Can phenomenon-based budgeting support smart management of central government finances?

Sustainable development has been included as a cross-sectoral theme in the state budget since 2018. The National Audit Office of Finland (NAOF) has launched a mapping project to examine the framework conditions and best practices of phenomenon-based budgeting supporting sustainable development. The mapping project is not an audit.

The National Audit Office aims at strengthening its knowledge base and possibly also at providing central government and Parliament with ideas or tools for continuing the development of phenomenon-based budgeting.

“Phenomenon-based budgeting and particularly sustainable development budgeting will be developed on the basis of the proposals of the working group report published by the Ministry of Finance. They will be used as a practical and helpful tool,” states the Government Programme.

The working group of the Ministry of Finance addressed phenomenon-based budgeting in 2018–2019, and the issue has also been discussed in Parliament. The Committee for the Future, in particular, has advocated experimenting and developing phenomenon-based budgeting.

Many societal challenges are so complicated that they cannot be tackled by a single administrative branch. Climate change, social disintegration, urbanization, and immigration are examples of extensive phenomena causing challenges to decision-making. Many phenomena are also global. The coronavirus pandemic, for example, can be considered a global phenomenon.

To be able to respond to the challenges, we need new kinds of tools, and phenomenon-based budgeting could be one of them.

Phenomenon-based budgeting has attracted interest around the world

There are many phenomena and many phenomenon-based approaches as well. The most long-standing one is probably gender-responsive budgeting, i.e. including the gender perspective in the budget. According to a survey conducted by the International Monetary Fund (IMF), more than 80 countries have experimented with it in some form. Other examples include child-responsive budgeting, climate or green budgeting, sustainable development budgeting, and wellbeing budgeting.

The most ambitious approach is probably New Zealand’s wellbeing budget model, which strives to plan the entire budget process on the basis of phenomena.

Budget models that take the Sustainable Development Goals (SDGs) into account are also applied by Mexico, Ireland, and Scotland, for example. As regards gender-responsive budgeting, the forerunner is Canada, but there are also other countries that take the gender perspective into account in their budgeting: Iceland, Austria, and Sweden, to name just a few. France, in turn, has started to develop climate-sensitive budgeting resolutely.

The NAOF’s project aims at mapping the practices and experiences of other countries, as they can be useful in the development of phenomenon-based budgeting in Finland.

How could we strengthen phenomenon-based budgeting in the present budget process?

The NAOF’s mapping project applies a pragmatic approach. We are considering how phenomenon-based budgeting could be promoted already in the present budget process and structure applied in Finland. Could we find such general framework conditions and practices that might be useful regardless of the phenomenon under review?

Utilization of data analysis tools could open windows to new kind of data. An analysis level built on top of the current budget structure could already provide phenomenon-based perspectives to cash flows.

We are addressing the entire process: the preparation, approval and implementation of the budget and the General Government Fiscal Plan, and the related to monitoring and reporting. We consider which measures or factors could contribute to a phenomenon-based approach in different steps of the process.

Our aim is to have close interaction with central government and our other stakeholders.

Phenomenon-based budgeting may support the principles of good financial management 

The state budget is one of the key instruments of political steering and public performance management. Is phenomenon-based budgeting in fact mainly smart performance budgeting? At least it may support several principles that have been considered an integral part of good financial management.

Phenomenon-based budgeting may improve the knowledge base of decision-making. It may, for example, help the Government, Parliament, and the administrative branches to form a shared overall view. At the same time, it may also provide continuity over different government terms if a phenomenon proves to be a long-term challenge.

It may promote policy coherence, increase the efficiency of the use of state assets, and improve the effectiveness of the assets used in relation to the targets set. Phenomenon-based budgeting may help us identify objects of funding whose impact is opposite to the set target, such as benefits or subsidies leading to inactivity traps or environmental damage. Correspondingly, it may help us identify common benefits for different targets and different resource allocations.

Phenomenon-based budgeting may also improve transparency and accountability. Parliament and citizens could obtain more comprehensive and new kind of information on the allocation of state assets and on how the Government is achieving the phenomenon-based objectives it has set.