Hierarchical and Contractual Approaches to Budgetary Reform

Based on a review of recent reforms of the budgetary systems used in the Danish public sector, the article argues that such reforms have not been effective instruments for public sector resource management. The reason for this lack of effectivity is found in the principles of hierarchical governance on which these reforms are based. The systems provide only weak incentives for respecting spending targets decided at superior levels, while, simultaneously, budget-holders are tempted to exceed these targets. Alternatively, the article argues for a contractual approach to budgetary reform where micro-level incentives are brought into operation.