Beyond Zero Based Budgeting

Abstract

In theory, zero based budgeting calls for total cost analysis of all programs every year. Each item of expenditure is to be scrutinized to see if it can be reduced or eliminated. Thus, zero base budgeting has two distinctive characteristics. First, budget requests are formulated in in each management unit. A minimum package, in which all existing functions must be justified at the lowest practical level of operation, forms the first block. Additional decision packages offer more program results for greater costs, bringing the total budget proposals to successively higher levels, some below the current level, one which might be at the existing level, and others which represent increased support. Second, each unit manager ranks all by priority and each successively higher manager similarly ranks packages across program lines clear to the top of the organization. Thus, each marginal increment of budget can be placed on the next most important activity. ' In practice, zero basing is expensive and time consuming. A good manager uses it when he expects the gains will outweigh the costs. Few managers would deny that analyzing and defending the entire budget is a useful tool in selected circumstances. For example, when an agency has encountered a significant change in program demands and must shift its resources to cope more effectively with the change, a good manager will call for a zero based budget to re-establish a defensible base. Even very stable, continuing programs can be usefully zero based occasionally, perhaps once in five or seven years. Little, however, can be learned about most programs from an annual zero based budget. This article suggests that the most practical budgeting system for most managers is a formalized combination of incremental and zero based analysis. Incremental analysis of budgets begins with the assumption that three-fourths of the federal government's expenditures are on non-controllable items such as interest on the public debt and commitments to individuals for social security, medical care, pensions, and the like. It further assumes that the remaining one-fourth is largely committed to the continuation of long-established programs upon which the public has come to depend. Neither the executive leadership nor the legislature really has an option of discontinuing these programs in the short run. Incremental analysis recognizes that budget making cannot be approached as a brand new political ball game each year. Political decisions have been made over many years to provide these specific services. Facilities have been built and personnel employed and trained. The public has come to depend upon these services. The budget system, then, must also provide a technical or professional basis for continuing to allocate resources to these established programs which the public expects will continue. It should not require an annual political reconfirmation of every program. For many programs, then, the only real budgetary question is whether the past level of activity, which has proved politically acceptable over many years, is appropriate for the next fiscal year. In most instances, the answer is going to be yes within a very narrow range of dollars. An effective incremental budget, then, displays certain basic data.