Output Based Budgeting Australia

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A C C R U A L O U T P U TB A S E D B U D G E T IN G

S Y S T E M S INA U S T R A L I A

The rtietorrc-reality gap

Tyrone M . Caii in and James Guthrie

lyrone M. Carlin and James Guthrie

Macquarie Graduate School of Management

Macquarie University

bydney, NSVv/, 2109Australia

Routledge



146 Pub l ic M anagem en t Rev iew

I N T R O D U C T I O N

The past two decades have witnessed considerable changes in the manner and mode ofpublic sector management, and in particular, public sector financial management. This

has not been a uniform global experience, with some nations or jurisdictions vnthin

nations adopting public sector financia l manageixient techniq ues radically different from

traditional methodologies (Jones et al. 2001a). Australia (and the various states and

ter rito rie s which compiris^ the federation) is an exanjple of a cou ntry whicti has Ichosen

a radical rather than conservative o r traditional approach to public sector financial

management (English et al. 2002).

This degiree of change can be in terp reted in several ways. Often, technical o t p rocessoriented changes in management techniques are represented as neutral, perhaps eVen as

agnostiCj, in thej sense that they theoretically lack decision bias towards one set of

outcomes (for example maintaining the public sector as the locus of considerable

economic and social activity) versus another (disperstagi tnatty of the roles and functions

traditionally carried ou t by the public sector to p rivate sector operatives). This neutral

technico-centric view of the reforms carried otit in jurifedid;ioltis such ,k% Australia

pervades official normative and descriptive literature relating to the intfodwctitm of

methodolog ies such as accrual accounting and financial rep or ting , capital charging, newasset valuation methodologies and accrual output based budgeting systems.

However, viewed from an alternative perspective, stich as that offered by Hines

(1988), accounting is a form of communication that both, represents reality and

constructs that reality through the discourse and images created. That ip, acCoilntants, in

choosing what to account for and vs hen aad how t o account fbr i t, shapte' ao

factors (e.g. society), which in turn impact on the form pf accioiit^tiftg c;ho«#n.

According to this approach, although accounting doefs ii()t dorpinate in the^fe, ifpffle

processes, it does influence them. Therefore, ptil^lic seirtor accounting is not socially,politically or economically neutral (Broadbeflt aftd Guthrie 1992; Gittbxie 1^94). Sipiilariy,

financial reporting and budgeting reforms are more than nieittral, ifechnjcal, disinterested

activities (Guthrie 1998). Rather, the adoption of accrual accotjnting V bA biidgeting

techniques has been part and parcel of broad based public sectot refibrjii, whfcrleby old

discourse ideals and methods of management have hew gradwlly sa,peisaded by

managerialism, contracting and market based activities (tftrkep akiA Gtatkrie 1993'; Alford

and O'Neill 1994; Olson et al. 1998; English et al. 2002).

While the material contained in this article is written in awareness of these debates,

the purpose of this article is not to attempt to add to f h % . politico-critical lit^rsfture on



Carl in & G uthr ie : Accrua l ou tpu t based bud ge t ing sys tem s in Au s t ra lia 147

from a range of jurisdictions in Australia explaining the 'necessity' and 'desirability' o

such reforms.' Our analysis is informed by the discrepancies we observe between the

characteristics of accrual output based budgeting systems as implemented and predic

tions and explanations contained in normative theories about such modes o

administration and resource allocation.

This article is organized into five subsequent sections. In section two we explore the

nature of AOBB systenis in light of some pertinent literature on budgeting regimes. In

section three, a brief review of AOBB systems adopted in a variety of Australian

jurisdictions is outlined. In section foûr we artalyse claims, which we bave classified as

rhetorical in their, nature, made in relation to the role, i'ûnction and benefits of AOBB

systems. Subsequently, in section five these claims are contrasted against some evidence

we have collected in relation to the actual operation of AO'BB systems in Australia

Finally, we offer some conclusions and thoughts re lating to possible profitable future

research agendas.

A O B B k m T H E N A T U R E O F B U D O E T IM G S Y S T E M S

Traditionally the literature on central budgeting has focused on comparisons withprac tices ioterna tionally (Knight 1970; Ca,rderi and Wildavsky 1974; Gray et al. 1993

with emphasis on similarities and differences, as well as political institutional systems

explaining these variations in practice.

Other authors have focused on the form of budget documents (e.p. incremental, line

items and performance) with emphasis on explaining tlie legislative intent and structure

of budgets (Joyce 1997). This stream, of .literature indicates that the last fifty years ha

witnessed a riumber of .serious attem pts. at central budge t transformation w t h the

imp lementation of new procedures and processes. This was th.e case with p rogrambudgeting, management and budgeting by objectives, deficit control through 'no-fault

budgeting and balanced bu dgets (Schick 1966; Tyer and Willand 1997). Some have

agreed that these new budget fads come and go, while 'real' budgetary battles still take

place over iVhd gets how much money for y/hat programmes, and where the money will

be spent (Wildavsky 1988; Jones 1997: 49).

An importsint stream of central budget literature is that which examines the public

policy debate .about its iniain objective (fol' example executive accountability, control

oyersight)' (Tyer and WilLand 1997), or takes .an'economic approach focusing on centraeconom ic and'fiscal m anagem ent conce rns. Another Stream is that litera ture w hich deal




viewed generally as the process by which government funds are distributed among

competing interests. In most jurisdictions, complex budget systems have developed

where major actors in the process have set criteria and discourse as a means to resolve

choices about allocation of funds (also 'ne w ' policy choices). The budget process and the

annual budget itself are immersed in these political processes, and indeed the technical

aesthetic of the budgeting process itself is deeply enmeshed in the overlayed political

structure wjiich makes use of the underlying; technical budgeting system. Though

comprehension of the politics of the budgetary pi*ocesses is central to understanding

budg eting, it is no t a focus of this artic le.

In order to imderstand the recent transformations taking place generally in central

budgeting , the following them es have been identified (Lynch aiid Lynch 1997 ; 161—180):

• budget formats and procedu res are im por tant as they do influence policy outcomes;

• a major feature of future budgeting is the use of performance measures which

focus on outputs and outcomes; and

• anoth er changing feature is the use of the currency of 'accruals' to replace m ore

traditional public sector accounting (focused on cash measures).

In the official literature, accrual budgeting is most often not highlighted as an end in

itself, but rather, as a means of shifting the emphasis of the budgetary process away from

cash inputs, towards outputs and outcomes, in the hope that this will result in greater

management efficiencies, and hence, better outcomes for governments and the

comm unities they service.

Irrespective of these recent alterations to perspective, it is worth noting that the

traditional currency focus of the governm ental budgeting p rocess has been cash. The

rationale for this phenomenon is simple. Cash is the resource extracted by governmentsfrom the household and corporate sector, and cash is, despite suggestions from some

quarters to the contrary, the resource governments transform into the goods and

services consumed by the public (Bland 1946). For that reason, traditionally it was

appropriate that the discharge of accountability exercised, via the budgetary process

should have cash as its focus (Guthrie 1998).

The use of cash based budgeting was questioned in various Australian jurisdictions

from the late 1980s onwards, as various pundits claimed that it was a flawed system, due

to its inability to measure the 'full cost' of government service provision (see Officer

1993; SACA 1:994). This resulted in the movement, in some jurisdictions, towards the



Garl in & G uthr ie : A ccrua l ou tput baseo bud get ing system s in Au st ra l ia 149

Theoretically, the recog.nition of 'fulF cost ought to inspire governments and their

agencies to seek greater efficiencies in their processes and resource usage. Revelations

that for many agencies, the only hint of 'accrual reporting' came with the passing of

a limited number of year end adjusting journal entries, have subsequently raised

questions as to whetlier tlie mere presentation of numbers in a particular format has

actually changed underlying incentives and behaviour, an important point to which we

return later in this article.

In contrast to traditional cash based input budgeting systems, AOBB represents an

attempt to transform the public budgeting process into a .system within which

goveriiraents puri;;hase outputs from providers, often publicly funded governmen

departnients. In this sense, the budget mechanism, becomes much more than a simpleresource allocation system, but rather, the clearing house for a range of market and quas

market based transactions between central financial management departments, acting as

principal, and a range of agent providers.

I.nAO.BB systems, the object on which, the foundation of the funding decision is laid i

the collection of outputs produced :by agencies. O utpu ts are to be conceptualized as goods

or services produced, by agencies as a resu lt of the expend iture of their effort and

resources." The resource management process witliin tbe contex t of AOBB should

proceed, ft'om a consideration ai the ; operationial plans of the agency in terms of theproduction qf outputs .and achievement ,of outcom.es, to a consideration of the inputs

recjuirec! to finaoce the desired operaticmal ends. This allegedly differentiates managemen

use Ot AOB,B systemis versus cash systems,, thoujrh logically,there is no reason why the use

of a'cash'systeni is predicated o,n,,ignc!r'an(;e of operational ends any more than the use of

an AOBB' .system is necessarily hased on a .focus on this dim,ension. While it is the case tha

th.e measures of total cost .constructed ij nder both systems will differ, th is does not of itself

suggest a diffetential focus on matters of eperational concern.

The AOBBi systenis w hich have developed in Australia have their lineage in eai-liecontract base<| budgeting systems which evolved in New Zealand (Robinson 2000) and

the lUiiiited,l<;ipgdpm. (most pa^ticulatriy the NHS internal market model introduced in

the. early 1990st) (B ar tk tt land. Harrison 1'9'93). Knowledge of this heritage assists in

explaining, the character,,, and objectiyies of ylOBB systems. Since these systems act a

much in relation to resource allocation as they do in relation to tlie provision of a marke

clearing infrastructure, they cannot be ariialysed within framev/orks appropriate for the

assessment ,ol traditional cash based ipput budgeting systems.

In. par ticular, it needs l;o be recognized that AOBEi systems provide an explicimechanism for the determinaticn of the cost of providing goods and services within




A D O P T I O N OF A O B B S Y S T E M S IN A U S T R A L I A

Various governments in Australia have introduced AOBB reforms. For instance,

Australian Capital Territory (ACT 1995a, 199Sb; Wearing 1997), Victoria (Victoria

Treasury 1996), W estern Australia (WA Treasury 1996), South Australia (SA Treasury

1997), Tasmania (Tastaania 1994), Queensland (Queendand Treasury 1997a, 1997b,

1997c) and the federal goyernment (Khan 1997; Solnyay 1997; DOFA 1998).

Victorian budgets, like those of other jurisdictions with parliamentary processes

modelled on the Westminster example, have traditionally been presented, managed and

repo rted on a cash basis. Small adaptations to this traditional input based, cash calculated

and line item driven approach to budgeting and reporting began to manifest themselvesin the early 199Gs. For example, Victor'ia included in the 1 9 9 3 ^ Budget Paper no . 4 a

series of output meastires for each department. Actua! data for 199'2—3 and'estimated

data for 1 9 9 3 ^ were presented.

This relatively rhinor step was the precursor to a more material change which

occurred in 1996—7 in Victoria with the introduction of budget documentation

containing improved dfeHnitiohs of outputs and extensive sets of performance measures

in the reporting of outputs.^ A comprehensive output budgeting reporting regime was

implemented from the 1998—9 budget period onwards. Victoi-ia's 1998—9 budget, andthose subsequently coilstructed have been on an accrual basis includihg all parliamentary

appropriations.* This accrual basis complemen ts an output based view taken by the

budgeting, ptocess of the Victorian public sector environment.^

The ACT ' prepared an accrual based output budget for 1996—7 and 1997—8 with

improvement in output definition and quality of perfo]*wiance measures over that period

(ACTTreasqry 199Sa, l99Sb). That jurisdic tion has continued with this line of i-feporting

subsequently.

The Commonwealth engaged in a series of trials during 1998—9, in which a hmitednumher of agencies implemented and reported on the basis of a full accrual framework,

including an accrual budget and quarterly accrual reports from 1999—20G0 (DOFA

1999): The ti"ial having been judged successful, the Commonwealth has now adopted

a full accs'ual based management and reporting system for all agencies, tod has, like

Victoria, included a capital charging reginde as an integrated element of its new

budgeting and reporting model.

NSIf presen ts accrual hudget and financial statements for agencies in budget estimates

(it has yet to decide on whether it will shift to an accrual appropriation). It published

output measures for forty-one agencies and outcome measures for tv.'êlve agencies in



Garlin & G t ith r ie : Acc rua l ou tp u t based budg e t ing sys tem s in Au s t ra l ia 151

Subsequently, full accrual budgeting was introduced in 1999—2000 (Queensland

Treasury 1999).

South Australia began pilot trials of output based budgeting during 1998—9, and movto a full accrual output based budgeting model in 1999-^2000 (SA Treasury 1999).

Ihsmaaia implemented output based accrual budget in 1999—2000.

Western Australia's experience with output budgeting began with all new funding

tlie 1997-8 financial year .and extended to all funding in 1998—9. In addition , all agencie

bave been expected to produce moiithlv accrual financial reports from 31 July 1998

onw ards, within seven days of the end of die month. A full accrual based budget was

iraplem ented for 1998—9. A gencies are expected to provide estimated operating

statements, statem ents of financia i .position .and cash fiow s tatem ents for 1998—9 to2000-0.1 inclusive (WA Treasury 1999).TheA Vestern A ustralian AOBBmodel, like those

of Victoria and the Commonwealth, includes a capital charging system.

Though there has been, a general tlirust towards the adoption of AOBB systems in

A ustralia (with the notable excep tion of the oldest and most populous jurisdiction. New

South. W ales), .tliere is no sense in which a if^niforrn btidgetary managem ent or rep orting

fram ework has been ado pted Jtcx-oss A ustretlia, or in deed w ithin individual jurisdictions

across, time (since the adoption of AOBB Sdeals).. R.ecentlY, it appears:that the federal

government has quietly abaildo-ned its cDTOmitment to accrual budgeting. Withotitcom ment o r remark ing, the 2002 federal bydget moved away from accrual fiscal metrics,

instead rep orting a cash bfisedi budge t surplus of SA 2.1 billion, when the acCTual based

figure was a surplus of $ A 200 million (Harris 20'02).

C L A I M S A B .O IJ T A 0 B 8 SY S TE M S

The key rhetorical device used in an attempt to legitimize the introduction of A OBBsystems is the resort to claims that under previous budgeting regimes that the procu rement

of goods and services within the public sector was subject to a high degree of inefficiency,

brought about by chronic market failure. This ploy is somewhat unfair, given the not

uoreasDnable expectation that the objectives of a purely market driven system of resource

planning and allocation roight differ extensively from th.e non-m arket system which existed

historically. Furthermore, the cost of supporting a pure market architecture would be

expected to differ from the cost of supporting a non-market system with greater

accomitability a.nd transparency demands.

Related .closely to the arguments set out above, a subject of ongoing interest in public



152 Publ ic M anagem ent Review

reason for this phen om en on . Cole sug gests that i t is be cau se the pub lic service is n ot

designe d to b e effic ient (in an ec onom ic or financia l sen se), b u t ra ther, fa ir, open ,

objec t ive and accountab le .AUars (1997) review s som e of the leg isla t ive requ irem en ts operative on the pub lic

sec tor , and in par t icu lar the genera l government or budge t dependent sec tor , which

differen tia te the pu blic frona the priv ate sphere. Two of the m ost im portan t of these are

the Adm inistra t ive Decisions (Ju dicia l R ev iew ) Act 1977 (Cth) and the Free dom of

Inform ation Act 1982 (Cth). T he im pact of these Com m onw ea lth s ta tu tes (as vvell as

sim ilar sta te b ased provisions) is to im pose a far ,g reate r deg ree of scrutiny on decision

m aking by pub l ic sec tor bodies than w ould be coun tena nc ed by the priva te sec tor, w hich

has the be nef it of m akipg 'com m erc ia l conf ident ia l ity' a rgu m en ts to protec t i ts pos it ionin a way tha t publ ic sec tonag en c ies (andiin par ticu la r' bu dge t depen den t or la rge ly bu dge t

depen den t g ene ra l goyer tim en t sec toi" agen c ies) do n ot . '

T he strong legisla t ive pro\dsions w hich exist in a va r ie ty of Austral ian jur isdict ion s to

p e r m i t a n d fenforce jadic ial revieWi of adm iijistrative decisions as w ell as pei'm it access to

a wide range .of dqcum.e t i ts genera ted by the publ ic sec tor , mean tha t the preva i l i i ig

institutional Glim.ate places a heavy emphasis op openness, fairness objectivity and

accountabil i ty, an emphasis which may very well overr ide eff ic iency considerat ions.

T he ' 'des ire ' 'for'e fBcie n cy in ' the . 'p i ib l ic sec tor on ' th e one hamd^ cons tra ine d bya legislatisd duty for openfeess.and fair ness, on the o the r b r ing in to r e l ie f a considerable

conflic t a t 'a s tra tef ic ' leve liw ithin 'tfie Au'stra l ian pu blic sector. How can the pub lic service

tran sform its efficiency to achiev e 'priv at e se ctor leve ls of efficien cy', w hile at the.'sam e

t im e m ain ta in in g the fa irness and openn ess required of i t by leg isla tion? T he recon-

cil ia t ion of these goals b ec om es e xceptiona lly difficult be yond a cer ta in poin t, the

dem an ds of the adm inistrative revie w and ope n n ess proce ss: afetjii'g: a s,at ka st:a ;pa rtia l

cou n terw eig ht to e fforts for effic iency en han ce m en t (Walsh 1989). Assum ing that i t is

n ot a cce ptable to drop ef ther the 'effic iency' or the 'fa iri less and ac cou n tab il i ty' goal, an

inte rnally un nav igable im passe lis reac hed. How eve r, there is an other a l ternatiYe — the

rem ov al, or at least the c redible threa t of rem ova l, ofla rge chu n ks'of activity,,frorti w itliin

the public sector sphere to the, private sphere, via competi t ive ter ider ing, outscfurcing,

contrac t ing out and other re la ted piechanisms.

This solution howev erj requ ires, a t a m in im u m , a set of fully or nom inally fun ctioning

m arke ts frora w hich to dtaw price signa ls from com pet ing resource providers , inc luding

t ra d i t io n a l b u d g e t fu n de d i n c u m b e n t s. These m arke ts , or m ore accu ra te ly,,quasi m arke ts ,

would require a comprelnensive set of cost or price inputs, yet information produced by

pub lic sec tor agen cies had t;radit ionally not-give n r ise to deta i led data re la t ing to the cost

of'produciBg iqdividijiat'gpcids er 'services.



Cari in & G uthr ie : Accrua l ou tp u t based bud ge t ing sys tem s in Aus t ra lia 153

accounting methodology to support tlie preparation of budgetary aggregates in theory

means that 'full' costs of prod uction are taken into accou nt, with the result that the cost

data produced by such a system should be broadly comparable to cost data prepared bypotential private sector or other public sector competitive contractors.

Internal markets such as those supported by the ado ption of the purch aser-pro vider

model referred to above, ultimately draw their inspiration from the operation of pure,

competitive m arkets. In such markets., transactions are contractual phenom ena, in which

suppliers agree to provide known quantities of .goods or services of a pre-specified

quality to buyers, in exchange for a kaovs-n p>rice. A key objective of tJie implementation

of the accrual output based budgeting system is that a.ll exchanges within the public

sector would operate according to a simitar methodology, the suggestion being that thiswould improve transparency, drive down costs and ultimately result in more efficient

and effective outcomes.

It should be noted that the market price borne by the purchaser of goods or services

and the cost of producMg the go.ods and .services on the part of the producer wall often

diverge in the case of a market exchange situation. This is especially so where 'cost' does

not.refer to aii im.plicit cost of capital associated with the production of any particular

gO'od or service. Theoretically, it is possible,, through a process of benchmarking, to

derive an 'efficient price' for a good or service, which may be lower than tlic cost ofproduction faced by the incum bent produ cer.

W hether in such a. set of circumstances the incumbent producer would be faced with

the idecision as to whether to sell services or goods at a 'loss' or alternatively lose the

frajicliise to produce has not yet been tested, though the omnipresent threat of

outsourcing certainly .suggfests .that dicbotomiz.ation ot price and cost may be a powerful

stimulant to. the reduction of public sector'agency cost bases over time, all otlber things

being, ec{uaL A rguably th.erefore, it is the existence of this credible thre at of replacem en

mechaaism., more tijan anything else, which lies at the heart of the expectation, on the

pa rt of A O.BB iprotagoriists, that its adoption will resu lt in cost savings, efficiency

increases and generally improved resource planning and allocation processes.

Tui?ning,.froiTi tbe^maciro to the micro, it is wo^rth e.xami!ning the description O'f A OBB

and its benefits offered :by y\ustralian jurisdictions'in central "agency official literature.

A rep.resetatati". e definitioja. and descrip tion is conveniently drawn from ^ the state o

Que eoslan;d..The definition' of accrual outp ut based budgeting, adopted in that

jurisdict iati'is: 'fcpirocess. thro ugh 'wdiich ageacies are funded and m onitored on th e basis

of deliyery (peirforiTiiarice.') of oiitpaits .which h^ve iie en costed on a full accrual basis

(Qucen'slfiind Treasury' 1997b: 17). It is claiiTied thit some of the benefits to Bo'w from




• provision of clear and informed choices to buyers of goods and services;

• provision of a conceptually sound basis for internal and external resou rce

allocation;• focus on the prod uction of outp uts and the achievement of outcom es, leading to

better management and value for money.

Thus benefits are contrasted with the outcomes offered under traditional cash based

budgets which focus on inputs and processes (Guthrie 1993), in which compliance, not

effective management of resources is suggested to be the key goal. Thus, the shift in

budgetary focus has meant a concentration on 'outputs ' , 'outcomes' 'prices ' ,

'agre em ents ', 'flexibility in suppliers' and 'performan ce bench marking', rather than thetraditional focus on expenditure aggregates.

A N T IC I P A T E D D I F F IC U L T I E S AND S O M E C O N T R A R Y E V ID E N C E

We posit that notwithstanding arguments put forward by central agency protagonists in

favour of AOBB and setting out anticipated benefits to arise from the adoption of such

a system, there are several key precond itions to success in practice.First, appropriate definitions of outputs and outcomes need to be agreed upon, and

useful, stable performance measures and indicators must be identified and implemented

to su ppo rt an effective feedback m echanism. Examination of ou tpu ts, outcomes and per-

formance indicators in actual implementations gives cause to question the degree of

success w ith w hich this goal is being m et, and reveals instead, a great degree of confusion

about the basic mechanisms underpinning the accrual budgeting methodology. In

relation to the use of performance indicators, we have reported elsewhere the immense

variability in the adoption and maintenance of these in Australian AOBB im pl e-

mentations, and the poor quality of many indicators adopted over time by public sector

agencies (Carlin and Guthrie 200fb).

In relation to outpu t and outcome specification and definition, we have also previously

published data which calls into question the capacity of AOBB systems as we have

observed them in implementation to deliver the types of managerial benefits discussed

above. Some brief examples of the types of difficulties we have encountered include

a consistent blurring of the lines between measurable outcome dfefinitions and broad

brush 'vision' statements, the adoption of'definitions for 'outputs' which are actually

outcomes or the faijureto specify and attenipt to measure outcomes at alL Given that itis critical that outputs and outcomes be accurately and appropriately defined and



Carlin & Guthrie: Accrual output based budgeting systems in Australia 155

held up as a role model for other jurisctions) has existed over the past four years. The

Victorian budget funded public sector is arranged into eight main government

departments. Each of these departments has its budgetary arrangements set out anmanaged on an AOBB basis. In each case, annual budget docum.entation discloses the

output groups used by each department as the basis for their internal budgetary

management raodels. Each output group is a placeholder, within themanagement and

budgetary framework, for a ranige of individraal outputs produced by agencies on an

ongoing basis. We argue that the degree of changeability in this top level placeholder is

a meaxiingful indicator of the nature of a jurisdiction's AOBB system inpractice. Table 1

includes data for output group survival rates for each VictO'riati government department

from 1998/9 through to 2001/2.*In. interpreting the data contained within the Table., note that the base year in which

observations were taken was the 19 98 /9 budget year.This explains why survival rates for

that year are set at 100 per cent for eacli department. Each successive year's data refe

to the survival rate of observed output groups when compared against the portfolio of

output groups used by each department in the base year. The Victorian public sector

provides a useful forum for study of this issue because, unlike many other Australiati

jurisdictions, the collection of agencies for wMch budget data is individuallyTeported has

remained essentially unchanged, since tJie implem enta tion of AOBB systems in 1998.'Thismeans that oui" data observations are no t obfuscated by material departm enta l portfolio

shifts. Notwithtstaniding this, so tue ' degree of variation in output groups would be

expected over time. For example, the D epartm ent of Infrastructure exhibits a 0 per cent

survival raite from base yeir plus twO' onwards. This can be largely explained by the fact

that mo st of that departm ent's o utput groups w ere centred on'project based wo rk, much

of vvhich matured earlv in .the data' capture period — replaced with tiiew projec

undertaken, .by l i e . departm ent. However, this, organizational setting is no't the norm,

m..ost departments (e.g. erfecatioti, health) carrying out relatively constant operational

missions over time .

TatiJe 1: .Siirviuî.fates inoutput.iroups - Victorian liEidget funded public sector 1998/9-2001/2

Education

Human services

infrastructure

1998/9

100

100

100

1999/2000

66

82

100

2000/1

66

63

0

2001/2

33

63

0




In order to develop a more acute appreciation of the degree to which the AOBB

framework across the Victorian budget funded public sector has experienced flux and

volatility, it is possible to drill down into the data to examine the rate of change inreported individual underlying outputs. Due to space constraints and the very large

amount data"^ we have gathered while conducting this highly detailed analysis, we are

unable to re po rt our fmdin,gs in detail in this.a rticle. Hovrever, it is possible to rep or t that

the level and rate of ch^tige of individual underlying outputs has been higher, over the

observation pei-iod, than the headline rates of change reported iii'Table 1.

Again,.we acknowledge tha t some degree of change wo uld'be expected, perhaps even

necessary, as a new budgetary system is put into operation. What we find inexplicable

however, is the degree of change we have observed in the underlying data, and morepartictilarly, 'the i-atc df change, which has increased as we have roLOVed fujfther away from

the initial implementationj point. If change is to: be explained as the: artefact of a 'bedding

down' process, we posit that tbe rate of change should have slpwed as time from initial

implem enta tion length ened. Instead, we havei.observed the rate of ickange Increasing. All

of this leads us to (question th e deg ree to wbieh the'A OB B isystetft, at least as im ple-

mented in Victoria, can: i have been expected to have 'meaningfully" con tributed, to

enhanced public sector rnanagement.

Second, in order fOr the micro (management) level improvements to be realized,

internal I'operating-str'Uctares .must reflect an external, open orientation, implyipg that

the adoption of an acc ru al/o utp ut/ ou tco m e budgetary stance .needs to be mo re than an

act of externa^l 'symbolism'. Rather, the notions of accruals/outputs and outcoiiies will

need to pervade management culture in the same way that the focus on availahle cash

resources has been a. critical elem ent of manag em ent'tech niqu e in previous budgetary

regimes. W here :an interna l managem ent shift does n ot take place, there is no rete on to

expect, simply because'the format and content of external buc^geti docum ents .changes,

measurably improved orjânizational economy^ efficiency or effectiveness. Yet some

evidence which has recently come to light in Australia suggests a groi^ng concern that

managers and financial d ocu ment users have difficulty in even understanding; AOBB

systems, let'alone.using:them to better''op'eratioual.effect (Awty 3Q03).,.Poiiqetn with

budget p apers is not confined to the ACT. The Commonw ealth Joint Co mm ittee of

Public Accounts and Afidiit recently, announced a public hearing as part of its review of

tbe effectiveness of the current budget docuixientation and options for enhancing its

format and content. Further evidence of interest in these issues by various jurisdictions

can be found in the re po rt of the 2001 conference of the Australasian Council of Public

Accounts Committees held in Canberra (AiCPAC 2001).Third , if improved transparency and accountability is to be a result of tbe adoption of



Cari in & G uthr ie : A ccrua l ou tpu t based bud get ing system s in Au st ra lia 157

underlying lacuna between the substance of much of contemporary private sector

financial reporting and that adopted by public sector entities. Again, we have previously

published evidence to this effect (see, for example, Carlin 2000; but see alsoBarton 1999). One key area in which a profound underlying difference is evolving

between public and private sector financial measurement and financial reporting

practices is in the field of asset valuation.

Aga.in,.the institutional factors a t. play in .Australia at present have conspired to

emphasize the use of historical cost accounting for non-current assets by private sector

entities (especially since lie coining into force of Australian Accounting Standard AASB

1041 for periods ending Septeniber 2001. and late r), w.hile in public sector settings,

replacement cost methodologies dominate/Fhis has direct consequences for depreciationcharges, capital charges, measures of organizational activity and efficiency such as

turnover ratios and crude rate of return, measures. Further, these differences are

articulated , throug h tiie .AOBB and .supporting , managem ent mech anisms, in to height-

ened cost estimates for public sector producers versus private sector alternative

suppliers.

We suggest that this is one plausible explaBation for the fact that many large scale

outsourcing initiatives undertaken by Australian public sector agencies have not yielded

the sawigs mooted at the point at vi/hich the decision to o utsource was made. Put simply,the public .provision alte rnative was overcqsted relative tO' true cost, and the apparent

saviHjfs available as a result of' niieving to a 'cheaper' private sector alternative more

illusory than'real.

Fo.urth, it has been suggested in some quarters that the notion of accrual based

funding is iitsell'nti.eaningless, sfnce iJie :oHly tru e souixe of funds is cash, appropriated hy

parliaineats: Can a parliament,appropriate an accrual (it would seem not), or in reality

can it only appropriate cash? Even if accrual based appropriations were possible and

m.earungfu.l (wliich is uncertain, since cash is the resource appropriated by governments

from th e. comrnuriity and cash is the resource which drives the service provision

process), there are .questions as to the constitutionality of non-cash based appro priations,

and ttiis is so^mething, wliich is'beiiig Carefully exa.Hiined'in'.a number of .jurisdictions at

present. Although such state base.d constitutioniai problems could be changed via an act

of parliarrtent and vTOuld not necessarily require a referendum, there is little consistency

of opinion as. to w hich 'accrual allocation' systems would in fact he constitutional, given

the t radition al .parliamentary focus on .cash.

FifA, if appropriations are. to take place on the bagis of'accruals' does th.is mean that

agencies will be provided with' cash .funding for their expected (budgeted) depreciation.




that depreciation is an allocation of the cost of using or consuming an asset's service

potential, to the period when that loss or consumption occurred, subject to the errors

inherent in the estimation procedures we employ. (Note that the use of the termmeasurem ent would not b e ap propriate in this situation.) N owh ere is it suggested that

the depreciation charge is some type o f virtu al' savings account itito which we deposit

the necessary amounts for future investment.

There is no necessary nexus between the act of cost allocation and new investment,

simply because of the axiom of organizdtional flexibility -- an agency's current asset base

may be inappropriate or unnecessary in future operating environments and while the

recovery of full costs (by including an overhead allocation comprising of depreciation and

other costs) is necessary t© sustain aperating capacity in th.e long term, there is nonecessary nexus betDveeii ftill prod uc t (testing and future investment decisions. It therefore

seems almost incoTOpreljensible that in some models of accrual budgeting, cash is

provided up front to agencies, even where they may have no present need or intent to

invest. However, giveJi that this is under consideration in some jurisdictions, the

implementation of accrual output based budgeting also poses significant questions in

relation to asset recognition and valuation as well as the management of the cost of capital.

Fu rth erm ore, qiaestJonsneed to be rais ed ab ou t the. effectiveness of nnecljanisms pu t

in place to ensure that agendas expend ca^h balances according to the will and desire of

parliament — sometliing which was a feature of capital allocation systems under: cash

based budgeting; bu t may not be a feature of accrual budgeting, systems as implemented .

At the same time, questions need to be raised about the effectiveness of cash

management at an agency ând more particularly whole of government level. If cash

transfers to agencies were made vrithout explicitly matching those transfers to current

needs, an undesirable situation where excessive unu$ed cash balances comnionly .existed

could arise, something which imposes significant cost on the bu dget sector! but does not

result in any matching gain.

C O N C L U S I O N S A N D R E C O M M E N O A T i O N S F O R T H E F U T U R E

Proponents of accrual output based budgeting have asserted that it is a management

technology capable of substantially improving the efficiency and effectiveness of the

public sector. It is claimed that one reason for this is the su perior quality of performance

information generated via the output based budgeting system.

We have challenged these assertions on grounds both general to the adoption ofAOBB systems, and specific to certain implementations in the Australian context. It



Carlin & G uthrie: Accrual outp ut based budg eting sys tem s in Au stral ia 159

Moves toward s AOBB have b een chai-acterized by a wil l ingness to embrace change, often

based on the assumpt ion t l i a t pre-exi s t ing sys tems of accountabi l i ty a re in many respec t s

inade quate. Often, th ere is l i t tle evidenc e tha t this is tJie case . Ironically, in th e case of calls for

t he aban donm ent of t rad i ti ona l i npu t ba sed bu dge t ing , t he r e m ay be a de gre e of just i i icat ion.

Whi le cash based ( inp ut ) budg et ing sys tem s have bee n a rgued to be a useful too l for the d i s-

chai'ge of par l iam entary accou ntabi li ty (which m ay explain the length of thei r survival d espi te

other obvious shor tcomings) , i i ey a re unable to capture informat i .oo re la t ing to the ent i re

bu dg et ing p roce ss , inc luding , imp or tant ly , outco m es. Outcom es m ay be quan t it a tive , bu t in

m any ci rcum stances wil l be qual ita tive (i .e. qual ity of healthcai 'e, e t c . ), and hen ce, exceed-

ingly difficult tO' m easu re w.ith too ls wliidb c on cen trate so'le ly on tb.e m ovem ents of cash.

I t l i e r e fo re seems s t r ange t ha t t he nex t Vrea t l e ap fo rward ' t r ave l s no fu r t he r downthe route of a l lowing governpient s and s t akeholders to assess the effec t iveness and

eff ic iency of government than the tool w.hich i t i s des t ined ( in the schedules of some

cen t r a l agenc i e s) t o r ep l ace .

This ar t ic le was pre se nte d at ttse Seventh Intern at ion al Synaposium on Publ ic Managem .ent ,

in Ho ng Kciiig in A pril 2003, whe re i t was awarded the pr ize for the bes t refereed paper .

N O T E S

1 W e ha ve l a be l l e d t he se m t l ue n t l a l a ge nc i e s 'e v a ng e l i s t s ' in som e of ou r e a r l i e r wo rk , a s a r e su l t o f

t h e ir f aith b a s e d a p p r o a c h t o t h e i m p i e m e n t a t i o n a n d d e s c r i p t io n o f r e f o r m s s u c h a s A O BB (s e e

Ca r l i j i a nd G u t h r i e 2001 a ) .

2 I t is o f c o u r s e p o s s i b le t o c o n t e m p l a t e si tu a t i o n s w h e r e o u t p u t s a r e p r o d u c e d jo i n t l y b y t w o o r

m ore a ge n c i e s . T h i s t yp e o i s i tua t i on p re se n t s d i ffic :u ltie s l o r t ho se wh o a rg ue t ha t t he

i m pl e m e n t a t i on of A OBB sys te m s wi ll y i e ld c l e a r i n s i gh t s i n t o t he fu ll c os t o f p r od uc t i on , s inc e i nj o i n t p rodu iC t ion s i tua t i ons^ c os t s me a su re d a t a ri i nd i v idua l a ge nc y l e ve l a re by de f i n i ti on pa r t i a l ,

a nd a ny a t t e m pt t o ^gg ' ^'g^te a c ros s a ge nc i e s is a c c om pl i she d on l y t h ro ug h som e p ro c e s s o f c os t

a l l o c a t io n / T h i s w i ll r e q u i r e a s e r ie s o f a s s u m p t io n s a b o u t s o u r c e o f c o s t , o ve r h e a d b u r d e n s a n d s o

( ; n , a n d m a y n o t r e s u l t i n a n e c o n o m i c a l l y a c c u r a t e e s t i m a t e b e i n g p r o d u c e d .

3 A s re p o r t e d i n sonn ie o f ou r p re '^ ious pub l ishe d work howe v e r , t he e x t e n t t o whi c h the se

p e r i o r m a n c e m e a s u r e s w e r e a c t u a l l y u s e f u l , e i t h e r \y\' i n t e r n a l o p e r a t i v e s o r IOT p u b l i c

c L Cc oun t a b i l i t y pu rpose s , wa s a nd re ma i ns q ue s t i ona b l e . S e e Ca r l i n a nd G u t h r i e (2001 b) .

4 See Dep artToen t of Treasu ry and Finance (DTF) (1$98) A Guide to tbe Budget Papers, DTF, State of

Vi c t o r i a , ?4 e l bo i i rne .

5 O t h e r c o m p l e m e n t a r y a n d r a d ic a l c h a n g e s t o t h e b u d g e t i n g fr a m e w o r k a d o p t e d a l o n g s i d e t h e

In t rod uc t i o n of the A OBB syvStem i n Vi c to r i a wa s t he i m p l e m e n t a t i on of a c a p i t a l c h a r g i n g r e g i m e ,




8 Dem onstrated for example by the NSW Commissjon of Audit (1988), Victorian Comm ission of

Audit (1993), Victorian Management Improvement Initiative (1993), South Australian Commission

of Audit (1994), National Commission of Audit (1996), which are discussed in English et al (2000).9 All tlie data used to con struc t Table 1 were Arsvfn from the Victorian budget papers for each period

in question. An output group was coded as surviving from one period to the next if it continued to

appear in each successive set of budget doctanentation. This coding task was largely devoid of any

require me nt for active or subjective judgemen t as' to whfether survival or tjon-^sur-rival appropriately

described as ta te of affairs. H owever, oi) a small .ftumber of occasions, certain de scriptiojis of out put

grQtipS' were replaced in otie iperiod with output :group$ described in siiBiletr, but not the same

language in later periods. Vi/l ere mipor descriptive changes occurred, these were interpreted as

falling within the defiriition of 'survival', otlierwise, cbanges were coded as non-stirvival.

10 W e.currently have these data arranged into seventy-two separate tables, see Carlitu (forthcom ing).

11 In tile Victorian experience, exactly what those 'conventional' procedures incltide is not clear. Does

this goal mean adoptiqti of relevant Austi'alian accounting! staiidards, or perhaps the IAS framework,

or even tlie much tao-fe: am orphous conc ept ofG AA P (and If so, whose CAAP)?

12 For reasons of lack of space, these data are not reporte d here. However; Cirliii (forthcoming)

includes a detailed examination of the extent to which budget sector entities, though adopting

'accrual' accounting according to a largely similar set of accotmting tiorms as those which inform

and guide private sector practice, create sets of accounts based on fbndata'eiitiaJly Afferelit •valuation

no rm s than tliose foitnd in the private sector. Briefly, this yfork dernonsjfates that while,private

sector organizations tend strongly towards the almost exclusive use of historical cost rnethodologies

for asset valuation, pttblic sector organizations have almost exclusively adopted replacement cost

values. This causes ma terial differences in both the balance shee ts and profit and loss stateme nts of

private versus public sector organizations, and renders extremely difficult any direct financial

comp arisons, not to m ention indirect compariscms, for example relative outpu t costs.

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Documents

Output Based Budgeting Australia