The use of expenditure needs, sometimes referred to as "expenditure norms", "budgetary norms", or "minimum standards", is important in the formulation of budgets and, especially, in the establishment of transfer and grant formulae. Minimum standards are also used by central governments to control expenditure policies of subnational governments, often with the goal of protecting and enhancing national priorities. However, despite the continued wide use of expenditure norms, there are many aspects there are not fully understood. Perhaps the most basic issue is the actual construction of the norms. In this paper we examine what some countries have been doing to bring a more accurate assessment of their expenditure needs. We argue that the broad trend across most all countries is for budget controls and procedures to become less complex, and this tendency is observed throughout the assessment of expenditure needs process, including the design of grant formulae. Indeed, perhaps the major trend is to use simpler methods of expenditure needs where rules are clear for every component of the process and for all participants in the process. The consensus also appears to be that traditional budget processes should place a greater emphasis on the outcomes achieved by government spending units and the evaluation of managers and personnel according to these outcomes rather than controlling ex ante expenditure control, and that expenditure needs assessment can help in this process.
During the last ten years many transformations in public budgeting have taken place across governments in all parts of the world. One significant area for these changes has been in the assessment of expenditure needs across all governmental agencies. The use of expenditure needs, sometimes referred to as "expenditure norms", "budgetary norms", or "minimum standards", is important in the formulation of budgets and, especially, in the establishment of transfer and grant formulae. Minimum standards are also of interest because central government agencies often use them in an attempt to control expenditure policies of subnational governments. Broadly, these budgeting changes are directed at devising more efficient and effective ways to deliver public services to people.
The terms "budgetary norms," "minimum standards", and so on are not always clearly and consistently used in the literature. "Budgetary norms" and "expenditure norms" are typically used in the context of budget formulation and in the computation of expenditure needs, such as is the case in formulas for equalization grants. These budgetary norms may be used for computational purposes only (i.e., to arrive at a budget or to calculate the amount of a transfer). They can also be used for budget implementation purposes whereby it is the responsibility of the budget units to actually execute the budget norm; in these cases the budget norms are also known as minimum expenditure standards. On the other hand, the term "minimum expenditure standards" or simply "minimum standards" may not be associated at all with the amounts used to formulate budgets or compute transfers, but simply be used in the context of mandates that the central government makes in order to control local budgets or to make sure that certain national expenditure priorities are preserved at the local level.
The use of expenditure norms has been a source of troublesome budgetary practices. For example, in what might be termed a "needs-based" approach to budgeting, budgets are viewed from a perspective of needs rather than from a perspective of feasible service provision given current revenue generation. Here the components of some standard of living are first determined; minimally acceptable levels of these components are determined (thereby determining a minimally acceptable standard of living) and are used to determine the goods and services that must be provided by government; the minimum necessary government budget needed to provide these goods and services is then calculated; and taxes are set to raise the necessary revenues. This approach was quite common in the formerly socialist countries, and stemmed from the normative and egalitarian tenets of these countries' political philosophy and economic assumptions.(1)
Indeed, a significant feature of budgeting under planned socialism was the use of thousands of these detailed expenditure norms, often defined in physical terms based on infrastructure levels controlled by lower-level governments (e.g., funding based on the number of hospital beds or school buildings). The centralized control over the budget process, combined with the extensive use of spending norms, created extraordinary rigidities in the resource allocation process. This passive, norm-based approach to budget formulation inherited from the Soviet budget process has been a significant source of difficulties in transitional economies. Budgeting from a perspective of needs as defined by expenditure norms, without accounting for resource availability, has been an important cause for the development of unrealistic budgets and the absence of aggregate fiscal discipline. In addition, norm-based budgeting, especially when physical norms were used, failed to provide budget units with incentives to prioritize expenditures or achieve operational efficiency, and often induced inefficiency by rewarding budget units that kept idle or unneeded physical capacity. (2)
The reality is that most countries use some notion of budgetary norms or standards either based on the cost of inputs, the quantity of outputs, or some measure of desired outcomes, in order to formulate their budgets and fund the different components (education, health, welfare, and so on.).
Expenditure norms also find an important use in the design of intergovernmental transfers. In many countries central government transfers to lower levels of government are often intended to equalize the abilities of lower levels of governments in their provision of public goods and services. Governments typically have very different expenditure needs. A government may have concentrations of specific demographic groups who require large amounts of government services such as health care for the elderly or education for the young; the government may also be located in an area that has especially high costs of service provision due to the age of its infrastructure, its climate, or its population density. "Equalization transfers" are intended to make roughly equal the expenditure capacities of the governments. (3) If a central government transfer program is to address the horizontal disparities that such factors generate across subnational governments, the central government must first quantify these different expenditure needs by the calculation of expenditure norms for the relevant categories of expenditures. The estimated expenditure norms can then be used in determining the amounts of grants allocated to each subnational government, as well as in planning and implementing budget policy.
The imposition of minimum standards by central governments with the purpose of controlling subnational expenditures may be justified when either the constitution or other laws (e.g., on budget process or fiscal decentralization) make a clear point in assigning compulsory or obligatory expenditure responsibilities to local governments, as opposed to those that are optional or voluntary. However, not all central governments use minimum expenditure standards. Some decentralized countries may shy away from using minimum standards because they do not want to reduce local autonomy.(4) Legitimate central government interest in expenditure outcomes at the local level (e.g., national priorities on education), can still be exercised through the implementation of conditional grants. The imposition of service standards is more common among countries with a unitary form of government and decentralized system of finance. Typically, there is less political room for the center to legislate minimum standards in federations, although unfunded and funded mandates are also frequently found in federations.
Despite the continued wide use of expenditure norms and minimum standards, there are many aspects that are not fully understood. Perhaps the most basic issue is the actual construction of the norms. In this paper we examine what some countries have been doing to bring a more accurate assessment of their expenditure needs. We address several questions:
* What procedures are followed in assessing a governmental unit's level of expenditures?
* What procedures are generally followed in estimating the expenditure norms?
* What are the current international practices in the determination of the norms and minimum standards?
* What are the benefits and costs of these practices?
* What are the policy alternatives for the determination of the norms?
We examine each of these issues in turn.
As we will see, the broad trend across most all countries is for budget controls and procedures to be less complex, and this tendency is observed throughout the assessment of expenditure needs process, including the design of grant formulae. Indeed, perhaps the major trend is to use simpler methods of expenditure needs where rules are clear for every component of the process and for all participants in the process. After all, data availability is always an issue in the development of grant and transfer formulae and procedures to establish expenditure needs across departments and agencies. One of the principle aims is to have consistency and comprehensive information, so that expenditures can be efficiently assigned and evaluated. This is especially true in the early stages of reforms and transformations of budgetary practices. Sophistication comes with practice and the development of better practices over time. Moreover, the need for greater transparency throughout the process of expenditure needs...