Lackluster if not poor public sector performance during the seventies and early eighties and the
consequent backlash from the general polity have pushed many governments around the world to seek
reforms of their public management systems. Re-inventing government has indeed become a common
theme throughout the world. And practitioners have become absorbed in experimenting with new
approaches. This was the spirit underlying the much publicized work of Osborne and Gaebler (1993) on
the United States and the critiques that followed. And much of the same motivation has driven the United
Kingdom’s “Next Steps” program, and the New Zealand and Australian reform efforts.
The stimulus for these concerns stems primarily from the persistence of aggregate fiscal crises,
driven primarily by large budget deficits, and the political fallout that such crises have engendered (see
GAO, 1994). The focus on cutting budget deficits however has also forced governments to take a serious
look at the allocation of public expenditures and the cost effectiveness, i.e. technical efficiency, with
which programs can be delivered. Leaner budgets have meant that some program expenditures have to be
cut and improved efficiency could help offset some of the cuts. Which expenditures to cut and how they
can be achieved have indeed become equally pressing problems.
While not alone in this endeavor, Australia and New Zealand (ANZ) have pursued what many
consider to be the most far-reaching reforms to date. But not enough about the details of these reforms
has been published. Moreover the published material generally focuses on either the New Zealand or
Australia reforms individually with very limited comparisons between the two. The lack of attempts to
make comparisons stems primarily form the absence of a common analytical framework through which
reform efforts or programs can be systematically analyzed. Absent such a framework, it becomes difficult
to deduce real differences and similarities in the approaches and thus to derive fundamental lessons that
could be adapted or avoided in other contexts. In this paper, we introduce an analytical framework that
provides a common basis for making comparisons. Our approach is based on key theories developed in a
large body of work generically referred to as the new institutional economics (see Eggertsson (1990) and
Alston (1994) for an overview of this literature) and is motivated largely by our desire to provide
practitioners and academics alike a methodology for evaluating public sector management reforms in a
more systematic way. We apply this methodology to an analysis and a comparison of the reform efforts
of Australia and New Zealand.
Specifically, the paper attempts to develop a new approach whose emphasis is on examining how
institutional arrangements (i.e., the rules, norms, procedures both formal and informal) governing the
budget process affect incentives governing the allocation and use of resources. Using theories from the
new institutional economics to guide us, we identify key theoretical problems that underpin any public
expenditure management system. We then construct a set of generic institutional arrangements each of
which can potentially address one or more of the problems and identify relevant accountability and/or
transparency enhancing mechanisms. We categorize these arrangements and mechanisms according to
their relative impact on three levels or categories of expenditure outcomes, namely, the aggregate level of
spending and the deficit, the composition of expenditures, and the technical efficiency in the use of
budgeted resources. On the basis of this categorization, we are able to develop a parsimonious measure
of the potential effectiveness of a system with respect to each of the three expenditure categories which
we are then able to use to correlate the “quality” of public expenditure management systems with
expenditure outcomes.
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