Every year, governments around the world allocate billions—if not trillions—of dollars to infrastructure, schools, hospitals, and energy systems. These decisions are meant to shape our future, bolster economic growth, and deliver public value. Yet all too often, they fall short. Roads lead to nowhere. White elephant stadiums drain budgets. Critical environmental concerns get ignored. What’s missing isn’t money—it’s better capital budgeting.
Capital budgeting isn’t just a technical exercise for number-crunchers in finance ministries. It’s a strategic tool for making smarter decisions about which public investments to pursue—and which to avoid. Done well, it ensures that scarce resources are channeled toward projects that truly improve lives, build resilience, and support long-term national goals.
The Problem with How Governments Spend
In theory, public investments should be guided by rigorous analysis: What are the costs? Who benefits? Are there long-term risks? In practice, many capital budgeting processes are fragmented, under-resourced, and prone to political interference. Projects get greenlit not because they pass a cost-benefit test but because they offer ribbon-cutting opportunities before elections. As a result, governments risk wasting precious public funds on projects that either underperform or harm communities.
My research and experience in public finance suggest that many governments still lack the institutional frameworks and technical capacity to evaluate and manage capital investments effectively. In some countries, project selection criteria remain vague or poorly enforced. In others, climate considerations are still an afterthought—despite increasing climate-related fiscal risks.
Lessons from Around the World
Some countries have made real progress. Chile requires every major public project to pass through a rigorous, standardized cost-benefit analysis process. South Korea uses its Total Project Cost Management system to track investment performance throughout a project’s life cycle. Canada emphasizes performance-based budgeting and ties infrastructure funding to clear policy outcomes like inclusiveness and sustainability.
Even countries with smaller fiscal capacity can innovate. Azerbaijan, for example, has piloted a climate budget tagging system that helps identify and track climate-related spending in its national budget—a move that could help attract green finance and align investment with global climate goals.
These examples show that it’s not just about how much governments spend, but how wisely they do so. Transparency, accountability, and sound appraisal matter. And they can be institutionalized with the right political will and technical support.
What Needs to Change
So, what can governments do to strengthen capital budgeting and make public investments more effective?
First, they need to strengthen their institutional frameworks. That means setting up legally mandated processes for project appraisal, ensuring independent technical review, and aligning investments with national development strategies and fiscal frameworks.
Second, governments must invest in technical capacity. This includes training public officials in cost-benefit analysis, risk management, and environmental impact assessment. It also means using modern tools—such as digital dashboards, geospatial data, and performance-tracking software—to improve monitoring and transparency.
Third, sustainability should be non-negotiable. Every major investment decision should account for long-term climate risks and social equity. This isn’t just good policy—it’s fiscal prudence. Ignoring climate risks today creates budget crises tomorrow.
Fourth, public participation must be more than a buzzword. Citizens have a right to know how their money is being spent and to shape investment priorities. Participatory budgeting, citizen audits, and open investment data portals can help bridge the gap between government and the governed.
Finally, governments should institutionalize post-project evaluations. Learning from what worked—and what didn’t—is crucial to improving the next round of investment decisions. Without feedback loops, we’re doomed to repeat mistakes.
Capital Budgeting is Democracy in Action
At its heart, capital budgeting reflects a country’s values. Do we prioritize vanity projects or equitable development? Do we invest in clean energy or perpetuate outdated fossil fuel infrastructure? Do we include marginalized voices or leave them behind?
Capital budgeting is where fiscal policy meets democracy. It’s where governments decide whose futures they’re building—and how.
Better capital budgeting won’t solve every problem, but it can prevent many of the worst ones. It’s time we treat it as a strategic priority, not an administrative formality. Because in a world of growing challenges—from climate change to aging infrastructure to citizen distrust—we simply can’t afford to get it wrong.
