Practice Advice on Public Financial Management
Top-Down Budgeting Techniques (OCED)
Summary Advice: The OECD advises that instead of using the tradition bottom-up technique in budgeting, where agencies and ministries send requests to the Finance Ministry, governments should instead employ a top-down method. This approach requires the government to makes a binding political decision as to the total level of expenditures and to divide them among individual spending ministries.
Main Points: A top-down approach is made possible by the medium-term expenditure frameworks which contain baseline expenditure information, i.e. what the budget would look like if no new policy decisions were made. The political decision is whether to increase expenditures for a high-priority area, for example education, and to reduce expenditures, for example defence programmes. Only the largest and most significant programmes reach this level of political reallocation. The key point is that each ministry has a pre-set limit on how much it can spend. Once this decision is taken, the Finance Ministry largely withdraws from the details of budgetary allocations for each ministry. The Finance Ministry concerns itself only with the level of aggregate expenditure for each ministry; not the internal allocations and each ministry has a total amount and it can freely reallocate that money among its various agencies and programmes.
The disadvantages of the bottom-up method are:
Time consuming because requests are often excessive.
The process has an inherent bias for increasing expenditures; all new programmes, or expansion of existing programmes, are financed by new requests; there is no system for reallocation within spending ministries and there are no pre-set spending limits.It is difficult to reflect political priorities in this system as it is a bottom-up exercise with the budget “emerging” at the end of this process.
It is difficult to reflect political priorities in this system as it is a bottom-up exercise with the budget “emerging” at the end of this process.
The advantages of the top-down method are:
- Discourages creeping increases in expenditures as new policies are funded by reallocations from other areas within the ministry.
- Creates ownership in the respective ministries for the actions that are taken.
- Decisions are better informed as spending ministries are in the best position to judge the relative merits of their programmes.
This is a remarkably simple budgeting system once it is in place but it involves considerable time to establish because the entrenched traditions of both spending ministries and Finance Ministries work against it. This is because the Finance Ministry would be very suspicious of the real motives of spending ministries and spending ministries would feat that any cuts in programmes they make will be accepted by the Finance Ministry, but not the corresponding reallocations for new initiatives. Trust needs to be built between the two and it has varied greatly in different countries whether that is possible and how much time it takes.
Source: OECD (2003) Budget Reform in OECD Member Countries: Common Trends at http://www.oecd-ilibrary.org/governance/budget-reform-in-oecd-member-countries-common-trends_budget-v2-art20-en (accessed 20 October, 2012).
Page Created By: Matthew Seddon on 1 November, 2012. Updated by Ian Clark on 4 January 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.