What is zero-based budgeting? What are its pitfalls?

ZERO-BASED budgeting (ZBB) has always been an attractive technique to US state-government level planners. It became even more so when Americans felt the 2008-2009 economic meltdown.

At least 15 state legislatures saw bills proposing statewide zero-based budgeting last year.

The most famous proponent of ZBB is President Jimmy Carter. His ZBB experience as the governor of Georgia was hailed as a success until analysts later saw it to be exaggerated. When he introduced it to the federal government, the Office of Management and Budget developed it as budget method by 1978.

But President Ronald Reagan’s administration used only some elements of it as an alternative form of determining funding options for agencies when their budgets were reduced. With ZBB, these agencies with less money were forced to prioritize their most essential tasks and activities.

This is what appears to be the main reason President Benigno Aquino 3rd has decided to make ZBB his administration’s approach to determining how much should be allocated to which programs.

In its most basic sense, ZBB is what is forced on households that find themselves with very little money. They have to begin from scratch. There is no money for anything but the very basics.

That is what ZBB fundamentally is.

Under the ZBB regime, when a government agency has to make its plans at the start of a budget cycle, it must assume that there is no remaining money for programs from the previous cycle.

Incremental budgeting

It’s opposite is the traditional budget technique—“incremental budgeting.”

In this method, which is what we had in the previous administrations, the new cycle’s budget is prepared using last year’s as a base or the program’s actual performance.

Computing present estimates of costs and, say number of persons to be served by a program, and taking into account any unspent amount in the previous budget, the new budget is prepared.

All projects and programs, unless decided by law or executive decision to be stopped, are considered as ongoing. Allocations for the programs are made based on the past cycle’s expenses. So the new budget is almost always an increased amount, an increment, over the last year’s budget.

The criticism of this, our present system, is that it encourages spending whatever is budgeted—even if in fact an agency could spend less and still achieve the same results. Another objection is that even if there is a lot of unspent budgeted funds, the government agency must use it all somehow —and in some cases allow “kurakot” to happen—because otherwise when the budget next year is prepared, the Congress or the Budget office might cut that agency’s budget down.

ZBB requires all agencies to assume or pretend that it has no projects and programs whatsoever.

And it has to draw up as if from scratch a list of projects and programs and justify each and prove that it must have a certain amount of money for each project and program.

And it is not as though once the budget has been prepared and the funds are allocated for an agency’s approved programs and projects, it can rest easy until next year.

The ZBB method requires the analysis and monitoring of whether the project and program and the amounts allocated to them are being properly used according to the approved plan. Any deviation could mean forfeiture of the funding.

Promoters of ZBB claim the following to be the advantages of ZBB over other techniques:

• Agency executives are forced to be on their toes. They must review and analyze what they are doing and if their projects and programs are achieving what they are supposed to achieve. They must be ready to ask for more funds if necessary and justified by program success and effectiveness.

• Agency executives will realize that they have a bad or ineffective project and will honestly have it killed now, not next year, and have the funds for that project added to the ones that are successful.

• Really high priority projects become the focus of funds and performance.

• Constant review and analysis, with all the managers and planners participating, boost the management’s skills and collaborative habits. Transparency and meritocracy are valued. Openness and honesty become natural virtues because unceasing discussions and analyses would be fruitless without these virtues.

Disadvantages of ZBB

• It is time-consuming. If the review and analyses are not exhaustive, the findings might end up being less than correct. And dishonest inputs might go undetected.

• Since decision-making cannot be made on huge chunks of data and situations, so-called “decision units” and “decision packages” must be isolated. It is not easy to arrive at these units and packages.

• Futuristic planning and prevention projects, which are just as important in the long run as actual productive activities, will usually be set aside or downgraded. For it is not easy to justify funds for the prevention of possibly bad events that never transpire. In ZBB the bias is always in favor of production of results. In private companies, ZBB always tend to be biased against R&D.

• Executives of agencies not trained in ZBB and rigorous analysis (which most civil servants in the Philippinesd probably are) will most likely not be very useful in the beginning. This makes the ZBB process even more time-consuming than it should be.

• More people and stakeholders must be involved in the ZBB process. This makes it necessary to communicate all facts to all of them correctly. A difficult task when many are involved in the analysis and decision process.

• In the big government departments, the large number of people and the thick folders of reports or very long computerized reports will not be easy for members of the review teams to digest. Making these detailed information materials shorter would result in loss of data necessary for correct decisions.
• The honesty of every executive must be guaranteed, otherwise the results and decisions will be wrong.

Deadline August 24

Given all the pitfalls that ZBB lays for our government executives, one of my worries is whether Budget Secretary Florencio “Butch” Abad and his co-workers would be able to complete a correct budget proposal to Congress by August 24.

I personally think trying the ZBB is a good move. It further boosts the image of President Aquino that he is determined to make ours a really honest and fiscally responsible government focused on the top priorities for the common good.

My only hope and prayer is this: If the ZBB effort turns out to be similar to that of Governor Jimmy Carter in Georgia, then there must be no effort to cover up and gloss over the flaws of the exercise. Doing that would diminish the credibility of the President.

And it would open a window to the enemies whose aim is to make President Aquino fail. –RENE Q. BAS EDITOR IN CHIEF, Manila Times