J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 18 (4), 480-515
WINTER 2006
ZERO-BASED BUDGETING IN CHINA:
EXPERIENCES OF HUBEI PROVINCE
Jun Ma*
ABSTRACT. Sometimes regarded as the best method of prioritizing
budgetary expenditures, Zero-Based Budgeting (ZBB) was introduced into
China in the early 1990s and systematically adopted since the recent
budgeting reform although it has experienced numerous failures in many
countries. This study examines ZBB as practiced in Hubei province in China.
In Hubei, although the reformers are intended to create ZBB as a general
budgeting framework, eventually, it was a Chinese style Target-Based
Budgeting (TBB) rather than ZBB that has been put into place. Interestingly,
ZBB has not disappeared but is deliberately applied to budgetary decisions
of one type of expenditures under the Chinese style TBB. However, even in
the field where ZBB is practiced, its achievements are at best moderate. The
Chinese experiment of ZBB presents something new not only for the theory
of ZBB but also for the budgeting literature.
INTRODUCTION
For many years, budgeting systems seen in western countries
have been absent in China. For almost thirty years from the
establishment of communist China in 1949 to the 1978 economic
reform, fiscal resources were allocated by the central planning system
in which the budget was just a tool to implement the plan. From 1978
to the 1999 budgeting reform, while the plan-dominated system of
revenue allocation was disintegrating, a new budgeting system was
not developed to fill the vacuum. In 1999, China initiated a budgeting
reform aiming to create a modern budgeting system (Wang, 2001). In
------------------* Jun Ma, Ph.D. (University of Nebraska at Omaha), Professor, Associate
Dean of the School of Government, Director of the Center for Public
Administration Research, Sun Yat-sen University, P. R. China. His teaching
and research interests are in public budgeting and public management.
Copyright © 2006 by PrAcademics Press
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this nationwide budgeting reform, Zero-Based Budgeting (ZBB), which
had been practiced by several local governments (e.g. Hubei, Hainan,
and Anhui) as early as 1993 (MOF, 1997), was further emphasized
and systematically adopted. Since ZBB has had a record of numerous
failures in many countries (Lauth, 1978; Schick, 2002), it is
intellectually interesting and academically worthwhile to ask the
following questions in the Chinese context: What are the goals that
Chinese local governments expect from ZBB? Is it “real” ZBB that
China’s local governments have been muddling with? Has ZBB
changed the budgetary process and outcomes?
In the literature, empirical study of China’s ZBB is very limited. A
World Bank report on China’s recent efforts to improve public
expenditure management indicates that the implementation of ZBB
in local governments is constrained by the fact that finance
departments are unable to change personnel costs (World Bank,
2000).1 In their investigation of sub-national finance in China, Wong
et al. (2003) find that no governments investigated have really
adopted ZBB because wage expenditures, which compose more than
70% of some local governments’ budgets, are determined outside the
process of ZBB. However, ZBB is not the focus of either of these two
studies.
This article is the first study of China’s ZBB. Specifically, it is an
examination of ZBB in Hubei in China. This article is organized as
follows. To provide a background, this paper first examines the
budgeting history of Hubei. Next, research methodology is addressed.
In the following sections, findings of this study will be presented. The
last section is the conclusion and discussion.
BUDGETING HISTORY OF HUBEI: A BACKGROUND
Budgeting reforms in Hubei province, particularly its ZBB
experiment, are better understood within a historical context.
The Plan-Dominated Period (1949-1978)
In this period, a highly centralized economic planning system was
created and unitarily implemented in the whole nation, in which
resource allocation was determined by the plan. Therefore, during this
period, it was the Plan Committee rather than the Finance
Department that was the central budgeting office in Hubei province.
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Since the plan implementation always involved several governmental
departments, it was unnecessary and difficult for the governmental
budget to be compiled on a departmental basis; instead, the budget
was function-based, in which expenditures were compiled in terms of
their functions in the economic construction (Hou, 2005; Zheng,
2003, pp. 25-34, 52).2 Despite its well-acknowledged shortcomings
in economic performance such as disincentives and rigidity, the
planning system retained a certain fiscal discipline and expenditure
control.
The Transitional Period (1978-1999)
In this period, although the role of the plan as a tool of resource
allocation began to decline as a result of the market-oriented
economic reform, a new and effective budgeting system was not
developed to fill the vacuum largely because fiscal reform during this
period was centered on the revenue side (Wang, 2001). Consequently,
the authority of revenue allocation formerly controlled by the Plan
Committee was gradually fragmented and eventually grabbed by a
variety of departments. In Hubei, besides the Finance Department,
several other departments also held the authority over certain types
of expenditures, including the Plan Committee (basic construction
expenditures), Science and Technology Department (three science
and technology improvement funds), Economy and Trade Committee
(state-owned enterprises technology improvement funds), and Health
Department (health care funds). The fragmentation of budgeting
authority was exacerbated by the expansion of off-budgeting finance
since the economic reform, in which each department held its own
off-budgetary revenues and spent with discretion (I-4; I-5; I-6; I-8).
Despite the deterioration of the planning system, its budgetary
format was comfortably inherited and government expenditures
continued to be compiled in terms of functions of expenditures rather
than on a departmental basis, providing little information on revenue
and expenditure activities of each department. Moreover, within the
Finance Department, the process of examining budgetary requests
was decentralized. Each specialized agency within the Finance
Department allocated certain types of expenditures to almost all
spending departments, while each spending department went to
almost all agencies within the Finance Department to ask for money,
resulting in a fragmented budgetary examination (I-4; I-5; I-6; I-8).
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483
In consequence, budgeting during this period was fragmented
and crude to the extent that even the Finance Department was
unable to present a whole picture of governmental finance. By the
beginning of the 1990s, establishing a modern budgeting system
became urgent. In 1994, China passed the first law on budgeting, the
Budget Law, providing a foundation for a new budgeting system.
Moreover, as early as 1993, Hubei along with several other provincial
governments started experimenting with ZBB in compiling
governmental budgets (MOF of China, 1997).
The Recent Budgeting Reform
Since 1999, under the leadership of the central government,
China has initiated a budgeting reform, aiming to restructure budget
compilation and execution. The core of this reform is the
Departmental Budgeting Reform (DBR) in which the budget is
required to be compiled on a departmental basis, and every
department is required to consolidate all of its revenues and
expenditures into its budget (Lou, 2002, pp.153-164). The DBR is
supposed to centralize the budgeting authority into the hands of the
finance department and improve budgetary transparency at least
within the government by presenting detailed budgetary information
of each department.3
In 2000, Hubei province began to experiment with the DBR in four
departments.4 In 2001, the reform was extended to twenty-two
provincial departments, and to twenty-six departments in 2002.
However, it was not until 2003 that the reform completely followed
the requirements in ten departments,5 in which off-budgetary
revenues and expenditures were consolidated into departmental
budgets. The provincial government decided to extend this system to
all departments and institutes in 2004 (HPFD, 2003ab; HPPC, 2002;
Tong, 2002a). For the purpose of this essay, it is important to
understand the following aspects of the DBR in Hubei.
First, the new system re-clarifies and unifies the scope, category,
and composition of the departmental budget. The departmental
budget is composed of three major categories: personnel, operating,
and program expenditures. Personnel expenditures include wages
and welfare expenditures for civil servants. Operating expenditures
are used to support the normal operation of the departments, such
as printing, traveling, mailing, vehicle maintenance, etc. Program
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expenditures are requested by the departments to achieve certain
specific administrative missions or development goals (HPFD, 2002).
For example, to assess the province’s technological development level,
the Science and Technology Department will formulate an
“investigation program” and request money for it.
Second, the Finance Department is reorganized. Within the
department, two new agencies are established to separate the
functions of budgetary compiling and execution: the Budgeting Office,
which is responsible for examining budgetary requests of the
departments, and the Treasury Office, which is responsible for daily
financial management. Upon this reorganization, a centralized
examination process was created to replace the old process that was
decentralized in nature. In the new system, each department’s
requests are now examined only by one specialized agency within the
Finance Department. The department’s requests thus examined are
submitted to the Budgeting Office for further inspection (I-1b; I-12).
Third, the principle of comprehensiveness is emphasized, offbudgetary revenues and expenditures are required to be consolidated
into the departments’ budgets and under the control of the Finance
Department. This has to some extent solved the problem of budgetary
fragmentation. However, budgetary fragmentation over program
expenditures remains because several other departments like the
Plan Committee and the Science and Technology Department still
hold the authority of allocating certain types of expenditures.
Fourth, the budgetary procedure has been fundamentally
restructured; a so-called two-ups and two-downs procedure (liang
shang liang xia) is established. Budget compilation starts with the
department submitting its budgetary estimates to the Finance
Department with a variety of supporting evidence (e.g. laws and policy
documents). This is the first up. The Finance Department will set a
ceiling (kong zhi shu) for each department after it has reviewed the
department’s estimates. This is the first down. What follows is socalled the second up, involving a variety of actors. The department
will revise its requests under the ceiling and resubmit its new
requests to the Finance Department. After reviewing the
department’s new requests, the Finance Department will compile the
governmental budget, which will be submitted to the Provincial
Government Standing Members Meeting (PGSMM, including the
governor, vice governors, and the director of the Finance Department,
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
485
etc.) for approval. Next, the budget will be submitted to the Provincial
Chinese Communist Party Standing Committee (PCCPSC) for approval.
Then, according to the Budget Law, one month before the annual
session of the Provincial People’s Congress (PPC), the governmental
budget will be submitted to the PPC Standing Committee for initial
review (chu shen). The government may revise its budget according to
the PPC Standing Committee’s suggestions and submit its formal
budget to the annual session of the PPC for approval (da hui shen).
Finally, after the governmental budget has been approved by the PPC
annual session, the Finance Department will inform each department
of its budgetary appropriation. This is the second down (HPFD,
2003ab; HPPC, 2002; I-3). In this process, although the PPC is
responsible for reviewing and approving the budget according to the
Constitution and Budgetary Law, it is weak and incapable of
functioning as a serious budgetary actor (I-3). Also, within the
executive budgeting system, besides submitting its requests to the
Finance Department which is the central budgeting office in the new
system, the spending department may submit its requests to other
departments holding budgeting authority, such as the Plan
Committee, which are quasi-central budgeting offices. Figure 1
presents the budgetary procedure in the province.
ZBB IN HUBEI
Hubei is one of the early provinces practicing ZBB. In 1993, ZBB
was introduced into the provincial budgeting process. Nevertheless,
before the DBR, ZBB was not systematically adopted (I-1a; I-1b).
Before the DBR, budgets were compiled without the departmental
participation; instead, it was the Finance Department that was
responsible for compiling the budgets for the departments. Therefore,
ZBB during this period was a tool employed mainly by the Finance
Department rather than the departments in making budgetary
decisions. Furthermore, before the DBR, ZBB had no influence on
most of the departments’ expenditure decisions because a large
amount of the departments’ expenditures falling in the off-budget
category was out of the control of the Finance Department.
The recent DBR provided a chance for the province to
systematically implement ZBB. First, as the budget is now compiled
on a departmental basis, ZBB is therefore employed not only by the
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FIGURE 1
The Budgetary Procedure in Hubei Province
4
5
PGSMM
CBO-1
6
PCCPSC
6
8
10
3
1a
2
7
1c
PPC
1bSD
9
CBO-2
1b
Note: 1a, the spending department (SD) submits its requests to the Finance
Department (CBO-1); 1b, the spending department submits its requests
to other departments with budgeting authority (CBO-2); 1c, CBO-2 may
inform CBO-1 about their allocations to spending departments; 2, the
ceiling is given; 3, the department resubmits its requests; 4, the
governmental budget is submitted to the PGSMM; 5, the governmental
budget is submitted to the PCCPSC; 6, feedback from the PCCPSC to the
government and its Finance Department; 7, the governmental budget is
submitted to the PPC standing committee for initial review; 8, feedback
from the PPC standing committee; 9, the governmental budgeting is
submitted to the annual session of the PPC for approval; 10, CBO-1
informs spending departments about their appropriations.
Finance Department to make budgetary decisions but also by the
departments to formulate requests. Second, as the comprehensiveness principle is emphasized by the DBR, off-budgetary revenues and
expenditures are gradually consolidated into the budget, suggesting
ZBB is now able to affect most of the departments’ budgetary
decisions. The Finance Department is also active in extending and
improving ZBB in the recent budgeting reform. It requires all
departments included in the DBR to adopt ZBB in compiling their
budgets. Therefore, this study focuses on the period since the DBR to
examine the province’s ZBB practice.
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
487
RESEARCH METHODOLOGY
The research methodology is mainly borrowed from Professor
Thomas P. Lauth’s (1978) classic study of ZBB in Georgia. Hubei, as
one of the early provinces experimenting with ZBB in China, is a
suitable case for this study. Data has been collected through in-depth
interviewing with budgetary officials and from accessible official
documents.
The interviews were carried out in August 2003. Nineteen
budgetary officials from eleven departments of the provincial
government, the Finance department, and the People’s Congress
were interviewed. Three of these officials were from the Finance
Department, two of them from the People’s Congress, the others from
spending departments (see the Appendix).
As the budgetary process in China is not open to the public,
budgetary officials tend to suspect interviewers from the outside. To
access the field, this researcher contacted budgetary officials through
a number of personal relationships. Moreover, to relieve the
interviewees’ suspicions and worries no recorder was used in
interviewing; instead, this researcher wrote down the key words,
numbers, and opinions respondents told him and then transcribed
them immediately after the interviews finished. The length of the
interviews ranged from thirty-five minutes to two hours. The average
length of the interviews is one hour and fifteen minutes.
Usually, respondents were asked to reply to a series of openended questions about their experiences and views of the DBR rather
than ZBB. This method was used to prevent respondents from viewing
this study as an evaluation of their practice of ZBB. This interviewing
strategy was necessary in the Chinese context because officials are
highly sensitive to “outside” assessment of their reform achievements.
This approach proved to be fruitful. In most situations, while
describing the DBR, respondents gradually moved to disclose their
experiences and opinions of ZBB. Only when respondents failed to
address ZBB would this researcher ask questions directly about ZBB.
Findings of this study are presented in the following sections.
THE GOALS OF ZBB
Despite enormous difficulties experienced, Hubei’s reformers,
especially those in the Finance Department, have been enthusiastic
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in advocating ZBB during these years. Two goals are expected from
ZBB by the reformers.
First, it is expected that ZBB will enable the Finance Department
to make budgetary decisions in fiscal stress. During these years,
Hubei provincial government has been facing fiscal stress, i.e., its own
revenues are far from meeting expenditure responsibilities falling
upon its shoulders. As Table 1 shows, the provincial government’s
share in the total provincial fiscal revenues (i.e., the sum of the
provincial government and all sub-provincial governments’ revenues)
is low, less than 12% during these years. Moreover, the self-finance
capacity of the provincial government, i.e., the percentage of the
provincial government’s own revenues to its expenditures, is also low,
indicating its own revenues are far from compensating most of its
expenditure needs.
Budgeting in such an environment is inevitably difficult. Every year,
after spending needs on personnel and operating expenditures have
been met, only a small amount of revenues are left. In the province,
the percentage of administrative expenditures (personnel and
operating expenditures) in the total of budgetary and extra-budgetary
revenues is very high and has been increasing quickly since 1993,
from 54.83% in 1993 to 99.4% in 2001, increasing 7.72% annually
(HPFD, 2003c). In other words, in 2001, less than 1% of the
TABLE 1
Revenue Share and Self-Finance Ratios of the Provincial Government
Year
Revenue Share (%)
1990
1995
1996
1997
1998
1999
2000
2001
6.14
11.61
10.56
11.19
8.62
9.16
10.15
9.96
Source: HPSD (2002).
Self-Finance (%)
20.02
34.71
31.29
31.79
20.28
19.54
24.41
14.79
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
489
government’s own revenues are left for program expenditures. Not
surprisingly, interviewees vividly name the provincial finance “finance
for eating” (chi fan cai zheng).
Therefore, during these years, provincial politicians and the
Finance Department have been trapped in a difficult situation in
making budgetary decisions. ZBB is therefore viewed as a way out. As
a respondent from the Finance Department says:
We have been facing fiscal stress while there are so many
programs asking for money. We hope to use ZBB to force
every program to be budgeted from zero and to arrange
expenditures according to program priority (I-1b).
Second, it is expected that ZBB will help to scrutinize existing
expenditures entrenched in the budgetary base and to eliminate
unnecessary expenditures which were difficult to remove under the
old system. For many years, budgetary decisions in the province have
been made upon the budgetary appropriation of last year plus an
increase (ji shu jia zeng zhang), similar to so-called incremental
budgeting. However, Chinese incremental budgeting is operated
under a system where a modern budgeting system is not in place;
hence, the budgetary base is constructed very arbitrarily. The
budgetary base is constructed mostly according to a variety of
previous central laws and policies, provincial policies, and spending
needs of powerful politicians.
As the Chinese polity is unitary in nature, the provincial
government is required to carry out laws passed by the National
People’s Congress and central policies made by the State Council and
its departments. Therefore, for many years, central laws and policies,
even if they were obsolete, have been employed by the departments
as “royal swords”(shang fang bao jian) to justify their budgetary
requests (I-6).
Moreover, provincial policies, formulated by the Governor’s Work
Meeting (GWM, sheng zhang ban gong hui yi) to further carry out
policy goals set by the provincial Chinese Communist Party (CCP)
standing committee, are used by the departments to justify their
requests even if they were obsolete. In many situations, the GWM
memoranda and even words of powerful politicians--all are not formal
policies--are used by the departments to support their requests (I-4; I6).
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Powerful politicians (mainly CCP standing committee members
and other vice governors) have the informal power to ask the Finance
Department to allocate money to departments or programs that they
favor.6 Consequently, the departments tend to bypass the Finance
Department and directly lobby these politicians for budgetary
appropriation at any time during the budgetary year. If the politician
thinks that a department’s request is reasonable from his or her own
perspective, he or she will write a slip to endorse this request, known
as pi tiao zi (writing slips) in Chinese budgeting practice. With this slip
in hand, the departments would go to the Finance Department to ask
for budgetary appropriation. As a respondent points out, there are a
lot of such slips on the table of the director of the Finance
Department, and how to handle these slips is indeed a political skill
the director needs to have (I-7).
Therefore, in the pre-reform system, there was no real comparison
and competition among budgetary requests. Which requests would be
funded and how much they would receive was mainly determined by
political powers supporting them. To the departments, the program
was not so much designed for achieving something socially useful as
for grabbing money. As a respondent points out, “we tend to first grab
money, and then consider how to spend them” (I-5). All suggest that
in the old system, the bases were determined arbitrarily and
irrationally, as many respondents admit. Meanwhile, it was difficult for
the Finance Department to remove from the base those expenditures
endorsed by previous central and provincial policies and slips written
by powerful politicians even if they were no long necessary or
unnecessary even at the beginning. The Chinese incremental
budgeting also resulted in an unfair allocation of revenues among the
departments. The departments with more central and provincial
policies or politicians’ slips to justify their requests would have larger
bases than those relying less on such strategies. In face of these
problems, as many interviewees admit, ZBB was viewed as an
effective way to re-examine the bases accumulated in the old system
in order to achieve allocation efficiency to some extent.
THE NATURE AND SCOPE OF HUBEI’S ZBB
As the reform proceeded, ZBB was reshaped to fit the budgetary
environment of the province, making ZBB practiced in Hubei
substantially different from its theoretic caricature and in many
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
491
aspects different from ZBB practiced in USA local governments in
1970s.
The Ceiling Control System
The provincial reformers at the outset intended to create ZBB as a
general budgeting framework. When the DBR was initiated to prepare
the 2001 budget, the departments included in the DBR were required
to formulate their requests according to ZBB, and many did work hard
to follow the logic of ZBB. The budgeting process then was bottom-up,
starting with the formulation of fund requests by agencies within the
departments. Each agency formulated its requests according to its
work goals and submitted them to the department’s financial office.
The latter examined these requests in terms of program priority and
then ranked them. Ranked expenditures were then submitted to the
departmental director and Chinese Communist Party (CCP) group
(dang zu) within the department for examining. Finally, approved and
ranked expenditures were compiled as the departmental budget and
submitted to the Finance Department (I-7).
However, at that time, as no ceiling was set for the departments’
requests, requests submitted by the departments came up to an
amount much higher than available revenues. Without any choices,
the Finance Department refused all departments’ requests and set a
ceiling for each department. The departments were required to revise
their requests under their ceilings. For instance, although the original
budget the Social Security Department formulated according to the
logic of ZBB came up to 1.5 billion yuans, it was required to reformulate its requests under the ceiling of 87 million yuans, which is a
dramatic cut (I-7). Since then, the ceiling control system (CCS) has
been institutionalized into the two ups and two downs budgetary
procedure--a firm ceiling is given for each department in the first
down (I-4, I-6, I-7, I-8, I-9),7 indicating it is CCS rather than ZBB that
has been created as the general budgeting framework.
Hubei’s CCS is similar to Target-Based Budgeting (TBB) viewed as
a modification of ZBB in USA,8 though respondents never used the
term “TBB” which is also absent from Chinese budgeting literature. In
the experience summary meeting organized immediately after the
compilation of the 2001 budget, many budgetary officials from the
departments named the whole system “control budgeting” (kong zhi
yu suan) (I-7). As in TBB, the Finance Department in Hubei heavily
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relies on the ceiling to constrain the departments’ requests while
letting the departments have certain flexibility in budgetary trade-offs
under the ceiling.
ZBB under Chinese Style TBB
Hubei’s CCS is a Chinese style TBB, differing from TBB practiced
in American local governments. In American TBB, new programs and
programs squeezed out from the departments’ base budgets due to
the low ceiling can be put on a second list sometimes called “unfunded” list. The departments then rank their lists of high-priority unfunded programs. Whatever money is available is allocated down the
priority list until the money gives out (Rubin, 1997; 1998). But, in
Hubei’s CCS, although un-funded programs may receive money during
the budgetary year when money is available, there are no such
ranked lists for un-funded programs. Moreover, in American TBB, the
ceiling is given at the beginning of the budgeting process (Rubin,
1998), but in Hubei’s TBB, the ceiling is given after the departments’
first budgetary estimates.
However, the most unique aspect of Hubei’s TBB is that the
installation of CCS has not led to an abandonment of ZBB; instead,
the application of ZBB is deliberately limited to budgetary decisions
on one type of expenditures, i.e., program expenditures. In the
Financial Department’s notification of compiling the 2004 budget,
only in the section of program expenditures does the name of ZBB
appear (HPFD, 2003b). Moreover, respondents tend to describe their
budgeting methods as “personnel expenditures according to the real
need, operating expenditures according to the standard, and program
expenditures according to the rank,” suggesting ZBB is applied only
to program expenditures rather than all expenditures. It seems that,
in the eyes of provincial reformers, basic expenditures (personnel and
operating expenditures) and program expenditures are different in
nature, and hence, should be budgeted differently, suggesting a kind
of discriminate alignment (Patashnik, 1996) may exist in the
provincial budgeting.
Furthermore, as one respondent states, since personnel and
operating expenditures are fixed and immovable, the constraints of
CCS as well as ZBB mainly fall on program expenditures (I-13).
Actually, as the reform proceeds, ZBB in Hubei, operating under the
Chinese style TBB, is mainly regarded as a budget preparation
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493
technique designed to improve fiscal control over departmental
requests although ZBB in theory is designed to achieve resource
reallocation. This echoes Lauth’s (1978) finding of ZBB in Georgia.
Before the DBR, the provincial Finance Department was not a real
central budgeting office. The DBR is a reform aiming at centralizing
budgeting authority to the hands of the Finance Department and
restructuring it into a real central budgeting office. ZBB, as a formal
and rational procedure, fits this goal of the Finance Department. In
the eyes of the Finance Department, ZBB is a “scientific” budgeting
method enabling the Finance Department to provide “scientific”
explanations for its cutting decisions on the departments’ budgets (I1a; I-1b; I-11). But, spending departments view the control aspect of
ZBB quite differently. In the eyes of spending departments, the
Finance Department is centralizing budgeting authority in the name
of ZBB (I-7; I-9). As one respondent complains, “a program the
Finance Department doesn’t favor will be reduced to zero-base, while
a program it likes will not be zero-based” (I-9).
Personnel Expenditures
The determination of personnel expenditures involves four
departments: the spending department, the Staff Size Authorizing
Committee (SSAC), the Personnel Department, and the Finance
Department. The SSAC determines how many employees the
departments can hire. According to the wage policy and other
personnel policies issued by the State Council and its Ministry of
Personnel, the provincial Personnel Department calculates the total
personnel expenditure and an average expenditure standard (e.g.,
20,000 yuans per person each year). The Finance Department will
review this standard in terms of available revenues and living cost of
the province. Since personnel expenditures enjoy priority in the
budgetary process, the Finance Department will usually accept this
standard. Pursuant to this acceptance, the departments will decide
on their requests for personnel expenditures by multiplying the
expenditure standard by the staff quota (I-2).
From the perspective of the departments, the determination of
personnel expenditures is a calculation according to formula.
However, as several respondents indicate, while the Personnel
Department and Finance Department make their decisions on the
average personnel expenditure standard, the budgetary appropriation
of last year also plays an important role (I-1b; I-2).
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Operating Expenditures
In determining operating expenditures, the Finance Department
first decides an average operating expenditure standard for the
departments, e.g. 20,000 yuans per person for the ten departments
included in the DBR. Then, the departments will decide their requests
for operating expenditures by multiplying this standard by the staff
quota (I-2). Therefore, to the departments, the decision on operating
expenditures is a kind of formula budgeting.
However, budgetary bases play an important role in determining
the average expenditure standard. For the departments included in
the DBR, the determination of the standard starts with decisions on a
series of average expenditure standards for different items of
operating expenditures. The standard for each item is determined
according to the average expenditure of the selected representative
departments during the past two or three years. After all items have
been measured as such, a total standard is computed. Next, this
standard will be slightly adjusted according to the function, workload,
and budgetary base of each department (HPFD, 2002).
For other departments beyond the DBR, budgeting is incremental
in nature. As a respondent from such a department indicates,
“operating expenditures will be decided on the base of last year’s
budgetary expenditures, and then we will take into account of this
year’s change” (I-4).
Program Expenditures: The Place Where ZBB Operates
In the interviews, as far as the program expenditure is concerned,
respondents, especially those from the departments included in the
DBR, will use the vocabulary of ZBB to describe their budgetary
process, including zero-base, program priority, ranking, and removing
unnecessary expenditures. Nevertheless, since Hubei’s ZBB for
program expenditures is operated under a Chinese style TBB, its
operation has some unique features.
While ZBB in theory follows a bottom-up process, Hubei’s ZBB
process is both bottom-up and top-down. It is bottom-up because,
given the ceiling, the directors of the departments are given the
option of putting new programs into their requests and taking other
less important programs out of current year’s requests. However, it is
at the same time a top-down process because, with the
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
495
implementation of a kind of zero-base policy (ZBP) and program
reservoir system (PRS, xiang mu ku) during the past several years, the
Finance Department actually directs the departments’ budgetary
trade-offs.
First, although the departments and their subordinate agencies
are responsible for decision-unit analysis, which is the first step of
ZBB (Taylor, 1977), with the implementation of zero-base policy (ZBP),
the Finance Department actively intervenes in such analysis. In the
field of program expenditures, the decision unit is the program. In
formulating their programs, some departments really conduct
decision unit analysis, reexamining the purposes, activities, and
operation of the decision unit, and asking whether certain programs
can be terminated (I-4). However, with the implementation of ZBP
which has stipulated that while certain expenditures will be
guaranteed for money, others must be terminated or partly cut (HPFD,
2003ab), the Finance Department actually directs the departments’
decision unit analyses as to which programs must be reduced to a
zero-base.9
Second, with the establishment of the program reservoir system
(PRS), the Finance Department intervenes in not only the
departments’ decision unit analyses but also their ranking processes.
The PRS is created upon the departments’ PRSs. In creating their
PRSs, the departments analyze and rank their programs according to
departmental functions plus central and provincial policies. Upon the
departments’ PRSs, the Finance Department will construct its own
PRS, in which all programs are ranked in terms of priority. Although
the PRS may reflect the departments’ needs, once the Finance
Department’s PRS has been created, it will impose a constraint on
the departments’ requests (I-4; I-6).
Lastly, it is important to note that not all program expenditures
are determined within the process of ZBB because the Finance
Department is still not a department monopolizing all budgeting
authority, and several other departments still hold the authority of
allocating certain types of budgetary revenues outside the DBR. For
example, the Three Funds for Science and Technology Improvement
(ke ji san xiang) are controlled and allocated by the Science and
Technology Department and operates outside the DBR. Within those
departments, funds are allocated according to the plan set by these
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departments and corresponding central policies. The Finance
Department cannot affect the allocation of these funds (I-8; I-9; I-11).
Figure 2 presents budgeting methods applied to different
expenditures within the Chinese style TBB in the provincial budgeting.
The gap in the graph indicates that certain program expenditures are
beyond the control of the Finance Department.
FIGURE 2
The Nature of the Departmental Budgeting System
Note: This graph is not drawn from the actual share of the three
components. Moreover, although it has been mentioned that only less
than 1% of the government’s own revenues are left for program
expenditures, the actual program expenditures will be higher than that
percentage because the province will receive program expenditures
from the central government.
BUDGETARY PROCESS
In the field of program expenditures where ZBB is practiced, to
what extent has ZBB changed the budgetary process? This is certainly
a question important for assessing the achievement of ZBB in Hubei.
Certain Positive Changes Occurred
In fiscal stress, revenues left for program expenditures are so
limited after most revenues have been allocated to personnel and
operating expenditures that the competition for program expenditures
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
497
is furious in the provincial budgetary process. The installation of TBB
further intensifies such competition because the control of ceilings
mainly falls on program expenditures as mentioned before. Within the
firm ceiling, the departments are forced to make a tough trade-off
among programs, including the most important programs into the
requests while taking out less significant programs.
The application of ZBB to program expenditures has served to
improve such trade-offs by providing a tool to incorporate budgetary
rationality into the budgetary process. Budgetary rationality as
perceived by respondents signifies the allocation of fiscal resources
according to program priority rather than previous policies, political
officials’ will, and the department’s lobbying strategy that was
prevalent before. The following statement indicates the occurrence of
positive changes.
ZBB has prevented those departments, supported by loads of
documents from “the above” (shang mian), from demanding
money with no reasonable and specific purposes. [Before
ZBB], they have been using these documents as supporting
evidence for their bases and new requests (I-6).10
Moreover, the grafting of top-down elements to the procedure of
ZBB has in some degree improved budgetary trade-off among
programs. The implementation of zero-base policy (ZBP) makes it
impossible for the department to include into the requests a program
marked as zero-base. The program reservoir system (PRS) further
constrains the department’s requests over program expenditures.
When the department decides to submit its requests, it must
consider whether or not the program it wants to carry out has been
included into the Finance Department’s PRS and how it is ranked.
Moreover, the system makes it difficult or impossible to win funds for
new programs without strong policy rationale (I-4; I-6). To a certain
extent, this system has helped to rein in old budgetary strategies
such as arbitrarily creating a new program, submitting a “fake”
program to bail out money,11 and even requesting money without
specific programs (I-6).
Lastly, the grafting of top-down elements to the process of ZBB
seems to enable the Finance Department to constrain the practice of
“reverse ranking” that confounded ZBB in USA in the 1970s, in which
the managers in the departments protected less important programs
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by building them into the base and won increased funds by ranking
impossible-to-cut programs very low (Kettl, 1992, p. 85).
However, even in the field of program expenditures, the
achievement of Hubei’s ZBB should not be overstated. All
respondents admit that the implementation of ZBB is incomplete and
not very successful as whole; some call the provincial ZBB “quasiZBB” (I-1ab; I-3; I-8). Furthermore, beyond the decision-unit analysis,
the achievement of ZBB is not as successful as expected because the
decision of how much money should be given to each program is still
made arbitrarily, and in the process of ranking, no real comparison or
scientific analysis has been carried out among the programs (I-8).
Finally, almost all respondents admit that the bases continue to be a
starting point of budgetary decision. An interviewee even makes the
following strong comments: “It is termed ZBB, but is actually base
budgeting, the decision over program budgets is still based upon
previous policies” (I-4). Nevertheless, there is a variation in the
perception of the base. Some respondents tend to perceive the base
as the ceiling the departments received last year (I-7), some perceive
it as the actual budget of last year (I-5; I-6; I-9), while some perceive it
as previous policies (I-4). Several respondents even openly defend
using the base as the starting point of budgeting in general (I-3; I-6),
of program budgeting (I-10), and of personnel and operating
budgeting (I-8). The following three elements greatly contribute to the
moderate achievement of ZBB in Hubei.
ZBB in Fiscal Stress: “Poor Finance, No Budgeting, No ZBB”
As has been discussed, the provincial government adopted ZBB
because it was driven by fiscal stress. However, fiscal stress in turn
has greatly constrained the implementation of ZBB, a point almost all
respondents emphasize. In fiscal stress, the revenues that can be
used for program expenditures are extremely limited after most
revenues have been allocated to personnel and operating
expenditures. In this situation, if ZBB had been exactly carried out,
that is, revenues had been allocated according to the priority rank
until all available revenues were exhausted, most programs planned
by the departments would not receive any money even if they were
desirable and had strong and reasonable policy rationale. Worse,
there would be many departments receiving no funds for their
programs, a situation that the Finance Department and the governor
are not willing to face. The Finance Department trapped in such a
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
499
budgetary environment would find it difficult or impossible to
implement ZBB because of the resistance from the departments. In
such an environment, ZBB is no better than incremental budgeting,
which is easier for the Finance Department to carry out (I-1ab; I-2; I-5;
I-13).
The difficulty in implementing ZBB in fiscal stress is well
illustrated by the experience of compiling the 2001 budget in which
the Finance Department involuntarily retreated from its ambition of
creating ZBB as a general framework and turned to relying on CCS as
a way out. The reason for the retreat is quite simple. It is because the
Finance Department found available revenues were too limited to
meet the departments’ requests formulated by the bottom-up
procedure of ZBB.
Unfortunately, the installation of CCS has frustrated the
departments’ efforts to implement ZBB because, although the
departments tend to request more than what is really needed as
several respondents admit, most of their requests are reasonable.
The following complaint is illustrative of this point.
If the Finance Department will not rely on our ZBB-type of
budget, what is the meaning of doing it? Since then, we never
seriously conduct program budgeting. What we were
concerned about first was whether we can win support from
the governor and vice governor, whether we can get a slip from
them, and what is the ceiling the Finance Department will give
to us. What we now follow is: only when you are sure about the
money can you start to consider about programs. When we
formulate the program budget, we will use last year’s ceiling as
the base (I-7).
In sum, fiscal stress has greatly limited the government’s capacity
to implement ZBB. As one interviewee from the Finance Department
says, when the finance is poor, there is no advanced budget, let alone
a successful ZBB (I-1b). This reminds us of what Caiden and
Wildavsky (1974) had found in poor countries thirty years ago; that is,
it is difficult to budget when the budgetary environment is
characterized by poverty and uncertainty. Although Hubei’s budgetary
environment is not uncertain, it is poor.
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Insufficient Operating Expenditure: “Eating the Program”
A persistent problem of provincial budgeting, which is closely
related to fiscal stress, is the insufficiency of operating expenditures.
For many years, the operating expenditure standard has been set very
low, far from supporting the normal operation of the departments. In
the departments not being included in the DBR, their standards are
set very low, e.g., 6000 yuan per person. In such a department, the
total operating budget is around 280,000 yuan each year according
to this standard, while the actual expenditure for maintaining
departmental vehicles alone will cost around 300,000 to 400,000
yuan annually (I-4). As to the departments included in the DBR,
although their standards have been increased (roughly 20,000 yuan
per person), a large gap of operating expenditures still exists (I-10b).
Therefore, for many years, financial officials have been forced to
find whatever revenues are on hand to make their departments
operate, including seeking budgetary supplements, using offbudgetary revenues, and removing revenues from program budgets to
compensate operating expenditures. The last strategy, named “eating
the program”(chi zhuan xiang), is popular in Hubei as well as many
other local governments. According to a respondent, usually, around
50% of a program budget is eventually used for operating
expenditures (I-3).
The strategy of “eating the program” has impeded the
implementation of ZBB because it has distorted the information
about program expenditures. Under this practice, when the
departments make their decisions over program expenditures
according to ZBB, they will incorporate spending needs on operating
expenditures into program budgets, impairing the development of
decision-packages of ZBB.
Recently, the operating standard for the departments included in
the DBR has been increased, which may provide the province an
opportunity to improve its ZBB. However, at least in the near future,
this may not be a good news for ZBB because with the increase of the
operating standard, even less revenues will be left for program
expenditures after operating expenditures have been budgeted,
considering fiscal stress is unlikely to be relieved in the near future. In
other words, the influence of ZBB will be further narrowed with the
increase of the operating standard. Therefore, what can be expected
from the DBR is to normalize the budgetary process for basic
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
501
expenditures; however, as to program expenditures, it is still hard to
achieve the goals (I-5).
Political Constraints: “The Failure is not Technical but Political”
ZBB in China is carried out under a specific political and
administrative context far different from the USA political system
where ZBB was first practiced. This study finds that the Chinese
political and administrative system has certain characteristics that
are impeding the implementation of ZBB for program expenditures.
First, despite repeated efforts of transforming governmental
functions accumulated during the period of the planned economy, the
transformation in sub-national governments has not been very
successful. Without a well-defined departmental function and goal,
the departments will find it is very difficult to rank programs
according to ZBB. As one respondent states, “We are still a big
governmental system with so many functions. Therefore, it is difficult
to compare the budgets compiled. The failure is not technical but
institutional, related to political elements”(I-8).
Second, the implementation of ZBB in Hubei has been impeded
by the fact that sub-national governments in China do not have
sufficient budgetary autonomy. The lack of local budgetary autonomy
manifests itself in two aspects: (1) Un-funded Policy. As Chinese polity
is unitary in nature, local governments are required to carry out
policies made by the central government even if no or only part of
central revenues is provided with these policies (I-5). (2) Fiscal
Dependency. Fiscal decentralization between 1980 and 1994
granted a large amount of revenues to local governments, resulting in
the fall of the ratio of central revenue to general budgetary revenues.
In 1994, to arrest the fall of the ratio, China implemented a new fiscal
system, i.e., tax-share system (fen shui zhi),12 which centralized a
large amount of revenues to the center.13 As a result, the central
government’s capacity to make fiscal transfers is also increased.
Since 1994, each year, around 40-50% of central revenues have been
transferred to local governments (Wang, 2002, p.120). The central
transfers are very important for sub-national governments like Hubei
trapped in fiscal stress during these years. In 2001, while Hubei
provincial government’s own fiscal revenue is 2,309.91 million yuan,
the central subsidy it received is 1326.86 million yuan (Tong, 2002b),
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i.e., the latter is 57.4% of the former, indicating a very high fiscal
dependency upon central transfers.
The existence of un-funded policies has impaired the
implementation of ZBB in provincial budgeting. To carry out these unfunded policies, the provincial government has to find additional
money. But, the problem of the budgets for un-funded policies is that
they have not been compared with other program expenditures
budgeted at the beginning of the budgetary year (i.e., these two types
of program expenditures have not been ranked together) because
these policies are usually made after the provincial budget has been
passed, and they usually arrive at any time during the budgetary year
(I-5; I-6).
Fiscal dependency also impaired the implementation of ZBB in
provincial budgeting. This is because many central transfers are
granted in the form of matching grants, i.e., to receive central grants,
local governments must provide a certain amount of its own revenues
to match central grants. To meet this requirement, at the beginning of
the budgetary year the Finance Department has to leave a certain
amount of revenues unallocated. Consequently, program
expenditures corresponding to central grants are determined outside
the process of ZBB (I-5).
Third, during the past few years, despite the introduction of ZBB to
the decisions on program expenditures, the old practice of “writing a
slip” by powerful politicians to justify requests continues to play a role
in budgetary decisions. This also impaired the implementation of ZBB
because requests backed by such slips will be treated specially or
higher in the priority list than those requests without such support,
meaning the slips influence the ranking of programs. Of course, at
least according to formal institutional arrangements, only the
provincial CCP secretary, the governor, and vice governor in charge of
the provincial finance have the authority to order the Finance
Department to make budgetary appropriation, indicating that other
vice governors and CCP standing committee members do not have
such power. But in the real world, the governor and vice governor in
charge of finance have to respect the power of their colleagues,
especially CCP standing committee members. The fact that the
provincial government is still emphasizing the need to eliminate
program expenditures allocated according to such slips in compiling
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
503
2004 budget (HPFD, 2003b) indicates that the influence of such slips
persists.
In sum, ZBB has not achieved its goal to bring an end to
incremental budgeting and fundamentally change budgetary officials’
behaviors in Hubei. Moreover, it has not helped to reduce budgetary
conflicts stemming from fiscal stress as expected; instead, it tends to
intensify such conflicts, leading to its failure as a revenue allocation
mechanism in fiscal stress.
BUDGETARY OUTCOMES
Upon the above analyses, it is argued that we should not expect
large and dramatic changes would occur in budgetary outcomes. First,
ZBB has not been applied to personnel and operating expenditures,
which have eaten most of the provincial revenues, suggesting ZBB
can only possibly affect a small amount of budgetary expenditures,
i.e., program expenditures. Second, some program expenditures are
beyond the DBR and hence are decided out of the process of ZBB,
further narrowing the impact of ZBB. Third, even for those program
expenditures included in the DBR and required to determine within
the framework of ZBB, ZBB has not replaced incremental budgeting.
To test the above proposition encounters great difficulties in data
collection since governmental budgeting in China is not transparent;
for instance, the information of departmental budgets is still
classified as a governmental secret. Data that is available at present
is from annual budget reports between 2001 and 2003 that the
director of the Finance Department on behalf of the provincial
government presented to the annual session of the PPC in February
each year. The reports usually provide information about seventeen
major expenditures budgeted for the new budgetary year.14 Based on
such data, a correlation analysis was conducted. First, seventeen
expenditure items of each year were ranked in terms of their
percentages in the total expenditure of that year. Next, a Spearman
correlation analysis was conducted to measure whether there are
associations among the rankings of the three years (Table 3). The first
correlation analysis included all expenditures. The second analysis
excluded basic construction expenditures and science and technology
expenditures. The reason for this exclusion is that the former
expenditures and most of the latter expenditures are beyond the DBR
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TABLE 3
Correlation Analysis
Fiscal Year
FY2001-2002
FY2002-2003
FY2001-2003
N
All
Expenditures
.988*
.961*
.944*
17
Expenditures Within
DBR & ZBB
.986*
.950*
.943*
15
Notes: * Correlation is significant at the 0.01 level (2-tailed).
Sources: Tong (2001; 2002b; 2003).
and hence the framework of ZBB. All coefficients are positive and very
high, indicating an item receiving a large appropriation in one year will
continue to receive more in the next year. It therefore suggests that
ZBB has not brought about a significant change on budgetary
outcomes.
However, the above test, though informative, should not be
viewed as a conclusive assessment of ZBB’s impacts on budgetary
outcomes due to the following two reasons. First, the data used
provides no information about each department’s appropriations and
actual expenditures. Second, it is impossible to separate program
expenditures from this data, which is important for assessing ZBB’s
impacts on the appropriation of program expenditures.
CONCLUSION AND DISCUSSION
It is expected that ZBB may have more chance to be successful in
China because 1) the legislature is much weaker in the budgetary
process, and hence, political support for certain expenditures may not
be as strong as it is in a democratic system; and 2) entitlement
expenditures are very small in the budget. However, although Chinese
budgeting system lacks those political and legal elements besetting
ZBB in USA (Kettl, 1992, pp. 82-85), it has its own political and
economic constraints ZBB has to face. First, in fiscal stress, it is
difficult for ZBB to achieve its goals of bringing an end to incremental
budgeting and reallocating revenues among programs. This is
something new for the theory of ZBB. Second, the Chinese political
system is something that ZBB as a budgeting method cannot change
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
505
but has to adapt to. This is a lesson important for developing
countries in terms of the appropriate degree of enthusiasm in
borrowing administrative and budgeting systems from Western
countries.
Despite its moderate achievement, Hubei’s ZBB does have
something innovative for the theory of ZBB as well as the budgeting
literature. First, it suggests that ZBB can be combined with TBB and
operates under TBB, while in American local governments’ practices
ZBB seemed to have been replaced by TBB. Second, it suggests that
ZBB can also be a top-down process, though ZBB before is mainly a
bottom-up process. Third, it shows that ZBB can be discriminately
applied to one type of expenditures, suggesting a kind of discriminate
alignment is possible in public budgeting.
Finally, it should be noted that this study has several limitations.
First, it only examines ZBB in one province in fiscal stress, which has
greatly limited the implementation of ZBB. Therefore, a question
worth further exploring is: will ZBB have more chance to succeed in a
province whose finance is to some extent rich? Second, the
conclusions of this study may not fit ZBB in the central government.
Third, the data employed to conduct empirical testing is incomplete.
In the future, when the provincial government’s departmental
budgets are opened to the public, new empirical tests are needed.
ACKNOWLEDGEMENTS
This author wishes to acknowledge the three referees for their
helpful comments, critique, and suggestions. He wishes to thank
Professor Irene Rubin and Thomas P. Lauth for their valuable
comments in the 2003 ABFM conference, and Dr. Yilin Hou for his
dedication and patience in organizing the conference panel and this
symposium. He also wants to express his gratitude to Professor Irene
Rubin and Dr. Leuenberger for their helps in editing this paper. Lastly,
the author wants to express his gratitude to 985-2 National
Innovation Base “Public Management and Social Development” of
Sun Yat-sen University for providing fund for this research.
NOTES
1. Cited from Wong et al. (2003, p. 134).
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2. Chinese budgeting system during this period is basically same as
the plan system practiced by other socialist states. See more in
Martinez-Vazquez & Boex (2001) for a description of such system.
3. Other two reforms are treasury management and public
procurement reform. The former is to create a centralized
treasury management system upon a single accounting system to
replace the old decentralized system. The latter is to create a
centralized and transparent governmental procurement system
(Lou, 2002).
4. They are the Agriculture Department, Education Department,
Science and Technology Department, and Labor and Social
Security Department.
5. The ten departments include the General Office of the provincial
government, General Office of the provincial Chinese Communist
Party, Plan Committee, Economy and Trade Committee, Foreign
Economy and Trade Department, Finance Department,
Transportation Department, Science and Technology Department,
Agriculture Department, and Association of the Disabled.
6. In a province, there are around seventeen such political officials.
7. As many respondents point out, in the two-ups and two-downs
procedure, although the first up provides the Finance Department
information about the departments’ estimation of service
maintaining costs, it is in general meaningless because no matter
how much the departments request they have to budget under
the ceiling given by the Finance Department.
8. In TBB, to resolve the game playing and antagonism between the
budgeting office and spending departments, the budgeting office
gives firm ceiling to the departments for their requests at the
beginning of the budgetary process. The departments are then
required to keep their requests under this ceiling. If the
departments’ requests are above this ceiling, the budgeting office
will return the requests to the departments and ask them to
revise. The revisions are accepted only if they come under the
ceiling. Of course, as early as the 1920s, TBB had appeared,
much earlier than ZBB (Rubin, 1998).
9. Usually, expenditures guaranteed to receive money are social
security expenditures and wage expenditures. Expenditures that
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
507
must be reduced to a zero-base include the following program
expenditures: one-time and obsolete programs, old programs no
longer having reasonable policy supports, programs not belonging
to the responsibility of the provincial government (partly cut),
programs decided by various meeting memoranda of the
Governor’s Work Meeting (partly cut), and programs formerly
authorized by the slips of politicians.
10. “The above” (shang mian) is referred to the central government or
provincial politicians.
11. Usually, the program is created for a specific purpose easy to win
money. But, once the money is at hand, the department will use it
for other purposes.
12. See Bahl (1998) for more information about the tax-share system.
13. The centralization of the 1994 tax share reform is demonstrated
in the change of self-finance capacity of the central and local
governments. In 1993, the ratio of self-finance capacity of the
central government was 0.73, while the ratio of local governments
was 1.02. But, the 1994 reform turned the situation upside down.
In 1994, the central ratio was increased to 1.66, while the local
ratio was decreased to 0.57 (Teng, 2003).
14. Usually, these expenditures include basic construction
expenditures; agricultural expenditures; education expenditures;
science and technology expenditures; health expenditures;
developmental expenditures for culture, sporting, broadcasting,
and population control; developmental expenditures for industry
and transportation; developmental expenditures for commerce;
developmental expenditures for tax administration, industry and
commerce administration, and audit; social assistant and
relieving expenditures; social security subsided expenditures;
administrative expenditures; expenditures for police, court, and
inspection; policy subsidies; special expenditures; and assisting
grants for underdeveloped areas (Tong, 2001; 2002b; 2003).
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Tong, D. Y. (2002a). “Summarizing Experiences, Actively Exploring,
and Firmly Proceeding to Improve the Comprehensive Reform of
the Provincial Department Budget.” Hubei Provincial Finance
Department Meeting Record (with no document number).
Tong, D. Y. (2002b). “The Report of Hubei Province’s 2001 Budget
Execution and 2002 Budget Draft.” Hubei Provincial People’s
Congress: Hubei People’s Concerns (http://www.hppc. gov. cn
/page/pages/Rdgongbao.asp).
Tong, D. Y. (2003). “The Report of Hubei Province’s 2002 Budget
Execution and 2003 Budget Draft.” Hubei Provincial People’s
Congress: Hubei People’s Concerns (http://www.hppc.gov.cn
/page/pages/Rdgongbao.asp).
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Wang, J. (2001). “The History and Future of Fiscal Expenditure
Reform.” In the Ministry of Finance of China. (Eds). Optimization
of Fiscal Expenditure Structure and Expenditure Efficiency (pp.1929). Beijing, China: Economic Science Press.
Wang, Y. J. (2002). “Intergovernmental Transfers in China: The Goal,
Institution, and Enforcement Mechanism.” In National People’s
Congress Standing Committee. (Eds.). Chinese and Foreign
Experts on Fiscal Transfer Expenditures (pp. 120-140). Beijing,
China: Chinese Fiscal and Economic Press.
Wong, C. et al. (2003). China: National Development and SubNational Finance. Beijing, China: CITIC Publishing House.
Zheng, J. X. (2003). A Study on Chinese Governments’ Budgeting
Institution Reform. Beijing, China: Chinese Fiscal and Economic
Press.
APPENDIX
Interview List
The following list includes citation number, interviewee position,
and interview date for fourteen open-end interviews conducted in
Hubei province. All respondents were guaranteed anonymity. To
further protect the interviewees, the agency’s names within the
departments are not presented here.
Codes Interviewees
I-1a
A division head of the Finance
Department
I-1b
A vice division head of the Finance
Department
I-2
A vice division head of the Personnel
Department
I-3
Two vice division heads of the
Provincial People’s Congress
(Interviewed together)
I-4
A vice division head of the Cultural
Department
I-5
A division head of the Statistical
Department
Interview Dates
Morning, August 11
Morning, August 11
Night, August 11
Morning, August 12
Afternoon, August 12
Afternoon, August 13
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
511
I-6
A division head of the Audit Department Afternoon, August 13
I-6
I-7
A division head of the Audit Department
A division head and a vice division head
of the Social Security Department
(Interviewed together)
A division head of the Science &
Technology Department
A division head of the Agricultural
Department
A division head and a vice division head
of the Plan Committee (Interviewed
together)
A division head of the Plan Committee
A division head of the Finance
Department
A division head and two vice division
heads of the Economic and Trade
Committee
I-8
I-9
I-10a
I-10b
I-11
I-12
Afternoon, August 13
Morning, August 14
Morning, August 15
Afternoon, August 15
Morning, August 18
Morning, August 18
Morning, August 19
Morning, August 20
A RESPONSE TO “ZERO-BASED BUDGETING IN CHINA: EXPERIENCES
OF HUBEI PROVINCE”
Beverly Bunch and Christina Tang*
Given the demise of ZBB in the United States, it is interesting to
learn about how ZBB is being proposed and implemented as a means
of budget reform in China. The article by Jun Ma provides us with the
opportunity to revisit ZBB and think about how the issues in Hubei
compare to the issues that U.S. governments have encountered when
implementing ZBB and other types of budget reforms. It also allows
us to reflect on what aspects of ZBB remain in U.S. budgeting today.
Issues Associated with the Implementation of ZBB
The reviews from when ZBB was implemented in the U.S. in the
1970s are mixed, ranging from generally positive to quite negative.
Worthley and Ludwin (1979, p. 10), for example, concluded that ZBB
could be a “useful and workable budgeting system in state and local
governments” and could be used as “an aid in redirecting increasingly
scarce resources to the most needed and productive programs.” In
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contrast, Hammond and Knott (1980, p. 1) concluded that the early
experiences showed “ZBB to have had little impact on either budgets
or budgeting.” Over time, ZBB has become less popular as
government officials have come to better understand the demands
and limitations associated with implementing ZBB.
A number of the issues associated with the implementation of
ZBB in Hubei are similar to the issues that have been encountered
with the implementation of ZBB and other governmental budget
reforms in the United States. Some of these issues are discussed
below under the following categories: (1) spending that is exempt
from the ZBB process, (2) a lack of an integrated budget, and (3) the
impact of political factors.
Spending That Is Exempt from the ZBB Process
The author notes that significant portions of Hubei’s spending are
not subject to the ZBB process. This includes personnel and operating
expenses, as well as unfunded policies from the central government
that occur after the start of the budget year.
Governments in the United States also have forms of spending
that fall outside the purview of most budget reforms. At the federal
level, there are outlays such as interest on the federal debt, previously
approved multi-year spending, and entitlement programs that typically
are not scrutinized during the annual appropriations process. At the
state and local government level, there are mandates from higher
levels of government or the courts that affect spending in areas such
as education, prisons, the environment, and the accessibility of
facilities.
There
also
are
obligations
associated
with
intergovernmental programs such as K-12 public education and
Medicaid.
Excluding significant portions of spending from the purview of
ZBB or other types of budgeting reforms lessens the potential
effectiveness of these reforms. If a budget reform is considered very
effective when implemented but only applies to a portion of the
spending, its overall effectiveness is significantly reduced.
Lack of a Unified Budget
The author notes that Hubei has made progress in developing a
comprehensive budget by gradually consolidating off-budget revenues
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
513
and expenditures into the budget. However, certain types of
expenditures remain under the control of entities other than the
Finance Department. The lack of a unified budget makes it difficult to
prioritize across all governmental programs.
A fragmented budget also is a factor that constrains the
effectiveness of budget reforms among governments in the U.S.
Some programs at the state or local government level, such as
highways and water and sewer operations, usually are financed
through earmarked revenue sources and therefore are less
susceptible to trade-offs with general government programs. Tradeoffs are even more unlikely if some programs are administered
through enterprise funds or through a separate entity, such as a
public authority. A similar situation exists at the federal level with
trust funds (e.g., social security and the highway trust fund) and
government-owned businesses, such as the U.S. Postal Service.
The Impact of Political Factors
Budgeting remains a political activity regardless of the type of
budget system that is utilized. Portions of the process may become
more rationale and systematic, but that does not preclude the
intervention of political officials who have particular projects or
programs that they want implemented.
In Hubei, politicians may “write a slip” expressing their support for
some particular program or project to be funded. The author states
that these notes were an important part of budgeting prior to the
reform and still remain in existence. U.S. governments also encounter
input/pressure from politicians who make special requests during the
budget process.
The ranking of programs under ZBB also is subject to politics.
While in theory one could utilize economic criteria, such as
maximizing the benefits per dollar spent, in reality it is difficult to
compare programs which serve different purposes and have different
types of outcomes. Information about impacts and costs can be
provided, but ultimately choices are made largely on the basis of
values and political considerations. As the Hubei article notes, “the
decision of how much money should be given to each program is still
made arbitrarily, and in the process of ranking, no real comparison
and scientific analysis have been carried out among the programs.”
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Politics also plays a role in deciding whether or not to discontinue
funding for lower ranked programs. In Hubei, the author notes that in
tight fiscal times, the Finance Department and governor would find if
difficult to implement ZBB if it meant that many departments would
receive no funds for their programs. Similarly, in the United States
some government officials choose to do across-the-board cuts rather
than singling out certain programs for cuts. These practices may be
politically expedient, yet they run counter to the rational process of
prioritizing programs to determine which programs should be funded
or cut.
There also is a level of political ease in building on decisions that
have been made in the past rather than dismantling the base budget
and starting from scratch. This tie to the base budget makes it
difficult to implement reforms such as ZBB.
Aspects of ZBB That Remain in U.S. Budgeting
Although ZBB as originally proposed is not widely used in
governments in the United States today, various aspects of ZBB
remain. Most of these practices focus on efforts to examine at least a
portion of the base budget or to identify the outcomes from
alternative spending options.
One modified ZBB approach is to have departments submit
budget requests reflecting (1) the current level of spending, (2) a cut
of a certain percentage, and (3) an increase of a certain percentage.
As was true for ZBB, this allows central budget officials the
opportunity to trade-off lower priority items in one department to fund
higher-priority items in another department. It also facilitates input
from the departments in identifying what activities are considered
high or low priority.
The current focus on integrating budgeting with strategic planning
encourages government officials to identify goals and then evaluate
how alternative strategies and spending options will impact the
achievement of those goals. Under outcome budgeting, as proposed
by Gaebler and Hutchinson (2004), existing governmental programs
are not given any special status. They are evaluated the same as
other alternatives for achieving the desired outcomes.
Another government process that relates to ZBB is the use of
sunset legislation. Some governments, in particular state
ZERO-BASED BUDGETING IN CHINA: EXPERIENCES OF HUBEI PROVINCE
515
governments, periodically conduct reviews of public agencies and
programs to see if they are efficient and effective and whether they
are addressing an important need. If the legislature does not pass
legislation to continue the existence of these agencies/programs, the
law allows “the sun to set” on these agencies/programs. This process,
like ZBB, looks at the “base” programs and operations.
Conclusion
Given the history of ZBB in the United States, it will be interesting
to see how ZBB evolves and affects budgeting in Hubei and other
provinces in China. We hope the author and others will continue to
keep us informed.
References
Hammond, T. H., & Knott, J. H. (1980). A Zero-Based Look at ZeroBase Budgeting: Why Its Failures in State Government Are Being
Duplicated in Washington, New Brunswick, NJ: Transaction Books.
Osborne, D., & Hutchinson, P. (2004). The Price of Government:
Getting the Results We Need in an Age of Permanent Fiscal Crisis.
New York: Basic Books.
Worthley, J. A., & Ludwin, W. G. (1979). “Zero-Base Budgeting in
Theory and Practice. In John A. Whorthley & William G. Ludwin
(Eds.). Zero-Base Budgeting in State and Local Government:
Current Experiences and Cases (pp. 1-12). New York: Praeger
Publishers.
--------------------------* Beverly Bunch, Ph.D., is an Associate Professor and Christina Tang
is a DPA student at the University of Illinois at Springfield.