The UAE's proposal to move away from incremental budgeting to a zero-base format will help the government better handle economic challenges, analysts said.
The Finance Ministry yesterday said it will revamp the way it develops the federal budget and adopt a Zero Based Budgeting format. The revamp would include releasing the budget every three years with the first three-year budget running from 2011 to 2013, a statement said.
The first draft plan will be ready by November.
"Shifting to zero-based budgeting will help create a good balance among sectors, more stability and a balance in the GDP, especially when we are trying to reduce the impact of energy sector," senior analyst Wadah Al Taha told Emirates Business.
The new form of budgeting, which involves a comprehensive review and details of all expenditures, would mean more streamlining, higher transparency and help develop segments that need more focus.
"This is quite positive in the sense that it would force departments to focus on internal policies in detail; it would require proper definition of roles and would also lead to streamlining of processes within their divisions," said Gillian McMeekin, Director of Risk Consulting at Horwath Mak.
Shifting to zero-based budgeting would also help control expenditure, said Prabhakar Kamath, Partner at consultancy Morison Menon. "Each item in the budget will have to be looked into again and this would also help curb unnecessary expenses," he said.
"The government would be able to divert funds needed for the most important segments," he said.
The ministry said: "We are moving away from incremental budgeting because incremental budgeting presumes a stable environment where current activities persist at roughly the same cost in future years. Zero-based budgeting is useful for rapidly growing GDP and (the) need for large-scale infrastructure development." Yazan M Abdeen, Fund Manager at ING Investment, said: "With funds becoming more difficult to attract, it is important for the government to be able to control its expenses. Using a more exhaustive way of developing the budget will increase transparency."
Adopting the change would be a challenging task, said the analysts, adding that the decision on new format of budgeting would provide departments sufficient time to prepare for these changes.
The UAE currently uses incremental budgeting and releases budgets every year. In incremental budget the budgeting teams of different departments have to justify only the increases in expenditure over the previous year.
Zero-based budgeting nearly reverses the working process of incremental budgeting and every single expense has to be justified. It involves a review of expenses and all of them are required to be approved..