A Republican, Mr. Pyhrr said one of his wishes is that more government entities would embrace zero-based budgeting to make the kind of necessary changes that companies, such as Heinz, are making. “But that is a long discussion,” he added.
Friday, March 27, 2015
Update: zero-based budgeting in the government?
All the apparent success of zero-based budgeting in the private sector raises the obvious question, "why not use it for the government." Apparently, it was tried before: in 1977, Jimmy Carter ordered the executive branch to implement it. However, without reforming the civil service protection of government employees (lifetime tenure, and very difficult to fire or reward), it was predictably unsuccessful.
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It seems each year governments, rather local or federal struggle with budgeting. The challenge of allocating resources and allocating resources on time seems a difficult task for budget developers. While excess exist in one area, depletion may exist in another. The very nature of this tug of war (budget) may cause self-interest to prevail over the interest of firm, causing shareholders and stakeholders to demand more fiscal accountability. Zero based budgeting forces the firm to eliminate excess and waste, translating to cost reduction. Cost reduction becomes an effective competitive strategy. However, does zero based budgeting work well in firms were innovation is key to organizational growth. Even though allocations may be made to fund innovative incentives, are opportunities missed to expand revenue, margin, and profit as a result less flexibility in the budget. Certainly as long as MR is greater that MC the company should continue to invest, service or produce. Yet, it seems at times zero based budgeting might be inhibitive even choking when implemented improperly. In general, however, I believe zero-based budgeting with balance has benefits worth exploiting.
ReplyDelete5. Mr. Pyhrr is not the only Republican who wishes government entities would embrace zero-based budgeting. According to Rep. Randy Hultgren (R-IL), "unlike most hardworking American families who each year account for every incoming and outgoing dollar, the federal government assumes ongoing expenditures and rolls them over from year to year" (Hultgren 2012).
ReplyDeleteIn a letter to the editor, Hultgren also writes that "while incremental budgeting retains the advantage of simplicity, it doesn't lend itself to cost control and program justification, a big reason why our national debt is now eclipsing $15 trillion. As long as the underlying budgetary foundation remains calcified and prone to protect existing expenditures, Congress and the federal agencies will have a difficult if not impossible time cutting spending" (Hultgren 2012).
With zero-based budgeting, activities, methods of performance and levels of effort are evaluated on the basis of their contribution towards achieving the desired objectives of the organization and tries to see how well the organization as a whole works towards accomplishing its goals and how efficiently each part of the organization operates. This certainly sounds like a formula the federal government could use. Not too surprisingly, the zero-based approach offered tangible benefits. It led to more thorough planning, better budgetary information, and more efficient allocation of resources and a greater understanding of how programs related to the agency as a whole. And, yes, it did identify areas of unnecessary and wasteful spending (Hultgren 2012).
References:
- Letter to the editor: Federal government needs to embrace zero-based budgeting. (2012). Lanham: Federal Information & News Dispatch, Inc.
It is difficult for Government entities to make sweeping reforms, especially if it affects the resources available through budgets. An overhaul of reform, such as zero-based budgeting, requires group interests to supersede special (self) interest. Each department, fund or enterprise advocates for their own self-interests. Even if coordination for group interests maximizes profits, the dominant strategy is self-interest.
ReplyDeleteIt is similar to the tragedy of the commons. Government budgetary resources are finite yet each governmental entity requests a budget from this common resource pool. Self-interests prevail over group interests and the common resource is depleted. “Because the marginal cost of a common resource is zero, people will continue to consume the resource until their marginal benefit is zero. Hence, the resource is consumed, but not replaced. Therein lies the tragedy.” (Spaulding 2014)
Government should be good stewards of common resources. A balanced budget is a fundamental standard of fiscal responsibility. Perhaps government will learn from the private sector’s success but currently there are too many competing entities with self-interests, too much political influence and too much bureaucracy for government adoption of zero-based budgeting.
Reference:
William C. Spaulding (2014) Tragedy of the Commons: Cost Benefit Analysis. Thismatter.com/economics