The Budget Evolution
he most surprising casualty of the surpluses that are now universally projected to start this fiscal year may be the federal budget itself, or at least the budget as we know it.
The current budget measures primarily the government's cash transactions-revenues and outlays-and the difference between the two, which is the deficit or surplus. In the sound-bite world of news and politics, this traditionally has been the easiest way to explain what an elected official, candidate, political party, Congress or the White House has been doing, saying or proposing on the budget. An increase in the deficit has been bad, a decrease good.
But by paying attention solely to this one number, other equally critical measurements of the federal government's fiscal health have been put aside temporarily or ignored completely. This has influenced budget decisions in ways that many believe are at best inappropriate.
Cash-in/cash-out budget measurement generally encourages policies that postpone or minimize spending increases and revenue losses, or at least make them invisible. This allows the policies to look fiscally responsible and lets Congress and the President leave problems they may be causing for others to correct.
Short-Term Thinking
The best example of this and the one that has been getting the most attention is the long-term liability of federal pension and insurance programs. The current cash-based budget records only the relatively immediate impact of decisions to implement and enhance these programs and ignores the government's large long-term spending commitments. As demographic changes substantially increase the number of people claiming these benefits, the higher costs that cash accounting has hidden will finally become obvious.
A second example is leasing. Because the short-term cash needs of buying are so much greater than paying monthly rent, leasing has been the preferred method of acquiring federal office space, even though there is no question that the government will spend more in the long run than if it bought the space.
In fact, the cash budget is biased against federal capital purchases of all types because of their large up-front costs. Even though the benefits derived from a bridge, sewer, computer, road, plane or ship will last far longer and be much greater than current expenses, the cash budget has no way to take them into account. Only the up-front spending needed to build or procure these projects shows up. Because the budget fails to capture any increase in productivity, growth and efficiency, such investments are far less likely to be made.
A third example is federal timber sales. For most programs, the budget records only the cash collected and spent in the current year, so the up-front costs of doing the surveys and other preparations involved in a timber sale appear immediately. The revenue is not reflected in the budget until years later, when the timber is harvested and the sale completed. Thus, the budget rules reduce the financial incentive for the government to sell timber from federal lands.
The Long View
Changes have been proposed to fix these problems, but they have seldom been considered seriously. As long as there has been a deficit, every attempt to change how the federal budget records a transaction has been considered a gimmick that diverted attention from what was perceived as the problem at hand.
That singular focus has been changing along with changes in the deficit. A special task force of the House Budget Committee has devoted much of its effort this year to the long-term budget problems of the pension and insurance programs.
Two of the most prominent groups that are promoting federal fiscal responsibility-the Concord Coalition and the Committee for a Responsible Federal Budget-have shifted their focus from the annual deficit or surplus to the future impact of current spending and taxing decisions, especially those involving Medicare and Social Security.
A presidential commission is due to report by the middle of December on whether "capital budgeting," which spreads the cost of a project over the time in which it is expected to provide benefits, would be appropriate for the federal government.
In addition, congressional and executive branch budget analysts are starting to consider whether the net present value (NPV) calculations used for federal direct and guaranteed loans would be appropriate for some spending programs. NPV was adopted in 1990 when Office of Management and Budget Director Richard Darman convinced the rest of the federal budgeting community that cash accounting forced Congress and the White House to favor guaranteed over direct loans because the cash-in/cash-out budget format made them seem costless. This same analysis is now being applied elsewhere.
Each of these reforms will cause a substantial change in the decisions that are made about a program and so could have a profound effect on whether it is a budget winner or loser. That, in turn, will change the politics of the program and the responsibilities and pressures on those charged with managing programs.
Stanley E. Collender is senior vice president and managing director of Fleishman-Hillard's Federal Budget Consulting Group and editor-in-chief of the newsletter Federal Budget Report. His weekly column, "Budget Battles," appears on National Journal's Web site, Cloakroom.