How Zero-Based Budgeting Can Save the Public Sector
Updated: Jun 16, 2022
Shorter summary articles on this paper were featured on CapX and the IEA Blog. Links here:
The case for Zero-Based Budgeting in the public sector - CapX
The case for Zero-Based Budgeting in the public sector — Institute of Economic Affairs (iea.org.uk)
· Zero-Based Budgeting (ZBB) is a radical budgeting tool developed by the private sector. It has a proven track record of delivering in times of economic adversity and high inflation.
· It is the perfect tool for the moment: with the ability to cut costs while improving productivity and delivery of core tasks.
· As well as saving money quickly, implementing ZBB transforms cultures and re-energises staff. It increases autonomy, simplicity and refocuses organisations on their core aims.
· The ethos of ZBB can drive the desired cultural revolution across the public sector while slashing bureaucracy, mission creep and wasted resources on issues such as woke-ism and legacy Covid measures.
· ZBB could work across the entire public sector, ideally operating on a rolling basis.
· To make ZBB a success, implementation and messaging are crucial. It is vital to emphasise the cultural change as much as the financial. ZBB should make public sector workers feel more empowered and energised by their work.
What is Zero-Based Budgeting?
Zero-Based Budgeting (ZBB) is a radical approach that starts with a budget of zero across every department. Then, every item of spending has to be justified if it is to be added back.
This is very different from traditional budgeting, which calls for small incremental increases or cuts to budgets. Thus, traditional budgeting only analyzes new expenditures, while ZBB starts from zero and calls for a justification of recurring expenses in addition to new expenditures.
ZBB has been around since the 1960s, when it was developed by Peter Pyhrr, an accountant at Texas Instruments. It has enjoyed a revival over the past decade thanks largely to its use by the Brazilian buyout group, 3G Capital. It is now widely used by Private Equity and large corporations, such as Unilever.
Now is the moment for ZBB
The value of ZBB is that it prevents the misallocation of resources that creeps in over time. It is particularly effective at eradicating legacy spending that can no longer be justified.
In doing so, ZBB refocuses organisations on their core aims. Thus it, is a great way to defeat the pervasive problem of public sector mission creep - particularly to tackle woke-ism and identity politics.
With its focus on eradicating legacy budgets that are still hanging around, ZBB is perfect for the post-Covid world, where many are still running Covid budgets and Covid responses.
ZBB has a great track record of cutting costs quickly and effectively in times of high inflation and economic adversity. It was used by the US in the 70's, China in the 90's, and frequently in Brazil.
Further, its recent private sector revival has vastly improved ZBB. Previously it was a very blunt instrument; But ZBB today incorporates better employee engagement and utilises data-driven decision-making. There is even specific accounting software for the job.
Thanks to its popularity, thousands of managers, accounting firms and consultants (including Deloitte, Accenture and McKinsey), now have the skills to properly implement ZBB.
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.'
How ZBB can move us on from Covid and win the woke wars
Imagine a hospital with four budgets: Oncology, Maternity, Diversity & Inclusivity (EDI) and Covid measures.
Conventional budgeting would salami slice say, 2% of oncology and maternity, and 5% off EDI and Covid. Thus, those wasteful legacy budgets would hang around for years, no doubt morphing into new and equally pointless initiatives in the meantime.
ZBB would just take the Covid and EDI budgets straight to zero and up the maternity and oncology spend. Job done.
More Kate Bingham, Less Sir Humphrey
The outstanding success of the Johnson era so far 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 right down 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.
Then, just like the vaccine rollout, we can push authority down the chain as far as possible, right down to front-line staff and local managers. They know and understand the details of budgets, and empowering them will make this reform a partnership with staff rather than the usual confrontation. This is how ZBB works: give staff some basic guidance and tough targets, then let them get on with it.
ZBB drives cultural transformation and greater autonomy at every level
For those implementing ZBB, the resulting cultural change is just as important as the financial change.
When ZBB is implemented successfully, every single employee throughout the organisation experiences a dramatic shift in culture; with more accountability, greater autonomy, a total focus on delivery and an end to mission creep.
The result, according to the FT, is ‘a revolutionary mindset, under which an organisation feels ‘as if it 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.
When implemented properly, ZBB should increase autonomy by decentralising authority and empowering staff. Directors who attempt to micromanage budgets are doomed to failure by their lack of detailed knowledge. Productivity gains are more likely when divisional bosses are given tough targets and left to get on with it.
ZBB Can Inspire and Re-energise Public Sector Employees
When implemented properly, ZBB rekindles employee engagement and fosters an ownership mindset. Employees get a chance to question every spending decision. They don’t have to do pointless tasks just because they have always been done that way. Excessive bureaucracy, complexity and surveillance sap employees of energy and enjoyment.
By simplifying an organisation and refocusing on core objectives, employees feel more motivated and united around a set of common goals. That simplicity also means greater autonomy and less bureaucracy.
ZBB is most effective as a rolling process over Several Years
While ZBB can be financially and culturally rewarding, it is more time-consuming than conventional budgeting. Furthermore, after two or three years, the benefits begin to diminish, because you have already weeded out most of the wasteful practices and redirected resources to the good stuff.
If you keep doing it continuously, you may end up cutting important things. Hence, take a break and repeat in a decade's time.
Therefore the best way to implement ZBB is as a rolling process. For example, you may do it across one third of departments at a time, with the process running over three years; then rolling out over another third of departments, then the final third; before returning to the original third for a fresh round of ZBB.
Know in advance what you’re going to do with the savings and tell everyone
Corporate case studies of successful ZBB programmes emphasise the importance of defining in advance where the budgets savings will go.
This is a great way to get everyone board. If employees believe the savings they find will go to pay rises and tax cuts, then they are likely to take part enthusiastically – especially if it comes with less bureaucracy and more autonomy to boot.
I would suggest pledging in advance to spend 50% of any savings on salaries and 50% to go to tax cuts for working people.
Messaging is Crucial
ZBB is a great way to save money and improve delivery by challenging waste, idleness and special interest groups.
Government needs to cut back and sharpen public service delivery. BUT what it must avoid doing is repeating the playbook of Theresa May's 'Cuts' and 'Austerity.'
Here are three ways to achieve that:
1 - Emphasise the change to public sector culture and delivery rather than the cost savings. This revolution is about simplification, doing the important things well, cutting waste, greater autonomy, and rediscovering the purpose of public service.
2 – Call it 'Smart Parsimony.' ZBB is is more intelligent than blanket cuts or 'austerity'. Parsimony is a virtue, and everything has to be 'smart' these days (smart finance, smart meters, smartphones, etc).
3 – Adopt the language and approach of Marie Kondo, and her global best-seller, 'The Life-Changing Magic of Tidying Up'.
While de-cluttering your home might sound far removed from public sector reform, it’s the same principle as ZBB.
Both ZBB and Marie Kondo begin with an inversion: don't decide what to throw away/cut. Instead throw away /cut everything and then bring back only what is brilliant and sparks joy.
Kondo's book uses inspiring and popular language that millions of people understood intuitively. You can apply exactly the same method and language to government budgeting and deregulation. The idea of 'Marie Kondo-ing' government to discover what we want to become as a nation, is far more inspiring than 'austerity'.
For more detail on this see Appendix article for The Conservative Woman.
Appendix: How Marie Kondo Can Save Government
As Originally Published in The Conservative Woman: Keep Britain tidied - The Conservative Woman
· The philosophy and language of Marie Kondo's bestseller, "The Life-Changing Magic of Tidying" can inspire the country and our leaders to deregulate and simplify government.
· Her simple approach transforms this daunting task into an inspiring mission: Decide what to keep not what to throw out; keep only what delights you; sort by category; do so quickly and completely; and reduce until something clicks.
· Our legal and parliamentary structures mean we can be extremely gung-ho about the process.
· Doing so would save billions, make life more pleasurable, improve public sector execution, unleash entrepreneurism and personal empowerment, and help the country discover the direction it needs.
· The troubled House of Lords could be given a constitutional new lease of life as the Government de-clutterer. Clearing out excess rules, bureaucracy, pointless quangos and waste.
· "If the Magic of Tidying can transform people it can transform nations."
If you haven’t heard of Marie Kondo, you are in the minority. The petite cleaning lady from Japan has conquered the world with her best-seller, “The Life-Changing Magic of Tidying.” It takes something pretty special to become a global phenomenon, let alone a verb (as in, I’m going to Marie Kondo my bedroom). And all credit to anyone who can turn the drudgery of de-cluttering into a confidence boosting celebration of life.
As Adam Smith wrote, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” In laying out her philosophy of tidying, Marie Kondo has inadvertently told us how to fix the world.
Government has become like an excessively cluttered house. The passage of time sees us ineluctably surrounded by stuff we don’t actually want. From Jane Fonda tummy toners to George Foreman Grills, pretty soon, your once pristine property resembles a junk shop.
Yet somehow we cannot let go. This is what behavioural psychologists call the endowment effect. We find it much harder to get rid of what we’ve got, even if we would never go out and buy it. It is this human quirk that has turned the humble self-storage unit into the biggest real estate bonanza going. The annual spend by British households on self storage far exceeds the value of the stuff stored. They’d be richer and freer if they just burnt the lot and started afresh.
The same thing can be said for modern government. Thanks to a blend of sentimentality, obsolescence, fleeting aspirations, and things that seemed like a good idea at the time, we have accumulated too much: Too much law, too much bureaucracy, too much cost and too much waste. The result is a chaotic mess. We would all be richer and freer if those in charge could just find the courage to throw out the junk and start afresh.
But how to find that impetus and where to start? Something Jacob Rees-Mogg must be pondering, having been charged with the task of post-Brexit deregulation. This is where Marie Kondo comes in. Her approach is simple and clever. As with so many great insights, it begins with an inversion: Instead of deciding what to throw away, decide what you really want to keep. Keep only the things that inspire joy.
Then throw everything else away. In other words, if a piece of legislation or initiative is not great – if it is not beautifully drafted, really important and at the core of what we want Britain to be - repeal it and abolish all the quangos and jobsworths that hang off it.
Secondly, Sort by category. Pile up all the criminal laws and chuck away all those silly non-crimes. Gather the 20,000 pages of tax law and bin at least half. Media interventions and restrictions on freedom of expression – the lot can go. All that dross from our EU days can be dumped.
Crucially, do this as quickly and completely as possible. Be joyfully ruthless about the process. We would never pass The Human Rights Act or repressive hate speech laws. Nor would we ever give away so much legislative power to opaque and unaccountable bodies, most of which have been nothing but embarrassments. So ditch them all and do it quickly. You won’t miss them when they’re gone.
We can be pretty gung-ho about it, particularly because the UK is a common law country. As a back-up to statutory legislation we have centuries of laws and principles made by judges. The truth is, if you repealed every act of Parliament tomorrow, you would barely notice the difference. Under common law, you could still enforce contracts, convict criminals, sell houses, execute wills or even divorce your spouse.
Moreover, even if something important did get lobbed onto the bonfire, we can revive it pretty fast. What Covid has demonstrated is that our Parliamentary system is well equipped to pass legislation in a matter of hours if it is really needed.
If we are not quick and ruthless, we will soon get side-tracked, while special interest groups and the blob will mobilise against us. Cleaning house is all about momentum. If the momentum is lost, the whole task fails.
Reduce until something clicks. As Marie Kondo has observed, you reach a point where you know you have just the right amount. Just as we know that we have way too much interference right now, we will know when we hit the sweet spot.
Reduction itself produces insight. Steve Jobs constantly relied on reductive intuition. As Nokia were adding entire keyboards to mobile phones, Jobs could see that things were getting silly. So he stripped it right back to just one button. As he observed:
When you first start off trying to solve a problem, the first solutions you come up with are very complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can oftentimes arrive at some very elegant and simple solutions.
That's been one of my mantras -- focus and simplicity. Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple.
If you want to live your life in a creative way, as an artist, you have to not look back too much. You have to be willing to take whatever you've done and whoever you were and throw them away.
One house we need to get in order is the House of Lords. Lords Reform gets written up almost every day. The reason it is so problematic is that you cannot fix something until you define its purpose. The House of Lords could take up the mantle as the Marie Kondo of government. One way would be to give it a mandate to repeal excessive legislation. A better way would be to attach sunset clauses to all UK legislation with the exception of constitutional and referendum-backed statutes. Thus, legislation would simply expire after 20 years unless the House of Lords (or Commons) thought it worth reviving for another twenty years. This is in essence a market-based approach: if no-one buys products or services, they disappear. Similarly if neither house can be bothered to re-enact legislation, it passes into history.
This is an ideal role for the Lords. Their distance from the electorate becomes a benefit not a weakness. Ministers will always be too busy fire-fighting today’s problems to clear out the legislative attic. The Lords can give it the consideration it deserves.
Too often important issues, such as deregulation, fall by the wayside simply because we cannot make it sound inspiring or urgent. But we have now reached a tipping point – the house is so full of junk it is becoming uninhabitable: the clutter is the problem. Too much government is imposing an unbearable financial burden on taxpayers. It is getting in the way of core government functions like defending our borders, treating cancer and educating children. A focused government is a more effective government.
The language of Marie Kondo is not about cuts. It is about rediscovering what is important. It is the process of simplifying and cherishing what is truly valuable. Just as Marie Kondo inspired millions to spend their bank holidays clearing out their homes, her philosophy can de-clutter government with thoroughness and joy. If voters can get Marie Kondo, they can get de-regulation.
Moreover, in deciding what we want to keep, we can forge a national identity and purpose: the very things we have been lacking. In deciding what to keep, we discover what we want to become. As Marie Kondo puts it:
Putting your house in order will help you find the mission that speaks to your heart. Life truly begins after you have put your house in order.
If the Magic of Tidying can transform people it can transform nations.