Incremental Budgeting

One of the most common approaches to the preparation of estimates is incremental budgeting. This approach to drawing up a budget starts with the estimated amounts for the current financial year or the provisional accounts of actual expenditure in the previous FY. Small amounts (increments) are then added or subtracted to accommodate budget increases or cuts for the coming FY.

It is possible to calculate the same percentage increase or decrease for all budget lines, and this is not uncommon for national budgets when allocating funds to different ministries. In practice, however, certain items of expenditure (such as salaries) cannot be treated in this way, because of the long-term financial commitment involved in hiring or laying off permanent staff. As a result, budget increases and cuts are usually concentrated on other budget lines.

Advantages
Incremental budgeting is easy to understand and the calculations required are relatively simple and straightforward. This approach has the advantage of producing budgets that are relatively stable, with gradual changes from year to year. As a result, where activities have been planned for more than one year, this approach provides some assurance that funds will be available in future. Moreover, if all the departments within a ministry or ODL institution are treated in the same way (with guideline amounts incorporating the same incremental increase or cutback), this can reduce inter-departmental conflict.

Disadvantages
With the incremental budgeting model, the allocation of resources is based on the existing pattern of activities. When the levels or types of activities are subject to significant change, for example, through the introduction of a new course or programme, this may pose problems. As a result, incremental budgeting can create disincentives to developing new programmes or courses. Likewise, when funding for a particular activity in the coming financial year is based on current spending, then there is no incentive to reduce costs. Another drawback of the incremental budgeting approach is that it encourages managers to adopt a ‘use it or lose it’ attitude, spending money towards the end of the financial year simply because it is there. Overall, the incremental budgeting approach is based on the assumption that the existing level of funding is right, whereas in fact it may be too high for the current level of activity or too low to sustain these activities in the long-term.

Activity

Exercise 7.1: Incremental Budgeting Click on this link for Exercise 7.1 Feedback: You can check the sample answers here by opening Worksheet 7.1 - Sample Answers.

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