How Does Past Performance Impact Performance and Budget Allocation?

Against the backdrop of constrained resources and increasing demands, governments across the world have adopted performance budgeting systems. However, it is also true that most countries implementing performance budgeting systems don't link performance with budgets directly but just provide performance information in the budgeting process for management purposes. The reasons for not actively using performance information in budgeting may be two fold. First, theoretically, budget cuts for poor performing programs may worsen the performance. Second, practically, other factors such as the practice of incrementalism or political considerations may hamper the link of performance to the budget. This dissertation aims to see if performance information can be used in budgeting more aggressively by examining if the above probable obstacles are real. With this in mind, the research questions are developed as follows: Does budget affect performance?; Does performance affect budget? The data is collected from the Korean national government performance evaluation results. Korea is apt for this study because the country tries to link performance to budget directly. Previous studies on the budget effect on performance are scarce and, if any, they used pooled OLS method, which uses both variations of variables within and between programs. This study uses fixed effects method, which uses only variation within program, so that different characteristics of programs are better controlled for. The data from 2008 to 2014, with 1,095 observations shows there is no budget effect on performance. There is no performance effect on budget, either. These results contradict the results of the previous studies. The contradicting results may be due to the difference of the estimation methods : pooled OLS(overall variation) versus fixed effects(within variation). The study results indicate both possibility in theory and difficulty in practice regarding the more aggressive use of performance information in budgeting. The possibility is supported by the finding that budget cuts for poor performance do not worsen program performance. The difficulty is supported by the finding that performance does not influence budget, but political influence and incrementalism have an impact. For performance budgeting system to be an actual budgeting tool beyond merely a performance management tool, measures to enforce the link of performance to budget, in the face of political considerations, should be devised.