Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period.
Zero-based budgeting starts from a “zero base,” and every function within an organization (such as a ministry) is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one
3 essential questions which must be answered objectively before going for any expenditure as per the techniques of ZBB:
Should we spend?
How much should we spend?
Where should we spend?
Everything including expenditure and receipts begin from a scratch under ZBB. Budget estimates for each Ministries or heads are provided on the basis of what is needed for the upcoming period, regardless of the budget activity of the previous years.
Under ZBB, allocations or funding are based on program efficiency and necessity rather than budget history. However, ZBB is a time-consuming process that takes much longer time than traditional, cost-based budgeting.
Prioritizing the competing needs is another special feature of ZBB. As the resources/funds are always scarce, in the process of prioritized allocation, the item/ items at the bottom might not get any funds.
Limitations of ZBB
There are certain expenditures upon which the government/parliament does not have the power of scrutiny (as the ‘Charged Expenditure’ in India).
There are certain public services which defy the cost-benefit analysis—defense, law and order, foreign relations, etc.
Scrutiny is a subjective matter and so this might become prey to bias. Again, if the scrutinizers have a complete utilitarian view many long-term budgeting and public policy might get marginalized.
It has scope for emergence of the Ministry of Finance as the all-powerful institution dictating other ministries and departments.
Bureaucracy does not praise it as it evaluates their decisions and performances in a highly objective way.
We should go for ZBB or not?
Despite the strong limitations, 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 optimize the benefits of expenditure in every area of activity and in this sense it is exceptional.
It is already successful in corporate world.
Many of the profit-fetching PSUs have been able to use it successfully and optimize their profits.
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