- Finance Minister Tito Mboweni wants South Africa to adopt a zero-based budget.
- That would mean every year the budget is created from scratch, rather than using the previous year's budget as a starting point.
- All government departments will have to justify all their expenses, and show that it was worth the money.
- For more articles, go to www.BusinessInsider.co.za.
On Wednesday, Finance Minister Tito Mboweni will present a new, emergency national budget.
It won’t be pretty.
The new budget will have to reflect billions in lost tax revenue due to the lockdown, and large sums of extra money – not budgeted for in February – that government committed to support the economy and its citizens during the crisis.
Mboweni has warned that South Africa is now on track to have a debt burden bigger than its current GDP by 2024, which means that it may have to ask the International Monetary Fund (IMF) for help.
The only option is a deep cut to state expenses now, says Mboweni.
To do this, he wants to adopt zero-based budgeting.
What is zero-based budgeting?
Usually budgets work like this: The previous year’s budget is used as a starting point, and allocations to each department is increased or (very rarely) cut.
But with zero-based budgeting, every year you start from scratch.
Every line item is interrogated to see whether it is worth it, whether it will contribute to a company’s goals for the next year, and whether there may be a cheaper alternative. If a department can’t properly justify a previous cost, it is left out of the budget completely.
What are the benefits of zero-based budgeting?
Instead of automatically including past line items in a budget, careful consideration is now given to each cost – which should eliminate unnecessary expenses.
The approach also prevents the inclusion of items that aren’t core to a business, or do not align with its current needs. Often, budgets include expenses that were necessary a long time ago, but may not be anymore; a zero base should get rid of those.
And even if a cost is included, participants are forced to look for the cheapest alternatives to make sure that the books are balanced.
And the drawbacks?
It is extremely time consuming and takes real expertise for large organisations to draw up a budget from scratch every year.
There is also a big risk that expenses on unexciting, but core, functions that keep a company afloat and its customers happy, are hit – which could affect customer experience. For units that deliver intangible outputs (like HR, for example) it may be difficult to justify expenses that do not immediately result in increased profit.
Zero-based budgeting can also spiral out of control, and end up cutting too much out of a business.
Some analysts believe this is what happened with the takeover of the large food giant Kraft Heinz by the Brazilian private equity firm 3G Capital, one of the biggest proponents of zero-based budgeting. Critics say cost-cutting due to this approach came at the expense of investments in growth and new ideas, which resulted in big losses at Kraft Heinz.
Who uses zero-based budgeting?
Peter Pyrrh, an accountant at the technology giant Texas Instruments, is credited with inventing the approach in the 1970s.
Currently, there are more than 300 large global companies that have adopted it. The Wall Street Journal reports that Covid-19 has convinced more companies to turn to zero-based budgeting. This is because the crisis has upended the way businesses work, and traditional line items like travel and entertainment may require more scrutiny in a locked-down world.
In the US, former President Jimmy Carter used it in his home state of Georgia, and wanted to roll it out for the national budget in the 1970s. But according to Deloitte, the approach proved too complicated and time consuming for the US government, and also ineffectual.
Why does Mboweni want to adopt zero-based budgeting?
Mboweni sees zero-based budgets as a way to allocate “funds according to our revenue base, avoid as much as possible borrowing to fund the gap and live within our means”.
Starting from scratch and working through expenditure by line item – while also looking whether past expenses paid off - should certainly cut out some fat and may offer a better chance to balance government’s books.
Will it work in South Africa?
For zero-based budgeting to work, every department will have to justify all of their expenses – from scratch, every year, says Nazmeera Moola, head of SA investments at Ninety One and recently named as a member of the presidency’s State-Owned Enterprise Council.
This is a massive exercise, and the South African government doesn’t have the resources and skills to do this, she told Business Day TV.
Peter Attard Montalto, head of capital markets research at Intellidex, also believes that Mboweni doesn’t have any realistic expectation that it will happen – instead, he is using the mention of zero-based budgeting more to try and shift the mindset in South Africa.
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