Budget support | Basket Funding
Budget support is the term used to refer to money of donors that is directly entered on the state budget of the beneficiary country.
That way the beneficiary country can execute more activities to fight poverty, on the basis of approved long-range plans (so-called Poverty Reduction Strategies).
Unlike traditional project support budget support has no specific, identifiable objective. The government of the beneficiary country decides with the donors how the money will be spent. This joint consultation is also called the policy dialogue.
Advantages of budget support
Budget support is less time-consuming and cheaper than project support. It costs less to deliver aid on the spot, which is especially to the benefit of the beneficiary authorities.
The results of budget support are operating at a larger scale than project support, which again is more efficient in terms of reducing poverty in view of achieving the Millennium Development Goals.
Budget support increases internal accountability of the partner government to its own Parliament, Court of Audit and civil society. The partner government, after all, is accountable to its own institutions for the spending of the budget support.
Budget support can be used for investment expenditure as well as for current costs, whereas project support traditionally is used to finance investment expenditure. Thanks to budget support more resources are available for recurrent costs to keep investment projects from the past operational .
Risks of budget support
Public services in developing countries are not always as well organised as in the West. This increases the risk of poor public financial management.
So, donors have a hard choice to make. On the one hand, budget support is a tool that can improve and strengthen policy and management in the partner countries. On the other hand, the donor has to take the risk that budget support fails when the policy and the administration in the partner country are weak.
So, it is best to have budget support accompanied with activities that strengthen the local public services.
It is also very difficult to establish causal connection between budget support and the improvement of the macroeconomic situation. This remains a challenge for the donor community.
Basket Funding
Between project support and budget support there are a few hybrid aid forms. An important hybrid aid form is ‘so-called’ basket funding.
Basket funding is in fact a form of sectoral budget support; so it supports a certain sector, for instance the health sector. The difference with budget support it that the money from basket funding is not spent following the beneficiary partner country procedures.
Generally, expenditure in a certain (sub)sector – which is more or less defined – is financed via a joint bank account held by a group of donors (so, not a Ministry of Finance bank account of the beneficiary country). In doing so, specific procedures are followed that have been agreed by the participating donors and the beneficiary government.
Basket funding is used whenever the donors want to channel the resources directly to specific expenditure of a particular ministry, because they still have insufficient faith in the ability of the Ministry of Finance to earmark the funds for priorities in the poverty reduction strategy. In many instances basket funding is used for rural investment expenditure in education or health care.
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