Bottom-up budgeting: a path to public sector efficiency

Very few governments even acknowledge they have a spending problem (in public at least), and almost none are willing to tackle it. A major reason is that voters repeatedly elect governments based on generous spending promises, while opposing increases in taxes. Australians are notorious for doing that.

Until a libertarian government can be elected, like in Argentina, or voters can be convinced to vote for fiscal responsibility, for which there are few precedents, the challenge is to reduce spending without it becoming too controversial.

Traditionally, budgeting systems are anchored in the past: each year's allocations are driven by the previous year's expenditures. This incremental approach offers stability and predictability, but it also tends to entrench inefficiencies, perpetuate outdated programs, and obscure opportunities for meaningful cost savings.

An alternative is what's known as bottom-up (or zero-base) budgeting. It is based on the requirement to justify each expenditure starting from "zero" – providing a disciplined, transparent, and service-oriented framework that can reduce public spending without sacrificing essential services.

Instead of treating past expenditures as a baseline to be adjusted, zero base budgeting compels each department to articulate its objectives, identify specific activities to meet those objectives, and justify the costs of those activities from the ground up.

The method asks a simple but transformative question: If this service were being created today, would we fund it, at this level, in this form, and with these resources? This enables decision makers to reassess long-standing assumptions and uncover hidden inefficiencies.

It is also valuable for promoting accountability, because each activity must be justified. The process produces more detailed documentation of what services cost, why they cost that amount, and what outcomes they deliver. Such visibility helps policymakers, and the public, distinguish between high-value programs and lower-priority expenditures. Rather than relying on broad departmental totals or vague line items, decision-makers gain a clearer understanding of operational realities, which in turn fosters more targeted and evidence-based resource allocation.

It can also expose inefficiencies that incremental budgeting conceals. When the previous year's budget serves as the starting point, spending habits can become entrenched even when circumstances change. For instance, a department that once required a large travel budget may continue to receive similar allocations long after technological improvements or policy changes have reduced the need for travel. Similarly, staffing levels may remain inflated even if service demand has decreased.

Zero-base budgeting encourages managers to be more creative by asking whether tasks can be automated, partnerships can be leveraged, or processes can be redesigned. Through this scrutiny, agencies frequently discover opportunities to streamline service delivery, consolidate overlapping programs, or eliminate outdated activities altogether.

In the private sector, zero-base budgeting is a well-known technique for driving costs out of a business. Savings of at least 30% are typical.

In the public sector, perhaps the most compelling reason to adopt bottom-up budgeting is its capacity to reduce expenditure while preserving key services. Because it emphasizes outcomes and service priorities, it helps governments identify which functions are indispensable and which are not. Managers are compelled to rank activities by their importance, which creates a structured framework for making resource trade-offs.

Services are not arbitrarily protected simply because they are large, longstanding, or seen as untouchable, but because their value is clearly demonstrated through the justification process. Conversely, lower-impact or inefficient activities are far more likely to be redesigned or discontinued. In times of fiscal constraint, this prioritisation ensures that savings are achieved in a strategic, not indiscriminate, manner.

Zero-base budgeting also has the potential to foster innovation within the public sector. Traditional budgeting often focuses on maintaining the status quo; departments may feel pressured to request only slight increases or decreases in order to avoid political scrutiny. Zero-base budgeting, however, invites a more entrepreneurial approach by encouraging agencies to propose alternative ways to achieve their goals.

By re-examining how services are delivered – not merely how much they cost – governments can discover new methods that are both cost-effective and more responsive to community needs.

Zero-base budgeting is more time-consuming than incremental budgeting, and it demands substantial analytical capacity from both managers and finance staff. Agencies accustomed to stable budgets may initially resist what they perceive as a disruptive process. However, these challenges can be mitigated through phased implementation, appropriate training, and effective use of digital tools that automate much of the analytic work.

Governments that have adopted zero-base budgeting typically do so on a rolling basis, reviewing different departments each year rather than restructuring the entire budget simultaneously.

Ultimately, the case for bottom-up budgeting rests on a simple principle: public money should be spent in ways that demonstrably serve the public good. Zero-base budgeting provides a systematic method for ensuring that.