Challenges and Dangers of Performance Budgeting *
The goal of the article is to examine the challenges and dangers involved in performance-based budgeting and to make recommendations on how to proceed with the performance budgeting reform in Estonia.
Based on the existing academic literature on performance budgeting (which has extensively examined the experiences of other countries with various forms of performance based budgeting), it can be argued that those forms of performance budgeting reform that seek to establish closer and more direct links between performance indicators and resource allocations can bring about significant negative effects, including the following problems: diminished motivation of public officials (who may feel that they have been made unfairly responsible for outcomes not entirely under their control); declining quality of the performance information (if officials know that achieving specific indicators is linked to budget appropriations); playing the system (e.g. focusing on those dimensions of performance that are directly measured by the indicators). Furthermore, the experiences of other countries have shown that introducing a performance budgeting system where the budget law is structured according to outputs and outcomes (rather than inputs), has reduced the transparency of the budget and diminished the role of the parliament in the budgetary process. In light of the problems that the existing studies on performance budgeting have pointed out, a recommendation can be made to proceed with the performance budgeting reform in Estonia in a very cautious manner, while the Ministry of Finance should consult more extensively with the members of the parliament as well when planning further steps of the reform. The Estonian public sector is certainly not yet ready for the adoption of the performance-based budget format.
* Peer reviewed research paper.