Outcomes, not outlays: Why FM must reverse budget process

It speaks much for our lack of good sense that even when we are unravelling scam after scam in every sector - telecom (2G), sport (CWG), education ( fake student enrolments ), and health ( NRHM ) - the government is talking of spending more (on health, on food security) without first having a mechanism to check where the money is going.

At a meeting called by the Prime Minister’s Office (PMO) this week, it has been decided to hike outlays on health from 1.4 percent of GDP to 2.5 percent. Just in case you think this is a piddly amount, 2.5 percent of GDP is over Rs 2,20,000 crore. And we are talking about spending this every year. Each year’s health outlay will be enough to finance NREGA for five years, or the Food Security Bill’s bloated costs for two.

It’s around Rs 1,900 per head per year. Not a princely sum, but not peanuts either.

And we know where a huge chunk of the money intended for the National Rural Health Mission (NRHM) went: into unintended pockets. (Read this Firstpost expose on cataract operations that never were).

The government also wants to raise the tax-GDP ratio - around 10 percent now - to 12-14 percent over the next few years by reversing the post-Lehman excise and service tax cuts and finding other ways to raise revenues.

There’s no question we need to invest in our people’s health, just as we need to invest in educating them or feeding them and removing malnutrition.

There’s no moral problem in asking the rich to pay more taxes for this purpose, too. Provided there is a purpose.

It has to be about outcomes, not outlays. The fundamental change we need in our budgeting system is a mechanism to track what the spending achieves (outcomes), and not just indicate what is available for spending (outlays).

When he was finance minister, P Chidambaram famously announced the launch of an outcomes budget in 2005. That was the last we heard about it. The outcome of having an outcome budget has been an increase in all outlays, not outcomes.

In his last budget, Pranab Mukherjee talked about expenditure reforms. His pious statement read thus: “The effective management of public expenditure is an integral part of the fiscal consolidation process. Expenditure has to be oriented towards the production of public goods and services. The extant classification of public expenditure between plan, non-plan, revenue and capital spending needs to be revisited. This is necessary as one recognises the importance of the service sector and the knowledge economy for our development. A committee under Dr C. Rangarajan has been set up by the Planning Commission to look into these issues.”

So what did we achieve this year, when expenditure reforms were specifically mentioned as an important goal of fiscal policy?

Mukherjee has managed to exceed the entire year’s fiscal deficit target by January. It is now at 105 percent of the number mentioned in the 2011-12 budget, and there are two more months to go for the year to end. And guess what’s happening on the government’s most important social programme (NREGA): less than half the money is being spent this year as the scheme has run into trouble.

We don’t know where we are spending the money, or how. But we will just tax and spend, never mind how. So much for expenditure reforms.

Of course, Rangarajan may yet come up with his recommendations on expenditure reforms, but they are likely to be no more than a change in definition between plan and non-plan spending. Real expenditure reform - where the focus is on the efficacy of spends and outcomes - will not happen.

What we need is a way to define worthwhile expenditure from waste. But that is not happening.

So what is the remedy?

The remedy lies is reversing the process: we must first define the outcome we want, and then work backwards from it to figure out what is the least-cost way of achieving it.

For example, if we want a primary health care centre with the right staffing and equipment and medicines in every village - it does not follow that health spending must be raised from 1.4 percent of GDP to 2.5 percent.

This is what happened in the National Rural Health Mission. The money was spent - but we don’t know where it went. As documented by Firstpost, in Uttar Pradesh, Rs 9,400 crore went into the jaws of NRHM, but in several villages we visited, money claimed to have been spent on cataract operations went somewhere else. The CBI is finding out where.

Once we define outcomes, we need to ask: who can do the job best, and at the lowest cost? Should the government be funding it from its own budget, or should NGOs and companies be roped in?

Hundreds of companies spend crores on corporate social responsibility (CSR), and wealthy individuals also contribute to charity. Can they do the rural health job better? And how will we know if the target of rural health has been achieved? In what timeframe? How should it be audited so that we know we are getting bang for the buck? How will we know if we should invest more or cut our losses?

Should Narayana Murthy be overseeing it or should Ghulam Nabi Azad, the Union health minister? Of course, Azad has to see how the scheme can be enabled, but he does not have to spend all the money himself or tax all of us for it. (For the top 10 reforms we need in the budget read this. )

In short, the budget should be made to stand on its head. It should think outcomes first, and then outlays. We have been doing the opposite so far by focusing on raising taxes and then looking for projects to waste the money on.

It should be the other way round. First find out where we want to go and then figure out whether we need to get there on foot or by bus or car.

If you don’t know where you want to the economy and spending to go, why bother making a budget at all?