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In the recently released "Decision of the CPC Central Committee on Further Comprehensively Deepening Reforms and Promoting China's Modernization" (hereinafter referred to as the "Decision"), a major focus in the deployment of deepening fiscal and taxation system reform is to improve the budget system, and one of the key measures is to deepen the zero-based budget reform. Han Wenxiu, deputy director of the Central Finance Office in charge of daily work, said in his interpretation that this move is aimed at breaking the "base" concept and the rigid pattern of expenditure.

At present, China's budget preparation adopts base budget, which increases or decreases a certain amount based on the budget amount of previous years of departments and units. Zero-based budgeting is a budget prepared with zero as the base point, without considering the budget situation of departments and units in previous years. It is prepared according to actual needs, which can better break the rigid pattern of fiscal expenditure and improve the efficiency of fiscal funds.

Many finance and taxation experts told China Business News that this is the first time that deepening the zero-based budget reform has been written into the Party's resolution, indicating that the zero-based budget reform cannot be just a superficial work, but must be accelerated. This will undoubtedly affect the inherent interests of departments and units, and the preparation of zero-based budgeting is more complicated and involves other supporting reforms. Therefore, it is necessary to steadily coordinate and promote it, realize the complementary advantages of zero-based budgeting and existing base budgeting, and improve the efficiency of fiscal funds allocation.

Zero-based budgeting is beautiful but difficult

The tens of trillions of yuan of fiscal expenditures each year need to be arranged through budget preparation. At present, the main method of budget preparation is base budget, also known as incremental budget, which takes the budget revenue and expenditure of the department unit in the previous year as the base, and then increases moderately. The advantages of base budget are that it maintains the continuity of budget revenue and expenditure, has a small workload, and is easy to operate.

Lin Zhiyun, a financial consultant of the 14th Guangdong Provincial People's Congress, told Caixin that the base budget model easily leads to the solidification of budget expenditures, which is not conducive to the rational redistribution of public resources. In contrast, zero-based budgeting evaluates and allocates budgets from scratch, which helps to avoid waste and inefficient use of funds, break the pattern of expenditure solidification, more accurately guarantee key expenditures, and cut unnecessary expenditures, so as to achieve the rational allocation of fiscal funds and improve the efficiency of fiscal fund allocation.

"In fact, China implemented zero-based budgeting in the 1990s. At that time, it was mainly reflected in project expenditures in some regions. However, it was later shelved and brought up again in recent years," said Li Yan, director of the Budget Management Research Institute of the Central University of Finance and Economics.

The actual implementation of zero-based budgeting obviously faces many challenges.

A local finance official told Yicai Global that the local government had proposed to adopt zero-based budgeting a long time ago, but it had not been implemented. Zero-based budgeting would affect the vested interests of departments and there was great resistance to its implementation. Moreover, after so many years of using base budgeting, a fixed mindset had been formed. In addition, the zero-based budgeting was completely adopted to replace the base budgeting, which was also very complicated to compile in practice.

Deng Shulian, a professor at Shanghai University of Finance and Economics who has long paid attention to government budgets, told Caixin that zero-based budgeting requires that when preparing the budget, one does not refer to the budget and final accounts information of previous years, but instead starts from scratch and calculates the cost of each expenditure item. For the annual budget, the time cost is too high and it is basically difficult to achieve.

She introduced that not only that, zero-based budgeting is also a form of performance budgeting. On the basis of measuring project costs, the performance of the project needs to be estimated. This requires not only setting reasonable performance indicators, but also changing the current budget preparation method. That is, when preparing department budgets, the department budget is no longer divided into basic budgets and project budgets, but the department budget is directly divided into the budgets of each project, and the basic budget is integrated into the corresponding project budget to constitute the cost of the project. This increases the difficulty of budget preparation.

"Therefore, in reality, almost no government has implemented zero-based preparation and execution of the overall budget, but only implemented zero-based budgeting on certain new projects. The government budgeting method is still mainly the base method," said Deng Shulian.

Li Yan believes that due to the diversification of government spending targets, how to prioritize among the numerous spending items is a difficult decision-making point. If budget decisions are made from scratch and the cake is cut anew, it will be disturbed by the game of various stakeholders, and the decision-making cost will increase significantly, which puts higher demands on the decision-making method and level.

"Therefore, the difficulty in promoting zero-based budgeting in the past is not only a technical issue. The important reason is that the implementation of zero-based budgeting requires changing the base. Behind this is the adjustment of the original funding pool and interest structure of all parties, which will cause all parties to compete over the battle to defend the base." Li Yan said.

Local governments accelerate the implementation of zero-based budgeting

Although the promotion of zero-based budgeting faces many challenges, it is clear that China has accelerated the advancement of this key reform that touches on departmental interests. This is not only reflected in the fact that some provinces have taken practical actions in recent years, but also in the requirement in the above-mentioned "Decision" to deepen the zero-based budgeting reform.

In March 2021, the State Council formulated and issued the "Opinions on Further Deepening the Reform of the Budget Management System", which clearly proposed to actively use the concept of "zero-based budgeting" to break the rigid pattern of expenditure. In recent years, provinces such as Zhejiang, Anhui, Shaanxi, and Guizhou have explored and implemented budget reforms guided by the concept of zero-based budgeting.

Deng Shulian analyzed that when fiscal revenue growth is weak and rigid expenditures continue to increase, and the contradiction between fiscal revenue and expenditure increases significantly, the base budget is difficult to maintain and is not compatible with the current and future fiscal and economic development situation. Therefore, the central government hopes to reduce expenditures on the basis of tapping into fiscal resources as much as possible.

She said that after years of austerity, the government has limited room for structural spending cuts such as reducing general expenditures, and the only way left is to reduce the scale of expenditures. Zero-based budgeting is the best way to achieve this. According to theory, the implementation of zero-based budgeting is complex and difficult to achieve, but if the goal is to reduce the scale of expenditures, the problem can be easily solved.

"For example, for a department's expenditure, according to the base method, next year's budget will at least be the same as this year's. However, according to the zero-based method, it can be reduced a lot under the goal of reducing the scale of expenditure. As for the overall cost accounting and performance considerations of the zero-based budget, they can all be considered under the larger goal of reducing the scale of expenditure." Deng Shulian said.

At present, some places have also achieved results in exploring zero-based budgeting.

For example, in 2022, the People's Government of Anhui Province issued the "Anhui Province's Comprehensive Implementation of Zero-Based Budget Reform Plan", which stipulates that starting from the preparation of the 2023 budget, zero-based budget reform will be fully implemented across the province to break the rigid expenditure pattern and build a funding arrangement mechanism that ensures that what should be ensured is ensured, what should be saved is saved as much as possible, and performance is emphasized.

Since the full implementation of the zero-based budget reform, Anhui has comprehensively cleaned up 185 provincial expenditure policies and cleared 25 long-standing policies that have expired and completed their tasks; it also cleaned up provincial budget department projects, and the number of projects in 2023 has decreased by 482 compared with before the reform, a decrease of 18.1%. In 2023, Anhui Province will reduce non-key and non-rigid expenditures by 890 million yuan, and further reduce 2.68 billion yuan in 2024, freeing up more funds to protect people's livelihood and promote development.

Li Yan suggested that the next step in deepening the zero-based budget reform should be to organically combine the zero-based budget concept with the performance budget at the budget compilation level. The performance budget management implemented for new projects in recent years is, to a large extent, a zero-based budget concept. At the same time, in the future, not only new projects, but also existing projects should be regularly evaluated based on the zero-based concept to solve the problem that once they occupy the budget plate, they become permanent.

The aforementioned "Decision" requires strengthening public service performance management and strengthening ex ante functional assessment when deploying the deepening of fiscal and taxation system reform.

Lin Zhiyun believes that combining zero-based budget reform with performance management, emphasizing that "spending money must be accountable for results and ineffectiveness must be held accountable", will further promote the improvement of the efficiency of the use of fiscal funds.

Li Yan said that the basic work of implementing zero-based budgeting should be done well. Whether zero-based budgeting is effective depends on the scientific rationality of some basic information, which involves policy and expenditure standards. The key is to redefine the department's organizational structure, scope of responsibilities, staffing, expenditure standards, etc., and make adjustments that maintain and reduce pressure. At the same time, not only project expenditures, but also basic expenditures (personnel, public funds) should introduce the zero-based concept, comprehensively consider various influencing factors to formulate standards, and combine them with the local fiscal affordability to form a dynamic adjustment mechanism.

"Therefore, the implementation of zero-based budgeting is a systematic project, which will involve some difficulties. At the operational level, it should not be a replacement for base budgeting, but a complementary approach. It should be based on scientific and reasonable expenditure standards, introduce the concept of zero-based budgeting, and combine it with performance budgeting." Li Yan said.

Deng Shulian also said that zero-based budgeting will not replace base budgeting, and base budgeting should be the main form of budgeting in the future. Of course, base budgeting can be continuously improved. For example, unreasonable expenditure items in the base can be reviewed and eliminated, and dynamic adjustments to the base can be implemented.

(This article comes from China Business Network)