What is Zero-Based Budgeting?
Zero-Based Budgeting requires each activity to be justified on the basis of cost-benefit analysis, assumes that no present commitment exists, and that there is no balance to be carried forward.
Zero-Based Budgeting (ZBB) is a method of budgeting in which all expenses will be justified for each new year. ZBB starts from a “zero base” and every function of the government is analysed for its needs and costs. It involves preparing budgets which every year must start from scratch with no pre-authorised funds. It requires each activity to be justified on the basis of cost-benefit analysis, assumes that no present commitment exists, and that there is no balance to be carried forward. It also provides a systematic basis for resource allocation.
In other words, ZBB is an approach to budget formation where in a government prepares a budget from the ground, starting from zero rather than making an incremental provisioning for projects over previous year. This is part of an exercise to do away with unnecessary schemes.
How it is different from traditional budgeting?
As opposed to traditional budgeting, no item is automatically included in the next budget. Every program and expenditure is reviewed at the beginning of each budget cycle and must justify each line item in order to receive funding.
ZBB was discarded by policy practitioners owing to the method being an impractical budget-making option. However, with the global financial crisis of 2008, it has come back in the reckoning for its focus on prudent spending during budget formation.
Where has it been used?
ZBB first rose to prominence in government in the 1970s when US President Jimmy Carter promised to balance the federal budget in his first term and reform the federal budgeting system using ZBB, a system he had used while he was the governor of Georgia. ZBB, as Carter and bud get theorists envisioned, re quires expenditure proposals to compete for funding on an equal basis -starting from zero.
However, the concept did not take off in a big way.
Why is zero-based budgeting back in the reckoning now?
The global economy and many other advanced countries have been experiencing the worst economic slowdown in decades. These times have imposed major fiscal challenges on local governments which have prompted serious changes on how resources should be allocated. In today's environment of fiscal constraint the "zero" in zero-base budgeting sends a powerful message that taxes and spending will be held in check. Since 2008, many firms and government agencies have started using this form of budgeting.
How relevant is the option in the context of India?
In India, the state of Maharashtra attempted ZBB in the eighties under the then finance minister Late Shrikant Jichkar. More recently, railways minister Suresh Prabhu also discussed ZBB in allocation of resources for certain projects for Indian Railways.
What are the limitations of this process?
It is very costly, complex and time consuming as budget is rebuilt from scratch annually, whereas simpler and faster traditional budgeting requires justification only for incremental changes. Besides, it requires specialised training or personnel to accomplish, and requires more resources in general.