Zero-based budgeting (ZBB) forces departments to justify every expense from scratch, rather than increasing last year’s budget. Used by figures like Elon Musk and Donald Trump, it helps cut costs by prioritizing essential spending. While it can save money, ZBB is intense, requiring deep analysis and often long-term commitment to be effective.
What Is Zero-Based Budgeting? Here’s Why Trump and Musk Seem to Favor It
Author: Chris Morris
It was a chaotic week in Washington, D.C. after the Office of Management and Budget sent a memo informing federal agencies, including the Small Business Administration, it was pausing funding and ordering them to justify expenditures. While there are still plenty of questions about which federal grants and loans the Trump administration has or hasn’t frozen (and whether the freeze violates the Constitution), the underlying approach appears to have a lot in common with a particular form of financial planning: zero-based budgeting—ZBB, for short.
ZBB is a data-driven budgeting method that demands a department or division justify its expenses on an ongoing basis. And it’s a favorite of some in the startup world (and was employed by Elon Musk following his takeover of Twitter).
That approach seems to appeal to Donald Trump, who has vowed to slash government spending in his second administration. Through Elon Musk’s Department of Government Efficiency, the administration hopes to cut billions—perhaps trillions—of dollars of expenditures.
What is zero-based budgeting?
Coined in the 1960s, ZBB starts the budgeting process from a base of no authorized funds (which might explain the federal funding freeze). Managers build a case for their department’s budget from that ground floor, based on expected expenditures. Every activity needs to be justified every time a new budget is prepared, which could be annually or more frequently if priorities change. That’s different than the incremental budget method that’s more commonly used, where total spending is increased incrementally from year to year.
How does zero-based budgeting work?
ZBB backers say the method is a strategic way to set goals, then prioritize those financially. Managers have to defend every program or planned expenditure before they are allocated funds for it. Once allocated, the goal is to end each budget cycle with no money unassigned. Every dollar, in other words, has a job. And zero-based budgets can be changed when goals do.
In the case of Trump’s spending freeze, the executive branch says it is looking to apply the brakes to any programs that supported diversity, equity, and inclusion or clean energy (along with a host of other executive order limitations), effectively resetting the base and making dozens of departments justify planned spends, though the legality of that freeze is still unclear.
What are the advantages of zero-based budgeting?
A 2020 report from the Government Finance Officers Association (GFOA) weighed the pros and cons of this budgeting method, noting that it can be a useful tool when budget cuts are required because the questions it asks “allow for a more rational and comprehensive approach to reducing budgets.”
ZBB shakes organizations up. Instead of automatically funding the same initiatives from the year prior, it forces them to ask which programs and services should be prioritized in the budget. It also allows for an analysis of whether the money being put into a program or service is worth the expected output. And a ZBB approach encourages departments to look for efficiencies, which might be overlooked in a line-item budget.
It can save money, too. A 2018 study by Accenture of companies that use ZBB found they had saved up to $1 billion.
What are some disadvantages of zero-based budgeting?
As far as disadvantages, ZBB is a manager-driven budgeting method that’s paperwork-intense, which creates possible bottlenecks. And, since it uses operational information to make budget decisions, it can be hard to form a big-picture strategic view or do long-term planning. In fact, there’s often no strategic planning involved in zero-based budgeting, which can present problems for research-and-development-focused departments.
It’s a strategy that depends on performance measures to be its most effective, but in a government setting, there are often not many of those. “A lack of good measures to support decisions means that ZBB is less likely to result in serious examination of significantly different ways of providing service,” notes the report from the GFOA.
Governments that use ZBB generally veer away from the theoretical model and instead use one that works for their own needs, the report continues. “Like most budget reforms that promise to bring more rationality and comprehensive decision-making to cut back budgeting, ZBB has limitations. Budgeting is always art as much as it is science, and it is up to public officials to decide the extent to which ZBB, or at least elements of it, facilitate the presentation of financial and service information to decision-makers in a way that will help them reach a structurally balanced budget that meets the needs of the community,” says the GFOA report.
Does zero-based budgeting yield quick results?
While ZBB is sometimes used in turnaround situations like Twitter, some say it’s more well-suited as a long-term approach rather than a one-time, time-sensitive effort to cut costs. To succeed, it requires a commitment from all of the departments involved, notes the Accenture study.
“Unlike traditional cost management techniques that use a ‘cut-the-fat and gain-it-back’ approach like every fad diet does, adopting a zero-based mindset requires a full cultural transformation within an organization,” wrote Kris Timmermans, senior managing director and supply chain & operations strategy lead at Accenture Strategy. “It must become ingrained in how people think and work so that it begins to just happen naturally—that’s how you prevent the ‘weight’ from coming back.”
Credits: TCA, LLC.