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Federal Budgeting Should Learn From Family Budgeting

 

Background

One of the most pervasive problems faced by the Federal government in recent decades has been the budget deficit. The quest for an annually balanced budget has been one of the main pathways toward decreasing the deficit. Some administrations have had greater success than others in reaching a balanced budget, but even in these cases, the national debt has loomed large.

Of the many deficiencies in our nation's budgeting process that have led to the gargantuan increase in our deficit, one stands out as a gross departure from common sense. Our government does not have a "rainy day fund". It does not utilize a reserve fund by which it should set aside funds for unforeseeable disasters or emergencies. Instead, the budget is established first by spending more than we have, and even then with the assumption that nothing bad will ever happen to upset projected forecasts.

 

If a family or an individual were to budget their own money according to this behavior, they would be viewed as entirely irresponsible. Our national culture emphasizes the need to put aside money from each paycheck for general savings and investment, as well as to pay for unforeseen circumstances. The national savings rate is an important economic indicator because of what it means to the financial health of families.

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Individual spending beyond one's means leads to major credit problems and triggers heated debate over the role of government in helping those without savings. Even the debate over 2005's new bankruptcy law showed little remorse for such irresponsible behavior.

Yet, the Federal government continues to willfully and wantonly violate this basic precept. Anyone who asserts that there is no need for a reserve fund, or that appropriations for these circumstances should be made on an as-needed basis, need only look to the past few years for stark evidence to the contrary.

Following September 11th, billions were allocated to compensate victims and rebuild structures. The Iraq War has cost, by many estimates, more than $80 billion per year that were not budgeted for defense prior to its onset, and which still evades inclusion in annual budgets. Aiding the victims of the Asian tsunami had a high, but necessary, price tag for humanitarian, as well as geopolitical, purposes. The hurricanes of 2005, especially Katrina, provided perhaps the quintessential argument for a reserve fund, as the Federal government still has not found a way to fund the rebuilding effort. It goes to the heart of the role of the Federal government as a safety net for Americans who are victimized by natural disasters.

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Ideas / Solutions

The Federal government can learn much from the common sense practices of most American families and individuals. First, a balanced budget is essential, as it is unconscionable to spend beyond our means. Overspending translates to the US diving further into the depths of debt, which is usually financed by other countries, making the US perilously vulnerable to the caprices of other countries in the years to come. Expenditures, other than emergencies, which go beyond our national annual budget, are luxuries. It is as if a family that could not afford rent or food were to buy a 52-inch LCD television on credit.

We must start with a definition of "emergency" spending, and adhere to the distinction between emergencies and other purposes. Emergency spending that goes beyond a balanced budget should be permissible only upon approval of a "super-majority" of each chamber of Congress, e.g., a two-thirds majority, or at least a 60% majority. Although efforts were made during the 1990s to require a balanced budget, such a mandate must be made fully enforceable.

Secondly, annual payments into a reserve fund should be mandatory. The amount could be two or three percent of the annual budget. Over a period of years, it would become substantial. It would have to be accompanied by enforceable statutory language defining the types of events and types of expenditures that could trigger accessing the reserve fund, so that it does not become just another pool of funds for regular discretionary spending. It would probably still not cover all expenses for a disaster on the level of Hurricane Katrina, but it would be sufficient for most circustances. A Katrina-like situation could also trigger the "emergency" requirement for transcending the balanced budget limits.

Thirdly, “pay-go” rules, or “pay-as-you-go” spending, is a basic principle of family budgeting, and merits consideration for Federal budgeting as well. It is incongruous to advocate for a balanced budget without recognition of the need to pay for that which we choose to spend. It must, however, be viewed in a strictly prospective manner, without recriminations for past taxing and spending policies.

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Fourthly, the manner in which agency and departmental budgets are constructed should be revisited. Currently, budget requests are most commonly constructed by starting with current year budget amounts, and then adjusting those amounts -- usually upwards -- according to additional needs for new or enhanced programs and expanded caseloads. But that assumes that the existing year's budget is entirely necessary and appropriate. A more insightful approach is Zero-Based Budgeting, whereby an agency or department, and each component thereof, must begin from scratch, with a zero funding amount, and justify each and every amount that it is requesting. This approach has been found to save considerable money in the jurisdictions in which it has already been applied, usually at the city or county level.

Zero-Based Budgeting could be expected to save countless millions at the Federal level. It is, however, a much more laborious task, and probably impractical to do on an annual basis for the entire Federal government. But that should not prevent its use on a selective or incremental basis. Zero-Based Budgeting should be imposed as a rolling requirement, whereby each year a different three or four departments must apply this technique, such that each department undergoes the process over a period of years. The process would then circle back after covering all departments, so that each department undergoes this level of scrutiny every half-dozen years or so. Additionally, departments and independent agencies or commissions that are perceived as susceptible to, or plagued by, budgetary or other mismanagement could be required to undergo the process more often.

When it comes to spending and balancing a budget, our professional government should act like one, rather than like an 18-year old blowing his first paycheck or spending a month in Las Vegas to celebrate his first credit card.

 
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