above form, it must go through the prescribed procedure of presentation and approval by the Legislature.
- After the approval is achieved, the roles of different organisations in achieving the specified objectives are demarcated. The financial rules and accounting systems are re-arranged to effectively implement the programmes.
- Proper information and reporting systems on financial, physical and economic data relevant to the programmes are installed for monitoring the programmes during the execution and for evaluating them on completion.
- After the budget execution starts, a performance audit is done at the end of the financial year against the objectives enumerated in the budget and the criteria for evaluating the programmes.
A comparison between the traditional budget system and the Performance
Budget stage of discussion would bring out the concept of Performance Budgeting more clearly. The significant differences between the two systems are as follows;
- In the Traditional Budget, legal aspects of financial administration are focussed more as compared to other aspect of the budget. The traditional budget is hence meant to maintain strict financial control (from the legal view point), so that no misappropriation of money can be done. However, the Performance Budget focuses on target accomplishment i. e. performance of the administrators is primarily checked here.
- In the Traditional Budget, the attention of the legislature is focussed on the money that is to be provided to the executive so that he can achieve the targets in the budget. The performance budget instead of focussing on money, focuses on the targets and hence the success of the administration in effectively utilising the available money to achieve the targets.
- While the Traditional Budget focuses on the sources of expenditure i. e. salary of the employees, expenditure on establishment, building, furniture etc., the Performance Budget focuses on particular programmes and activities and their achievements.
- The audit conducted under the Traditional Budget System is primarily oriented towards checking the legality of the expenditure and hence to find out the instances of misappropriation of the money, if any. The Audit, as discussed earlier, conducted under Performance Budgeting System is aimed at checking the achievement of targets when all the material resources asked for in the Budget were provided to the Executive.
In other words, the Performance Budget shifts emphasis from means of accomplishment to the accomplishment itself. It brings annual budget and the developmental plans closely together. Performance Budgeting, since formulated in terms of programmes and projects; is complementary to planning and provides an effective feedback to planning itself.
Advantages of the Performance Budgeting
The Performance Budgeting has one distinct advantage over other budgetary techniques in that it establishes a direct relationships between the targets achieved and the resources spent for that, so that the performance audit for better administration of the financial affairs can be done. The other advantages of the Performance Budgeting are as follows:
- It helps in improving the procedure of budget formulation and in reviewing the actual progress of programmes at all the levels of government, because all the levels of the administration are organically linked through performance budgeting.
- It helps in improving the decision-making process and management of programmes in the day-to-day administration, since it seeks to bring the techniques of cost-benefit analysis, FERT, CPM, etc., in practice more frequently in administration.
- The performance-audit is facilitated through the adoption of Performance Budgeting in the Government which helps in fixing responsibilities for administrative lapses.
- The Performance Budget provides a clearer and true picture of the Pattern of spending in the Government and the possible revenue alternatives available to the Government.
- It enhances the accountability of the administration and provides an additional tool to the public and their representatives to control the management of financial operations through performance audit.
- This kind of budgeting is more intelligible to a common man who now knows about what projects and activities, the Government would undertake in the coming year and the targets that it seeks to achieve.
Performance Budgeting in India
The introduction of Performance Budgeting in India has been a long-standing demand of the representatives of the People. The Estimates Committee of the Second Lok Sabha in 1956 recommended for its use in the Government under its recommendations on budgetary reforms. The Administrative Reforms Commission also reiterated this recommendation which was finally accepted in 1977-78. In 1977-78, the Performance Budgeting was introduced for the first time in India. This has been extended to cover slowly all the Government departments. The introduction of the Performance Budgeting in India has a strong case due to the presence of certain special factors present in India. These are –
- Where a progressive budget with significant welfare content is made on an activity basis, the adoption of Performance Budgeting would strengthen the democratic process in India at the given level of literacy (which is low) in India. Since the Performance Budget can be made intelligible to the average citizen very easily, it can be used as a useful instrument to strengthen the democratic process.
- The Performance Budget facilitates implementation of the developmental programmes. Performance Audit at the end of the Performance Budgeting makes it difficult for the Executive to hide the delayed pace of implementation of the programmes as well as the distortion of schemes and the time of implementation. Any attempt by the Executives to hide inefficiency to suit their political ends can be easily detected.
- The Performance Budgeting promotes efficiency and economy in expenditure, because the money is directly linked to the activities and the duplication of expenditure under various heads, which is very common in Traditional Budget, is very easily avoided in the Performance Budget. The fear of Performance Audit on the other hand compels the Executive officials to be efficient in executing the projects.
- The Performance Budget integrates the three way process of planning, programming and budgeting. This is highly desirable in India since there are a number of missing links between planning and programming on one hand and budgeting on the other hand.
- The urgent need of enhancing the accountability of the administrators, when it is going down rapidly in all the quarters of Indian administration, can be easily fulfilled by having Performance Budgeting and Performance Audit.
However, everything associated with Performance Budgeting is not all right. There are certain obstacles too in the path of preparation of the Performance Budgeting. These are –
- One of the pre-requisite of the Performance Budgeting is the clarity of objectives so that targets can be easily fixed in quantitative terms and their achievement is checked. In absence of clear cut objectives, which is often the case in the Governmental activities, the Performance planning and performance budgeting would lack direction.
- Another pre-requisite of the Performance Budgeting is that the activities to be covered under the budget must be amenable to qualitative measurement. However, most of the Governmental activities, being sovereign and regulatory in nature, cannot be quantified i. e. the physically identifiable targets cannot be set against those activities and hence appraisal in terms of physical result is not possible in respect of those activities. For example Police Administration activities cannot be quantified. Even if a quantification is attempted in this area i. e. measuring performance by the percentage of cases solved, setting up of such a performance indicator would lead to distortions in the administration e. g. police might stop registering the FIRs to improve their record.
- The Performance Budgeting requires a comparatively stable environment in terms of inputs and the outputs of the overall system. In a system where either the input is unstable of price fluctuations on a large scale, unpredictable infrastructure facilities etc., or the output is erratic e. g. due to frequent strikes, lock-outs, power shortages etc., the measurement of performance is relatively very difficult and hence responsibility and accountability cannot be fixed so easily.
- The overall environment of the organisation too may prove to be an obstacle in the preparation of a performance budget, as performance budgeting is basically a tool for higher achievements. Unless an organisation is geared (or motivated) for higher levels of achievements. Performance Budgeting cannot be successful.
- Lack of proper cost accounting in Government is also an obstacle. Due to the lack of proper cost accounting, many of the assets of the Government cannot be accounted for the terms of unit costs and hence the task of preparing a Performance Budget in the absence of unit costs cannot even take off.
- Governments of the developing countries face the problems of abundant manpower (i. e. overstaffing) but shortage of skilled manpower in administration. There are very few people who can actually prepare a performance budget and, on the top of that, can conduct a Performance Audit too.
- The Audit conducted under the Traditional Budget System is very easy to be conducted, since only the legality of expenditure is to be checked. However, conducting a Performance Audit is not so simple and only experts can do it. For example, checking of Performance against the set standards and available resource position in high-tech areas like Space Research, Post and Telegraph (Communication), etc., requires familiarity with the subject matter in the field concerned. Ordinary law graduates or the auditors having no knowledge of the subject matter cannot conduct a Performance Audit which makes the whole exercise of Performance budgeting futile.
Although a number of defects seem to be there in operating the performance budgeting technique, it has been found to be very successful in areas where quality is appreciated and not the quantity. It has been found to be very successful in high technology, production activities, where activities can be easily quantified. Signing of MoUs (Memorandum of Understanding) between the Government and the Public Sector Undertakings, and the concept of MBO (Management By Objectives) are the offshoots of Performance Budgeting and have been found to be highly successful in improving the performance of the Public Sector Units.