ANZSOG/UAE Roundtable examines how Anticipatory Public Budgeting can deliver better government

Why do government budgets only quantify physical capital and not human capital when deciding what to spend? Should we be valuing the long-term benefits of investment in human capital through education as much as we value the long-term benefits of physical capital like roads and bridges?

There is a growing sense that budgeting has not really evolved in recent decades, despite the rapid growth in data that could potentially be used to better link finances to the end goal of creating public value.

As governments move to new ways of working in a post- COVID-19 world, there is a new interest in how budgeting gets smarter and better at measuring the real long-term value of government spending, and serves as a method of improving policy.

The Adapting Public Finances for the 21st Century – anticipatory public budgeting, what is it? roundtable, hosted by ANZSOG in partnership with the Global Innovation Council of the United Arab Emirates Government was a chance for participants from across the world to have a robust discussion, under the Chatham House rule, about the challenges and opportunities of using innovative approaches to public finance.

The roundtable was based around a whitepaper written by Professor Geoff Mulgan (who gave the key presentation at the roundtable) and the Demos Helsinki thinktank – Anticipatory Public Budgeting: Adapting public finance for the challenges of the 21st century which argues that public finance needs an overhaul to account for long-term problems and to anticipate future risks, and highlights examples of innovative public financing, including Aotearoa-New Zealand’s Wellbeing Budget.

The Whitepaper says that Governments in the 21st century face many difficult, long-term challenges, but many of the methods they use are very short-term. One key field where this is the case is public finance. Governments have very limited feedback on the results achieved by spending, which makes it harder for governments to learn; they lack good methods for mapping the long-term impacts of key areas of spending; and they lack ways of mapping and measuring intangible values of all kinds, even though these are essential to economic growth and societal progress.

At present, only physical infrastructure investments are appraised using rigorous investment methods – i.e. by analysing the link between present day costs and long term returns from buildings, roads, airports etc. Yet people now often last longer than infrastructure and human capital is increasingly important to economies, and there are fewer systematic methods to assess the long-term value of spending in health education and other fields.

This short-term approach leads to three major disadvantages:

Undermining the economy. If a government fails to invest adequately in some of the key building blocks of the 21st century economy (including R&D, intangibles and human capital), it will not provide optimal conditions for businesses to innovate and for the economy to grow. The key is the quantity, quality and balance of this intangible investment.
Undermining the life and wellbeing of people. People often last longer than buildings. If a government does not consider the whole lifespan of its investments, or uses imbalanced appraisal methods, this is likely to be reflected in an imbalance in spending and a failure to provide citizens with the best support for life opportunities. A common pattern is relative over-investment in physical objects – buildings and infrastructures – relative to investment in people.
Failure to handle risk. Without better methods of appraisal and allocation, governments are likely to underinvest in both taking positive risk (associated with both R&D and business innovation) and anticipating negative risks, with potentially serious consequences for stability and growth.

The forum also included presentations from New Zealand Treasury official Tom Hall and Demos Helsinki Chief Executive Juha Leppänen which explored several case studies of more innovative ways to develop budgets, including Finland’s Phenomenon-based Budgeting Initiative and Aotearoa-New Zealand’s Wellbeing Budget.

Finland is exploring ‘phenomenon-based budgeting’, the adoption of a thematic and cross-sectoral approach to performance management and budgeting based on ‘phenomena’ (i.e. policy issues not restricted to only one governmental entity) and sustainable development. The idea is to tag all budget allocations that contribute to a phenomenon, which helps the National Audit Office of Finland and the government as a whole, to draw up a coherent picture of what type of phenomena the budget allocations contribute to. This allows better understanding of the impact of spending and helps Finland to reach the prioritised goals of its Agenda 2030, many of which do not follow organisational boundaries of government.

In Aotearoa-New Zealand Wellbeing Budgets aim to link budgets more strongly with societal goals, both short-term and long-term. The annual budget process starts with the Government agreeing on Wellbeing Budget priorities, after which ministers making spending proposals are asked to demonstrate how their proposals would help achieve these priorities. The process of assessing proposals then considers how successfully the proposals demonstrate this. This aims to shift the budgetary paradigm from focussing on the inputs and outputs of spending, to the outcomes the spending is intended to achieve, such as supporting the transition to a climate-resilient, sustainable and low-emissions economy, and reducing child poverty and improving child wellbeing.

After a wide-ranging discussion including questions from participants, there was general agreement on the need for change in budgeting process and hope that over the next 5-20 years Anticipatory Public Budgeting (APB) methods would become more mainstream, and governments could learn to think in a more long-term way while making the budget process more transparent for the public.

Participants spoke of how the COVID pandemic had created a public mood for long-term change and that post-COVID reconstruction required both better ways of handling long-term risks and better ways of handling long-term opportunities, which should include changing the way governments thought about finance.

The UAE’s Global Innovation Council is a platform for seeking and testing radical alternatives for how governments operate. The council is funded by the Mohammed Bin Rashid Centre for Government Innovation.

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