Reforming the Budget: Four Steps to Restore Fiscal Discipline

America’s dysfunctional budget process has been mired in federal shutdowns and debt ceiling brinksmanship for the past several years. No wonder citizens’ confidence in government is at its lowest in four decades.  Conventional wisdom in Washington is that hyper-partisanship has infected appropriations along with everything else, and that barring a dramatic shift in political tone, the best we can do is to pass one-off deals such as the recent Ryan-Murray bill. But there are a series of structural reforms that could substantially improve the way the US does budgeting, and which could be enacted by a bipartisan majority dedicated to good government.

The current budget system is broken: it consumes far too much time for little gain. Every year, thousands of officials across government prepare detailed estimates of how much it will cost to run their organizations, which Congress mostly ignores.  Instead, we enact budgets based on the previous year’s spending—not based on true need, shifting priorities or changing realities. As a result, Congress has enacted 75 stopgap “continuing resolutions” during the past decade.  

In an effort to illustrate value, federal agencies also conduct an elaborate annual process to evaluate how well they are performing, but these assessments have almost no impact on Congressional appropriations.  Meanwhile, Congress has spent trillions for the wars in Iraq and Afghanistan using more than 30 such “emergency supplemental” bills, which circumvent normal budget caps and scrutiny.  

Even worse, we can’t keep track of where the money goes.  Federal accounting systems provide little management information and are completely unsuited to rooting out overhead, duplication and inefficiencies. Most agency budgets are simply long itemized lists of salaries and expenses.  There is no mechanism for calculating costs by the type of service delivered, and no way for managers to obtain such information. The process lags far behind many local governments, which break down their spending into “program budgeting”–providing much greater transparency over expenses, costs and overheads at each stage in the process.

The lack of functional budgeting and accounting has lowered the quality, and increased the cost of federal government services.  Agencies are unsure how much money they will have for next year, or even next month.  A recent study by Philip Joyce of the University of Maryland showed that such funding delays result in a series of inefficiencies. Agencies pay higher prices than necessary to hire contractors because the government needs to use short-term contracts. Agencies too often delay maintenance, leading to higher costs in the future and significant harm to employee morale, retention, hiring and training.  In a separate study, my Harvard colleague Jeffrey Liebman found that federal agency spending spikes in the 52nd week of the fiscal year, and unsurprisingly, much of that spending goes to lower-quality items. 

The congressional budget system has broken down, too.  Some of the brightest young people work on the Appropriations and Budget Committees. Yet these committees suffer from high staff turnover due to frustration with the constant crisis atmosphere, the antagonism between appropriations and authorizations functions, and the inability to get anything done.

There are four concrete steps we can take to restore discipline and to give us better control over national spending. 

  1. Biennial Budgeting.  One of the simplest ways to do budgeting better is simply to do it less often.  Biennial budgeting is already used in several states and in the US Department of Veterans Affairs.   The VA argued successfully that it was impossible to manage hospitals and care for the wounded amidst constant uncertainty about funding.  But thousands of programs from National Parks to weather forecasting are in the same boat. By extending the budget cycle to two years and allowing agencies more leeway to manage resources, the government would do better at grant and contract funding, and eliminate some of the wasted time and effort that is currently devoted to the annual budget cycle.  To make this stick, Congress would need to restrict emergency funding to real emergencies and limit the number of continuing resolutions permitted.

  2. Adopt standard managerial cost accounting and capital budgetingThis would provide much greater clarity over expenses, costs and overheads. Efficient cost-cutting requires first and foremost an understanding of what things cost. Most federal agencies do not have the basic tools to track the costs of their activities, particularly the unglamorous, indirect overhead costs. For example, for all the complaints registered about government contractors, there is no coherent system for comparing the costs associated with outsourcing to doing the work directly.  What is needed are activity-based techniques that measure the complete, fully-loaded cost of delivering all significant government programs, such as paying veterans claims or administering subsidized housing tax credits.

    Right now, only a handful of federal agencies come anywhere close to allocating indirect costs properly (which may add 25-40% on to the cost that taxpayers eventually pay) and even fewer prepare real capital budgets.  This is not rocket science. Many local and state governments do a reasonable job of planning long-term outlays for infrastructure and equipment purchases. Yet, the Pentagon, in particular, is prone to huge cost overruns due to poor long-term budgeting, and former Secretary Gates estimated that some 40% of the budget is consumed by overhead costs. With these overheads buried among thousands of individual line-items expenditures, the current system makes it impossible for departments to separate the fat from the bone.

  3. Change incentive structures to reward managers for efficiency gains. If we provide managers with better information about costs, they also need to be given greater flexibility to re-allocate resources more easily.  Right now managers who save money during the fiscal year find that their savings go right back to Treasury – hence the spending spike in the 52nd week of the year.  What if managers were able to keep a small portion of the money they saved and use it to invest in things like training and technology that would further improve efficiency? 

  4. Restructure and simplify the budget process. The congressional budget process has not been fundamentally changed in nearly 40 years. The current system is wildly complex, with dozens of committees and subcommittees overlapping and fighting over turf.  During the last 37 years, there were only four times that all of the major appropriations bills were enacted on time.   The status quo has created silos and stovepipes–making it easy for special interest groups to influence practically every decision.

Budgeting and accounting reform are not glitzy, but they would produce greater transparency and help the country stretch each dollar further. The budget process has deteriorated in recent years for a variety of reasons. Chief among them is the seemingly limitless ability to raise federal debt. The result? It’s now easier to open the federal checkbook than it is to figure out how to get better value for what we already spend.  While not a panacea, better budgeting would provide more continuity for government agencies and help restore sanity to the federal appropriations process.