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Budgeting in the Ideal and in the United StatesPresentation for the China Symposium of the
Kissinger Institute on China and the United States
AbstractInstitute Fellow Rudy Penner describes how the U.S. budget is prepared by the executive branch and Congress, and how it then is implemented by the executive branch. The budget preparation process could be improved, Penner asserts, but budget implementation works smoothly and efficiently. The severe long-run budget problem the country faces is caused by only three spending programs: Social Security, Medicare, and Medicaid. All are growing faster than the economy, and there is strong opposition against raising tax burdens. Changes are suggested for the budget process so that it is better suited for dealing with this long-run problem. CommentaryThe text below is an excerpt from the complete document. Read the full commentary in PDF format. Government budgeting is one of the most complicated activities undertaken by mankind. If time were free, the value received for a dollar spent on one program would be compared to the value of spending a dollar on every other possible program, and every possible means of finance would also be considered. But that would involve millions of tradeoffs, and time is not free. Indeed, it is severely limited: typically, budgeting is done every year. Consequently, budget preparation requires focusing on those tradeoffs most important to the national interest. After adopting a strategy, budgeting becomes a management challenge. The right information must be delivered to the right people at the right time. Budget Preparation The adopted budget strategy might focus on programs that seem to be working well, where expansions might be warranted, or on programs that are working badly, where reductions or total elimination might be appropriate. The strategy should look across agencies or departments so that interactions with other programs can be considered. In the United States, a number of departments are often involved in very similar activities. Take housing. Urban housing is subsidized by the Department of Housing and Urban Development, rural housing by the Department of Agriculture, and military housing by the Defense Department. The Office of Management and Budget of the U.S. Executive Office of the President (OMB) used to devise the strategy behind the president's budget submission in a spring review.1 It consisted of a series of formal meetings with the director of OMB seven or eight months before the presentation of the budget in January or early February of the next year. Unfortunately, the spring review has become less formal in recent years. When I worked at OMB, I regarded it as a valuable part of budget preparation. In the summer preceding the budget, the OMB sends directives to departments and agencies describing the macroeconomic and budget environment and giving them spending targets. Because the state of the economy significantly affects revenues and spending by certain social programs, the assessment of the overall budget environment and of the possible need for countercyclical actions requires an economic forecast. Within the executive branch, that forecast is prepared by the "Troika"—the Treasury Department, the Council of Economic Advisers, and the OMB. The forecast is frequently updated as the budget process proceeds. Agencies generally respond to their spending targets by saying that it is impossible for them to live within such a meager budget. That begins an adversarial process between OMB budget examiners and department officials in which departments defend their requests in formal hearings while OMB examiners aggressively attack them. Such an adversarial process is important in any budget process. It is lacking in many emerging economies, because budget offices are not well staffed. Budget requests are not critically examined, and the tendency is simply to look at last year's spending and to increase all activities by the same proportionate amount, unless there are powerful reasons for doing otherwise. Ideally, the adversarial process should be informed by formal program evaluations, but the large number of programs makes it impossible to look at each carefully. Initiatives that attempt to look at everything face almost certain doom, as did President Carter's zero-based budgeting and President Nixon's management by objectives. George W. Bush's administration devised an approach called Program Assessment Rating Tool (PART). It was sensibly designed in that it did not attempt to do everything. Only a portion of the universe of programs was evaluated each year. Although well designed, the approach was not well implemented. Department officials felt that OMB staff paid too little attention to comments and complaints regarding the evaluations. It is natural for department officials to resist all evaluations and complain about negative ones, but it also true that OMB personnel could have been more willing to respond to comments, many of which had merit. It was also difficult for OMB to explain how the evaluations were used in budgeting. A program might get high marks for efficiency but be treated negatively because OMB decided that it was better located in the private sector. Or an inefficient program might be expanded simply because it was so important to the national interest. These judgment calls were complicated to explain to the press, and, more fundamentally, the administration often ignored evaluations if it was in their political interests to do so. As a result, it was impossible to see much of a relationship between a program assessments and the amount allocated to the activity in the budget. (End of excerpt. The entire commentary with footnotes and references is available in PDF format.) |
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