Budgeting: Zero vs Incremental method

  • Zero-based budgeting in Nigeria
What you need to know about zero-based budgeting in Nigeria and its implication for the Ministry of Health.

A layperson would understand zero-based budgeting (ZBB) as going back to the drawing board, starting afresh to make a case for each project or programme on why it should be funded. Unlike the incremental budgeting method, which is a budget prepared using a previous period's budget or actual performance as a basis with incremental amounts added for the new budget period.

The recent announcement by the Federal Government to adopt the Zero Based Budgeting (ZBB) method for the development of the 2016 Federal budget met with mixed feelings from the Accountability and Budget transparency advocates. While some greeted it with optimism, many others still wonder how this system can best serve Nigeria.

Zero-based budgeting starts from a “zero base” and every function within an organisation are analysed for its needs and costs’’. Meaning that all project of the Ministries, Department and Agencies (MDAs) will be treated as ‘’new’’ and as such each project will have to put forth reasons to buttress its importance before it is funded.

For more clarity, a look at the 2015 budget of the Federal Ministry of Health headquarters revealed some on-going projects such as ‘’Coordination of Servicom reform activities, quarterly monitoring of E- payment compliance, renovation of headquarters office building’’ under capital votes, which have been a recurring decimal on the budget line item of the Ministry.

These budget lines have been funded on an on-going basis regardless of whether the objectives are still relevant or not. I suspect citizens have not felt the impact of Servicom for a while now, yet, it is being funded. 

In addition, while renovation of office building appeared under capital votes, maintenance of office building and residential buildings, which seems like a repetition, appeared under overheads votes. 

Although these budget lines were replicated, it was curious to see that they got topped up in every budget cycle!In a ZBB method, projects such as these will now have to be thought through and re-evaluated to ascertain its importance in order of priority in meeting health goals.

The draft budget from the MDAs will then be presented to the responsible government agency for approval and depending on how convincing the justifications presented are, projects might either be accepted or rejected and thereafter the MDAs will have to work with what has been approved for the period.

The potential advantage for this kind of budgeting is that it gives opportunity for projects and programmes to be evaluated on an on-going basis to ensure relevance and eliminate undesirability.

While this method of budgeting helps the budget planners to settle for the most important needs of the people, the MDAs will have to adjust their planning systems to categorize their plans ab initio as high priority, priority or low priority to take into consideration availability of funds for projects.

The ZBB also presents an opportunity for advocates to justify why a new budget line item should be introduced or expunged.  However, the drawback might be to ensure that the budget funders remove all forms of self-interest and subjectivity from the project selection process.

On the other hand, the Incremental Base Budgeting method previously used by the Federal Government up until the announcement was made concerning the 2016 budget is that which supports additional funding of already existing projects.

In this method, the budget planners also have to justify why they should have additional funding for the on-going project, however the drawback here is that additional funding for the next budget cycle may be reduced when budget funders discover that the previous budgets were underutilized.

This method gives room for wastage as often times employees may not want to lose their budgets thus may indulge in frivolous spending.

According to existing literature, no one method is better than the other, both have inherent advantages and disadvantages.

The responsibility for effective implementation and utilization of approved budgets therefore lies with the MDAs.

It is important that while the changes to the budgeting style are on-going, the government does not lose sight of the need to overhaul and strengthen the capacity of budget implementers through an effective performance management, monitoring and evaluation system.

Esther Agbon is the Health Budget Analyst with MamaYe (Evidence for Action) 

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