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by Joe Cobb

Last month, the California legislature faced a stalemate over its FY 2007-08 budget, and a number of service providers had to cope with late payments. It was a form of political theater and it repeats every year. The newspapers and commentators on television decried the “irresponsibility��? of lawmakers, who were deadlocked again over whether to raise your taxes or slow down their increases in spending.

News reports are now coming out of Washington, D.C. about a stalemate in Congress over the same issue. The federal lawmakers are even more behind schedule this year than in the past. They haven’t passed necessary appropriations bills. Some commentators are worrying about another government shutdown in October, when the federal fiscal year for 2008 begins.

Why do we need a government budget? Before 1900, governments didn’t do business with an annual budget. Back then, they had low taxes and still had a surplus in the treasury. Since adopting the modern “budget forecasting��? system, financial planning by governments has gotten worse every year.

Governments pass laws to spend money. Households and businesses don’t. Those laws make it much more difficult to change if they get things wrong.

Whereas households and businesses can predict wages and sales, governments have a difficult time predicting tax revenues when inflation and tax brackets have a large effect on actual revenues collected the following year. In California a large part of the state income tax depends on capital gains income. Former governor Gray Davis well remembers how the stock market slump of 2000-02, which reduced capital gains for most investors, affected his budgets, and his career.

Government revenue forecasts are unreliable (just look at recent history), but there is a more realistic way that governments can manage money. It is the same way governments did it before 1900.

Congress established a system of appropriations committees and separate “authorization��? committees over 200 years ago. Unfortunately, the appropriations committees, which decide how much money each program should receive each year, are no longer looking at how much money to spend based on actual tax collections; they spend money based on unreliable forecasts.

A year or two later, the programs are audited and someone says, “This program has cost more than we forecast.��? Another sad excuse is, “Revenues are less than we forecast.��?

Why not look directly at how much something actually costs and how much revenue is actually being collected, and match these debits and credits directly on a monthly basis? This practical idea, which is how every household and private business does the job, is dismissed because “experts��? say government would not be able to plan.

Government Planning

Government planning? Anyone who actually works in government is now laughing at you. Government planning is an idea that was popular a hundred years ago, when socialism was seen as the wave of the future. After the failure of the Soviet experiment, we should know better.

Government agencies never downsize; government agencies never discover more efficient or productive ways to deliver services. Government agencies never want to save money, because that might mean a smaller budget next year. Incentives are not oriented toward cutting costs, which is why governments cannot be organized “like a business.��?

In a few weeks, Congress will pass “continuing resolutions��? to keep spending after the fiscal year ends. A practical idea would be to make those “continuing resolutions��? not for one or two months, but for 12 months. The protest against this simple idea is that some government agencies and programs will run out of money next April or May if they cannot get an increase in their appropriations.

But this is not a valid protest, because some government agencies and programs will run out of money next April or May even if they do get an increase from some “forecast��? budget. Lawmakers always vote for supplemental appropriations bills when this happens. It happens every year.

This is a “look back��? method of controlling spending, and it is actually how households and private businesses control spending. Government really needs a new method to control spending. It is as simple as giving up the bad habit of trying to forecast the future.

“Reality Based” Budgeting

Between now and next April or May, let the appropriations committees perform oversight and audit the costs of programs. Let the treasury monitor the actual tax revenues. If there is enough money for an increase in spending, it can be considered. If there is not enough money, let the programs be cut. This is “reality based��? budgeting. Those founding fathers in Congress 200 years ago knew how to do it right in the first place.

This entry was posted on Monday, September 24th, 2007 at 9:54 pm and is filed under Political Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.