The big problems with Treasury’s ‘zero-based budgeting’ plan

Finance minister Tito Mboweni recently floated a new budgeting approach for South Africa, noting that National Treasury would adopt a ‘zero-based budgeting’ method to the country’s finances.

Zero-based budgeting refers to starting the budget process with a clean slate, and matching financial needs with available resources.

This allows budgets to be more flexible and responsive to financial requirements over a given financial year, which in theory allows an institution to shake off legacy budget burdens, and divvy up finances without having to consider previous demands.

Traditional budgeting is typically based on incremental increases of previous budgets, looking only at new expenses, and not the justification for old expenses.

However, while zero-based budgeting is a lofty idea for South Africa’s budgeting needs, Intellidex analyst Peter Attard Montalto says that there are some major stumbling blocks in its application – most significantly that it can only be applied to about 25% of the budget.

“There is substantial ring-fencing (in the budget) – of around 62.8% that cannot be touched,” he said.

“Of this, 32.7% is public sector employment levels; debt service costs are 12.7%; and 17.4% for social security grants. If one starts considering political ring-fencing of things like non-wage related higher education, health and education spending (approximately 12.1% in total) then we get up to 74.9% of the medium-term expenditure framework (MTEF) is ring-fenced,” he said.

This leaves only R450 billion approximately to see zero-based budgeting applied to, the analyst said – a large part of which is infrastructure as well as core administration costs at various levels of government.

This is not the only problem. Another point of contention is that it is unclear how this approach would work each year, when the budget works on locking in three year expenditure cycles in the MTEF negotiations between National Treasury and departments.

“If future years plans are continually being ripped up, this creates planning and uncertainty problems,” Attard Montalto said.

Further, the analyst said that the budgeting processes under cabinet do not have the capacity to consider political balancing of every single line item of the budget.

“The budget, in reality, is the sum of a vast number of individual political considerations and balancing each MTEF cycle which cannot merely be all done again.”

Treasury does not internally have a full slate of metrics per line item of the budget that would be needed for zero-based budgeting, he said.

Finally, he said it “opens pandora’s box” in areas that are underfunded, such as health and education, which would require budgets to be inflated by as much as 50% to reach international per capita levels.

What’s in a name?

Attard Montalto said that ‘zero-based budgeting’ is being used as a buzzword to handle a politically challenging space. What people need to take away from it, is to not get their hopes up for significant changes.

“National Treasury has already been talking since the MTBPS last year, about needing to ‘cut programmes rather than trimming around the edges’. This is clearly a politically challenging narrative, whereas ‘zero-based budgeting’ sounds cool.

“The nature of cutting programmes themselves is important; however, for markets to understand the complexity politically of whats going to have to happen to achieve the active scenario, the government will have cut off politically useful and vested interest connected provisioning,” he said.

Attard Montalto noted that National Treasury previously requested up to 7% cuts from departments over the next three financial years. However, in the end these turned out to be only around 2-3% cuts in the MTBPS, and market optimism was misplaced.

“As such, we should see zero-based budgeting  in a similar light – a stretch goal of National Treasury that will deliver something less.”

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