Public finance is among governments’ most important policy tools for promoting development. Across most countries, governments represent between a quarter and a half of the whole economy, and act both through the direct and indirect delivery of goods and services and the regulation of economic activities across many sectors. The ways in which governments raise and spend public resources have an impact on most aspects of a country’s development, from economic growth to income distribution, and from service delivery to crisis response. Harnessing the powers to tax and spend in the pursuit of positive development outcomes is therefore one of the key challenges and responsibilities facing governments the world over, especially as we approach the end date for the United Nations’ 2030 Agenda and the Sustainable Development Goals (SDGs).
The ‘Reimagining Public Finance’ initiative aims to unlock the potential of public financial management – the how of public finance - to generate positive development outcomes. Viewing public finance as a tool for achieving targeted objectives—such as enhancing education quality or strengthening economic resilience—can help governments align fiscal strategies and institutions more effectively with development priorities. In particular, the main focus of the initiative is on ensuring that PFM reforms are designed and implemented in a way that best supports governments’ fiscal policy objectives, and that helps maximize the impact of public finance in achieving better development outcomes.
The initiative is in its early stages. This page sets out the initial case for reimagining public finance (the Why), a preliminary outcome-led analytical approach (the What) and a proposed practical method for designing and implementing more effective PFM reform which unlocks the potential of public finance for development (the How). We welcome your feedback and contribution to these proposals which, are intended to be further shaped by the global community of PFM thinkers and practitioners acting together.
The publication of the World Bank’s Public Expenditure Management Handbook in 1998, more than 25 years ago, was a milestone in the World Bank’s efforts in supporting governments build better public finance systems. It was the first—and arguably the most influential—of a series of similar publications that shaped the PFM field in its early years. Since then, much progress has been made in the discipline of PFM. A comprehensive framework to assess the quality of PFM systems was developed based on international good practice benchmarks—the Public Expenditure and Financial Accountability (PEFA) framework. Similar assessment tools have been developed for other areas like fiscal transparency, tax administration, public investment management and debt management, for example. The accounting community started work on establishing accounting standards for the public sector, setting up the International Public Sector Accounting Standards (IPSAS) Board in 2004.
Over the past quarter-century, countries have made significant investments in PFM reform, from strengthening macro-fiscal management, to budgetary, accounting and audit reform. The focus of these reforms has evolved over time, reflecting changing global economic conditions and development priorities. Across lower income countries, PFM reform plans have followed a familiar pattern, focusing on core foundations and processes at the center of government. Common institutional arrangements and coordination structures also emerged across countries to oversee PEFA assessments and develop and coordinate the implementation of reform plans. There has been significant external funding for PFM reform, with a large share supporting the investment in financial management information systems (FMIS). The World Bank alone has financed 162 projects in 84 countries since 1984 in support of FMIS design and implementation, with total financing of more than US$5 billion.
In recent years, however, the record of PFM reform has come under scrutiny. Overall improvements in the quality of PFM systems have been inconsistent and incremental. Evidence on the extent to which better PFM systems have led to expected benefits in PFM outcomes is also lacking and inconclusive. The predominant approach to PFM reforms has been criticized for becoming too focused on technical details and somewhat insulated from broader public management and the political nature of the budget cycle, and for promoting a ‘one-size-fits-all’ approach that often does not take specific country contexts adequately into account. Defenders of the approach argue that expectations are unrealistic and building institutions takes time. Others say the problem is not the toolbox, but the way in which it is implemented. Both sides of the debate have a point, but the search for alternative approaches has been elusive.
The starting point for the ‘Reimagining Public Finance’ initiative is an assessment of approaches to and progress in PFM reform, and a stock-take of the lessons that have been learned over the past 25 years. It builds on ongoing efforts to move beyond the shortcomings that have been identified in both fiscal policies and PFM systems. It points to the need to:
Use development outcomes as the starting point and the end goal that PFM reforms should aim to contribute to, rather than just focus on intermediate results such as improvements in PFM systems or contributing factors like fiscal discipline.
Recognize the important linkages and complementarities that exist between fiscal policies and PFM systems, and the need for them to work together in order to better contribute to development outcomes.
Focusing efforts on addressing the key bottlenecks that prevent governments from being more effective.
Allow for institutional diversity in the ways in which governments attempt to use public finance as a tool for promoting development and focus instead on the problems that they face in making their fiscal institutions and PFM systems functional, and the specific bottlenecks that prevent them from being more effective.
Identify and understand the evidence and data gaps that have undermined previous efforts at operationalizing and measuring important aspects of PFM reforms, and purposefully address them.
These are some of the proposed points of departure for “Reimagining Public Finance”.
What do you think about the strengths and weaknesses of established approaches to PFM reform? What do you think about the proposed starting points? What needs to change?
Please join our conversation and provide feedback.
At the heart of the RPF initiative is a proposed outcome-led analytical approach for determining the focus of PFM reform. Rather than beginning with PFM technicalities, the approach starts by identifying the development outcomes that governments seek—such as improved health, education, economic resilience, or climate adaptation—and then working its way backward to determine how public finance can contribute effectively to these goals and how PFM may be constraining this from happening.
Figure 1: The Outcome-Led Analytical Approach
Figure 1 above sets out, in visual form, the logic of the approach, as follows:
Development outcomes (shown in green in Figure 1) are affected by several factors that are often beyond government control, such as social and cultural conditions, economic shocks, and natural disasters.
Public sector results (shown in yellow) contribute to these development outcomes, and are, in contrast, what governments can directly control and deliver to help achieve development outcomes, but they also face significant challenges (represented by the yellow warning sign) in delivering those results.
To achieve these results and address these challenges, the public sectors of different countries need both policies that are feasible—both financially and politically—and capability to deliver on these policies. Both public policies (light blue) and the functioning of public sector institutions (darker blue) that are affected by the broader context, in which people, power and politics help shape and determine the outcomes of government interventions.
Only then does the discussion turn to how public finance and then PFM can contribute to public sector results. Public finance (represented by the red areas in Figure 1) deals with the management of public resources and comprises both fiscal policy and PFM:
Fiscal policy (dark red) is a subset of broader public policy, while PFM systems are a subset of public sector institutions. Fiscal policy both shapes, and is shaped by, other public policies.
PFM (light red) provides the framework and structures for interactions among the various actors involved in public finance decisions. PFM systems support both the formulation and implementation of fiscal policies through functions such as planning and budgeting, procurement, accounting, reporting, and auditing. They also interact with other public sector systems to deliver public policies, including PFM.
Ultimately, it is the combination of PFM systems and broader public sector institutions, together with fiscal other public policies, that determines a government’s delivery capability to achieve public sector results.
Fiscal Policy and Public Financial Management
Fiscal policy is the what of public finance. It is what governments choose to do with public finances in aggregate to influence the economy. This relates, for example, to the size of the budget deficit or surplus, the level of debt, how taxes are structured, and how much to spend overall. It answers questions like: Should we stimulate the economy? Should we tighten to reduce inflation?
Public Financial Management is the how of public finance. It is about how revenue and expenditure choices are made and how they are raised and used and translated into real outcomes. It covers budget planning, preparation and execution, accounting, procurement, cash management etc. It answers questions like: Can schools actually hire the teachers they need? Do health clinics get their medicines? Do climate commitments show up in the budget? Are expenditures actually controlled in aggregate?
Two key questions underpin the proposed outcome-led approach — represented by the red and blue arrows running from left to right in Figure 1:
What are the specific roles that public finance plays in shaping public sector results and achieving development outcomes?
What are the key PFM bottlenecks that need to be addressed to ensure that happens?
In answer to the first question, the proposed outcome-led approach identifies four main roles for Public Finance (which includes fiscal policy and PFM) in achieving positive development outcomes. These are drawn from and validated by a program of outcome-based research and build and expand on the three widely accepted “objectives” of PFM that were originally set out by (Campos and Pradhan 1996) and included in the Public Expenditure Management Handbook (World Bank 1998), namely: (a) aggregate fiscal discipline; (b) resource allocation; and (c) operational efficiency.1 They recognize the important linkages that exist between public finance and public policy more generally, the need to go beyond a narrow focus on fiscal discipline, the relevance of the revenue mobilization function, and the importance of focusing on performance and accountability. The four broad potential roles for public finance can be summarized as follows:
Commitment to Feasible Policy. Government policy, planning, and budgeting processes act as a clearing house for policy proposals within and across sector institutions, promoting stakeholder dialogue, consultation and decisions around policy trade-offs and ultimately linking policy objectives with resource availability, mobilization and use. These processes, and the finance ministries and other agencies that manage them, play a fundamental role in coordinating policy decisions. This not only helps improve the feasibility of policies individually and collectively but also builds commitment to policy decisions that are made, thereby increasing the likelihood that they will be implemented.
Fiscal sustainability. Governments need to ensure the long-term equilibrium of public finance, balancing revenue, spending, and financing decisions over time with the resource needs of the multiple policy objectives that they pursue. This role demands costing and forecasting capabilities, institutional coordination, careful oversight and management of various types of government entities (including subnational governments and state-owned enterprises), and the reconciliation of short- and long-term incentives and interests.
Effective Resource Mobilization & Distribution. Governments then need to raise and allocate financial resources in pursuit of their policy objectives. This can ensure both that adequate resources are available when needed, and that these are equitably allocated according to needs across locations and groups and in a cost-effective way. How governments do this has important distributional impacts.
Performance and Accountability in Delivery. Public financial management systems—for revenue, budgeting, reporting, accounting, audit and external oversight—help to balance control, delegation of authority and accountability, and they interact with other public sector systems and institutions. In so doing, they inform delivery and policy decisions and strengthen transparency, accountability, and trust in the use of public resources. This ultimately strengthens performance in terms of how effectively public resources are being used in achieving public sector results and development outcomes.
Figure 2: Roles of Public Finance and PFM Bottlenecks
In answer to the second question, the proposed approach identifies nine PFM bottlenecks at different stages of the results chain. Addressing these bottlenecks will enable PFM systems and processes, in their interaction with fiscal policies and public sector policies and systems, to contribute most effectively to positive outcomes. The preliminary nine broad categories of bottlenecks, validated through outcome-based research, are as follows:
Insufficient Stakeholder Commitment to Policy Action. Political and bureaucratic commitment to policies – and the related resources – is weak and based on limited stakeholder involvement.
Incoherent, fragmented and poorly prioritized policy. Bureaucratic silos, political and management incentives and/or external donor support contribute to policies that are inconsistent or unnecessarily duplicated and overlapping and difficult to implement.
Mismatch between policy goals, priorities, capabilities and resources. Resource mobilization is insufficient to fund overly ambitious policy objectives that are not prioritized and formulated without taking costs, fiscal realities and available organizational capacity into account.
Unsustainable fiscal situation of governments and organizations. The fiscal policy making process and management is marred by short term biases, inaccurate fiscal forecasting, volatile resource flows, weaknesses in debt and cash management and commitment control, which results in pro-cyclical spending, amplifies economic downturns, and crowds out private investment and fiscal space for policy implementation. This is exacerbated by fiscally unsustainable delivery models and financially unviable providers and utilities.
Inadequate and inequitable resources mobilized and deployed for policy implementation. Due to weakness in budget formulation and execution, financial resources are mobilized in a costly and inequitable manner, are inadequate and deployed in a way that is often incremental and not informed by demand or costs, generating ineffectiveness and further exacerbating inequalities.
Unreliable, delayed and fragmented funding for delivery. Funding channels, particularly across levels of government, tend to be fragmented and incoherent, generating shortfalls, delays and diversion of funds for delivery.
Inefficient deployment and management of resources and inputs for delivery. The ways in which resources are managed and deployed is inefficient due to weaknesses in a number of areas, including public investment, human resources, operational funding and procurement systems.
Inadequate use of fragmented sector and finance data in decision making. Data systems are fragmented and inconsistent, with limited or no integration of financial and non-financial information, whilst the data that is available is not effectively used in decision making, management and accountability.
Incentives, management, oversight and accountability systems and institutions fail to enable and encourage performance as intended. Rather than encourage a focus on performance, management systems, oversight and regulation tend to limit autonomy and are characterized by weak enforcement and inadequate accountability, undermining public and private investment and action.
The nine bottlenecks span the key interactions of PFM with policy formulation and fiscal management; with resource mobilization, allocation and use; and with performance and accountability in delivery. They contribute directly to the different roles public finance plays in supporting governments to achieve development outcomes. These bottlenecks are not discrete; they are interconnected, overlapping, and mutually reinforcing.
These roles and bottlenecks constitute only a preliminary effort at mapping out the broad set of opportunities and obstacles that governments face in using PFM as an instrument for development impact. They will be further refined and adapted to specific contexts and circumstances based on research, consultations and practical application. As can be seen, while some of them fall very clearly within a conventional PFM reform agenda, many others reflect a much broader approach to unlocking the potential of PFM in supporting the feasible policies and delivery capabilities that governments need to be more effective.
What do you think about the proposed outcome led approach and the preliminary taxonomy of roles and bottlenecks?
Please join our conversation and provide feedback so we can develop the approach together.
The aim of the ‘Reimagining Public Finance’ initiative is to promote more effective public financial management (PFM) reform. Effective reform needs to focus on identifying, understanding and addressing key bottlenecks related to PFM, and unlocking the roles of public finance. To do so seven features of reform are proposed:
Outcome-led: Rather than take PFM systems as the starting point and assume that their improvement will generate positive outcomes, the approach proposes to use specific development outcomes as the starting point for reform. It involves identifying and understanding the roles that public finance can potentially play in achieving those outcomes and then involves developing robust connections between the desired outcomes, specific public sector results, public sector challenges, identified PFM bottlenecks and selected PFM reform actions to solve them. This encourages evidence-based prioritization and stakeholder involvement, leading to more efficient and cost-effective reforms. Ultimately this ensures that the focus of reforms is on tangible improvements in public service delivery and institutional effectiveness.
Problem-driven: The approach focuses on identifying and breaking down specific PFM bottlenecks that contribute to public sector challenges. Resolving these bottlenecks is likely to lead to more relevant and better tailored solutions, rather than fall back on “one-size-fits-all” reform packages, that unlock the potential of PFM to impact on development outcomes. This avoids generic solutions and aims for context-sensitive, adaptive, and politically informed strategies. By tackling locally defined problems, this approach leads to more relevant and effective solutions and impactful reforms.
Locally led: This principle emphasizes the importance of local authorities and stakeholders in the design and implementation of reforms. Understanding the specific context, including political, economic, social, and cultural factors, is crucial for developing tailored solutions. Local leadership ensures better understanding of problems and more feasible and relevant solutions.
Team-based. The identification and resolution of bottlenecks involves multiple stakeholders with diverse interests, incentives, and capabilities. Ensuring that they are all involved in reform design and implementation helps address this complexity and builds support, legitimacy and ownership of the reform and its effectiveness and sustainability. A key component of PFM reforms should be the building of cross-organizational, multi-disciplinary teams to drive reform implementation, and the building of broad-based coalitions to help overcome blockages and build reform momentum.
People-centered: A people-centered approach to reform not only takes the views of relevant stakeholders as the starting point of reform design, but also takes into account their differing needs and capabilities. Designing effective PFM reforms involves taking a user-centric approach to developing solutions to existing bottlenecks, so that solutions respond to the needs and problems identified by different stakeholders – from the beneficiaries of services, to frontline providers and those that oversee them locally or nationally, to those that hold the public sector to account.
Feasible Function: To be successful, reforms need to be politically viable, affordable, and consistent with available delivery capabilities. They also need focus on what PFM actually does - its function – which involves focusing on reform results which represent changes in behavior that address bottlenecks and strengthen the actual role public finance plays in development outcomes.
Iterative: Flexible and iterative processes allow reformers to adapt to real-world conditions, respond to feedback, and learn by doing. This approach enables reforms to evolve with shifting constraints and opportunities, contributing to feasible, relevant, and context-specific reforms. Continuous feedback loops and incremental learning help improve the relevance, responsiveness, and impact of reforms.
Building on these principles, the ‘Reimagining Public Finance’ initiative proposes a five-step process for reform (see Figure 3):
Figure 3: Proposed steps to put an outcome-led approach into practice
Select Outcomes. The proposed approach starts with reform leaders selecting a subset of the long-term policy objectives that a government wants to pursue, and that public finance might help achieve. This will be accompanied by selecting the associated public sector results that are the focus of government efforts to achieve these outcomes. This then involves mapping relevant policies, examining delivery systems, and pinpointing the key public sector challenges that hinder progress. At this stage, it is crucial to involve key stakeholders and leaders to ensure broad-based ownership and strategic alignment from the outset.
Outcome-led appraisal. The next step focuses on analyzing the role of public finance in reaching the selected results and identifying core PFM bottlenecks that contribute to public sector challenges through data, evidence, and stakeholder consultation. Reform teams use these insights to understand where and why PFM systems are not fully supporting effective service delivery, thus highlighting priority challenges that require attention.
Develop a theory of change and action plan. Reform teams then collaboratively develop a theory of change and action plans to address the identified bottlenecks. This includes outlining the desired reform results, specifying the actions required, establishing milestones, and developing strategies for stakeholder engagement and obtaining authorization. The action plan should be realistic, context-sensitive, and adaptable as new challenges or information emerges.
Co-create User-Centric Solutions. The next step is for teams from the relevant organizations to actually design ways to “solve the problem”. This involves applying the knowledge and analysis generated in the appraisal and planning phase to co-create specific solutions. It brings together relevant teams and stakeholders to collaboratively design, test, and implement practical solutions. The approach encourages user-centered design and iterative experimentation, adapting solutions to existing capacities and organizational realities. Success depends on continuous feedback, learning, and refinement to ensure interventions are feasible and effective in practice.
Drive Action. The most important step represents the reform process which enables continuous work by teams to take the necessary actions together to implement the solutions, coordinated and facilitated by convenors, and encouraged and enabled by those in authority. Reform teams are encouraged to learn from both successes and setbacks, adapting their approaches as circumstances change, whilst maintaining a sustained focus on results. Fostering cross-functional collaboration and coalition-building is essential, helping to institutionalize reforms, ensure accountability, and build resilience. Critically, this involves using the policy, planning and budget cycle to enable the four roles of public finance – building more feasible policy and commitment to it, ensuring fiscal sustainability, effective resource mobilization and distribution, and performance and accountability in delivery – to drive public sector results and development outcomes.
Overall, this five-step process for PFM reform highlights the importance of flexibility, ongoing learning, and local ownership. The five steps are not intended to be linear, but part of a continuous process of iteration and adaptation, with solutions and action informed by changes in the state and importance of bottlenecks and evolving understanding of those bottlenecks. By engaging stakeholders throughout the process, prioritizing context-specific challenges, and building the capacity for adaptation and innovation, it aims to deliver lasting, meaningful improvements in PFM and development outcomes.
What do you think about the principles of effective reform? Does the proposed five-step process provide a practical method for putting these principles into practice?
Please join our conversation and provide feedback.
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