< Previous | Contents | Next >
The idea of zero-base budgeting (ZBB) first came to the privately owned organisation of the USA by the 1960s. This basically belonged to a long list of guidelines for managerial excellence and success, others being Management by Objectives (MBO), Matrix Management, Portfolio Management, etc to name a few.51 It was the US financial expert Peter Phyrr who first proposed this idea for government budgeting and Jimmy Carter, Govornor of Georgia, USA was the first elected52 executive to introduce ZBB to the public sector. When he presented the US Budget in 1979 as the US President it was the first use of the ZBB for any nation state. Since then many governments of the world have gone for such budgeting.
Zero-base budgeting is the allocation of resources to agencies based on periodic re-evaluation by those agencies of the need for all the programmes for which they are responsible, justifying the continuance or termination of
each programme in the agency budget proposal—in other words, an agency reassesses what it is doing from top to bottom from a hypothetical zero base.53
There are three essential principles of ZBB. Some experts say it in a different way, there are three essential questions which must be answered objectively before going for any expenditure as per the techniques of ZBB:
(i) Should we spend?
(ii) How much should we spend?
(iii) Where should we spend?
There are three special features of this budgeting which distinguishes it from the traditional budgeting. These features, in brief, are as under:
(i) The conventional aggregate approach is not applied in it, in which each department of the government prepares their own budget for many activities in the aggregate and composite form, making it difficult to scrutinise each and every activity. In place of it every department needs to justify its existence and continuance in the budget document by using the mathematical technique of econometrics, i.e., cost-benefit analysis. In a nutshell, every activity of each department is ‘X-rayed’ and once the justification is validated they are allocated the funds.
(ii) Economy in public expenditure is the raison d’etre of this budgeting. This is why the ZBB has provisions of close examination and scrutiny of each programme and public spending. Finally, the public spending is cut without affecting the current level of benefits of various public services accruing to the public.
(iii) Prioritising the competing needs is another special feature of ZBB. Before allocating funds to the different needs of the economy, an order of priority is prepared with utmost objectivity. As the resources/funds are always scarce, in the process of prioritised allocation, the item/items at the bottom might not get any funds.
Side by side its benefits, there are certain limitations too before the ZBB which prohibits its assumed success, according to experts. These limitations have made it subject to criticisms. The limitations are as given below:
(i) There are certain expenditures upon which the government/parliament
does not have the power of scrutiny (as the ‘Charged Expenditure’ in India).
(ii) There are certains public services which defy the cost-benefit analysis— defence, law and order, foreign relations, etc.
(iii) Scrutiny is a subjective matter and so this might become prey to bias. Again, if the scrutinisers have a complete utilitarian view many long- term objectives of budgeting and public policy might get marginalised.
(iv) It has scope for emergence of the Ministry of Finance as the all- powerful institution dictating other ministries and departments.
(v) Bureaucracy does not praise it as it evaluates their decisions and performances in a highly objective way.
Despite the above-given strong limitation, the ZBB has a sound logic and should be considered a long-term budgetary reform process. The basic idea of this form of budgeting is to optimise the benefits of expenditure in every area of activity and in this sense it is exceptional. To the extent the corporate world is concerned, this has been a very successful financial management tool.
In India, it is believed to be in practice since 1997–99. We cannot say that India is a success in ZBB, but many of the profit-fetching PSUs have been able to use it successfully and optimise their profits.