Zero-Based Budgeting for 2016 and beyond!

Undeterred by the upcoming election, a confident Finance Minister Ravi Karunanayake has declared that the 2016 fiscal program will be presented under the more effective ‘Zero-Based Budgeting’, claiming that past practices had been imprudent.

The new method and its benefits, along with the ills of previous practices, came under discussion at last week’s Cabinet meeting, where preparations for the 2016 Budget were approved.

Finance Minister Ravi Karunanayake has informed the Cabinet that there has been a significant amount of carried forward liabilities settled during the following budget year, a practice which has been carried out for decades.

“Due to this reason, the targets of development programs have not been reached on time and as a result, allocated resources for the year are not sufficient to meet the requirement of the budget year,” the Government said.

With these developments, cash flow management of the Treasury has become extremely difficult, the Cabinet was told.

In view of this predicament, the interim Government has decided to introduce the Zero- Based Budgeting method as a tool of budget preparation and implementation from 2016 onwards.

“With this method it is expected to manage public expenditure prudently,” the Government said.

Accordingly, the Department of National Budget will issue a Budget Call 2016 including guidelines of preparation for this year’s budget within the targets of a Medium Term Budgetary Framework.

Furthermore, all spending agencies are requested to prepare their estimates for 2016 under the Medium Term Budgetary Framework by using the Zero-Based Budgeting method in which reviewing missions, objectives and functions of ministries, departments, institutions and assessing the relevance of all activities being carried out so far in the current context are considered integral elements.

An Annual Budget will be prepared with a starting point of 0 and expenditure will be limited to approved budgetary provisions. Accordingly, any issue associated with carry forward expenditure should not arise. Resource allocation to the ministries is based on sectoral ceilings.

The Ministry of Finance is in the process of formulating the annual national budget for 2016 within the Medium Term Budgetary Framework for 2016-2018 in consultation with the relevant line ministries.

The consultation process with the spending agencies will commence during the first week of August 2015.

Minister Karunanayake informed the Cabinet that it had been planned to prepare the Budget for the year 2016 to achieve the following objectives:

Reduce the budget deficit to 5.5% of Gross National Production; maintain the state investment level between 6-8% of the GDP; encourage to make private sector investment between 22-24% of the GDP; maintain the total investment level of the economy at 30% of the GDP and achieve economic growth beyond 8% in the medium-term framework of 2016-2018.

What is Zero Budgeting?

‘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 is analysed for its needs and costs. Zero-based budgeting is an approach to planning and decision-making that reverses the working process of traditional budgeting. In traditional incremental budgeting departmental managers justify only variances versus past years based on the assumption that the “baseline” is automatically approved.

(Source: Daily FT / FT.LK)