What does outcome budgeting mean for NSW agencies?
What is outcome budgeting?
NSW Treasury is undertaking the Financial Management Transformation (FMT) reform program, which is intended to improve financial governance across the NSW public sector. FMT will also introduce outcomes budgeting starting in 2018/19, which will see a stronger emphasis on what outcomes are forecast to be achieved and how a proposal aligns with wider Government priorities. This is underpinned by a new IT solution, capable of tracking both financial and performance information.
On the surface, the FMT reform appears to be a good idea – instead of funding agencies on activities, fund them on outcomes which will ensure that citizens will reap the benefits. For example, instead of the number of knee surgeries performed, focus on the outcomes of the surgery, which may be mobility measures, recovery time etc. Instead of funding kilometres of roads built, focus on travel time.
What impact will outcome budgeting have on NSW agencies?
The immediate impediment for agencies is the change involved in the public sector culture and IT systems. NSW public sector is generally focussed on programs and activities, inputs and outputs. Outcomes are seldom measured or reported. Moving to an entirely outcomes based culture would involve significant change, the success of which is predicated on Treasury and management’s ability to convince public servants of its benefits.
Even if the culture could be changed, it is generally acknowledged that outcomes are notoriously difficult to measure. To illustrate using the knee surgery example, mobility measures might be conducted by a private physiotherapist, unconnected to the hospital’s IT system. Plugging data gaps would take considerable time, with some initiatives only viable in the medium to long term.
Furthermore, there may be more than one contributor to an outcome. For example, a state priority such as “tackling childhood obesity” is likely to involve multiple agencies, including Health, Education, Sport and Recreation. Determining the contribution of (and hence funding due) to each agency would be subjective and highly contentious, even if the outcome itself can be easily measured. Other non-Government factors also contribute to the outcome, such as genes and diet. Outcomes funding used injudiciously could also easily undermine collaboration between different arms of the Government as they compete for the same funding bucket.
Outcomes may not be sensibly measured for some programs until these have been running for many years. For example, programs targeting childhood disadvantage and global warming. Outcomes budgeting cannot applied retrospectively. Even where outcomes can be easily identified, measurement is likely to be new territory for many agencies, requiring much exploration before settling on the most appropriate indicators. This suggests that in the interim, budgets will have to continue along its traditional lines.
What is the international experience with outcomes budgeting?
The NSW public sector is not the first to tackle outcomes budgeting. The New Zealand public sector began this in the 1990s and has been wrestling with this since. According to New Zealand Initiative chief economist Eric Crampton “There’s some support within the bureaucracy for better outcomes-based measurement, but too many places that seem resistant”. According to Crampton, the government has an integrated data approach which makes it easier to track outcomes.
Scotland has also implemented an outcomes based approach. However, the implementation is not without its challenges. Audit Scotland in 2015 reported that while all newly formed health and social care integration authorities were recording information on outcomes, they were using different indicators thus limiting the capability to compare between local areas.
The bottom line:
Outcome budgeting will introduce a lot of change to government agencies
Get a start by identifying potential outcome indicators and analysing data gaps
Be prepared to negotiate for funding where other agencies have co-contributions
It’s going to be a long road to full implementation, don’t throw away your current indicators
Update, December 2018: The NSW Treasury has released its new Outcomes Budget policy, which can be found here
 Treasury website https://www.treasury.nsw.gov.au/budget-financial-management/financial-management-transformation