BUDGET

Definition:A budget is a description of a financial plan. It is a list

of estimates of revenues to and expenditures by an agent for a stated
period of time. ormally a budget describes a period in t!e future not
t!e past.
Bac"grounder #$%&' on Federal Budget
April () *++&
,our -rinciples of Budget -rocess .eform
.estraining runa/ay federal spending /ill re0uire difficult decisions by
la/ma"ers. 1a/ma"ers /!o are /illing to ta"e a toug! stand need a budget
process t!at !elps) rat!er t!an !inders t!em) and t!at is not stac"ed in
favor of excessive spending.
Unfortunately) 2ongress remains saddled /it! an outdated budget process
t!at /as created in $3%&44/!en t!e federal budget /as only one4t!ird of
its current si5e. A 6+4year4old budget process t!at !as been punc!ed
full of !oles by successive 2ongresses cannot ade0uately address t!e
nation7s current budgetary c!allenges.
1a/ma"ers are /or"ing to repair t!e federal budget process. 8et) budget
process reform can easily become bogged do/n in tec!nicalities)
obscuring t!e big picture. Any positive budget reforms s!ould reflect
four general principles:
-rinciple #$: 9verall :pending :!ould Be 2apped at a :et 1evel
,amilies understand spending caps. Every year) millions of families sit
do/n at t!eir "itc!en tables and evaluate !o/ muc! t!ey can afford to
spend. A family7s /is! list almost al/ays exceeds /!at it can afford;
t!erefore) t!e family must prioriti5e in order to remain underneat! t!e
cap. :etting limits is never easy: <o/ever) responsible budgeting "eeps
t!ese families solvent in t!e long run.
T!e federal government does not cap spending. 1a/ma"ers can simply add
up t!e cost of t!eir preferred programs and pass legislation to fund
t!em. =andatory programs44/!ic! no/ comprise t/o4t!irds of all federal
spending44gro/ eac! year /it!out any cap or oversig!t. Discretionary
programs gro/ /it! only slig!t constraints imposed by t!e annual budget
resolutions. >it!out real federal spending caps) la/ma"ers often avoid
difficult trade4offs and spending gro/s beyond /!at taxpayers can
afford. ot surprisingly) mandatory spending is gro/ing % percent
annually. Abandoning enforced caps on discretionary spending !as
resulted in double4digit gro/t! in annual discretionary spending.
T!ere are several options available to cap spending. =ulti4year caps on
discretionary spending succeeded in t!e $33+s) /!en t!ey /ere enforced
and considered politically realistic. 1a/ma"ers could set annual
spending cap levels every fe/ years or determine t!em by a formula) suc!
as inflation plus population gro/t!. 1in"ing spending increases to
budget deficits or to t!e gross domestic product is more difficult
because economic gro/t! and tax revenues can fluctuate rapidly.
Additionally) t!ose limits /ould re0uire t!e deepest spending cuts
during recessions and allo/ large spending !i"es during booms.
2aps could /or" for mandatory programs as /ell. In t!e $33+s) t!ese
programs /ere sub?ected to -A8G9 rules t!at limited only t!e creation of
ne/ entitlements44and did not!ing to limit t!e calamitous spending
increases pro?ected in t!e current :ocial :ecurity and =edicare
baselines. >it! mandatory spending pro?ected to double in $+ years and
over/!elm t!e rest of t!e budget) current mandatory programs can no
longer be left off t!e table. Effective caps s!ould apply to all federal
spending44/!et!er mandatory or discretionary) current or proposed.
1a/ma"ers could create separate levels for mandatory and discretionary
spending) utili5ing distinct levels or gro/t! formulas.1
Alternatively) t!ey could set a single @omnicap@ t!at applies to all
federal spending. An omnicap /ould !ave t!e advantage of allo/ing trade4
offs bet/een mandatory and discretionary spending44t!us promoting
flexibility and simplicity.
-rinciple #*: T!e Annual Budget :!ould -resent a ,ull -icture of
,uture 9bligations
,amilies also understand t!e costs of long4term financial commitments.
T!ey can 0uic"ly calculate !o/ muc! t!ey o/e on t!eir mortgage) car) and
ot!er long4term obligations) and /!en t!ose obligations /ill be fully
paid. Importantly) families cannot commit to ne/ financial obligations
/it!out demonstrating t!at t!ey can pay for t!em. ,or example) potential
!omeo/ners must ma"e a substantial do/n payment and s!o/ t!at t!ey can
afford t!e mont!ly payments.
Businesses operate under similar fiscal constraints. A business is
re0uired to disclose t!e si5e and scope of its obligations on financial
statements so t!at s!are!olders) oversig!t entities) and potential
investors can understand t!e true nature of its financial condition and
can ma"e informed decisions. It must report all long4term obligations)
including liabilities associated /it! pension and retirement !ealt! care
plans44similar in nature to :ocial :ecurity and =edicare44/!ile a
measure of t!eir gro/t! is counted against t!e business7s bottom line.
>!ile measuring t!ese types of liabilities is muc! more difficult t!an
reporting t!e liability on a contract or mortgage) excluding t!is
information from financial reports can grossly misrepresent a business7s
financial viability and lead to poor decisions by management and boards.
Including t!e best estimate of suc! liabilities44and t!eir annual impact
on t!e bottom line44is superior to implying t!at no obligation exists by
excluding suc! calculations because t!ey are imprecise and difficult to
estimate.2 In t!is /ay) every business is re0uired to pay today in
order to fulfill its obligations for tomorro/.
T!e federal government is under no suc! constraints. T!e federal budget
does not include any measure of t!e federal government7s future
obligations and t!us misinforms citi5ens about t!e true fiscal burden
facing t!e nation. T!is omission allo/s policyma"ers to ignore t!e need
for fiscal planning and reforms. 1a/ma"ers can commit to a massive
financial entitlement Asuc! as t!e =edicare drug benefitB /it! no do/n
payment) no set mont!ly payments) and no standard @credit c!ec"@ to
determine /!ic! commitments are affordable. T!e entire open4ended
spending spree is placed on a credit card /it! no spending limit)
relying on blind fait!44rat!er t!an annual planning44t!at future
generations /ill pay t!e balance.
A positive first step /ould be to include a measure of all future
obligations in t!e federal budget) ?ust as businesses are re0uired to
do. T!is /ould contain a brea"do/n of contractual liabilities) suc! as
debt) and social insurance liabilities) suc! as =edicare and :ocial
:ecurity. If budgets began including t!ese measures) policyma"ers /ould
no longer be able to ignore t!ese liabilities and could begin budgeting
for t!eir costs and initiate t!e reforms necessary to "eep t!ese
financial commitments manageable.
-rinciple #6: T!e -resident :!ould Be Involved T!roug!out t!e
Budget -rocess
If t/o parties are expected to negotiate a detailed agreement on a
complex sub?ect /it!in a nine4mont! period) separating t!em until t!e
end of t!e nint! mont! ma"es little sense. It ma"es even less sense for
one side to spend a great deal of time /or"ing out t!e smallest details
of its offer /it!out first !aving forged t!e basic structure of an
agreement /it! t!e ot!er side. 8et) 2ongress and t!e -resident currently
use t!is met!od to /rite t!e federal budget.
T!e -resident begins t!e process in ,ebruary by presenting !is proposed
budget as an opening offer. 2ongress t!en spends up to eig!t mont!s
preparing its counteroffer in t!e form of $6 detailed) annual
appropriations bills. At t!at point44/it! t!e deadline for completion
0uic"ly approac!ing44t!e -resident7s options are limited to eit!er
signing or vetoing eac! appropriations bill.
>it!out any agreed4upon budgetary frame/or") t!ese last4minute
negotiations over t!e details of !undreds of programs become extremely
difficult. T!e inevitable results are rus!ed compromises t!at are
completed /ell past t!e fiscal year deadline. In fact) t!e past t/o
federal budgets /ere completed four mont!s late44one4t!ird into t!e year
t!at t!ey /ere designed to fund.
An increasingly popular solution /ould be to move from a concurrent
budget resolution A/!ic! does not involve t!e -residentB to a ?oint
budget resolution A/!ic! /ould be signed into la/ by t!e -residentB. By
/or"ing out differences early in t!e process and enacting a binding la/)
contentious debates on t!e si5e of government /ould be settled in
=arc!44rat!er t!an in 9ctober) /!en delays ris" government s!utdo/ns.
T!e appropriations debate /ould be limited to t!e composition of federal
spending) and disagreements /ould be far easier to resolve if spending
limits /ere already fixed by la/.
Issues remain regarding !o/ to move t!e budget process for/ard /!en
2ongress and t!e -resident are unable to agree on a budget blueprint.
9ne idea is to re0uire a superma?ority to pass spending bills t!at are
introduced under an unsigned budget resolution. T!at /ould provide
ade0uate pressure on 2ongress and t!e >!ite <ouse to settle t!eir
differences.
Anot!er /ay to bring t!e -resident into t!e process /ould be to re0uire
congressional votes to bloc" rescissions. -residential rescission
re0uests) /!ic! cancel previously appropriated budget aut!ority)
currently re0uire bot! <ouse and :enate approval to ta"e effect. T!us)
2ongress can bloc" a rescission by simply refusing to vote on it.
.e0uiring =embers of 2ongress to vote do/n t!e rescissions t!ey oppose
/ould be a positive reform. .escission proposals not voted do/n by at
least one !ouse of 2ongress /it!in &C days /ould go for/ard. :upporters
of 0uestionable spending could no longer avoid going on t!e public
record /it! t!eir position.
-rinciple #&: Budget Decisions :!ould Include :trong Enforcement.
Budget restraints /it!out strong enforcement are paper tigers.
.estraints are intended to force 2ongress to ma"e some uncomfortable
trade4offs in order to preserve t!e nation7s long4term economic !ealt!.
<o/ever) =embers of 2ongress typically ta"e t!e easy pat! of see"ing
loop!oles t!at bypass restraints) t!us avoiding difficult c!oices.
2onse0uently) rules are only strong as t!eir /ea"est lin".
,or example) t!e discretionary spending caps of t!e $33+s did not apply
to emergency spending. -redictably) la/ma"ers began classifying regular
annual spending as @emergency@ spending in order to bypass t!e caps.
2ongress s!ould budget sufficiently for regular @emergencies@ /!ile
assuring t!at t!e necessary escape !atc! for unforeseen) catastrop!ic
emergencies is not abused. =odest reform options include altering t!e
definition of emergency spending and re0uiring t!e -resident to agree to
an emergency designation. A more ambitious reform /ould re0uire
la/ma"ers to set aside a pre4determined portion of t!e budget for
emergencies and re0uire a superma?ority vote to spend beyond t!at fund.
T!e budget resolution7s spending ceilings are also /ea"ly enforced. In
t!e <ouse of .epresentatives) passing a spending bill t!at exceeds t!e
spending ceiling re0uires only a simple ma?ority44/!ic! is no more of a
!urdle t!an any ot!er spending bill must clear. T!is renders t!e budget
resolution7s spending ceilings meaningless in t!e <ouse of
.epresentatives. T!e :enate is slig!tly better) re0uiring a t!ree4fift!s
vote to violate t!e budget resolution.3 .eal enforcement) !o/ever) may
re0uire closer to a t/o4t!irds vote. ,urt!ermore) if la/ma"ers convert
t!e concurrent budget resolution into a ?oint budget resolution)
exceeding spending limits /ould also re0uire >!ite <ouse approval.
:uc! reforms /ould promote better planning and coordination /it!in t!e
constraints of t!e budget caps and annual budget resolution.
2onclusion
T!e federal government currently spends over D*+)+++ per !ouse!old. T!at
cost is pro?ected to begin rising s!arply over t!e next $+ years) /!en
retiring baby boomers begin receiving :ocial :ecurity and =edicare
benefits. 1a/ma"ers can avert painful tax increases only if t!ey ma"e
t!e difficult decision to limit federal spending. T!e current budget
process) /!ic! is designed to maximi5e federal spending) is t!e /rong
tool for t!at ?ob. T!e four principles listed above represent positive
budget reform consistent /it! sound planning) responsible spending) and
lo/ taxes.