IPMN Newsletter 2002
Number 2
An Update on Budget Reform in the U.S.
The most recent reform introduced in U. S. federal budgeting is that announced by President George W. Bush and his Office of Management and Budget (OMB) in the FY 2003 President's Budget delivered to Congress last week. This budget has introduced "performance-based budgeting" to link funding to performance measures and accomplishments for federal departments and agencies.
In initiating performance-based budgeting for the federal government President Bush is attempting to bring the U.S. into line with many of the more progressive national practices around the world. Other nations including New Zealand, Australia, Canada, Switzerland and the United Kingdom have employed performance and output or results-oriented budgeting practices over the past decade or more. Furthermore, in testimony before the Senate Armed Services Committee on February 5, 2002 OMB Director Mitchell Daniels noted that the reform interests of the Bush administration were not limited to performance budgeting. While stressing the importance in evaluating programs on the basis of achievements, Mr. Daniels also expressed approval with members of the committee who asked him about other budget reforms. The first issue addressed was whether there was a need for new budget caps" or spending ceilings given that the caps previously enacted in the early 1990s and re-endorsed in the Balance Budget Act of 1997 had expired. Also mentioned was the fact that Congress often exceeded the caps even when they were in force. Mr. Daniels agreed with some members of the committee that new caps should be enacted to control congressional proclivities to spend.
A second and related issue was whether new spending caps should include a ceiling for national defense spending. Mr. Daniels indicated the strong preference of the administration against a cap on national defense appropriations in a period when the nation was at war with the forces of terrorism around the globe. In rejecting the idea of a cap for defense spending, the testimony of Mr. Daniels conformed to the views expressed by Chairman of the Federal Reserve Bank Alan Greenspan in testimony to Congress with the same week. When asked directly by members of the House Budget Committee whether caps should be reinstated for the discretionary (non-entitlement) portion of the federal budget Mr. Greenspan responded that he believed new caps were needed in all areas but national defense. Both Mr. Greenspan and Mr. Daniels reflected the priorities of the Bush administration in placing the war on terrorism as the highest priority in policy and budgeting.
In response to questions from congressional members, Director Daniels also expressed the interest of the administrations in exploring biennial budgeting and budgeting by results contracting. While the biennial budget initiative
was not an element of the President's 2003 budget, the fact that the Bush administration expressed interest in biennial budgeting appeared to open the door to discussion of even more ambitious reform, e.g., with multi-year budgets similar to the types of budget processes in use in the United Kingdom, where budgets are enacted for a three-year period and reviewed biennially, and in Australia, where three year "running cost" budgets had been used in the 1990s with some success. Australia has, as of this writing, shifted to an even longer five-year cycle of budget enactment and review. Budget critics have long argued the inefficiency of the annual budget cycle (see J. L. McCaffery and L. R. Jones, Budgeting and Financial Management in the Federal Government. Greenwich, CT: Information Age Press, 2001). Annual budgeting satisfies congressional preferences for a cycle that provides maximum opportunity to reward constituents with spending largess. In fact, as political scientists have observed for decades, virtually all congressional politics is local politics, i.e., driven by the need to satisfy the special interests of members' districts or states. And while this opportunity provides the benefits of democratic representation and responsiveness, it does not lend itself well to expenditure control, fiscal discipline or efficiency in either spending or program performance. Rather, annual spending encourages the behavior well-known to both budget officials and academics, i.e., spend it or lose it. Further, because the problems that governments face are never constrained to periods of one year, spending demand is, given the nature of service demand, always multi-year in character. The annual budget cycle produces all kinds of perversities and strategic misrepresentation in budgeting. Perhaps the best recognized is the end of year spend-out phenomenon where real spending priorities often are ignored in the rush to spend or obligate every dollar available, regardless of whether the items purchased or the services provided are really needed.
Unfortunately, the annual spending cycle encourages exactly the types of behavior that Congress, the Executive and various audit agencies of the federal government, including the General Accounting Office, indicate is abhorrent. The incentives implicit in the spend it or lose it approach to budgeting push otherwise prudent budget executors to the brink of Anti-Deficiency Act violations including spending for things not authorized or appropriated by Congress, or spending from budget accounts dedicated to one purpose for other purposes not authorized by law. And the obvious
incentive from annual spend-outs is to over spend rather than under-spend if what is not expended is likely to be lost in the next budget.
For these and other reasons nations including those mentioned above have moved to multi-year budget appropriations and execution, providing programs the authority to over or under spend in any one particular year so long as spending conforms to totals appropriated for the longer term period of years. This provides greater opportunity for budget and program managers to execute budgets more efficiently, with greater attention to management "steering" to achieve desired results and increased flexibility to adjust short and medium spending plans to fit the demands of efficient budget execution.
Related to multi-year budgeting for results is the issue of contracting for results. Contracts for results written into budgets in other nations have included agreements between legislative bodies and program agencies to produce a set amount of outputs or outcomes (e.g., in New Zealand) or contracts within the Executive branch between control agencies such as OMB and departments and agencies. In the UK the Department of the Treasury engages in such contracting under the oversight of the Prime Minister and Cabinet and Parliament. However, the real work of holding service providing agencies to their contracts is held by officials of the Treasury. There are other examples of contracting in budgeting in Australia, Switzerland, Sweden, Denmark and elsewhere. It is too early to attempt to evaluate the experience of the Bush administration with performance budgeting, but in several years there will be opportunity to assess the efforts and success of OMB with this approach, and that of Congress and the Executive in continued implementation of the Government Performance and Results Act.
I hope this information on the status of budget reform in the U.S. is of interest to members of the IPMNetwork who work or conduct research on public budgeting and financial management.
Best Regards,
Larry Jones
IPMN Coordinator
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Last Modified: March 19, 2002