However, the Chinese style TBB is not exactly same as the TBB practiced in U.S. local governments. As our investigation shows, the installation of TBB has not brought an end of ZBB. Instead, ZBB is largely applied on one type of expenditures, i.e., program expenditures. The departmental
budgeting reform re-clarifies and unifies the scope, category, and composi- tion 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 of civil servants. Operating expenditures refer to expenditures spent on adminis- trative operation of the departments, such as printing, meeting, traveling, vehicle maintenance, and electricity. Program expenditures are expendi- tures for the departments to achieve certain specific administrative missions or goals (Ma, 2003).
As mentioned above, at the provincial level, ZBB is mainly applied to program expenditures. For example, in Hubei, only in the section of program expenditures does the name of ZBB appear in the Notifica- tion of Compiling 2004 Provincial Departmental Budgets issued by the finance bureau. Moreover, in our interviews, respondents tend to describe their budgeting methods as ‘‘personnel expenditures according to real need, operating expenditures according to the standard, and program expenditures according to the rank,’’ suggesting that ZBB is just applied to program expenditures rather than all types of expenditures. It seems that basic expenditures (personnel and operating expenditures) and program expenditures are viewed as different in nature, and hence, they are budgeted differently, which suggests a kind of discriminate alignment (Patashnik, 1996, p. 200) may exist in the provincial budgetary process.
Lastly, as one respondent in Hubei stated, ‘‘[s]ince personnel and operating expenditures are fixed, ZBB mainly fall in program expenditures’’ (Ma, 2003). Due to the same reason, the control of the budget ceiling also mainly falls in program expenditures. Figure 25.1 presents the budgeting methods applied to different types of expenditures in the budgetary process.
Figure 25.1 The nature of the departmental budget reform.
Modernizing Public Budgeting and Financial Management in China g 705
25.3.4.1 Personnel Expenditure and Operating Expenditure
Personnel and operating expenditures are termed basic expenditures in China. According to our investigation, both of them are determined by a combination of formula budgeting with incremental budgeting. In China four organizations involve the decision of personnel expenditure: the spending departments, the staff size authorizing committee (SSAC), the personnel bureau, and the finance bureau. The SSAC determines how many employees each spending department can hire. According to the wage policy issued by the State Council, the personnel bureau calculates the total wages and an average personnel expenditure standard (e.g., RMB 20,000 yuan per person each year), which is then submitted to the finance bureau. The finance bureau will review this standard according to its estimation of available revenues, a comparison with the salary level of non-government employees, and local living level. Since personnel expenditure enjoys high priority in the budgetary process, usually, the finance bureau will accept this expenditure standard (Ma, 2003).
Theoretically, spending departments could make their own budgetary requests for personnel expenditure. Actually, they have no discretion to make their own recommendation on personnel expenditures because both the staff size and expenditure standards are beyond their authority. For them, the determination of personnel expenditure is a straight calculation according to formula. Spending departments must follow the staff quota set by the SSAC and the average personnel expenditure standard decided by the personnel bureau and finance bureau. However, when the personnel bureau and finance bureau make their decisions on the standard, the budgetary appropriation of last year still plays an important role in defining the standard. Therefore, the determination of this part of the budget requests indicates a combination of incremental budgeting and formula budgeting (Ma, 2003).
The determination of operating expenditure involves a more compli- cated calculation. In the budgetary decision on operating expenditures, the finance bureau calculates an operating expenditure standard for every department based on their activities, e.g., RMB 20,000 yuan per capita each year for the education department, and 30,000 per capita each year for the police department. At the earliest stage of the reform, most local governments carried out departmental budgeting reform in some spen- ding departments rather than all departments. For the departments being included into the departmental budgeting reform, operating expenditure standards are determined item by item according to the average expenditure of the selected representative departments during the past several years.8 For example, the printing expenditure standard can be set as RMB 60 yuan per capita annually based upon the average printing expenditure
of the representative departments during the past several years. After all items have been measured as such, a total operating expenditure standard is computed. Next, these standards will be slightly adjusted according to the departments’ function, workload, and previous budget appropriation of each department (Ma, 2003). Usually, a higher standard is given to important departments such as the police departments and the judicial system, while a lower standard is given to less important departments such as the associations of women. Also, the operating expenditure standards vary among regions and levels of government due to their fiscal situation.
At the central government, the average standard was RMB 40,000 yuan per capita in 2003. In Guangdong, the richest province in terms of both local economy and fiscal revenue, the standard was RMB 50,000 yuan per capita in 2003. In Hubei province, which faced serious fiscal stringency during these years, the standard was RMB 20,000 yuan per capita in 2003.9
No matter how big regional distinctions are, the determination of the average standard of operating expenditures is under the control of the finance bureau. Multiplying the average standard by the number of employees, the spending department then gets its budget request for operating expenditures.
Therefore, for spending departments, the budgetary decision on operating expenditures is also carried out according to certain formulas. Nevertheless, as the above analysis suggests, the previous appropriation of operating expenditures is still one key element to decide the average operating expenditures, suggesting the budgetary base matters as well.
For other departments not being included in the departmental budgeting reform, budgetary decision-making is still a kind of incrementalism. As a budgetary official in Hubei said, ‘‘operating expenditures will be decided on the basis of last year’s budgetary expenditure, and then we will take into account this year’s change’’ (Ma, 2003). However, these departments’
budget requests are constrained by the available revenues, and a low expenditure standard is applied to these departments. For example, in Hubei province, the standard was around only RMB 6,000–7,000 yuan per capita in 2003.
The problems with the basic expenditures are largely related to operating expenditures. First, in provinces facing fiscal stringency, the operat- ing expenditure standard has been set too low to cover actual operating expenditures. Therefore, during these years, all spending departments have been misappropriating expenditure from program appropriations or even extra-budgetary revenues to compensate operating expenditures in order to support their daily operations. Second, although adjustment of operating expenditure standards among departments is expected, usually, the operating expenditure standard is applied to most departments with no consideration of the real need of different departments, largely due to the difficulty of measurement.
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25.3.4.2 Program Expenditure
Program expenditure is required to be decided within the framework of ZBB. In the interviews, as far as the program expenditure was concerned, budgetary officials would use terms of ZBB to describe their budgetary processes, including program priority, rank, and zero-base. Our investiga- tion shows that, to a large extent, ZBB in China is regarded as a budget preparation technique designed to improve fiscal control over department requests, similar to the practice of ZBB in Georgia that Professor Lauth (1978) found twenty-six years ago.
Nevertheless, since ZBB over program expenditures is operated under the Chinese style TBB, its implementation has something unique.
While ZBB in theory follows a bottom-up process, ZBB implementation in China 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 important programs into their requests and taking other less important programs out of current budgetary year’s requests. How- ever, it is also a top-down process because the ceiling control mainly falls on the program expenditures, as has been mentioned. Moreover, in the provincial governments, the finance bureau actively directs the departments’
budgetary trade-off through the implementation of program inventory system (xiang mu ku).
Although the departments and their subordinate agencies are respon- sible for decision-unit analysis — the first step of ZBB (Pyhrr, 1973), the Hubei case shows that the finance bureau actively intervenes in such analysis. For program expenditures the decision units are the programs. Some departments really conducted decision units analysis, reexamining the purposes, activities, and operation of the decision unit, and asking whether certain programs can be terminated. However, the finance bureau actively involved the departments’ decision unit analysis by stipulating which program must be terminated or partly cut (Ma, 2003).
Further, with the establishment of the program inventory system, the finance bureau actually involves in not only the departments’ decision unit analysis but also their ranking process. In creating the program inventory system, the finance bureau first asks all departments to develop their own program inventories by analyzing and ranking their programs according to the importance of programs, based on the consideration of their functions and the central and provincial policies. After that the finance bureau will construct its own program inventory system, in which all departments’ programs are ranked in terms of priority. To be honest, the inventory system is created to reflect the need of the departments. How- ever, once the program inventory system has been put in use, especially when the finance bureau’s program inventory system is decided, it will
impose certain constraints on the departments’ requests over program expenditures (Ma, 2003).
However, the impacts of ZBB in China should not be overstated. Not all program expenditures are determined within the framework of ZBB because the finance bureau is still not the only department having the authority to allocate budgetary revenues, and several other departments continue to hold the authority to allocate certain types of budgetary expenditures outside the departmental budgeting system. For example, the Three Funds for Science and Technology Improvement (ke ji san xiang) is controlled and allocated by the Science and Technology Department (Ma, 2003).
Moreover, according to a recent investigation of ZBB in Hubei provin- cial government (Ma, 2003), even in the field of program expenditures where ZBB is practiced, ZBB has not produced fundamental changes in the budgetary process and outcomes. The implementation of ZBB in China, especially in local governments, is severely beset with three structural elements. First, revenue stringency has greatly impeded the implementation of ZBB in some provinces facing fiscal stringency. In fiscal stress, budgetary revenues must first be allocated to personnel and operating expenditures. But, after this, remaining revenues are relatively small in amount, making it difficult to apply ZBB to program expenditures.
This is because, in this situation, if ZBB had been exactly carried out, that is revenues had been allocated according to the priority 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. The finance bureau trapped in such a budgetary environment would find it is difficult or impossible to exactly implement ZBB because of the resistance from the departments (Ma, 2003).
Second, the practice of ‘‘biting program expenditures’’ (chi zhuan xiang), stealing program appropriation to compensate operating expenditures, is a common practice in China’s local budgeting system, which further impeded ZBB implementation. Compared with personnel and operating expendi- tures, spending departments have more discretion in the formulation and execution of program budget. Meanwhile, since the low operating expenditure standard set by the finance bureau is far from satisfying the real operating demand of spending departments, departments tend to use part of program budget to meet their operating needs (Ma, 2003).
Third, certain political elements have produced negative impacts on ZBB implementation. For instance, the practice of ‘‘writing a note’’ by powerful politicians to support certain budget requests persists into the new budgetary process. Excessive intervention of politicians in the
Modernizing Public Budgeting and Financial Management in China g 709
budgetary process of ZBB greatly impaired the ranking process, makes it completely meaningless (Ma, 2003).