National Audit Office: Activity-based budgeting doesn't comply with reality

Euros (photo is illustrative).
Euros (photo is illustrative). Source: Siim Lõvi/ERR

Activity-based budgeting (ABB) doesn't comply with reality, and Estonia's ministries largely regard it as a project to be carried out at the Ministry of Finance's request and whose objectives and benefits remain unclear, the National Audit Office said in its report on the audit of the state's 2022 annual accounts.

In a report released Monday, the National Audit Office confirmed that the Estonian state's 2022 annual accounts accurately reflect the state's financial position, and as a whole, this audit shows some improvement compared with the previous one. Nonetheless, issues with state budgeting highlighted in previous years persisted without any new budgeting principles being introduced in 2022.

Auditor General Janar Holm has consistently noted in annual audit interviews that activity-based budgeting (ABB) remains largely regarded within the ministries as a project requested by the Ministry of Finance, with unclear objectives and benefits. In practice, however, real world operations adhere to different formats.

"The current so-called activity-based budget and its corresponding execution data lack consumers," Holm said according to a press release. "Unfortunately, this does not prevent the portrayal, ignoring reality, of a transition to the new budget format as a success story that only needs a little adjustment or new information systems. I am certainly not suggesting that the idealistic goals of ABB are inherently flawed; we simply cannot implement it in reality. It would require an entirely different kind of management and thinking."

In reality, he said, the world operates differently.

"My discussions with MPs also reveal minimal demand for this so-called ABB within the Riigikogu," he continued. "Moreover, the government's funding decisions do not align with an ABB picture, but are rooted in practicality. In my opinion, the Riigikogu, as the recipient of the budget, deserves a pragmatic portrayal — nevermind the public. Continual improvements in methodology and information system development do not address the fundamental issue — if something is impractical, then it remains so."

The National Audit Office noted that despite the government reserve being designated for extraordinary expenses, funds are consistently being allocated from it for activities that could be anticipated.

Throughout 2022, the government reserve was repeatedly tapped for activities that didn't qualify as extraordinary and can be written into respective ministries' budgets. Examples highlighted by the audit report included payments to support "Film Estonia," covering icebreaking service-related costs, funding the construction and maintenance of Estonia's state border, procuring medicines, activities tied to the amendment of the Public Information Act as well as the promotion of Estonian-language education.

The principles guiding fund allocations likewise didn't align with current legislation, as funding decisions amounting to €16.6 million were made retroactively for a budget year that had already concluded.

The National Audit Office has been making similar observations regarding the government reserve for several years, it emphasized.

State revenue totals €14 billion

According to the National Audit Office's report on the implementation of Estonia's 2022 state budget, the state's revenue in 2022 totaled €14 billion. Its expenditure and investments totaled €14.54 billion, with expenditures accounting for €13.91 billion and investments €630.08 million thereof.

The state's consolidated annual accounts indicated that as of December 31, 2022, the financial volume of state assets amounted to €23.99 billion, with most of the assets consisting of fixed (non-current) assets, including forests, roads, buildings and machinery. On year, the financial volume of Estonia's assets increased by €4.56 billion.

As of December 31, 2022, the state had liabilities in the total amount of €17.07 billion, marking an increase by €2.98 billion on year. The majority of these liabilities comprise long-term liabilities in the amount of €10.23 billion. The state had borrowings totaling €6.95 billion, up by €1.05 billion on year.

The National Audit Office audits the annual accounts included in the state's consolidated annual report and the regularity of the state's transactions annually. Pursuant to the State Budget Act, the National Audit Office completes the audit no later than on August 31 in the year following the accounting year.


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Editor: Aili Vahtla

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