A Performance-Based Budget

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The UAE announced its third consecutive zero deficit budget this week justifying its move toward a performance-based budgeting strategy.

The 2007 federal budget is the first to apply the strategy since its introduction, along with a new budget law in 2005. The budget not only illustrates the federal government's commitment to greater transparency and rigorous financial management but also highlights the key areas for national development for the next fiscal year and beyond.

The budget, approved by the UAE cabinet on October 15, completes a three-year run of balanced budgets. Prior to 2005, the country had experienced a spate of budget deficits stretching back throughout the 1990s. The successful balancing of the last two budgets was complemented by the announcement of a new budgeting strategy in 2005. This policy is aimed at insulating the country's fiscal management from short-term disruption to government revenue such as oil price volatility.

Mohammed Khalfan bin Kharbash, the UAE minister of state for financial and industrial affairs stated at the announcement of the budget, "Maintaining a zero-sum budget was the reason for implementing the performance and programme-based budget as a basis, in addition to the new budget law issued last year, which stipulates the necessity of drawing up a balanced budget." However, he noted that the primary importance of the budget is to facilitate the provision of public sector services. He added, "A balanced budget is a means rather than an end to serve the budget programme and to enable the different sectors to achieve their goals."

The Dh28.42bn ($7.74bn) budget for 2007 is 1.96% higher than the 2006 budget, which was Dh27.87bn ($7.59bn). Kharbash clarified, "The increase in budget figures is due to the rise in the ministries' revenues to Dh9.92 bn ($2.7bn), as well as investment income to Dh3.67bn ($1bn)." Abu Dhabi and Dubai contributed 52% to the budget, the ministries 35% and investment income 13%.

The largest federal expenditure for 2007 will be government salaries constituting 33% of the budget and amounting to Dh9.19bn ($2.5bn). Expenditures for goods and services will come to Dh3.66bn ($996m). The number of public sector jobs is swelling with the budget accounting for more staff in the health sector as well as the ministries of foreign affairs, labour and the interior. The budget allocates Dh50m ($13.61m) to the ministry of labour to create more jobs for its new inspection department.

Minister Kharbash outlined the areas of focus for the budget, asserting that the 10 central programmes for the 2007 financial year are education, power generation, police services, educational curricula development, curative services, social development, foreign policy and higher education at the UAE University and the Higher Colleges of Technology.

The commitment of the government to health and education is evidenced in the weighting of expenditure towards these sectors. Education will receive the largest provision with a federal commitment of Dh7.11bn ($1.94bn) or 25% of overall expenditure. The next areas to receive a boost are security and health accounting for 11.93% and 5.44% respectively.

The budget also allows for strong public sector investment in infrastructure with Dh434.8m (118.38m) being allocated for national road-work and road improvements. The Dubai - Fujairah highway is a central component of this expenditure.

Kharbash pointed out that there would be no increase in the cost of government services as a result of the budget. He also stressed that the budget factors in major projects over the coming three years as the UAE seeks to move towards a five-year budgeting plan.

This fits into recent plans to update the UAE budget law and strategy. UAE Minister of Finance and Industry, Sheikh Hamdan bin Rashid Al Maktoum, told OBG earlier this year in Emerging Dubai 2006, "The UAE is implementing a modern organic Budget Law along with performance-based budgeting to achieve better disclosure and greater transparency, and linking spending with outcomes and measurable results to provide a dynamic planning tool for a period of three years."

At the micro level, it is hoped that performance-based budgeting will allow government ministries and autonomous agencies the ability to exercise greater discipline in setting and enforcing budget constraints. Also, it is expected to foster the development of accountancy mechanisms that allow public sector managers the ability to assume more authority in setting how outputs and outcomes will be achieved.

At the macro level, this feeds into creating medium term financing strategies that are not impacted upon by short-term changes in income streams. Sheikh Hamdan told OBG, "In 2006, we achieved a balanced budget despite the large increase in oil prices last year. We cannot allow volatility in oil prices to drive our budget and fiscal policies. Our aim is to keep a balanced and growing national budget while increasing the efficiency of government operations and the overall effectiveness of the financial resources available and deployed." The 2007 federal budget is a statement of this intent.

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