Civil Service Reform as an Enabler of Public Financial Management Reform

This article is published in association with IMF.

Civil service reform and public financial management (PFM) reform are closely intertwined, both vital to improving governance. Strong PFM helps ensure public sector efficiency and transparency, which in turn supports economic growth, improves service delivery, and reduces corruption. Similarly, civil service reform seeks to improve the delivery of public goods and services by using techniques, such as professionalizing the public service, using contemporary management practices and technologies, making increased use of digitalization, and making public servants accountable for the services they deliver.

During the 1980s, New Zealand pioneered a new model of public financial management by emphasizing outputs over inputs, focusing on performance outcomes, and instilling accountability throughout the civil service. This model became a hallmark of public sector modernization, emphasizing results rather than traditional activity or input based accountabilities for the delivery of services (as evidenced by line-item budgeting).

PFM reform was the backbone of these changes and included an increased focus on fiscal outcomes.  The success was remarkable: from 1993 to 2005, New Zealand reduced its gross financial liabilities from 65% to 23% of GDP, and net debt fell from 52% to near 10%. Meanwhile, they have maintained budget surpluses almost every year since the early 1990s.

Australia and other countries followed a similar approach to New Zealand. While overall fiscal outcomes have been mixed, the close connection between civil service reform and PFM reform has endured.

Effective PFM reform requires skilled personnel who can handle results-oriented budgeting and complex financial systems.  To do this, civil service reform needs to identify the skills and capabilities that are required to support PFM reforms.  For example, South Korea invested in comprehensive civil servant training, resulting in the successful implementation of modern budgeting techniques and supporting its rapid economic development.

Reforming civil service administration to promote merit-based recruitment, transparent performance evaluations, and strong disciplinary actions helps enhance financial integrity. Georgia’s civil service reform, for example, which emphasized merit-based hiring and anti-corruption measures, led to significant improvements in its public financial management and higher rankings on the Transparency International Corruption Perceptions Index.

Well-motivated civil servants are critical for implementing effective PFM practices. Here are a few examples. Rwanda introduced a performance management system that linked civil servant performance with rewards and career advancement, significantly improving service delivery and PFM reform implementation. Rwanda also successfully implemented an integrated financial management information system (IFMIS), crucial for tracking public spending and reducing inefficiencies and leading to better information to support accountability and decision-making.

Ghana’s PFM reform highlights the importance of civil service reform in driving financial management improvements. The government restructured its civil service, enhanced training programs, and introduced performance management systems. These reforms enabled the successful deployment of the Ghana Integrated Financial Management Information System (GIFMIS), improving budget transparency and expenditure tracking.

Estonia’s emphasis on digital governance and a professional civil service is key to its PFM success. By focusing on continuous learning, transparency, and retaining skilled personnel, Estonia has emerged as a global leader in e-government and efficient public financial management. The country’s civil service reforms supported the development of advanced digital financial management tools, streamlining government processes and improving outcomes.

While civil service reform is critical for successful PFM reform, it is not without challenges. Resistance to change, limited resources, and lack of political and senior management support can all impede progress. For instance, entrenched bureaucratic practices often slow down reform efforts, while a lack of political will can derail even well-designed reform programs.

To address these challenges, governments need to adopt a holistic approach to civil service reform that aligns with broader PFM objectives. Strong political leadership and a clear, sustained vision are essential, supported by strong leadership from senior civil servants.  Additionally, reforms should consider the local institutional and cultural context to ensure lasting impact.

To conclude,the experiences from several countries shows that civil service reform is a key enabler of PFM reform. A more competent, motivated, and accountable civil service creates the necessary environment to design, implement, and sustain robust financial management reforms. 

By building capacity, fostering accountability, and improving incentives for civil servants, governments can create a workforce capable of implementing and sustaining effective public financial management. Evidence from several countries underscore the positive relationship between civil service modernization and improved PFM outcomes.

However, the road to reform is complex and requires addressing significant challenges. As governments continue to prioritize PFM reforms, placing equal emphasis on civil service reform will be critical to achieving sustainable governance improvements.