Tax and Fiscal Policy

The case for Zero-Based Budgeting in the public sector


The public sector is in a mess.

The latest round of tax hikes have taken levels to their highest in over seventy years while government debt has swollen to 96% of GDP. And yet there is little to show for this largesse. NHS waiting lists are over six million while a generation of schoolchildren have fallen so far behind they may never catch up. From waterways to criminal justice, never before have so many billions delivered so little for so few.

The causes of failure are manifold and well known: complexity, inertia, bureaucracy, mission creep and powerful special interest groups.

Where do you begin to tackle such a vast problem? The answer may lie in a radical private sector technique called Zero-Based Budgeting (ZBB). While ZBB has been around since the 1960s, it has enjoyed a recent revival. It is now widely used by private equity and the corporate sector.

The essence of Zero-Based Budgeting is that you start with a budget of zero for everything. Then, every item of spending has to be justified before it is added back. This is very different from traditional budgeting, which calls for incremental increases or cuts to budgets.

Thus, ZBB reverses the misallocation of resources that creeps in over time. At a stroke, it eliminates legacy budgets that can no longer be justified.

For example; imagine a hospital with four budgets: Oncology; Maternity; Equality, Diversity & Inclusivity (EDI) and Covid measures. Conventional budgeting would salami-slice, say, a few percent off all four budgets each year. Thus, those wasteful legacy budgets would hang around for years, no doubt morphing into new and equally pointless initiatives in the meantime. By contrast, ZBB would ideally just take the Covid and EDI budgets straight to zero and up the maternity and oncology spend.

At its best, what ZBB does is to refocus organisations on their core aims. It could be a way to defeat the pervasive problem of public sector mission creep – particularly the scourge of woke-ism. Moreover, with its focus on wasteful legacy spending, ZBB is particularly suitable for our post-Brexit and post-Covid world, quickly defunding Covid relics and EU leftovers.

While developed for private businesses, ZBB is perfectly suited to the public sector. As per Forbes: ‘[ZBB] works really well for any industry where customers have no choice but to buy your company’s product and demand for that product never stops growing.’

Furthermore, ZBB has a track record of cutting through in times of high inflation and economic adversity. It has been used everywhere from America in the 1970s to Brazil in the 2010s; when both nations faced their worst economic crises in a generation.

In these cases, ZBB forced managers to prioritise. Doing so is popular because it directs more to frontline services. Look at the outrage at the explosion in NHS bureaucracy. Polls have shown the vast majority of voters reject identity politics. Would you rather the police investigated crime, or ‘non-crime hate incidents’? Would you rather more nurses on the wards, or patronising classes on gender pronouns? Prioritising like this is a vote-winning no-brainer.

Furthermore, ZBB’s recent private sector revival has made it even better. Modern ZBB incorporates deeper employee engagement and data-driven decision-making. There is even specific software for the job. Thanks to its popularity, thousands of managers, accountants and consultants now have the skills to implement ZBB.

That private sector know-how is vital; because something as radical as ZBB requires thorough implementation. And crucially you need outsiders with the authority to take on vested interests. When done effectively, the resulting cultural change is just as important as the financial change.

The result, according to the FT, is ‘a revolutionary mindset’, under which an organisation feels ‘as if it was experiencing a permanent revolution’ and in which everyone ‘approaches spending with fresh eyes.’

A shake-up of this magnitude is exactly what Jacob Rees-Mogg (and Dominic Cummings previously) have been trying to achieve within the civil service.

While that may sound daunting, ZBB actually re-energises staff. By setting tough targets and pushing autonomy to the front line, employees get the chance to question every spending decision. They don’t have to do pointless tasks just because they have always been done that way. And by simplifying an organisation and refocusing on core objectives, workers feel more motivated and united around a set of common goals. That simplicity brings greater autonomy and less bureaucracy.

The outstanding policy success of recent years has been the vaccine rollout. It was so well executed that it briefly made Britain the envy of the world. The rollout was led by Kate Bingham. Bingham was not a civil servant, but a “No-nonsense venture capitalist who knew little about vaccines and even less about government procurement.” She represented the best of Private Equity management; setting tough targets and accountability. Then she pushed authority to the front line, empowering local managers and GP surgeries to drive the implementation.

With ZBB we can repeat the trick. Private equity managers like Bingham know how to implement revolutionary budgeting. And best of all they can by-pass the hidden agendas, special interests and excessive bureaucracy of civil service insiders. That means tough targets and no excuses.

Corporate case studies of successful ZBB programmes emphasise the importance of defining in advance where budgets savings will go. Doing so is a great way to get everyone on board. If workers understand that half the savings they find will go to pay rises and half to tax cuts for working people, then they will take part enthusiastically – especially if it comes with less bureaucracy and more autonomy to boot.

ZBB is no silver bullet. ‘Big Government’ is popular with voters; special interest groups would still find ways to justify spending on their pet projects; and even without waste, demographic factors (population ageing) still lead to higher spending on healthcare, old-age benefits and social care. Still, with the cost, quantity and quality of government out of control, we have to start somewhere.

 

Andrew Hunt is a writer, investor and policy blogger.


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