Zero Based Budgeting

Zero-based budgeting is the latest technique of budgeting as a managerial tool.

This technique was first used in America in 1962 by the former President Jimmy
Carter when he was the Governor of Georgia for controlling state expenditure.
Zero-based budgeting in management accounting involves preparing the budget
from the scratch, that is, with a zero-base. Zero-based budgeting starts from zero,
rather than a traditional budget that is based on previous budgets. Thus, the
definition goes as “a method of budgeting whereby all the expenses for the new
period are calculated on the basis of actual expenses that are to be incurred and
not on the differential basis which involves just changing the expenses incurred
taking into account change in operational activity.” Under this method, every
activity needs to be justified, explaining the revenue that every cost will generate
for the company.

The primary objective of zero-based budgeting is the reduction of unnecessary

cost by looking at where costs can be cut. To create a zero base budget
involvement of the employees is required. You can ask your employees what
kind of expenses the business will have to bear and figure out where you can
control such expenses. It involves re-evaluating every line item of the cash flow
statement and justifying all the expenditures that a department is going to incur.
If a particular expense fails to benefit the business, the same should be axed from
the budget. Contrary to the traditional budgeting in which past trends or past
sales/expenditures are expected to continue, zero-based budgeting assumes that
there are no balances to be carried forward or there are no expenses that are pre-
committed. In the literal sense, it is a method for building the budget with zero
prior bases. It lays emphasis on identifying a task and then funding these
expenses irrespective of the current expenditure structure.
Differences between Traditional Budgeting and Zero-Base
Budgeting
● In traditional Budgeting, the previous year’s budget is taken as a base for
the preparation of a budget. Whereas, each time the budget under zero-
based budgeting is created, the activities are re-evaluated and thus started
from scratch.
● The emphasis of the traditional budgeting is on the previous expenditure
level. On the contrary, zero-based budgeting focuses on forming a new
economic proposal, whenever the budget is set.
 ● Traditional Budgeting works on cost accounting principle, thereby, it is
more accounting oriented. Whereas the zero-based budgeting is decision
oriented.
● In the traditional budgeting, justification of the line items and expenses are
not at all required. On the other hand, in zero-based budgeting, proper
justification is required, taking into account the cost and benefit.
● In traditional budgeting, the top management take decisions regarding any
amount that will be spent on a particular product. In contrast, in zero-based
budgeting, the decision regarding the spending a specific sum on a
particular product is on the managers.
● Zero-based budgeting is better than traditional budgeting when it comes to
clarity and responsiveness.
● Traditional budgeting follows a monotonous approach. On the contrary,
zero-based budgeting follows a straightforward approach.

What are the steps to create a Zero based budget?

● Identifying the decision units that need a justification for every line item of
expenditure in the proposed budget.
● Preparing Decision Packages*. Decision packages mean self-contained
proposals or module seeking funds. Each decision package comprises the
explanation of the activity, the amount involved, the need for the item, the
benefit arising from the implementation of the proposal, the expected loss
that may be incurred if it is not done and much more. Each decision
package is an identifiable and separate activity. These decision packages
are connected with the objectives of the company.
● The next step in ZBB is to rank the decision packages. This ranking is done
on the basis of cost-benefit analysis.
● Finally, funds are allocated on the basis of the above findings by following
a pyramid ranking system to ensure maximum results.
Zero Based Budgeting Steps
1) Identification of a task

2) Finding ways and means of accomplishing the task

3) Evaluating these solutions and also evaluating alternatives of sources of funds

4) Setting the budgeted numbers and priorities

Zero Based Budgeting Advantages

1. Accuracy: Against the regular methods of budgeting that involve just
making some arbitrary changes to the previous year’s budget, this method
makes every department relook each and every item resulting in cash flow
and compute their operation costs. This to some extent helps in cost
reduction as it gives a clear picture of costs against the desired
performance.
2. Efficiency: This helps in the efficient allocation of resources (department-
wise) as it does not look at the historical numbers but looks at the actual
numbers
3. Reduction in redundant activities: It leads to the identification of
opportunities and more cost-effective ways of doing things by removing all
the unproductive or redundant activities.
4. Budget inflation: Since every line item is to be justified, a zero-based
budget overcomes the weakness of incremental budgeting of budget
inflation.
5. Coordination and Communication: It also improves coordination and
communication within the department and motivates employees by
involving them in decision-making.

Zero Based Budgeting Disadvantages

1. Time-Consuming: It is a very time-intensive exercise for a company or
government-funded entities to do every year as against incremental
budgeting, which is a far easier method.
2. High Manpower Requirement: Making an entire budget from the scratch
may require the involvement of a large number of employees. Many
departments may not have adequate time and human resources for the
same.
 3. Lack of Expertise: Explaining every line item and every cost is a difficult
task and requires training the managers.

Conclusion: Zero-based budgeting aims at reflecting true expenses to be

incurred by a department or a state (in the case of budget-making by the
government). Although, being time-consuming, this is a more appropriate way of
budgeting. At the end of the day, it is a company’s call as to whether it wants to
invest time and manpower in the budgeting exercise to provide more accurate
numbers or go for an easier method of incremental budge

PERFORMANCE BUDGETING
Performance budget is a budget which refers to programs, functions, and
performance which reflects the estimated expenses and revenues of the
companies, Government or Statutory bodies. It is a budget that provides the
objective and purpose for which funds are being raised and proposed
activities and programs to be accomplished.
It is aimed to improve the efficiency of the people involved in performing
the budgeted task as per the budgets. Performance budget is not just about
the performance; it is much more than the evaluation of performance or
providing the performance information in the budgets. The main
characteristics of this budget is that to introduce the performance
measurement in the budgeting procedure and to include the budget
management system with the overall responsibility to compensate for the
excellent performances and punish the poor performances. Performance
budget is a budget mainly aimed to evaluate whether the budgeted task is
being carried out as per planned and measuring the performance involved in
the budget procedure. The purpose is to ensure the performance is as per
the budgets and workings are being done smoothly and the persons
performing their task with utmost responsibility along with efficient
utilization of the funds raised and achieving the objectives.

Characteristics of Performance Budgets

Following are the characteristics;

#1 – Improved Management
It helps in improving management skills and implementing the
management processes more efficiently. It helps in identifying the
organizational objectives, evaluate the program performances, understand
the problems with the operations and structure of the program.

#2 – Higher Transparency & Accountability

The resources are categorized according to the programs and also provide
the performance indicators. It finds solution-based accountability
management, which is responsible for the objectives they have to achieve.

#3 – Enhanced Communications

It helps in enhancing the communications as there are personal

responsibilities in performing their work, which will result in clear and
improved communication to avoid any delay in achieving the objective of
the program and also helps in the individual performances of the
management.

#4 – Better Decision Making

It helps in making a decision, with the help of a better understanding of the

processes. With the help of proper information, the management can
implement techniques for improvement and can take appropriate actions to
resolve the issues involved.

Performance Budget Process

Below is the step by step process which takes place:

Step #1 – Formulation of Objectives

It is the initial step to formulate the objective as to what to achieve. It is

essential to set the objectives, and then only the designated tasks can be
allocated to the teams based on their abilities.

Step #2 – Identifying various process and plans

It is the second stage to identify the process and plan, which will help in
achieving the objectives—various processes and strategy which can be
introduced to the program to achieve the objective.

Step #3 – Evaluation & Selection of the processes and plans

After identification, various processes and plans, the most profitable and
easy to communicate and implement plan and processes should be
evaluated and selected to achieve the objectives.

Step #4 – Development of Performance Criteria

It is another step to develop the criteria on which the processes and plans
will be rolled out. It is also essential to develop a basis to measure the
performances of the persons involved in the processes.

Step #5 – Financial Planning

After developing the processes, identifying the steps involved, it is required

to plan for the financial requirement and prepare a financial budget for the
processes planned.

Step #6 – Assessing Performance

After rolling out the processes, it is vital to measure the performance given
by the persons involved in the process to initiate the actions accordingly. It
is crucial to see whose performance was up to the mark and what changes
are required to be made.

Step #7 – Correcting Deviations

It is the final step that corrects the deviations in the process and
performances. Also, to make the required changes in both the process and
performance to remove all those deviations.

Advantages

There are the following advantages:

● Clear Purpose: It provides a clear purpose of budgeting and provides a
clear understanding of the performance of the persons involved. It becomes
easier to access the deviations and the performances and correct them.
● Improvement in Performance: It helps in improving the performance, as
there will be a continuous check on the deviations and performances to
remove the errors and correct the deviations, and therefore this will help in
improving the performances.
● Sets Accountability: Since this budget provides a clear understanding of
the roles to be performed and tasks to be completed by the persons, it
provides accountability on every person for their roles and tasks, and they
will be held accountable for there part of work.
● Transparency: It succeeds in making transparency in the budgeted task
and their performances, as it is clear to all their roles and responsibility, and
they are accountable for their jobs, which will help in providing clear
transparency in the processes.

Disadvantages

Following are the disadvantages:

● It is difficult for the long-term processes as there is a continuous update in

the processes;
● There can be the possibility of manipulation of data;
● There is a requirement of a robust system of accounting;
● These budgets are subjective in nature.

Conclusion

Performance Budget is vital for the organization to access the performance

of the persons handling the processes and to remove the deviations which
they face while performing their tasks.
What is Gender Budgeting (GB)?
▪ GB is concerned with gender sensitive formulation of legislation,
programmes and schemes; allocation of resources; implementation and
execution; audit and impact assessment of programmes and schemes; and
follow-up corrective action to address gender disparities.
▪ A powerful tool for achieving gender mainstreaming so as to ensure that
benefits of development reach women as much as men.
▪ Does not seek to create a separate budget but seeks affirmative action to
address specific needs of women.
▪ Monitors expenditure and public service delivery from a gender perspective.
▪ Entails dissection of the Government budgets to establish its gender
differential impacts and to ensure that gender commitments are translated in
to budgetary commitments.

The Five-Step Framework for Gender Budgeting

▪ Step 1: An analysis of the situation for women and men and girls and boys
(and the different sub-groups) in a given sector.
▪ Step 2: An assessment of the extent to which the sector’s policy addresses
the gender issues and gaps described in the first step.
▪ Step 3: An assessment of the adequacy of budget allocations to implement
the gender-sensitive policies and programmes identified in step 2.
▪ Step 4: Monitoring whether the money was spent as planned, what was
delivered and to whom.
▪ Step 5: An assessment of the impact of the policy/ programme/scheme and
the extent to which the situation described in step 1 has changed.
Rationale Behind Gender Budgeting
▪ According to the 2011 census, women account for 48 per cent of the total
population of the country.
▪ Women face disparities in access to and control over services and resources.
▪ Bulk of the public expenditure and policy concerns are in ‘‘gender neutral
sectors”.
▪ Implications on women in the above sectors are not recognised or identified.
▪ Gender responsive budgets policies can contribute to achieving the
objectives of gender equality, human development and economic efficiency.

Gender Budgeting in India

▪ Gender Budget Statement (GBS) was first introduced in the Indian Budget in
2005-06. This GB Statement comprises two parts–
o Part A reflects Women Specific Schemes, i.e. those which have 100%
allocation for women.
o Part B reflects Pro Women Schemes, i.e. those where at least 30% of
the allocation is for women.
▪ India’s gender budgeting efforts stand out globally because they have not
only influenced expenditure but also revenue policies (like differential rates
for men and women in property tax rates and reconsideration of income tax
structure) and have extended to state government levels.
▪ Gender budgeting efforts in India have encompassed four sequential phases:
(i) knowledge building and networking, (ii) institutionalizing the process,
(iii) capacity building, and (iv) enhancing accountability.
▪ Gender budgeting in India is not confined to an accounting exercise. The
gender budgeting framework has helped the gender-neutral ministries to
design new programs for women.
▪ Gender Budgeting Cells (GBC) as an institutional mechanism have been
mandated to be set up in all Ministries/Departments.
▪ GBCs conduct gender based impact analysis, beneficiary needs assessment
and beneficiary incidence analysis to identify scope for re-prioritization of
public expenditure and improve implementation etc.
▪ The Finance Minister has proposed to increase the gender budget allocation
to Rs 131,700 crore for 2019-20 from Rs 121,961crore a year ago.
▪ The Minister pitched for women-led development to be the government’s
mantra from being about women development; focussing on schemes on
nutrition, anganwadi and women employment.

Shortcomings
▪ Not only has the magnitude of the gender budget as a proportion of the total
expenditure of the Union Budget decreased, the budgetary allocations for
promoting gender equality and women’s empowerment have also shown a
decline.
▪ There are only a few “big budget” women exclusive schemes of the Ministry
of Women and Child Development (MWCD) like the Nirbhaya Fund and the
Beti Bachao Beti Padhao campaign.
▪ Lack of dedicated human resources to implement the interventions identified
by the GBCs.
▪ Monitoring remains one of the weakest links in the GRB work with no
designated mechanism for monitoring it at the national level.
▪ Assumptions behind reporting allocations under Part B of the GBS remain
questionable.
Way Forward
▪ An assessment of gender responsive budgeting in India reveals a mixed
picture.
▪ There are number of positive developments, such as changes in select
planning and budgeting processes and creation of gender budget cells.
▪ However, restricted reach of GB and stagnant or even declining allocations
for the gender agenda are stumbling blocks.
▪ The adoption of the GB should be accompanied by multifaceted and
interrelated improvements to budgets in general and the gender sensitivity of
budgets.
▪ There needs to be shift from mere "reporting" of gender allocations to
“purposive planning” with wider participation of women.

What is a Budget Deficit?

A budget deficit occurs when government expenditures exceed revenues from
taxes and other sources. Although the concept of a budget deficit applies to any
organization with operating revenues and expenses, the term is most commonly
applied to government budgets.
Public savings are also referred to as budget surplus. When public savings are
negative, the government is said to be running a budget deficit. To spend more
than tax revenues allow, governments borrow money and run budget deficits,
which are financed by borrowing.
The amount borrowed is added to the nation’s national debt. For example, the
national debt of the United States is estimated at $23 trillion as of 2020. As of
February 2020, the country’s federal budget shortfall amounts to $625 billion.

Budget Deficit – Components

1. Revenues
For national governments, a majority of revenue comes from income taxes,
corporate taxes, consumption taxes, and social insurance taxes. For non-
governmental organizations and companies, revenues come from the sale of
goods and services.
2. Expenses
For governments, expenses include government spending on healthcare,
infrastructure, defense, subsidies, pensions, and other items that contribute to
the health of the overall economy. For non-governmental organizations and
companies, expenses include the amount that is spent on daily operations and
factors of production, including rent and wages.

Budget Deficit – Implications

Contrary to what it may sound like, a budget deficit is not always a negative
indicator of economic health. Some of the implications of a budget deficit are
described below:
1. Increase aggregate demand
A budget deficit implies a reduction in taxes and an increase in government
spending, which results in an increase in the aggregate demand of the country
and subsequent economic growth, ceteris paribus.

2. Boost the economy during a recession

During a recession, the economy tends to experience a decrease in investment
spending from the private sector, along with lower aggregate consumption and
demand. A government may choose to borrow and run a deficit to combat the
situation by taking measures to spend effectively.

3. Increase government spending

Government spending serves many purposes, including investments in
infrastructure, healthcare, human capital, unemployment benefits, pension
programs, and so on. A nation’s government may choose to spend more than its
revenues allow by running a deficit.

4. Fiscal policy
A budget deficit may be used to finance an expansionary fiscal policy, which
involves lowering income and corporate taxes (therefore reducing revenue for
the government) and increasing government spending on infrastructure and
investments to attract foreign capital and boost economic growth.

5. Higher taxes in the future

A current budget deficit that runs persistently often implies that the government
will need to increase taxes in the future to pay off the accumulated debt since
taxes are one of the primary sources of revenue for the government.

6. Higher interest rates and bond yields

In order to borrow large amounts, governments often offer higher interest rates
to investors and international banks that lend them money. Increased
government borrowing results in higher interest rates and bond yields since
investors and banks require compensation for the risk through interest
payments.

Budget Deficit – Theories

1. Ricardian Equivalence Theory
The Ricardian Equivalence Theory argues that using budget deficit or
borrowing to stimulate the economy exerts no effect. It relies on many
assumptions, including one that states that the government will increase taxes to
pay off the current deficit.
According to the theory, households take it into account while making
investment and saving decisions and choose to save more to compensate for the
future increase in taxes. Therefore, consumption in the economy decreases, and
the increase in government spending financed by a deficit does not impact the
economy.

2. Crowding Out Theory

The Crowding Out Theory states that an increase in government spending and
borrowing leads to a decrease in investments from the private sector. It is
because governments borrow by selling bonds to the private sector and by
borrowing from foreign sources, such as other countries and international
banks.
However, it often results in higher interest rates, as well as higher spending on
bonds by the private sector – which leads to lower funds for private sector
investments and a higher cost of borrowing (due to higher interest rates).
Therefore, the increase in government spending is often met with a relatively
smaller decrease in private sector investments, which offsets the overall effect
of the expansionary move.
A budgetary deficit is referred to as the situation in which the spending is more
than the income. Although it is mostly used for governments, this can also be
broadly applied to individuals and businesses.
In other words, a budgetary deficit is said to have taken place when the
individual, government, or business budgets have more spending than the income
that they can generate as revenue.

Types of Budget Deficits

There are three types of budget deficit. They are explained follows:

1. Fiscal deficit
2. Revenue deficit
3. Primary deficit

Fiscal Deficit
Fiscal deficit is defined as the excess of total expenditures over the total receipts,
excluding the borrowings in a year. In other words, this can be defined as the
amount that the government needs to borrow in order to meet all expenses.
The more the fiscal deficit, the more will be the amount borrowed. Fiscal deficit
helps in understanding the shortfall that the government faces while paying for
the expenditures in the absence of lack of funds.
The formula for calculating fiscal deficit is as follows:
Fiscal deficit = Total expenditures – Total receipts excluding borrowings

Impact of Fiscal Deficit

The following impacts of fiscal deficit should be kept in mind.

1. Unnecessary expenditure: A high fiscal deficit leads to unnecessary

expenditure done by the government that leads to potential inflationary
pressure on the economy.
2. Printing more currency by RBI for meeting the deficit, also known as
deficit financing, leads to the availability of more money in the market,
leading to inflation.
3. Borrowing more will hinder the future growth of the economy, as most of
the revenue will be utilised towards meeting debt payments.

Remedial Measures for Fiscal Deficit

Fiscal deficit can be reduced by the following ways:

1. Reduced public expenditure

2. Reduction in bonus, leave encashments, and subsidies
3. Increase tax to generate revenue
4. Disinvestment of public sector units

Revenue Deficit
Revenue expenditure is defined as the excess of total revenue expenditure over
the total revenue receipts. In other words, the shortfall of revenue receipts as
compared to that of the revenue expenditure is known as revenue deficit.
Revenue deficit signals to the economists that the revenue earned by the
government is insufficient to meet the requirements of the expenditures required
for the essential government functions.
The formula for revenue deficit can be expressed as follows:
Revenue deficit = Total revenue expenditure – Total revenue receipts

Impact of Revenue Deficit

Revenue deficit has the following impacts on the economy.

1. Reduction in assets: For meeting the shortfall in the form of revenue deficit,
the government has to sell some assets.
2. It leads to the conditions of inflation in the economy.
3. A large amount of borrowing leads to a greater debt burden on the
economy.

Remedial Measures for Revenue Deficit

The following remedial measures can be taken by the government in reducing the
revenue deficit.

1. By reducing unnecessary spending

2. By raising the rate of taxes and applying new taxes wherever possible

Primary Deficit
Primary deficit is said to be the fiscal deficit of the current year subtracted by the
interest payments that are pending on previous borrowings. In other words, the
primary deficit is the requirement of borrowing without the interest payment.
Primary deficit, therefore, shows the expenses that government borrowings are
going to fulfil while not paying for the income interest payment.
A zero deficit shows that there is a requirement for availing credit or borrowing
for clearing the interest payments pending.
The formula for the primary deficit is expressed as follows:
 Primary deficit = Fiscal deficit – Interest payments
Measures to reduce the primary deficit can be similar to the steps taken to reduce
the fiscal deficit as the primary deficit is any borrowings that are above the
existing deficit or borrowings.