These sorts of perverse incentives are sadly common in financial situations. You never want to spend less than your full budget lest your budget be reduced next year.
edit: I meant corporate budgets but thanks for shedding light on the original question.
Then, if you want, you can provide a subsidy in terms of cash payments. That subsidy must not depend on the actual consumption of water.
This way, the marginal cost of the resource is correctly priced.
See also LVT, CO2 pricing,…
1. Zero-Based Budgeting: Instead of basing this year's budget on last year's spending, start from 'zero' each year. Evaluate each department's needs freshly.
2. Rolling Budgets: Allow for unspent funds to roll over into the next fiscal year, removing the incentive to spend just for the sake of it.
3. Quarterly Review: Don't allocate for a whole year. Break it into quarters and reassess needs regularly based on changes in environment or strategy.
4. Performance-Based Allocation: Link part of the budget to department performance metrics. Better performance leads to more budget.
5. Flexible Allocation: Have some funds allocated for urgent or emerging needs that arise over the year.