The most widely discussed proposals for reforms budgetary are as follows:
1. Program budgeting,
2. Performance budgeting,
3. Zero-based budgeting (ZBB) and
4. Planning- programming-budgeting system (PPBS)
1. Program budgeting
The Second Hoover Commission in the USA by American company in 1952 introduced the term Program Budgeting. According to this budget system, the objectives of budgeting system was focus on the detail information about the program that held in a country. It is a program based budgetary process. Generally, it is taken as the synonyms of the performance budget. In the program budgeting, the budget has made by a framework of performance to attain a particular objective which means there is no overlapping of objective.
The process of program budgeting is shown by the following chart:
Output =====>> Activities =====>> Input
· Program budgeting provides a more useful basis for evaluation of requests by Department.
· The program approach stresses the end product, such as eliminating poverty, providing employment opportunity.
· Program budgeting stresses the relationship between various outputs or programs and the inputs necessary to produce them.
· By James Cut: “Program budgeting is a set of procedures designed to improve the basis for policy decision and to secure a more effective and efficient allocation of scarce resources in the public sector, the output of which does not generally command market price”.
· By Burkhead: “In program budgeting, the principal emphasis is on a budget classification in which functions, programs and their sub-divisions are established for each agency and these are related to accurate and meaningful financial data. Performance budgeting involves the development of more refined management tools, such as unit costs, work management and performance standards”.
Features of Program Budgeting
Key features of program budgeting are as follows:
a) Based on program,
b) Single objective,
c) Whole expenditure is allocated to obtain the particular objective,
d) Policies are adopted to achieve the goals/objectives and
e) No overlapping of objectives because it emphases on the need of the overall management programs.
1) Performance Budgeting
Performance budgeting system was also developed by the American Second Hoover Commission in 1948. The term performance budget was made popular by an official US Commission (Hoover Commission) that reported in 1949. This system of budgeting was first applied in the U.S. Department of Defense. It recommended for the change in emphasis in budgeting from inputs (measured in money terms) for specified objects to outputs (measured in physical terms) where feasible (Singh, 2010:365).
It involves “(a) Casting budget categories in functional terms as opposed to objects of expenditure, and (b) providing work cost measurements to facilitate efficient performance of prescribed activities reducing as far as possible, the work cost data to discrete measureable units”. The basic idea of performance budgeting is to change the emphasis in the budget from the objects of expenditure to functions, programs, activities and projects. It is essentially a management approach to government budgeting. According to UN Manual, “It is intended to highlight management considerations in budgeting and in so doing to bring out the most significant economic, financial and physical aspects of the budgeting activity”.
Definitions
· By Jesse Burkhead (1956): “A performance budget is one which presents the purposes and objectives for which funds are requested, the costs of programs proposed for achieving these objectives and quantitative data measuring the accomplishments and work performance under each programs”.
· By A.E. Buck (1949): “A performance budget should be substituted for the present budget, thus, presenting in a document of much briefer compass the government’s expenditure requirements in terms of services, activities and work projects rather than in terms of the things bought”.
Limitations of Performance Budgeting
Some limitations of performance budgeting are as follows:
a. This system ignores the qualitative evaluation of the government functions, activities and programs.
b. It does not have its universal applicability.
c. This system has limited scope in the sectors of the government as law and orders, defense, external affairs and so on.
d. This system is useful only if there are well-organized departments and organizations to identify with definite activities, projects and programs.
Difference between Program and Performance Budgeting
The main difference between performance budgeting and program budgeting is that the first uses the techniques of cost accounting and scientific management while the second derived its tools from economies and system analysis.
In simple term, we can state that performance budgeting is a system of presentation of public expenditure in terms of functions, programs, performance units, viz. activities, projects, etc. Program budgeting is related to a system of classification in terms of functions, missions and programs in order to integrate planning programming with budgeting. “In essence, program budgeting emphasizes the need for overall program management in the light of long-term objectives. The keynote of Performance Budgeting, on the other hand, has been an improvement of internal management on the basis of volume of work to be accomplished (during a year and its cost (Thavaraj, 1978:313))”.
The performance budgeting mainly focuses the objectives and goal of a project. It tries to achieve the goal of a project. The performance budgeting is shown by following chart:
Goal
Output
Activities
Input
Key major points are as follows:
· First championed in 1949 by Hoover Commission in US.
· Performance budget as prescribed by the Hoover Commission were to provide more comprehensive and intelligent information to the President, the Congress and the public.
· The proposal calls for changing the emphasis in budgeting from inputs, usually measures as money expenditures for specified objects, to outputs measured in physical terms where feasible.
· It was intended to shift the focus away from the inputs of government to its function, activities, costs and accomplishments.
· A performance budget, rather than emphasizing items of expenditure, should concentrate on expected outputs resulting from a specific function or activity.
· Under performance budgeting, attention is centered on the function or activity on the accomplishment of the purpose.
· The 1951 US Budget may be described as the first performance budget that provided: (a) listings of the programs or activities imbedded within a budget account, (b) separated operating and capital expenses and established breakouts for grants and other fixed charges.
· Performance budgets are expected to align programs and activities in a uniform manner and assist managers in making trade-offs between-and-within particular programs.
· Experts are of the opinion that performance budget could be instrumental in correcting budgeting and accounting weakness and improving the administrative an oversight of programs.
Handa (1979:11) has used the following diagram to distinguish between performance and program budgeting:
The use of the inputs of vector I results in activities as shown in vector II. Output of vector III is the consequence of these activities. Inputs-activities-output sequence is the subject of performance budgeting. Program budgeting encompasses one more element, namely, the social state which represents the ultimate objective of the preceding three states.
Diagram: 6.4 Performance Budgeting and Program Budgeting
The key features of the system of program classification “consists in structuring the total task into homogeneous and coherent units, big and small, in order to facilitate decision-making and budget execution at various levels of administration”. According to the UN Manual, the structure of a program classification consists of (a) function, (b) program, (c) projects and (d) activities. A program is a sub-division of a function and is separated into capital and current expenditure program. Projects and activities are the two sub-divisions of a program. Let us take an example, if agriculture is a function, production of fertilizes is a program. In relation to this program, a project is the construction of the plant. Research and investigation is an activity. The program and its sub-division such as projects and activities provide convenient operational units for budget formulation, management and program analysis. This system easily related to the workload data, use pattern of human and material resources, and the financial outlay. When all these elements together with the operation are integrated they constitute the performance classification which enables the determination of the standards of economic efficiency in the implementation of public sector projects. A performance classification is an indispensable tool of program budgeting.
· Stages of Program and Performance Budgeting
Program and Performance budgeting involves the following five stages:
1) Objectives: The objectives of individual programs are to be clearly and explicitly spelled out in quantitative and measurable terms. Those objectives are to be viewed against long-term aims and goals of government.
2) Analysis: There is need to consider how the objectives of long-term strategy and short-term tactics are to be achieved. Possible alternative programs are to be identified. In the selection of programs, costs and benefits of the alternative programs have to be worked out.
3) Budget classification: The programs taken up for implementation are classified with reference to a classification system so as to facilitate allocation of resources to related programs. The budget so prepared must go through the prescribed procedure of presentation, approval and sanction.
4) Organizing: The roles of different organizations in achieving the specified objectives are demarcated and the financial rules and accounting system are remodeled to effectively implement the programs.
5) Evaluation: Criteria for evaluating the programs with reference to the objectives are evolved and proper information and reporting systems on financial, physical and economic data relevant to the programs installed so as to monitor the programs during execution and evaluation on completion.
The impact of budgeting can be evaluated from the following basis:
· Volume indicator/workload data
· Performance indicator/ratio
· Unit cost
· Effectiveness analysis
· Social cost-benefit analysis
Importance of Program and Performance Budgeting
The importance of program and performance budgeting is as follows:
i. To determine the national goals,
ii. To identify the extremely essential goals among the national goals,
iii. To find out the alternatives of solving the goals with minimum goals and with effective way,
iv. To clarify the service generation due to the program implantation.
The program and performance budgeting is a system of budgeting in which goals are set activities are performed and finally the results are obtained. The impact of social status is also analyzed. This type of budgeting was originally adopted in America at first. Nowadays, its implementation is found mainly in UK, Canada, India and Nepal.
· Pre-requisites
To implement the program and performance budgeting effectively, the following pre-requisites should be met:
1) Before implementing P and PB, it is essential to indicate managerial tools, work measurement, performance standards, etc.
2) The essential statistical data should be available easily.
3) A well-developed accounting system and cost-benefit analysis are extremely essential for P and PB.
4) The division and sub-division of social expenditures and topics should be done effectively.
Thus, program budgeting proposals were over-ambitious. The advocates of this system promised too much and were naïve about the nature of budgeting. Even the USA dropped the formal program budget only after five years in 1971. Despite failures, the efforts at introducing this system, particularly n developing countries, have improved performance measurement and auditing, and have indirectly improved resource allocation. In sum, although the term performance budgeting has lost favor because of the difficulties of implementations, its elements-the categorization of spending performance and the view of the budgets as a planning and policy instrument remain central to better public budgeting.
Difference between Performance and Program Budgeting
Nature
Performance budgeting
Program budgeting
1. Analytical aspect
Emphasis on outlays performance relationship
Emphasis on quantitative techniques
2. Budget and planning
Separate
Integrated with budget cycle
3. Timeframe
1 year
5 year
4. Evaluation aspect
Quantitative measurement of performance
Emphasis on evolving information system
5. Intended benefit
Measurement of outlays and cost effectiveness
Allocative efficiency
6. Techniques
Uses the techniques of cost accounting and scientific management
Uses the techniques from economic and system analysis
7. Objectives
Overlapping of objectives with organizational units
No overlapping of objectives with organizational units
2) Zero-based budgeting (ZBB)
The zero-based budgeting is the latest technique of budgeting as a managerial tool. In simple words, while reevaluating every program, the government must not think in terms of increase or decreases in spending but start from a zero base so that it must be justified freshly. The mere fact that a program has been carried on for many years is no justification for its continuation in future as well. This approach to budgeting is never followed literally (Singh, 2010:368).
One may go back to 1924 and find the trace of the concept of zero-based budgeting (ZBB) in the writings of the noted English authority Hilten Young who stressed the need for annual justification of budget programs. But it was first applied experimentally in the US Department of Agriculture in 1962. A fresh beginning was made in the 1970s. Peter Pyher is known as the father of ZBB (Singh, 2010:368).
A modified version of ZBB was introduced by the Federal Government of USA in 1977 by then President, Jimmy Carter when he was the Governor of Gorgia for controlling State expenditure (Lekhi, 2009:238).
It is starting from a scratch (zero-based). The normal technique of budgeting is to use previous year’s cost levels as a base for preparing this year’s budget. This method carries previous year’s inefficiencies for the present year because we take last year as a guide and decider. “What is to be done this year when this much was the performance of the last year”?
In zero-based budgeting, every year is taken as a new year and previous year is not taken as a base. The budget for this year will have to be justified according to present situation. Thus, zero is taken as a base and likely future activities are decided according to the present situations (Lekhi, 2009:238).
Concept of Zero-based Budgeting
A budgeting process under which existing programs are not funded automatically and their contribution is justified as a part of the annual budgeting system. Zero-based budgeting (ZBB) is a way to justify its budget requests from the bottom up, evaluating alternative program packages and ranking programs “as to select the best alternative and allocate resources. Prof. Musgrave defines it as a team and suggests that the idea is to consider the budget as a whole rather than to examine incremental change only”.
· By Peter A. Phyer: “A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (Hence, zero-based) and shifts the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities be analyzed in decision packages which are evaluated by system analysis and ranked in order of importance”.
In short, zero-based budgeting is that system in which no previous base is taken. Every activity is entirely taken as new considering that nothing has been done in the previous year. Some important points are as follows:
· In 1977 President Jimmy Carter introduced ZBB in USA.
· The basic philosophy behind the zero-based budgeting is that the existing levels of expenditures should not be taken for granted.
· All spending programs be re-examined and justified each year.
· ZBB in theory requires expenditure proposals to compute for funding on an equal starting from zero bases.
· It prepares a detailed identification and evaluation of all activities together with alternative and spending necessary to achieve desired plans and goals.
· ZBB requires looking below the base, evaluating the efficiency and effectiveness of current operations and comparing the needs of one program against the needs of other programs that might be of high priority.
· It also requires looking to a greater involvement of program managers in budgeting as a way to identify new efficiencies and to incorporate better analysis into budget decision-making.
Characteristics of ZBB
The following are the main characteristics of the Zero-Based Budgeting:
1) Identification of Decision Unit: A decision unit may be program of a project. In each and every case decision units has an identification manager. The decision unit has the responsibility to implement a particular allocation.
2) Decision Package: Decision package has revolutionized the budget concept. It is a document that identifies describes each decision unit so that the management can evaluate it and rank it. The decision package is a statement of objective, current operations, alternatives and possible level of funding for each unit.
3) Review and Rank: Ranking is done by an individual manager in order of priority. While ranking a decision, three aspects are considered essential. These are as follows:
· What are the objectives?
· How much resources are necessary?
· How many major goals are to be achieved?
4) Re-examination of Program: ZBB requires programs. It examines the structure, function and activities. It is never an increase or decrease over previous years.
Need of ZBB
As there is a manifold increase in the public expenditure in both under-developed and developed countries, thus, the urgent need has been felt for augmenting the productivity of public expenditures. Therefore, most of the governments have switched over from the traditional expenditure budgeting to one or another form of rationalistic budgeting like program budgeting, performance budgeting, planning-programming-budgeting system.
Pre-conditions of ZBB
The introduction zero-based budgeting (ZBB) is not so easy as it appears. It requires a tremendous paper-work and detailed analysis. Thus, the organization should be able to provide all information including the cost data necessary for introducing ZBB. Moreover, the successful implementation of the zero-based budgeting also depends upon the availability and acceptability of the concept in letter and spirit. Obviously, this acceptance would be associated with the organization where the new system has to be implemented. It is so because any apathy on the part of the people could lead to a situation in which priorities relating to the existing schemes may not be assessed accurately.
In short, it requires the following pre-conditions:
i. Identification and sharpening of objectives,
ii. Selection of best alternative through cost-benefit and cost effectiveness analysis,
iii. Examination of various alternative ways in order to achieve success of objectives,
iv. To allot priority to various objectives and programs,
v. Switching of resources from programs with low priority to high priority,
vi. To identify programs having more utility.
Steps in ZBB
The various steps are involved in zero-based budgeting, they are as follows:
1) Objective: The objective of budgeting should be determined. When the objective is clear, then efforts will be made to achieve that objective. Different organizations may have different objectives. One concern may try to reduce the expenditure on staff, another may try to discontinue one project in preference to another. So, the first step will decide about the object and then other steps will be possible.
2) Decision for Operation: The extent to which zero-based budgeting is to be applied should be decided. Whether it should be used for all operational areas or it should be applied in some areas only should be decided beforehand.
3) Decision Package: The next step in ZBB is developing of decision packages. A decision package is “a document that identifies a specific activity in such a manner that management can evaluate and rank it against other activities competing for limited resources, and decide whether to approve or disapprove it”.
4) Cost and Benefit: Cost-benefit analysis should be undertaken. We should consider the cost involved and the likely benefits to accrue. Only those projects should be taken first where benefit is more as compared to the cost involved. Cost-benefit analysis will help in fixing priority for various projects on the basis of their utility or ranking of decision packages.
5) Selection and Approval: The final step involved in zero-based budgeting is concerned with selecting and approving decision packages and finalizing the budget.
Benefits/Advantages of Zero-based Budgeting (ZBB)
ZBB is a revolutionary concept and is relatively a new management tool for planning and control of activities. It involves people at all levels in the organization and promotes team spirit. The plans and budgets based upon ZBB are much improved those based upon traditional budgeting. There are a number of benefits that arise from zero-based budgeting.
Some of the important advantages of ZBB are as follows:
1. Proper Allocation of Funds: It enables management to allocate funds according to the jurisdiction of the program. The priority can be fixed for various activities and their implementation will be in the same order.
2. Improvement in Efficiency: Zero-based budgeting improves efficiency of the management. Every manager will have to justify the demand for resources. Only those activities will be undertaken which will have justification and will be essential for the business.
3. Identification of Economical Areas: Zero-based budgeting will help in identifying economical and wasteful areas. Emphasis will be given to economical activities and alternative courses of action will also be studied.
4. Optimum Use of Resources: The management will be able to make optimum use of resources. The expenditures will be undertaken only when it will have justification. A list of priorities prepared and cost-benefit analysis will be guiding principle in fixing the priority.
5. Determining of Utility: Zero-based budgeting will be appropriate for those areas whose output is not related to production. It becomes difficult to evaluate the performance of those sided which are not directly related to production but undertake other activities. This technique will be helpful in determining the utility of each and every activity of the business.
6. Useful to Attain Organizational Goals: Budgeting will be related to organizational goals. Something will not be allowed the plea that it was done in the past. Only those things will be allowed which will help in realizing organizational goals.
Limitations of Zero-based Budgeting
In spite of many advantages, there are a number of limitations arising mainly from difficulties in operation of ZBB.
Some of the important limitations are as follows:
· Computation of cost benefit analysis, which is essential for ZBB, is not possible in respect of non-financial matters.
· Difficulty in formulation and ranking of decision packages as every manager may not have been necessary expertise.
· The system of zero-based budgeting has no scope to adjust for the changes, and thus, flexible budgeting is not possible.
· It involves a lot of time and cost of operating ZBB is also very high.
4. Planning-Programming-Budgeting System (PPBS)
The planning-programming-budgeting system was introduced in the United States Defense Department during 1961-62 and further, its extension to all federal agencies was made by the presidential order in 1965. PPBS incorporates some of the features of performance budgeting and goes further. Elements of PPBS include (i) emphasis on programs to attain objectives rather than on inputs (money expenditure), (ii) comparison of wide range of alternative programs and elements, (iii) long-range and medium-term projections, (iv) measurement of performance, and (v) supplementary reporting on performance. PPBS make an effort to gain for budgeting some of the mystique of planning.
PPBS was adopted in some form in a number of countries. Many developed countries such as Australia, Austria, Belgium, Canada, France, Japan, New Zealand, Norway, the UK and the USA introduced some elements of PPBS. Many developing countries including Korea, Malaysia, the Philippines, Sri-Lanka, India, Honduras, Guatemala, Panama, Paraguay, Ghana and Botswana also adopted it. But the introduction of program budgeting has generally meant more of a cosmetic than substantive change in budgets and has remained confined to terminology and improvements in classification. Thus, the outcome has been mixed. For example, Sri Lanka attempted to introduce performance budgeting in 1969 but abandoned it after 1976. The implementation of the PPBS in the US government did not deliver the revolution it promised, through, while introducing the system in 1965, the President Johnson had claimed that it was a “ very new and very revolutionary system ” through which the full promise of a PPBS has been disappointing and it has been so for the following reasons:
i. It proved to be hard to define programs and relate them to national objectives because an activity often serves several purposes and is viewed differently by various officials and interest groups.
ii. The measurement of output is fairly easy in some activities but almost impossible for traditional function such as law and order, defense, foreign relations, etc.
iii. It is not possible to consider a wide range of alternative ways of attaining ends in most cases.
The planning-programming-budgeting system (PPBS) helps to integrate the long range planning of the government activities and arrange to schedule the specific activities in the future. To this end, budgetary system makes the use of various quantitative techniques in the evaluation of different proposals of the budget. For a systematic qualification of costs and benefits, two techniques named system analysis and cost-benefit are used. Programming involves the relationship of inputs and outputs to achieve the desired objectives.
Stages of Planning-Programming-Budgeting System
It consists of following stages as:
i. Various goals or objectives of fiscal measures and policies have to be defined. A series of programs and schemes have also to be formulated which can help to achieve the desired results of fiscal objectives.
ii. The various projects, programs and schemes have to be analyzed in quantitative terms through the use of cost-benefit technique or the system analysis.
iii. The current policies and program have to be related to the future costs, benefits, problems and other developments. A perspective aspect of budgetary programs makes the budget an integral part of the development planning in the economy.
iv. A series of programs and schemes have to be promulgated which help to achieve the desired result of fiscal objectives.