|"We are trapped in a cycle of deficit/cut/spend. I want to break that habit."|
|-Premier Dalton McGuinty|
This paper outlines a vision for Budget reform in Ontario-one that is focused on making the Budget and its process more accountable to the citizens of Ontario. If government is to meet the priorities of Ontarians and realize the results they want to achieve, its planning and budgeting processes must change. This paper describes two complementary budget-reform initiatives: the proposed Fiscal Transparency and Accountability Act (FTAA) and a Budgeting for Results framework. In addition, this paper introduces an important new initiative that supports budget reform and will promote efficiency in the broader public sector-supply chain management.
Budgeting is not just about collecting revenues and spending money. It is an ongoing complex process involving people, interests and organizations from across the province that make competing and valid arguments for the use of public resources. As the culmination of this process, the Budget is a powerful instrument of change that can achieve both economic and social objectives. The way budgets are made-the way decisions are made and communicated - is a key determinant of government's accountability to its citizens. This accountability is important because Ontarians need to see that their money is being used wisely. Ontarians want a responsible approach to public policy and they want evidence of good fiscal and financial management. Ontarians need to know the true state of the Province's finances when they vote.
The box on the next page provides a brief overview of the system of traditional budgeting, planning and reporting processes. At its core, any system of budgeting exists to serve three main functions: 1
Like governments around the world, Ontario has, over the years, developed a budgeting process that offers certain strengths, but also serious weaknesses that this reform seeks to address. The initiatives outlined in this paper are designed to make budgeting in Ontario more effective in performing its core functions. The transformation of Ontario's budget process is comprehensive in changing the way planning is conducted and decisions are made and communicated. This will involve collaboration across the public sector in order to drive real, positive change while living within our means.
Reporting and Auditing:
Final numbers are reported in the Ontario Annual Report and Public Accounts, which can be thought of as ending the cycle for a particular year. The financial statements for the Province, which are audited by the Provincial Auditor, are presented along with detailed financial statements of ministries and significant Crown corporations, boards and commissions in the fall, following the end of the fiscal year.
|Source: Ontario Ministry of Finance. 2|
This paper is organized in the following way:
In every government, decisions related to long-term fiscal sustainability often tend to compete with short-term considerations, a tension that can be compounded by an annual budget cycle and four-year electoral cycle. In addition, by their nature, all governments consist of many ministries responsible for spending and few responsible for controlling that spending. This creates a tendency to address public policy issues with more spending. 3 Combine these tendencies with the usual uncertainty about changes to future revenues and public-service demands, and it is easy to understand how sustainability can be a challenge.
In many jurisdictions, governments attempt to address these issues by legislating rules governing fiscal planning and reporting. 4 In 1999, Ontario adopted the Balanced Budget Act (BBA). The BBA requires the government to plan for an annual balanced budget. Failure to achieve a balanced budget results in a 25 per cent reduction in ministers' compensation in the first year, and 50 per cent in subsequent years in which the budget is not balanced. The BBA includes exceptions for extraordinary circumstances such as war or economic catastrophe and an exemption from sanctions for any new government in the first fiscal year they were elected. 5
The BBA does not set standards for transparency in the development and presentation of budget documents. This is an important omission. Other governments, international institutions and public-finance academics have stressed the importance of transparency in ensuring accountability for sustainable fiscal policy. 6 This point was made by former Provincial Auditor Erik Peters in his October 2003 report on Ontario's finances. Mr. Peters' comments also raise the potential problem with rigid balanced-budget rules in limiting government flexibility, which has also been a focus of academic research. 7 This government believes that unbalanced budgets are not sustainable, but also understands that forcing balance at the expense of all other considerations is neither responsible nor consistent with long-term sustainability. Forcing balance, by indiscriminately cutting spending now, would require even greater spending in the future.
"I urge the new government to consider legislation dealing with fiscal responsibility. The objective would be to improve accountability through greater transparency in and quality of budgets and updates such as the quarterly Ontario Finances. This approach would be more effective in ensuring fiscal accountability than legislation that limits government's flexibility in responding to fiscal challenges."
Erik Peters, Former Provincial Auditor,
Report on the Review of the 2003-04 Fiscal Outlook, October 29, 2003
In order to increase accountability, this government is proposing a Fiscal Transparency and Accountability Act (FTAA) to replace the current BBA. If approved by the legislature, the proposed FTAA would have three main elements:
This government will accept the BBA's salary sanctions for the 2004-05 fiscal year. In future years, salary sanctions would not apply.
Key Provisions of the Proposed Fiscal Transparency and Accountability Act
Fiscal Principles and Objectives:
The box above summarizes the various provisions of the proposed legislation. The proposed Act would provide a clear set of principles to guide fiscal policy: responsibility, flexibility, equity and transparency. A similar set of principles have been established in the United Kingdom (U.K.). See box below for details of the U.K.'s budget reform. Building on these principles, the proposed FTAA would then establish two clear fiscal objectives:
The Government has specified two rules to guide policy consistent with those principles:
Source: HM Treasury. 11
In terms of transparency mechanisms, FTAA would require a significantly higher quality of disclosure than at present. For the Budget, FTAA would require that it be tabled in the legislature. It would also require the Budget to present a multi-year perspective. The adoption of multi-year planning and reporting is an international best practice and has been a key component of budget reform in other jurisdictions. 12 In addition, the Budget would be required to present a comprehensive discussion of risks and information on non-financial performance or results. The 1995 and 2000 Ontario Financial Review Commissions (OFRC) both emphasized the need for these types of reforms. 13
Summary of Key Ontario Financial Review Commission Recommendations for Government 13
The proposed Act would go further, specifying the timing and content of several key reports to establish a coherent cycle for reporting. A Mid-Year Economic Outlook and Fiscal Review would be required no later than 45 days after the end of the second quarter of the fiscal year to update information released in the Budget and provide a proper context for pre-Budget consultation. A Long-Term Report would be required to assess the long-term sustainability of fiscal policy given economic and demographic trends. 14 This is important as many public-policy issues, such as public infrastructure investment, the evolving nature of service delivery and sectoral change, are long term in duration. In addition, the release dates of quarterly Ontario Finances and Economic Accounts would be specified in the proposed legislation, enshrining a cycle for disclosure of the fiscal plan. 15
The government will work towards tabling the Budget before the start of the fiscal year. Once the planning and reporting processes described in the next section have matured, the government would consider making the timing of the Budget part of the proposed FTAA.
Finally, the proposed Act would require the Ministry of Finance to prepare a Pre-Election Report. This report would be reviewed by the Provincial Auditor and released well before elections to ensure governments do not mislead the public on the state of the Province's finances.
"We want to make sure that money is focused on the priorities we share and the results we need."
Ontarians face tough choices. This government is committed to informing those choices with clear and measurable results. Around the world, governments are moving towards developing and reporting on the results of public-sector activity. 16 This is motivated by the need to know what value is gained for money spent, rather than simply how much is spent. This shift in thinking is not easy for governments that must inevitably contend with wide and competing objectives. Amounts of money are easy to measure but, without any other information, understanding the meaning of those amounts is difficult. Without such an understanding, how can the public hold government accountable? The public needs to know the results of government activity. 17
However, providing information on results is a complex task. This is because the relationship between cause and effect can be unclear. Results can be influenced by many variables. For example, how much of a change in the economy can be attributed to government activity? How much was actually caused by global economic trends? While government has a clear responsibility and ability to work towards better results, it cannot (nor should it try to) completely control all variables. Often, government acts primarily as a catalyst for change. There is a risk that information on results will be misinterpretedand governments will be held accountable for things beyond their control.
A focus on results can also be complicated by a lack of clear, quantifiable measures of success and the information-management systems needed to track them. The next step, understanding how government activity is directed towards results, is complicated by the traditional incremental approach to budgeting, whereby the process focuses on what is new or changing rather than the entire budget. 18Governments around the world have recognized these problems and have developed many tools to address them. 19 See the box on the next page for an overview of reform in Washington State and Australia.
Sources: Washington State, OECD 19
Each jurisdiction must develop an approach to suit its own processes. A new made-in-Ontario approach to planning and budgeting is being developed to address these issues. It will make government more accountable in three key ways:
Immediately after being elected, the government started working on its transformation agenda. It initially engaged the Ontario Public Service in an Ideas Campaign. This resulted in the submission of 11,000 ideas that are focused on improving the effectiveness and efficiency of services in Ontario.
Early in 2004, the government commissioned the Canadian Policy Research Networks to conduct a series of Citizens' Dialogues. 20 The government also conducted an unprecedented consultation process, Budget Town Hall 2004. The Minister of Finance visited 10 communities as part of 14 separate pre-Budget discussions.
These consultations aimed to strengthen, as the Budget was drawn up, the government's focus on the priorities and results desired by people in Ontario. As such, they provide the cornerstone for moving forward with budgeting for results.
It is through measuring results that the public can understand progress on priorities. Some initial examples include: success for students can be understood through higher literacy and math scores; healthier Ontarians is associated with reduced waiting times for key services; prosperity can be measured by higher educational achievement and the extent of job creation; strong communities can be measured through people's quality of life; and stronger democracy can be achieved through more people actively contributing to their communities.
As discussed below, the government is working towards a report on results to be released later this year.
Planning for Results
Once priorities are set, the next step is to tie planning to priorities. This happens when the desired results of government activities are set out and ways of measuring progress towards them are put in place. The results are, in essence, a way of measuring return on public investment in key priorities.
The government has laid the groundwork for a results-based approach to planning and budgeting. The new approach integrates the desired results of government activities into the planning and approval process. In so doing, it ensures that decisions about how to use resources are aligned with results and priorities.
Because it is critical to understand the impact of desired results related to each priority and to establish the right ways of measuring progress towards each result, planning for 2004-05 represented phase one of the new approach. It will be fine-tuned as decision-makers gather more information about existing programs and clarify desired results, as well as related measures and the best strategies to achieve them. This will be an iterative process expected to evolve over the next two budgets.
The fundamentals of the new approach, as illustrated in the adjacent figure, are:
The fiscal implications in the planning process are important. Government must develop the appropriate strategies when making new investments in priority areas, so that it can continue to live within its means. Balancing the books through across-the-board cuts, without considering priorities or the multi-year fiscal situation, is not appropriate.
Later this year, the Premier will release the government's first report on results. It will show progress in developing measures for the results, targets for the measures and the plans for how they will be achieved. This will be an important milestone in the development of a more transparent approach to government reporting. This report will be released annually.
To ensure a link between the Premier's report and financial reporting, the proposed FTAA would require the government to integrate information on results into the Budget and the Mid-Year Economic Outlook and Fiscal Review. This integration is in line with recommendations of the Provincial Auditor, the Ontario Financial Review Commission, the Canadian Comprehensive Audit Foundation (CCAF), 21 and international best practices.
|CCAF Performance Reporting Principles 21|
The way ahead
Budgeting for results provides a robust framework for ensuring the best use of public funds to meet public needs. With an emphasis on getting priorities right and deciding on the results people want in priority areas, budgeting for results is key in setting the course as the government develops and acts on its fiscal plans.
It is important to note that Budget documentation will also begin integrating better information on risk. The combination of improved information on resources, results and risks is essential for a more transparent and accountable Budget.
This approach will eventually better support relationships between public-sector partners, creating clear results that all organizations can work together to achieve.
All governments attempt to promote efficiency in the public sector. People want to see efficient financial management. One of the ways governments in several jurisdictions are attempting to significantly improve efficiency in the delivery of public-sector services is through the introduction of supply chain management (SCM) best practices.
Citizens expect their public services to operate as an efficient, seamless and effective system. It is important that the government, along with its partners, ensure this is happening. If vital dollars are spent needlessly on back-office processes, fewer dollars are left to be spent on classrooms, hospital wards and lecture halls.
It makes sense, therefore, that if there are better ways for the public sector to plan, source, move and pay for goods and services, these should be examined and implemented.
Supply chain management is one such solution and refers to the array of processes that connect customers and suppliers. It is not merely about reducing the price of goods, but rather about taking greater advantage of improvements in how the public sector purchases and manages the flow of goods and services through an integrated structure. By implementing a rigorous and thorough SCM system in Ontario, hundreds of millions of dollars can be channelled back into key front-line public services.
The savings could be substantial. A 2001 Ontario Hospital Association Task Force study estimated the potential value of SCM improvements in the Ontario hospital sector at more than $300 million. 22 Some of those savings have been realized but more can, and needs to, be done.
Adoption of SCM best practices by the private sector has saved billions of dollars while also improving quality and customer service. Public-sector jurisdictions around the world are also adopting SCM. One such example is the Voluntary Hospitals of America Inc. (VHA), a U.S. not-for-profit hospital co-operative with 2,200 members. VHA estimates its members saved $813.5 million US on purchases of $17.7 billion US in 2003. 23 In the U.K., the National Health Service (NHS) has also adopted SCM and made significant strides in customer satisfaction. Please see the box below for an overview of a key supply chain management initiative in the U.K.
U.K. National Health Service (NHS): Excellence in Supply Chain Management
Some of the achievements of PASA include:
Source: National Health Service, U.K. 24
OntarioBuys Working Group
In Ontario, with a few notable exceptions, the SCM practices in the public sector are often inefficient, not coordinated, and inadequately supported. The solution to overcoming these obstacles is to build on the existing Ontario success stories, such as the Healthcare Materials Management Services in London, Ontario and the success with the Toronto-area school boards prior to amalgamation, and implement SCM best practices across the broader public sector.
To this end, the Government of Ontario is establishing the OntarioBuys Working Group, whose members will include sector expert-practitioners and representatives of institutions committed to best-practices implementation.
As part of phase one of this project, the Working Group will focus on implementing SCM in school boards, colleges, universities and hospitals. The Working Group will also examine linkages, where appropriate, to other sectors. The government will be asking the Working Group to discuss and make recommendations on the following:
Ontario is at a turning point. It faces a structural deficit and many urgent areas for public investment. The budget reform described in this paper will ensure that this province lives within its means while creating and improving public services for future generations. Ontarians will clearly see the results of public-sector investment. The combination of the proposed FTAA, Budgeting for Results and SCM represents an important step forward in the transformation of government. This transformation will not occur immediately. This is an ongoing process, but one the government is committed to seeing through.
The government will continue to pursue investments in programs that will improve customer service, increase efficiency and save money. Examples of transformation already underway include:
These examples are but a glimpse of changes to come. Successful transformation will require the development of policies, appropriate measures and targets, supporting information systems and necessary staff training. For example, the Ministry of Finance will develop a ministry expense-limit policy consistent with the evolution of results-based planning. 25 This will provide a key link between the multi-year fiscal framework of the Province and multi-year funding for its partners in the broader public sector.
Government will capitalize on existing structures and maximize the knowledge and experience of Ontario's public servants. A cultural change management strategy will be developed and implemented to support success. It will require ongoing refinement. The ultimate result will be improved accountability, both to the citizens who depend on quality public services and the taxpayers who demand the most effective and efficient use of their funds.
Ontario's accumulated deficit to GDP in 2004-05 is 25 per cent. While this is high relative to the average in the 1980s, it is lower than other governments in Canada, such as Quebec (TD Economics March 2004 provides an interprovincial comparison). Ontario's multi-year fiscal plan is consistent with a decreasing ratio in the future. The forecast for the accumulated deficit to GDP ratio is 22 per cent for 2007-08.
However, experience in other jurisdictions also indicates the need for flexibility and transparency in the design of fiscal rules. The following articles discuss the problems with strict adherence to narrow numerical targets:
Many jurisdictions have adopted multi-year planning and budgeting in order to improve both fiscal transparency and fiscal policy outcomes. The following is an overview of practices in selected jurisdictions.
Results are best thought of as outputs or outcomes. In the last two decades, many countries have moved away from input-oriented processes towards output- and outcome-focused approaches. This has meant a change in management practices, from controlling costs to determining what deliverables are expected and what impact they will have. Clear, measurable results can enhance the accountability of partnerships in the public sector through performance agreements. The following documents provide an overview:
In his latest report, the Provincial Auditor recommends that the government adopt the CCAF reporting principles.
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