Budget Programs: a Way to Improve Quality or How to Make Sure Program Budgeting is Used to Its Full Potential in Ukraine?

Finally, medium-term planning

2019 year is the first year in Ukraine when the Ministry of Finance plans on implementing the Budget Declaration. In the past, the Government periodically prepared the Main Directions of Budget Policy, a “precursor” of sorts of the Declaration. Before the amendments to the Budget Code in December 2018, this document did not contain any fiscal risk analysis with regard to budget or medium-term planning provisions as it did not in any way restrict the government’s ability to freely change the overall revenue ceiling, expenditure and funding. Notably, these very indicators need be well-grounded and predictable to prevent public finance crises.

The Budget Declaration should become a key tool of medium-term budget planning, which in turn, aims at much more efficient use of budget funds.

According to recommendations of international financial institutions, another necessary tool for effective medium-term budget planning (MTBP) is program budgeting, i.e. directing expenditure under specific programs with a clear purpose and performance indicators.

Program budgeting is a step forward in managing public finance compared to the so-called traditional (line-item) method of budgeting. Under such a “traditional” approach, expenditure is planned based on the principle of “funding last year’s expenditure indexed for inflation / expected GDP dynamics”. As a result, from year to year the state incurs expenditure that is not needed anymore or whose efficiency is dubious. 

In contrast to it, program budgeting is intended to ensure that budget funding is provided to state bodies not for the purpose of “keeping” but to achieve specific policy objectives. “The basic idea is that budget information and decisions should be structured according to the objectives of the government” [6].

In international practice, budget programs are used to achieve several or all of the goals from the following list [5]:

1. help the government prioritize spending based on the government’s strategic objectives
2. provide sufficient and predictable mid-term funding to priority policies 
3. link budget funding to policy objectives
4. increase efficiency of spending
5. help the government assess the relevance of funding individual programs based on value-for-money as compared to other budget programs.

Program budgeting also aims at increasing accountability on the part of the ministries, promoting a management culture among government officials that focuses on performance, as well as increasing transparency of government activities [1].

In Ukraine the first elements of program budgeting date back to 1998, the program classification of budget expenditure was introduced by the Budget Code of 2001, and in 2002 the government adopted the Concept of Implementing Program Budgeting. Ever since, budget allocations for individual needs have been made according to budget programs. E.g. the Law on the State Budget for 2019 provides funding for over 550 budget programs. 

Despite its long record, the effectiveness of this method in Ukraine is limited. This issue is addressed in the Public Finance Management Reform Strategy 2017-2020 [24] which states that “program budgeting is used only formally; the outcomes of program budgeting are not used to make managerial decisions. There is no effective control over budget programs’ performance»

The Strategy intends to turn program budgeting into “a tool for making effective management decisions and efficient use of public funds”. However, it does not contain any analysis of what causes poor effectiveness of this method in Ukraine. 

So what holds back efficient use of program budgeting in Ukraine and how could its maximum efficiency be ensured? 

Three types of program budgeting requirements

One way to find an answer to this question is to analyze how program budgeting is used in other countries (specifically, the model countries) and to compare domestic practice with international experience.

This budgeting method was successfully implemented in the United States, Canada, France, the Netherlands, the United Kingdom, Singapore, Australia, and New Zealand where it helped raise the level of achieving policy objectives. Today, program budgeting is being introduced in most countries of Central and Eastern Europe, including Slovakia, Romania, Georgia, as well as in Russia, Armenia, Turkey, etc. [1; 5].

Analysis of scientific research papers, recommendations of international financial institutions, as well as other countries’ experience suggests that in order to achieve the desired outcomes, program budgeting should meet three types of principles and / or requirements [5].

These principles are schematically represented in Fig. 1-3, see details in Table 1 in the Appendix

ТУТ РИСУНКИ (ОКРЕМИЙ ФАЙЛ) – Де?)..

Is Ukrainian PB practice consistent with these three groups of principles? A quick answer is: partly with the first two, and hardly so with the third. Let’s take a closer look.

Public expenditure management architecture (Fig. 1)

Two of the key elements of public expenditure management architecture are strategic planning that prioritises government policies to be financed and high quality practice of shaping up government policies. In Ukraine there is much room for improvement with regard to both.

Although there is no specific legislation on strategic planning in Ukraine, in 2017 the Cabinet of Ministers presented the Medium–Term Priority Action Plan 2017 to 2020 (MTPAP) which contains strategic objectives and around 90 policies for achieving these objectives (4-7 for each ministry) [13]. Three annual government action plans (for 2017, 2018 and 2019) were approved under the MTPAP.

At the same time, representatives of the dedicated division of the Ministry of Finance responsible for medium-term budget planning still do not regard the MTPAP as a guideline for prioritizing budget spending [5].

The basis for policy shaping was established by regulations of the Cabinet of Ministers back in 2007. However, the practice of shaping up policies in the government is still not common. Namely, SIGMA, a division of the OECD specializing in the development of effective public administration systems evaluated the performance of public services in Ukraine in the summer of 2018 and awarded only 1 point out of 5 with regard to “quality of public policy planning” of Ukrainian government’s current practices [12].

The groundwork for another important element of the budget planning system architecture – medium-term expenditure framework (MTEF) – was laid in Ukraine only after the introduction of amendments to the Budget Code in December 2018.

It was clearly stipulated then that passports of budget programs should contain the main spending agency’s policy objectives at which a budget program is aimed [29]. Previously, linkage to policy objectives (and policies as a product of government activities) in budget program regulations was blurred.

Finally, another December novelty was spending reviews which “provide analysis of efficiency of national policy in specific areas using public funds under budget programs, as well as assessment of efficiency, performance and feasibility of expenditure in question”.

Another important element of public finance management (PFM) architecture – annual evaluation of civil servants’ performance – was also introduced in 2018. Yet, the regulatory framework of annual evaluation still does not link public servants’ performance indicators to budget programs as is recommended by the OECD in its program budgeting guidlines. For this reason, this tool still is not of much help in building an effective PFM system in Ukraine.

Program budgeting procedures

The amendments to the Budget Code at the end of 2018 increased transparency in the preparation and execution of the budget.

Starting from 2019, the government has to submit to the Verkhovna Rada a draft law on state budget along with information about policy objectives and performance indicators for each spending agency.

Similarly, the government has to submit to the Parliament a report on ministries’ and other authorities’ achievement of planned goals, objectives and performance indicators of budget programs, as well as on achievement of national policy objectives in the reporting period.

In addition, the main spending agencies should hold a public presentation of information relating to implementation of budget programs, including achieving national policy objectives in respective areas. It should be noted that the ministers’ personal reporting to the parliament on the results of their activities and achievement of policy/budget programs’ objectives is not specified (although such norms were proposed by the Ministry of Finance in draft amendments to the Budget Code submitted to the Verkhovna Rada in December 2018).

Finally, lack of autonomy and flexibility in using funds to achieve program objectives significantly reduces the ability of “program managers” (i.e. unit heads responsible for their implementation) to respond promptly to challenges and effectively manage resources to achieve policy objectives for which budget programs were developed.

The recent changes to the Budget Code give the executors of budget programs more freedom to act. As of 2019, they should approve passports of budget programs “by agreement with the Ministry of Finance” rather than by a “joint decree” as before. This means a slightly simpler approval procedure and a smaller number of “visas” (signatures) to be collected. However, every step of a program manager in regard to budget funds is still strictly regulated with a minimum room for making operating decisions. Nor can he/she freely allocate funds within the limits (“expenditure ceiling”) as recommended by the OECD. And although the very term “expenditure ceiling” was proposed by the Ministry of Finance when making the latest amendments to the Budget Code it was later left out during parliamentary debates. Therefore, “ceilings” are not yet defined legally.

Thus, the amendments to the Budget Code adopted last December have raised transparency and accountability of budgeting. However, its manageability and improvement (see Figure 2) still leave much to be desired.

Firstly, one of the program budgeting’s key principles – “one policy – one budget program” – is hardly followed. Usually, several programs are directed at implementing a policy within a ministry [5].

E.g. seven budget programs aim at implementing the priority policy of the Ministry of Agrarian Policy and Food of Ukraine “Improving mechanisms of stimulating the agricultural sector”, under the government’s Medium-Term Priority Action Plan.

At the same time, one of the priority policies of the Ministry of Education and Science of Ukraine – the program “New Ukrainian School” (NUS) – does not have its “own” budget program (except for a subvention program of allocating funds between regions). The NUS funds are scattered over several different programs [5].

This means that the Minister of Education and Science, who is the political leader of the NUS reform, is in fact unable to see all the key figures relating to progress and efficiency of this policy in one document, i.e. the total amount of funding and its structure. Consequently, she cannot assess efficiency of achieving this policy’s objectives and its pace, nor can she decide on policy adjustments where appropriate.

Secondly, the number of budget program passports is too large and has (at times, abrupt) tendency to increase which also significantly reduces the ability of the ministers to effectively manage reforms while being politically accountable for them.

Thus, in the past 5 years the Ministry of Education and Science has seen the number of budget programs increase from 20 to 33, the Ministry of Health – from 18 to 22. The Ministry of Agrarian Policy and Food has 12 programs in 2019 against 11 in 2015. 14 budget programs (7 in the Ministry of Education and Science, 4 in the Ministry of Health, and 3 in the Ministry of Agrarian Policy and Food) have to do with activities of a separate institution / entity.

It is very hard to keep control of such a large number of budget programs.

Effectiveness of budget programs is also reduced due the fact that legislation does not require a clear definition of a structural subdivision within a ministry that is the owner of a specific program [5]. This means that the society has not idea who is to be held accountable for (not) achieving a specific state policy’s objectives.

Lastly, the current system of ex post evaluation of budget programs is more of a formality and does not fundamentally change program funding in subsequent budget periods [5].

SIGMA awarded 3 points out of 5 to Ukrainian government practices regarding the “quality of monitoring and reporting by the government” and 4 points out of 12 with regard to the “quality of reporting documents” [12]. The regulatory and legislative environment does not allow for full evaluation of budget programs’ implementation, which does not lay good foundation for increasing efficiency of using public funds under budget programs [11].

The amendments to the Budget Code adopted in December 2018 are intended to somewhat change this situation. Budget programs’ performance outcomes provide basis for making decisions on adjusting budget allocations (including suspension of a budget program) both in the current budget period and when planning the next budget, as well as during the preparation of the Budget Declaration.

However, genuine changes are possible only if the quality of performance indicators of budget programs is improved, as discussed in the next section.

Content of budget programs: Ukraine’s reality

Even that some elements of the budget planning architecture and PB procedures (Figures 1 and 2) have been recently introduced, the content of budget programs does not meet any desired criteria (Figure 3). Let us illustrate this point by looking at the three ministries whose budget programs we have studied.

The strategic objectives of the ministries to which the budget programs appeal are not always consistent with the priority policies of the government in the areas of the ministries’ responsibility.

E.g. one of the priority policies of the Ministry of Education and Science according to the MTPAP is “improving the quality of vocational education”. Yet, the purpose of the budget program “Training staff at vocational schools in the professions of national importance”, CPCEC 2201030 (2018), dedicated to vocational education is “realization of the right of every citizen to high-quality vocational education”. This objective’s performance indicators are (1) the proportion of students who will receive a respective education document (100%) and (2) the students’ employment level after graduation (100%)

How the implementation of this objective will help improve the quality of vocational education in Ukraine is not clear.

The principle according to which a program should clearly link government spending to specific policies is hardly followed.

For instance, the Ministry of Health’s budget program “Organization and Regulation of Institutions’ Activities and Some Measures within the Health Care System” aims at “improving health, life expectancy and reducing the incidence rate, preserving and restoring the health of citizens who suffered as a result of the Chernobyl catastrophe”. However, among the program’s objectives with respective allocations are collection of statistical data, IT services for medical institutions and even provision of disability sheets to medical institutions. None of the program’s performance indicators relates directly to health and life of the people.

In some cases, budget programs’ objectives specification is actually a description of the ministries’ current activities, and not the steps to be taken to achieve strategic objectives of the government or the purpose of the program.

For example, the purpose of a 2018 budget program of the Ministry of Education and Science – “State certification of scientific and pedagogical personnel of higher qualification, licensing, assessment and certification of educational establishments”, CPCEC 2201510 – is “provision of organizational services relating to accreditation and certification; production of accreditation and attestation certificates».

Naturally, there are also positive exceptions. E.g. programs of the Ministry of Agrarian Policy and Food whose objectives’ specifications provide a good understanding of what the policy is about for which the programs were developed (financial support for the agricultural sector).

However, none of the programs contains targets and basic performance indicators. This does not make it possible to analyze the effectiveness of government intervention and see whether such intervention helps solve policy problems in specific areas.

A number of the programs’ indicators are even counterlogical in terms of state regulation objectives. E.g. the budget program of the Ministry of Agrarian Policy and Food of Ukraine “Financial support of measures in the agro-industrial complex by way of reducing the cost of loans” has a quality indicator stating that the “share of preferential loans in the total volume of loans acquired in 2018” should be 100%. So, according to the program the state proposes to completely replace commercial loans with preferential loans (on market-related terms) for farming enterprises.

Finally, none of the programs contains an indicator of the entire policy’s cost (over the entire period) implemented by a given program. If the programs contained estimates of funding for said policy for subsequent years their effectiveness as medium-term budget planning tools would increase.

The root of the problems

Thus, the budget programs virtually do not meet any of best practice criteria (Fig. 3). Why? During the in-depth interviews with specialists directly responsible for preparing budget programs we identified a number of possible causes.

Firstly, during the first decade of using PB in Ukraine, the Ministry of Finance took it primarily to be a means of detailed control over the intended use of budgetary funds. Only in recent years has the Ministry of Finance come to the realization that the purpose of budget programs is primarily to achieve policy objectives [5]. This change of perception was reflected, in particular, in the amendments to the Budget Code adopted in December 2018.

However, years of specific understanding of the purpose of PB on the part of the Ministry of Finance had an effect on the employees of the financial and economic subdivisions of line ministries (these units traditionally prepare budget program passports) who developed steadily incorrect approaches to drawing up budget program passports. Today, too, budget programs are treated like formal documents needed to receive funding and not as a tool specifying the ways to achieve policy objectives and helping analyze the effectiveness of a given policy.

Now that the Ministry of Finance is changing its approaches to program budgeting, previously learned practices cause some inertia and poor understanding of the ministry’s new requirements toward PB on the part of respective civil servants in line ministries [5].

This leads to inability and at times reluctance of line ministries’ representatives to improve the quality of program passports.

Secondly, some regulatory acts of the Ministry of Finance require further improvement [5]. E.g. the ministry’s orders still do not require that policy funding needs for the next budget periods be indicated in the budget program passports. I.e. program passports remain one-year planning tools although they should be an integral part of medium-term budget planning.

The third reason for poor quality budget program passports is the principal-agent problem. The thing is that employees of the ministries’ structural subdivisions dealing with financial and economic issues in point of fact have a “monopoly of knowledge” on how to approve budget programs passports with the Ministry of Finance. So they can either assist the ministry in amending the passports or virtually block them referring to established practice of drawing up those documents.

Therefore, even if a ministry has a clear policy and desires to reflect this policy in a budget program passport, it is usually a difficult task which is not always successful.

Conclusions and recommendations

The overall outcome of misusing program budgeting in Ukraine contrary to international recommendations and established principles is that today budget programs in Ukraine do not actually fulfill their key role, i.e. help the political leadership of the country prioritize spending in the process of drafting the state budget and provide control not only over the intended use of funds but primarily to achieve the policies’ objectives for which the funds should be allocated.

Presently, budget programs are more of a planning bookkeeping document than a tool for control over effectiveness of policies implemented by the government.

It is necessary to bring program budgeting in Ukraine into line with international best practice. To succeed in this, approaches to drawing up and implementing budget programs need be changed in the first place.

We recommend:

(1) That the number of budget programs be reduced and that the principle of “one policy – one program” be followed. Where appropriate, spending within a single program can be subdivided into separate subprograms, but all of them should be aimed at achieving a single policy with a clearly defined goal.

(2) That the scope of information in budget program passports be increased. The OECD (2018) recommends that budget programs reflect the following:

• the public issue to be addressed 
• the stategy to be followed
• the populations to be considered 
• the goods/ public services to be provided 
• the expected results

This information should be made public on a separate online resource.

(3) That the number of performance indicators be small. However, they should reflect progress in achieving national policy objectives.

(4) That program managers be given more freedom in allocating budget resources, and that their “budget ceilings” be tougher.

(5) That ex post evaluation of budget programs be enhanced. High value, high risk and politically important programs should be prioritized for evaluation by the Ministry of Finance (OECD, 2018).

Secondly, the government should considerably enhance the ability of sectoral (line) ministries and the Ministry of Finance to use PB, in particular:

(1) Expand the team of professionals involved in advancing the reform. Fiscal policy affects the entire government and cannot be implemented by a few experts. “Turning book keepers into accountants and budget analysts is challenging and takes time and resources” (Scott, 2014). Best practice is to create a dedicated team in the Ministry of Finance, with counterparts in line ministries to develop and roll out the new system over a number of years (OECD, 2018).

(2) Enhance results-based budget skills by providing intensive training to responsible professionals in line ministries.

(3) Ensure greater integration of dedicated structural units involved in program implementation and structural units involved in strategic planning into the process of developing budget programs and discussing and approving them with the Ministry of Finance; disclose information about the ministry’s structural unit or other main spending agency responsible for preparing and implementing a budget program.

Finally, better communication of objectives and a potentially positive impact of program budgeting on effective budget planning should be provided to both the political leadership of the ministries and that of the government and the parliament.

Implementing these recommendations will not only improve the quality of budget programs and budget planning at the ministries but also ensure high quality implementation of medium-term budget planning of government activities that began in 2019 in accordance with the amendments adopted in December 2018.

List of literature:

1. OECD Best Practices for Performance Budgeting, November 2018
2. Graham Scott. PFM Reform: Promises and Tears – Lessons Learnt from Reforms gone Wrong, 2014 https://www.imf.org/external/np/seminars/eng/2014/asiapfm/pdf/scott2.pdf
3. IMFs Guidelines for Public Expenditure Management (1999) https://www.imf.org/external/pubs/ft/expend/

4. IMF. Ukraine: Technical assistance report – Public Financial Management Overview, February 2016 https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Ukraine-Technical-Assistance-Report-Public-Financial-Management-Overview-43660

5. D.M.Marchak How to make sure maximum use is made of the potential of program budgeting in Ukraine, 2019

6. John M. Kim, From Line-item to Program Budgeting Global Lessons and the Korean Case. – Korea Institute of Public Finance, 2007

7. Stefan Sjolander, Rimantas Veckys, Anastasiia Yermoshenko. Government Strategic and Budget Planing in Ukraine: Ways of Reform. – The project ‚Advisory Support for the Ministry of Finance of Ukraine on budget reform process and aid management‘. Kyiv, 2013

8. Modern Budget System. Rules and Procedures. Manual. – Institute for Budgetary and Socio-Economic Research, 2017

9. Financial and Economic Analysis Office in the Verkhovna Rada of Ukraine. Problems of the Program-Target Method Implementation in Ukraine – December 2016

10. О.Yatsenko. Individual Aspects of Implementing the Program-Target Method in the Budget Process at Local Budgets Level, – “Ukraine’s Finance”, 7’2013

11. Sergii Slukhai. M&E and Budget Program Performance Measurement in Ukraine: Current State and Needs for Improvement. – European Financial and Accounting Journal, 2011, vol. 6, no. 2, pp. 28-47.

12. SIGMA. Basic Measurement Report. Principles of Public Administration. Ukraine, June 2018 https://www.kmu.gov.ua/storage/app/media/17-presentation-2018/09.2018/11.09.2018Ukraine%20Baseline%20Measurement%20Report%202018_UA.pdf

13. Medium–Term Priority Action Plan 2017 to 2020 https://www.kmu.gov.ua/ua/diyalnist/programa-diyalnosti-uryadu/serednostrokovij-plan-prioritetnih-dij-uryadu-do-2020-roku-ta-plan-prioritetnih-dij-uryadu-na-2017-rik

Laws and regulations:

14. Directive of the KMU of 14 September 2002 #538-r On the Concept of Application of Program-Target Method in the Budget Process https://zakon.rada.gov.ua/laws/show/538-2002-р

15. Order of the Ministry of Finance On Budget Program Passports of 29 December 2002 #1098 https://zakon.rada.gov.ua/laws/show/z0047-03#n169

16. Order of the Ministry of Finance of 1 November 2004 #687 On Amendments to Order of the Ministry of Finance of 29 December 2002 #1098 On Budget Program Passports https://zakon.rada.gov.ua/laws/show/z1462-04

17. Order of the Ministry of Finance of 26 May 2010 #283/437 On Sample List of Budget Programs and Performance Indicators for Local Budgets in the Sphere of Healthcare 

18. Order of the Ministry of Finance of 02 August 2010 #805 On Basic Approaches to Application of Program-Target Method in Planning and Executing Local Budgets 

19. Order of the Ministry of Finance of 16 December 2010 #1568 On Amendments to Order of the Ministry of Finance of Ukraine of 29 Decemmber 2002 #1098 https://zakon.rada.gov.ua/laws/show/z0041-11

20. Order of the Ministry of Finance of 27 June 2011 #945 On Sample List of Budget Programs Indicators 

21. Order of the Ministry of Finance of 6 June 2012 #687 On the Instruction for Preparing Budget Requests https://zakon.rada.gov.ua/laws/show/z1057-12

22. Directive of the KMU of 1 August 2013 #774-r On Public Finance Administration Development Strategy 

23. Order of the Ministry of Finance of 26 August 2014 #836 On Some Aspects of Applying the Program-Target Method in Planning and Executing Local Budgets https://zakon.rada.gov.ua/laws/show/z1103-14

24. Directive of the KMU of 8 February 2017 #142-r On Public Finance Administration Strategy for 2017-2020 https://zakon.rada.gov.ua/laws/show/142-2017-р

25. Order of the Ministry of Finance of 20 September 2017 #793 On Components of Program Classification of Expenditure and Crediting Local Budgets https://zakon.rada.gov.ua/rada/show/v0793201-17

26. Law of Ukraine 2646-VIII On Amendments to the Budget Code of Ukraine with regard to Implementing Medium-term Budget Planning (of 06 December 2018) https://zakon.rada.gov.ua/laws/show/2646-19#n58

27. Order of the Ministry of Finance від 21 December 2018 № 1083 On Amendments to Order of the Ministry of Finance of 29 December 2002 #1098 On Budget Program Passports https://zakon.rada.gov.ua/laws/show/z0042-19#n7

28. Budget Program Passport as amended by Order of the Ministry of Finance of 21 December 2018 # 1083
29. Budget Code of Ukraine https://zakon.rada.gov.ua/laws/show/2456-17#n2689

Appendix