Preparing the Budget Estimate: From Line-Item to Performance-Based Budgeting

What is the difference between line-item and programme and performance budgeting?

A line-item budget is the traditional format: spending is classified by type of input, such as salaries, supplies and equipment, and the entity is held to the ceiling on each item. A programme budget instead groups spending into programmes, each a set of similar services with similar objectives. ^[1]

The OECD defines performance budgeting as the systematic use of performance information to inform budget discussions and decisions, so that it is clear what spending is for and what it achieves. ^[4] The IMF sums up its aim as improving the efficiency and effectiveness of public expenditure by linking the funding of public bodies to the results they deliver. ^[1]

Why is building on last year’s figures not enough?

When the budget estimate is prepared by adding a percentage to last year’s figures, decision makers know how much will go on salaries and travel, but not what they will get in return. The OECD Council Recommendation on Budgetary Governance calls for helping parliament and citizens understand not just what is being spent, but what services are being bought on their behalf, to what quality and with what efficiency. ^[3]

The IMF argues that performance information is most useful when assessing existing expenditure programmes; without systematic review of them, creating fiscal space for new priorities becomes much harder. ^[1]

Does performance budgeting mean tying funding directly to results?

Not necessarily. The OECD paper distinguishes four approaches: ^[2]

• Presentational: performance information is published in a document separate from the budget.
• Performance-informed: the budget document is restructured around programmes and includes the indicators.
• Managerial: budget and performance information are used together to change managers’ behaviour, which requires an existing performance culture.
• Direct: allocations are contractually linked to the results achieved.

No OECD country identifies itself as practising the direct approach. ^[2] The basic model proposed by the IMF is performance-informed budgeting: ensuring that decision makers systematically take into account the results expected from spending. ^[1]

How did the UAE federal government make this transition?

The UAE Ministry of Finance states that the federal budget moved from the line-item budget, which it dates to 1972, to programme and performance-based budgeting in 2001. A three-year medium-term budgeting system followed in 2008, medium-term zero-based budgeting was adopted in 2011, and a five-year zero-based cycle now covers 2022-2026. ^[5]

Under this system each federal entity sets its programmes, plans and KPIs in line with the strategic plan approved by the Cabinet and within the budget cap. ^[5] It shows that the transition happens in stages over years. Procedures and timetables differ between GCC states, and even between federal and local budgets within one country, so the binding reference remains the budget circular issued by the relevant finance ministry or department.

Steps in preparing a performance-based budget estimate

1. Start from the circular and the ceiling. The budget circular is the finance ministry’s memo guiding entities in preparing their proposals, and it may include annual or medium-term expenditure ceilings. ^[4] The OECD recommends top-down budget management within a medium-term expenditure framework. ^[3]
2. Define the programmes. Group similar services with shared objectives into a programme, link programmes as closely as possible to outputs and outcomes, and make sure they cover all of the entity’s spending. ^[1] The OECD advises aligning the programme structure with administrative responsibilities. ^[2]
3. Choose the indicators. The IMF advises starting with only a handful of key indicators ^[1], and the OECD paper expects baseline and target values to be set when a programme is appraised before approval. ^[2]
4. Cost each programme. Allocate funds across programmes; support costs can sit in a separate administration programme. The IMF considers cash-based costing close enough for useful decisions, so there is no need to wait for accrual accounting. ^[1]
5. Review existing spending. Identify programmes that can be expanded, scaled down or abolished in light of their performance. ^[1]
6. Justify new initiatives. Every new spending proposal goes through systematic scrutiny and ex ante appraisal before it is included. ^{[1, 3]}
7. Keep the core controls. Reduce the number of line-item limits, but keep controls on capital spending and transfers, and on items such as travel, entertainment and consultancy. ^[1]

How should you choose performance indicators?

The OECD Council Recommendation calls for a small number of relevant indicators for each programme, which are clear and easily understood, allow results to be tracked against targets and compared with benchmarks, and make clear the link with government-wide strategic objectives. ^[3] The OECD paper adds that good indicators combine short-term measures such as activity and milestones with longer-term outcome measures. France, for example, classifies its indicators into three types: efficiency, socio-economic effectiveness and service quality. ^[2]

Having too many indicators is a common mistake: France itself reduced the number of performance indicators in its budget from 1,173 to 677. ^[2] The IMF warns that setting arbitrary targets tends to be worse than setting no targets at all. ^[1]

Hypothetical example: a business licensing programme

A hypothetical municipal department used to present its licensing section’s budget as line items: salaries, supplies and IT systems. After the change it presented the section as a single programme (figures are illustrative inputs):

Presented this way, decision makers discuss what they get for the funding, not just the amount on each line.

Common mistakes when moving away from line-item budgeting

• Removing line-item controls all at once: the OECD paper notes that abandoning line-item control entirely carries risks, so most countries keep some controls on a simplified classification. ^[2]
• Building a sophisticated system in a short time: the IMF observes that countries new to this approach often try to build elaborate performance information systems quickly, underestimating their cost and the skills they require. ^[1]
• Penalising programmes automatically: strong incentives to hit targets can encourage gaming, and too tight a link between performance data and the budget can hold back cultural change, so responses to under-performance should focus on learning and problem-solving rather than financial rewards, penalties or budget cuts. ^[2]
• Neglecting evaluation: performance budgeting works alongside evaluation and spending reviews, whose findings are fed back into budget preparation. ^[2]

Who leads the change in government and in the entity?

The central budget authority usually leads the design of the performance budgeting system, supports ministries and entities in developing their programmes and indicators, and keeps the system under review. ^[2] Because this work needs analytical and process skills beyond typical budget training, the OECD paper treats a dedicated team in the central budget authority, working with counterparts in ministries, as good practice. ^[2]

Within the entity, it helps to give each programme a named owner who answers for its indicators, and to have finance and strategic planning teams work on a single proposal template, so that the budget is not prepared in one department and the plan in another with no link between them. The IMF regards adequate staff capacity to meet the information requirements as the main institutional prerequisite for this approach. ^[1]

Conclusion

Preparing a performance-based budget estimate starts not with new tables but with a new question: from “how much do we spend?” to “what do we achieve?”. Begin with clear programmes, a few indicators and a documented baseline, review existing spending every year, and keep the core controls until capacity matures.