Zero-Base Budgeting.

• Date: 01 October 2020
• Author: Kavanagh, Shayne C.

What are the pros and cons of Zero-Based Budgeting, especially during such tumultuous times? Using takeaways from recent research, we present both sides so you can decide if this approach is right for your government.

Zero-base budgeting (ZBB) is a budgeting process that asks managers to build a budget from the ground up, starting from zero. Though the apex of ZBB's popularity in the late 1970s is long past, there has been renewed interest in ZBB in today's environment of fiscal constraint, not least because the "zero" in zero-base budgeting sends a powerful message that taxes and spending will be held in check. ZBB won't fit all situations, but it is a potentially valuable tool.

ZBB has been the subject of a fair amount of controversy over the years, however, primarily because of questions about the value derived from ZBB analysis versus the cost required to put ZBB into practice. GFOA's research found that "textbook" ZBB or ZBB systems that conform to the theoretical ideal are almost unheard of in present day financial management. But an increasing number of governments that exhibit leadership in budgeting practices (albeit still a minority) are considering elements of ZBB and incorporating them into their budget processes.

GFOA's research has led us to several major conclusions about ZBB:

* Practical uses of ZBB streamline ZBB theory to focus on either detailed examination of expenditures or selecting between different levels of service.

* ZBB isn't for everyone. ZBB, or concepts inspired by ZBB theory, may be useful in certain situations. Ultimately, public officials must decide if the benefits of ZBB outweigh the disadvantages.

* Alternatives to ZBB exist. These alternatives can answer many of the same cut-back budgeting questions as ZBB, while sidestepping some of its disadvantages.

POINT

Original-Flavor ZBB

ZBB promises to move the organization away from incremental budgeting, where last year's budget is the starting point. Instead, the starting point becomes zero, with the implication that past patterns of spending are no longer taken as a given. To deliver on this promise, the organization is first divided up into "decision units"--the lowest level at which budget decisions are made.

Decision units could be formed along functional or organizational lines--for example, a division of a department is a common decision unit, but programs could be used as well. Managers in each decision unit then prepare a detailed description and evaluation of all the activities it performs, including alternatives to current service delivery methods and the spending plans necessary to achieve the decision unit's goals. This information is used to create a number of decision packages, which show marginal spending level differences that represent varying levels of effort and cost.

Given the issues with ZBB, how can it help in an environment of fiscal constraint, where budget cutbacks are required? First, consider...