Introduction In 2023, many countries contend with slowing economic growth and high inflation. Consequently, budgets are likely to be prepared in a fiscally constrained environment. As governments grapple with the task of delivering the same level of outputs with less resources, outcome-based budgeting is a practical approach to find savings, improve efficiency, and achieve budget outcomes. However, the concept and practice of outcome-based budgeting are still nascent and seen too difficult to implement. The practice is not yet mainstreamed into the government budget cycle. A phased approach to integrate and mainstream outcomes into the budget cycle can help governments gradually transition to outcome-based budgeting. Evolution of Government Budgeting The most conventional and prevalent budgeting approach is incremental budgeting, where the next budget is arrived at by adjusting the previous one. However, it is not an economical or efficient approach as it assumes the current budget is optimal. Zero-based budgeting was introduced to overcome this weakness and required every expense be justified and approved. Zero-based budgeting has some level of popularity and application among governments and brought about a focus on the “economy” of public spending. However, it did not focus on what the budget should achieve. Another evolution was program-based budgeting, which focused on outputs. First introduced in the United States Defense Department, program-based budgeting divided the budget into programs, and each program had to be justified with a detailed breakdown of activities, outputs, and estimated costs. Program-based budgeting gained widespread use and popularity and many of its features are part of government budgeting today e.g., definition of outputs (or results) in budget papers, use of performance indicators, multi-year budget estimates, and focus on efficiency of budget expenditure. However, outcomes were still not the primary focus or the driver of government budgeting. Image by: Amy Park. A More Comprehensive Approach Outcome-based budgeting goes further by focusing on results. It takes a comprehensive approach to budgeting by considering inputs, outputs, and outcomes of budget expenditure. Governments have to consider not just how much will be spent (inputs) and what goods and services will be delivered (outputs) but also what outcomes they will achieve for the people. For example, educational standards to be attained (not just more schools and teachers), quality of healthcare to be provided (not just more hospitals and health care workers), and reliability of public transport (not just better roads, more buses, and trains). This focus on outcomes means uneconomical budget expenditures and inefficient activities can be minimized or avoided. Outcome-based budgeting is meaningful when mainstreamed into the budget process and integrated in at least three key points of the budget cycle: (i) reporting; (ii) monitoring; and (iii) decision-making. A gradual and phased approach is necessary because integration will necessitate changes to budget processes, systems, and practices. For integration to be successful, they should be aligned to existing government structures for financial reporting, monitoring, and decision-making. Outcomes reporting. This frames the entire financial budget of the government using outcomes (i.e., present an outcomes view of the total budget expenditure). Outcomes should be citizen-centric (i.e., relevant and relatable to people), remain stable over the medium term (i.e., not revised every year), and have indicators with targets to track progress. The sum of budgets allocated to outcomes should equal the total budget expenditure of the government. Presenting an outcomes view of the budget is the first step toward outcome-based budgeting and now an emerging trend in many developed and developing countries. The 2021 Open Budget Survey reported that 33 of the 120 countries surveyed presented outcomes, with 25 countries including outcome targets. Outcomes monitoring. This is the next step toward outcome-based budgeting. This involves identification of performance measures for each outcome and periodic tracking and reporting on those measures. A practical approach is to disaggregate outcomes into programs and align programs to government structures (i.e., to a department or division of government). In its 2018–19 budget, the New South Wales State Government in Australia introduced outcome-based budgeting using the concept of programs and program groups to link outcomes to government agencies (Figure 1).This ensured that responsibility for managing the budget is accompanied with responsibility for achieving the relevant performance—promoting both financial and performance accountability. Figure 1. NSW State Government 2018–19 Budget Source: NSW Treasury. Outcomes-informed budget decisions. The final step is to use outcomes to inform budget decisions. For this to happen, outcomes must be assessed, and all programs linked to that outcome evaluated periodically. This will provide information on whether outcomes were achieved (or are on track to be achieved), whether programs were effective in contributing to outcomes, whether they were efficiently and economically managed by government agencies, and whether budget funding was optimal. It can also consider the impact of extraneous factors on outcomes. Policy makers can then make informed budget decisions to vary and re-prioritize funding, programs, and activities to deliver the same or better outcomes. Governments can have a rolling medium-term plan to review all outcomes (i.e., subject a set of outcomes to annual deep-dive reviews, with all outcomes reviewed over the medium term). Systemic reviews of public expenditure with a focus on outcomes, if institutionalized, can avoid the need for reactive and arbitrary budget cuts during a fiscal crisis. Outcome-based budgeting can help governments take an informed, differentiated, and prudent approach to resource allocation while achieving outcomes for citizens. During financially constrained times, this approach can help target fiscal austerity measures rather than impose broad-based spending cuts, efficiency dividends, and expenditure caps that may adversely impact outcomes in the medium to long term. If mainstreamed into the budget cycle, outcome-based budgeting can promote both financial and performance accountability for public funds and help governments become more citizen-centric. Resources NSW Treasury. 2018. Outcome Budgeting: Policy and Guidelines Paper. Ask the Experts Julitta Ponniah Senior Financial Management Specialist, Procurement, Portfolio and Financial Management Department, Asian Development Bank Julitta Ponniah has over 20 years of experience in public financial management. Prior to ADB, she worked at NSW Treasury, Australia and the World Bank. Her interest is in financial management reforms for promoting transparency of public funds. She is a fellow member of ACCA (UK) and a member of CPA Australia. Asian Development Bank (ADB) The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Follow Asian Development Bank (ADB) on Leave your question or comment in the section below: View the discussion thread.