The Effectiveness of Performance-Based Budgeting in the Public Sector: An Empirical Analysis and Policy Implications

Performance-based budgeting (PBB) is a financial management reform that links resource allocation to measurable outcomes, aiming to enhance fiscal discipline, operational efficiency, and transparency within the public sector. This study presents an empirical analysis of PBB’s effectiveness by examining data from 75 governmental agencies over a ten-year period (2010-2020) across three jurisdictions—the United States, Australia, and the United Kingdom. Using a mixed-methods approach, we combined quantitative analysis of annual financial reports from sources such as the U.S. Government Accountability Office (GAO), the Australian National Audit Office (ANAO), and the UK National Audit Office (NAO) with qualitative insights obtained through semi-structured interviews with 45 senior financial managers and in-depth case studies of 5 agencies. Quantitative findings reveal that agencies implementing PBB achieved a statistically significant reduction in budget variance from an average of 8.3% pre-PBB to 7.0% post-PBB—translating to a relative improvement of approximately 15.7% (p < 0.01). Additionally, the cost per service unit decreased by an average of $5, from $45 to $40 (an 11% improvement), while the frequency of performance reports increased by 25% (from 3 to 3.75 reports per year). Regression analysis and a difference-in-differences (DiD) framework further confirm the robustness of these improvements after controlling for agency size, baseline performance, and economic conditions. Qualitative insights underscore the importance of strong leadership, robust IT infrastructure, and customized performance metrics, with agencies investing in modern data systems reporting up to a 40% improvement in data timeliness and accuracy. These findings lead to critical policy recommendations, including investments in data infrastructure, the development of sector-specific performance indicators, leadership capacity building, and phased implementation strategies. Overall, the study substantiates that PBB, when properly implemented, serves as a potent mechanism for promoting accountability, efficiency, and enhanced public service delivery in the public sector.