An outcome-led methodology for determining the focus of PFM reform is at the heart of the approach. This starts with development outcomes and works backwards to the roles of public finance and the most binding PFM bottlenecks that impede delivery, and which could form the focus of reform.
Rather than beginning with PFM technicalities, the approach starts by identifying the development outcomes (green) that governments seek—such as healthy lives, education for all, economic resilience, or a transition to renewable energy—and the associated public sector results (yellow). While outcomes are often beyond government control, public sector results are what governments can directly influence and deliver to help achieve development outcomes.
To achieve these results, governments need public policies (light blue part of circle) which are feasible, both financially and politically, and the institutions (dark blue), both public and private, which are capable of delivering on these policies.
In practice, however, governments confront significant challenges in achieving results and identifying these challenges for specific outcomes - which arise from weak institutional capability, fragmented policies, unrealistic objectives, and limited coordination and commitment across actors - is critical for understanding the sector context, and focusing reform.
Only after these elements are examined does the discussion turn to how public finance and then PFM can contribute to public sector results. Public finance (represented by the red areas) deals with the management of public resources and comprises both fiscal policy and PFM:
Fiscal policy (dark red)—what governments choose to do with public resources in aggregate—is a subset of broader public policy and shapes decisions related to taxation, spending, deficits, and debt.
PFM (light red), by contrast, is how those fiscal choices are made and operationalized. It 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 interaction of fiscal policy, PFM systems, and the broader public sector ecosystem that determines a government’s capability to delivery and achieve development outcomes.
Fiscal Policy and Public Financial Management The outcome‑led approach distinguishes clearly—but treats as inseparable—the roles of fiscal policy and PFM. 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? |
In order to understand how public finance—and PFM reforms more specifically—can contribute to public sector results, the outcome-led approach poses two key questions:
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?
Roles of Public Finance
In answer to the first question, four interconnected roles for Public Finance in achieving positive development outcomes have been identified:
Commitment to feasible policy. Government policy, planning and budgeting processes help coordinate policy formulation and implementation within and across sector institutions, promoting stakeholder dialogue, consultation and decisions around policy trade-offs within fiscal constraints and ultimately link policy objectives with resource mobilization, availability and use. These processes help improve the feasibility of policies individually and collectively and build commitment to the policy decisions that are made. This consequently increases the likelihood that they will be implemented.
Fiscal sustainability. Governments ensure the equilibrium of public finance over time by balancing decisions over the limited available revenues and financing with the resource needs of the multiple policy objectives that they pursue. This role demands forecasting and costing capabilities in a framework beyond the annual budget, the reconciliation of short- and long-term interests and incentives, institutional coordination, monitoring and managing fiscal risks, and the maintenance of fiscal discipline.
Strategic resource mobilization and distribution. Governments raise and allocate financial resources in the pursuit of their policy objectives across and within sectors. Resources need to be adequate to achieve the required public sector results to achieve those objectives, equitably allocated according to need across locations and groups, and deployed in a cost-effective way to different programs over time. How governments do this has important distributional impacts. This helps governments prioritize what feasibly can be achieved, both financially and politically.
Productivity, transparency and accountability in delivery. PFM systems – budgeting, reporting, accounting, audit and external oversight – can help improve delivery and strengthen transparency and trust in the use of public resources. This ultimately increases the productivity of the public sector – how efficiently and effectively public resources are being mobilized and used in achieving public sector results. This involves balancing control with delegation of authority and accountability for performance, and PFM interacting with other public sector systems and institutions.
These roles expand upon the three traditional objectives of PFM—aggregate fiscal discipline, resource allocation, and operational efficiency—situating them in the broader context of public finance and recognizing the direct linkages to public policy coordination, revenue mobilization, and, ultimately, accountability for outcomes.
Figure 2: Taxonomy of Roles of Public Finance and PFM Bottlenecks
Key PFM Bottlenecks
In answer to the second question, the eight PFM bottlenecks undermine these roles contribute to public sector challenges and impede progress toward development outcomes. 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. These eight broad categories of bottlenecks include:
Insufficient stakeholder commitment to policy action. Political and bureaucratic commitment to policies – and to raising, allocating and spending the resources required for their implementation – is often weak and based on limited stakeholder involvement, undermining the implementation and impact of public policies. Policy, planning and budgetary decision-making processes often involve a narrow group of actors and do not make the implications of and the trade-offs between policy commitments explicit – and fail to help build the commitment required to deliver results.
Incoherence between policy goals, priorities, capabilities and resources. The planning and budget formulation process often fails to promote coherence of strategy or prioritization across or within sectors and levels of government. This reinforces inconsistencies in policies, which may be unnecessarily duplicated, poorly coordinated and difficult to implement. Meanwhile, the policy making process is not informed by medium and long-term fiscal projections. Combined, this contributes to policy objectives that are overly ambitious and unaffordable given their costs and fiscal constraints, and which do not take fiscal realities and available organizational capacity into account.
Unsustainable fiscal position of governments and organizations. Weak fiscal institutions and short-term perspectives in planning and budgeting contribute to and reinforce short-term biases, inaccurate forecasting, volatile resource flows, and weak debt management. This results in pro-cyclical spending, which amplifies economic downturns and limits fiscal space for policy implementation. This is exacerbated by unsustainable delivery models, and by the weak fiscal position of subnational governments, service providers and/or utilities.
Inadequate levels of resources are mobilized and deployed inequitably for policy implementation. Weaknesses in revenue administration, and macro-fiscal and debt management contribute to inadequacy, cost and inequity in the mobilization of resources; further weaknesses in budget formulation and execution mean that changes in resource deployment are often incremental, not linked to policy priorities 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, may be fragmented, incoherent and poorly coordinated. Weaknesses in cash management, commitment, procurement and payment procedures contribute to 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 are inefficient due to weaknesses in and the interactions between budgeting, public investment management, human resource management, procurement, and the management of operational inputs.
Resource management and oversight institutions discourage performance. Rather than encouraging a focus on performance, financial and sector management systems, oversight and regulation together tend to limit autonomy and are characterized by weak enforcement and inadequate accountability. This undermines public and private investment, regulation and service delivery.
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, while the available data is not used effectively.
These bottlenecks are interconnected and mutually reinforcing, and they often sit at the interfaces between fiscal policy, PFM, public policy, and broader public sector institutions. While common patterns emerge across sectors, the research confirmed that context matters: only a subset of bottlenecks will be binding in any given country or outcome area, requiring selective, problem‑driven reform responses.
The outcome‑led analytical approach and its supporting taxonomy provide a structured way to diagnose and prioritize where PFM reform can have the greatest impact— enabling more targeted efforts that strengthen government capability to deliver results.
