Incremental budgeting is a way of budgeting where the future allocations are based on current allocations. The new budget is prepared by increasing or decreasing the current budget by certain amounts or percentages. The increased amounts are arrived through a fairly simple calculation and the scope for political conflicts is minimised because everyone is treated as same.
Origin of incremental budgeting
The Theory of Budgetary Incrementalism was formulated by Aaron Wildavsky in the 1960’s. It has dominated the mainstream of American budgeting for decades. The theory of budgetary incrementalism assumed that budget process is driven by the ‘department heads’ and they are annually revised by having an increment. The revised budget heads were examined by the legislature. The theory of Budgetary Incrementalism survived till 1984.
Features of incremental budgeting
It is based on current budget: It assumes that the current year’s budget estimates as best and they are used to arrive at the next budget estimates.
No reconsideration: This method assumes that there is no need to reconsider the objectives and activities of the department. It follows that no substantial policy shift will occur, nor would there be any changes in the financing approaches of service delivery.
Stable budgetary allocations: Under this method, budgetary apportionments are comparatively consistent over time. The funding obtained by a specific sector for one year becomes the base for the ensuing year to keep decision-making concentrated on increments in revenue.
Size of the expense budget: The budget manager has no responsibility for determining the overall size of the expense budget. His job is to allocate budgeted funds between expense and accounts.
Assumptions: Incremental budgeting assumes that both needs and costs vary only a small amount from year to year. It also assumes that the budget from the fiscal year is accurate and fairly reflects the expenditures of the unit. Both these assumptions may be false.
Favours adjustments: Incremental budgeting makes alterations little by little instead of program-by-program scrutiny. These alterations or increments could be positive or negative depending upon reduction in other programsor by the addition of a new program.
Norms of incremental budgeting
Incremental budgeting is the most regular method used for determining agency appropriations. It is because of the conservative bias of the budgetary process, which seeks to preserve the status quo. Incremental budgeting has produced several informal norms:
Spend all your appropriations: Failure to spend the appropriations indicates excess and it is likely to result in reduced funding the following year.
Request more than your current appropriation: It is far easier to justify increases than to explain reductions.
Top priority items: Top priority items should be included into the basic budget as they will rarely be challenged.
Inflated budget: Budget must be inflated by large increases in existing programmes and introducing new programs.
Advantages of incremental budgeting
Simple: It is comparatively simple to function and uncomplicated to comprehend. This helps in resolving conflicts by dealing with departments in a similar way.
Historical figures are integrated: The advantage of incremental budgeting is that historical data and future predictions are integrated in the improvement of the budget.
Stability in budget: Incremental budget is stable and any type of modification is steady. The executives can function on steady basis.
Disadvantages of incremental budgeting
Past period’s figures: There is no assessment of the realities of present and future situations. It may lead to an outdated budget unrelated to the stage of activity or type of work being carried out.
Backward looking: It focuses on the past instead of the future and it is not a good model for planning purposes.
Use-it-or-lose-it: The executives fall into the trap of spending the allocated funds before the expiry of the fiscal year otherwise, the apportionment may be reduced in the ensuing year’s budget. This encourages uneconomical expenditure by workers for not wanting to lose on funds.
Budgetary slack: An un-reviewed budgetary slack may happen when the past budgets were overvalued.
No incentives: There is no incentive to develop new techniques and ideas or to reduce costs.
Weak budget: An incremental budget is liable to become weak and out-of-date rapidly, if it does not relate to the current work type.
Though incremental budgeting is the basis for some baseline decisions, there are some drawbacks also. Incremental budgeting focuses on aggregate trends and fails to analyse revenue and expenditure changes. Although there are many criticisms of incremental budgeting, it is being followed in many countries.