Performance-Based Budgeting (official name Activity-Based Budgeting in Estonia), being fully adopted in 2020, is an integral part of the State Reform, which aims to achieve more effective and efficient implementation of public functions, higher quality of public services, reduction of general government expenditure and staff costs, and more flexible and less bureaucratic management of the government sector.
More effective governance requires the ability to use the available resources as optimally as possible, which often means the implementation of strategic goals beyond the boundaries of ministries and organizations.
The objectives of development and financial decisions must be carefully considered in order to ensure the quality and availability of public services. It is unlikely that the Government will be able to allocate additional resources for the provision of public services in the near future, therefore the Government is faced with the task of improving efficiency. In order to increase the efficiency of service provision it is necessary to measure its cost, which in turn requires linking the resources with the activities and better monitoring and evaluation of the outputs and results of the activities.
In developing strategic and financial management, the emphasis is on improving cooperation between government areas, increasing the transparency of budget planning of how the public money is spent and what it is used for.
The more frequent use of performance and financial information as an input into decision making requires a significant quality improvement of performance information and restructuring it in a way that allows it to be used in conjunction with financial information.
Performance measurement means the use of various performance metrics throughout the management chain, from planning to evaluation of the final results. Moving from an input-based system to an output or performance-based approach requires organizing and systematizing performance-based information in order to reduce the complexity of its collection and use.
Activity Based Budgeting in Estonia
The concept of Activity-Based Budgeting implies the introduction of performance management which combines strategic and financial management, and where resource planning is based on results. Areas of Government have the flexibility to incrementally adopt financial management developments on their own timescale, taking into account their specific needs, but no later than 2020.
There are three conditions that need to be fulfilled for transition to activity-based budget:
- The budget is drawn up by programs
- 100% of the costs are connected to the services
- Government Agencies (incl. Ministries) have introduced traditional or activity-based costing for pricing services.
Activity-Based Costing (ABC) enables agency-level activity-based budgeting (ABB), which also results in an activity-based budgeting logic. All Agencies are equipped with cost accounting software by Central Budgeting Agency, Ministry of Finance. The costing software implies no extra cost for the Agencies.
In the New Public Management theory context Estonian ABC is guided by the goal of better management of results and effective allocation of resources within the framework of Performance Based Budgeting (PBB). PBB is a common practice in OECD countries where performance indicators are used alongside budget information for better performance management. Estonia is the first to link performance and financial management, and providing cost accounting software and reporting environment on a unified basis. It can be said that Estonia is innovating the public sector, resulting in a transparent budget and an effective State.
Preparation of the reform has been finalised by all of the ministries. In may 2019 the Government approved Estonias first activity based State Budget Strategy 2020-2023 and State Budget of 2020.
The transition to a program-based state budget has required better organization of strategic planning and reduction of the number of current development documents. Strategic planning must be structured along five levels of management: performance areas (outcome areas), programs, measures, program activities and services.
Levels of Management
Performance area (outcome area) development plan identifies the overall long-term objective, sub-goals, performance indicators, and the policy instruments by which the goals are to be achieved. The development plan of the field is approved by the Government. Budget programs are based on the sub-goals set in the development plan of a performance area. There is a linear connection between program and performance area, whereas the performance areas are determined in the National State Budget Strategy. Currently here are 24 Performance Areas set in the Budget Strategy and about 60 programs in the making.
The program is a development document for achieving the sub-goals of the field of performance area. The program defines measures, activities and services, including their objectives, indicators, and financial plan. Program also sets management and accountability structure for managing the resources and achieving the results. The program is approved by the minister.
The transition to service-based management enables a more customer-centered approach and more efficient resource management. Public services provided by Agencies (and Ministries) are divided into 4 categories: indirect services, direct services, external support services (incl. shared services) and internal support services. The service breakdown helps managers to determine target groups and set metrics during the preparation process of services and programs. Classification of services is also the basis for designing program based budget estimates - for example, cost of support services is allocated to the services which they generate value for.
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Last updated: 26.01.2024
