Zero-base budgets probe all State spending

Press, 22 September 1977, Page 16

Zero-base budgets probe all State spending

Budget requests from departments of the United States Government had to be in the hands of the Office of Management and Budget in Washington last week. The head of this office is Mr Bert Lance, whose actions as an officer of two Georgia banks are under investigation. For the first time, budget requests by American Government departments have had to be presented in the form of zerobase budgets. In this article lAN BALL, senior lecturer in government finance at Victoria University of Wellington, explains zero-base budgeting and discusses its application in New Zealand.

Zero-base budgeting is a technique which aims to remove from the budget of an organisation any item or activity which has outlived its usefulness, or which is no longer as important or necessary as it was when first introduced. Unfortunately, normal processes of government budgeting do not achieve this. Normal budgeting has the effect of making it easy for out-dated activities to be maintained, while at the same time making it very difficult to undertake new activities which may be vital if a government is to respond to new needs in the community. What usually occurs in government budgeting is that departments estimate how much it will cost in the coming year to maintain their

existing activities, and then, if the government thinks the taxpayers or ratepayers can bear it, new activities are considered. Any new proposals will normally be thoroughly evaluated, but there is no re-examination of existing activities. So once activities are in the budget, they are usually there to stay. Under zero-base budgeting the burden of proof is shifted to the manager of each department which is seeking funds to continue its programme. Each year he must fully justify his request for funds, even if the activity for which he is responsible has been carried out for a number of years. So when an activity outlives its usefulness this will become clear very much sooner than it would under

the traditional budgeting process. This would leave governments free either to reduce their expenditure, or if that is too much to hope for, at least reallocate their expenditure to the areas where it is now most needed, rather than to those areas in which it was needed 10, 15 or 50 years ago. Under traditional budgeting the “base” from which the budget is prepared is last year’s budget that is the starting point. Under zerobase budgeting no activity is automatically included in the budget—the base is effectively zero. Or, as it was put by one United States Budget Director, “Every item in a budget ought to be on trial for its life each year and matched against all other claimants to our resources.” President Carter was the first person to introduce zerobase budgeting into a government organisation. He implemented it in the State of Georgia in 1972 when he was Governor there, after he read an article describing how the technique was successfully developed in the firm of Texas Instruments Incorporated. As to how successful the system was in Georgia, opinions vary. President Carter thought it highly success-

ful and during his campaign for the Presidency, advocated its introduction at the Federal Government level. The people who operated the system in Georgia were not so impressed by the system —they did not think it made any significant difference to the way funds were actually allocated and they were more aware of the extra effort that had to be put into the preparation of the budget. Independent observers of the system in Georgia have concluded that there are definite advantages to be gained from the operation of the system, but that for those advantages to be realised great care must be taken in the introduction of the system—it must have the support of the people who will be operating it. One of the major advantages of the system was that it provided the Governor and other senior decision-makers in Georgia with much better information about the activities of government at all levels, and this allowed them to see where activities could be cut. or phased out, or increased. New Zealand faces the same problems that President Carter was, and still is, trying to overcome. The System of Integrated Government

Management Accounting (S.I.G.M.A) that was introduced by the New Zealand Government in 1967 was based on a budgetary system which is, in theory, zerobased. But the actual process of budgeting bv the Government retains the fault that it starts from the base of last year’s activity. The burden of proof has not been placed on the individual manager to justify his expenditure each year. A recently published report “New Zealand at the Turning Point” saw the system of budgeting in central government as being deficient when it argued that the budget Crocess “has a conservative ias which works to minimise the need to justify old policies and, arguably permits the perpetuation of lower standards of efficiency and economy in respect of existing policies than the standards maintained in respect of new policies.” Local authorities in New Zealand also budget in a fashion which encourages the continuance of irrelevant services. Being much smaller, however, local authorities may become aware sooner of irrelevant activities, and therefore the need for zerobase budgeting may not be so great as in central government.

On the other hand, being smaller, it may be rather easier to intro luce zero-base budgeting at the local level. The difficulties that the Government has faced in implementing S.I.G.M.A should provide adequate warning of the need to proceed with caution when attempting to change radically the budgeting process. The various interests which are likelv to be affected by such a change are well entrenched, and it is reasonable to expect that a zero-base budgeting svstem would fail unless all those who will be required to operate the system can be convinced of the benefits which can be obtained. The arguments in favour of zero-base budgeting apply with special force during a period of economic recession. During such periods it is even more important that government expenditure is not wasteful, because during recession new needs for government expenditure often emerge, and it is essential that activities which have become irrelevant do not block new activities which have a much higher priority. Present government budgeting practices encourage the continuance of unneessary government expenditures. Zero-base budgeting does not.