The Federal Budget: Politics, Policy, Process.
Washington, DC: Brookings Institution Press, 2000, 307 pp.
Rowan Miranda, Ph.D., is Director of Research and Consulting at GFOA.
Allen Schick's book on the federal budget is the most comprehensive work available on the subject today. Schick is the author of many of the classic works on budgeting and associated with some of the major attempts at federal budget reform. Although the book is exclusively focused at the federal level, the content should he relevant to those interested in understanding and improving budgeting at any level of government.
The evolution of federal budgeting differs substantially from the state and local level. While budget reform at the state and local level was well underway in the late 19th century, it had yet to catch on at the federal level. For one thing, with no income tax, the federal budget was still relatively simple and to the extent there was any systematic federal budgeting it was related to the use of surplus funds generated by tariffs.
While state and local governments were consumed by reforming the budget through better analytical tools and techniques, the reform efforts at the federal level have focused more on rules and procedures especially as they relate to the balance of power between Congress and the President. Schick identifies three main periods in this evolution, which are described below.
Legislative Dominance (1789-1921). The Constitution of the United States provides scant detail on how budgeting is to be carried out. This is somewhat excusable considering the modern concept of the budget had yet to be developed. To the extent the Constitution made provisions, it primarily placed power in the hands of Congress. Before federal agencies or the President could spend any money, authorization would have to be provided by Congress. Congress also constrained government agencies by making detailed appropriations although the degree of detail varied year to year. Over time, two committees--the House Ways and Means and the Senate Finance Committee--controlled spending and revenue legislation. Appropriations were made for one-year periods and legislation creating programs was generally separated from legislation that provided resources to programs. Although the Constitution did not require it, balanced budgets were the norms with occasional deficits that arose during wars and disappeared shortly after them.
By the middle of the 19th century, two developments brought the era of budget balance to a close. First, Congress fragmented fiscal policy making by expanding the number of committees that would be involved. Some scholars have argued that such fragmentation of spending power increased deficits. Another change was the massive expansion of the federal budget itself--roughly doubling in nominal terms between 1894 and 1910. Over much of this period, the country faced chronic peacetime deficits. This led to the adoption of the income tax in 1913.
The Taft Commission on Economy and Efficiency presented a report titled The Need for a National Budget in 1912. It argued that the President should prepare and present budgets to Congress, the budget message should accompany policy proposals and include summary financial information, the Secretary of Treasury should present a consolidated financial report to congress, agencies should present an annual financial report to congress and that agencies should establish and maintain a comprehensive accounting system. Congress did not agree with a budget process centered on the executive and rejected the Taft Commission's recommendations. As a result of World War I, the federal budget (from $726 million to $19 billion between 1914 and 1919) and debt (from $1 billion to $26 billion during the same period) grew sharply. With the growth of the public sector, reformers continued the quest to get the Taft Commission's recommendations into law. In 1921, the Budget and Accounting Act was signed which provided for a Bureau of Budget (that would in later years report to the Executive) and a General Accounting Office responsible to Congress.
Presidential Dominance (1921-1974). The Budget and Accounting Act of 1921 provided the President with a formal role in the budget process. Before this, agencies generally submitted budget requests directly to Congress. The 1921 Act forced the agencies to work through the President who would submit the budget to Congress. Congress still retained the right to accept, modify, or reject each outlay and to change the President's proposed revenue policies. While the new law did not mandate a balanced budget, reformers assumed that centralized authority in the executive branch would increase the probability that this would occur. During the years immediately after the Act, budget balance was indeed restored as Bureau of Budget staff vigorously analyzed and managed agency spending. The Depression, however, reduced the demands for budgetary discipline as the role of the federal government permanently expanded.
As the federal government became better at spending funds, it also became better at collecting taxes. After World War II, income tax collections soared due to the economy and a new system of withholding taxes from paychecks. Federal outlays, which were 3 percent of GDP in 1929, were 18 percent during the 1950s. As Schick (p. 17) notes, the new money transformed the president's budget role from spending controller to program planner." By the 1960s, the President's budget dominance started to wane. Increasingly, the growth of entitlement programs put pressures on the spending system. The need to finance a war in Vietnam and the Watergate crisis gave Congress reasons to reestablish itself in federal budgeting.
Congress versus the President (1974-2000). In the early 1970s, after repeated battles with the Nixon administration, Congress set out to create a new budget process. The result of its efforts was the Congressional Budget and Impoundment Control Act of 1974. This law allowed Congress to adopt an annual budget resolution that "sets revenue, spending, the surplus or deficit, and debt totals, and allocates spending among 20 functional categories" (Schick, p. 18). Although the role of the President was not changed--he would still prepare and submit the budget each year--it set up an apparatus where Congress has its own budget, budget staff, and projections of fiscal performance. The Act established the Congressional Budget Office whose role was to estimate the impact of new laws, estimate program costs, and make projections. In subsequent years, Republicans and Democrats repeatedly battled over budget policy, deficits became the rule of the day and battles raged on about how deficits should be addressed, bringing to the forefront reform measures such as entitlement caps and a balanced budget amendment (Schick, p. 20).
As budget reform efforts were hotly debated including laws forcing Congress to meet balanced budget targets (e.g., the Gramm-Rudman-Hollings (GRH) Act), the United States began an economic turnaround and deficits started becoming smaller. Presidents Bush and Clinton both approved tax increases but also supported new laws to bring the budget under control. The Budget Enforcement Act (BEA) of 1990 sought to overcome problems in the failed GRH Act by giving the president the opportunity to adjust deficit targets with the budget submission. The BEA also instituted a process to control deficits by distinguishing between "discretionary spending, controlled by annual appropriations, and direct spending, controlled by substantive legislation" (Schick, p.23). BEA also imposed a PAYGO requirement that requires sponsors of new programs to raise new revenues or cut spending elsewhere. With surpluses predicted till 2010 that are anticipated to total $1 trillion, how to spend this surplus or whether to reduce taxes is the battle on the table today.
How to Reform the Federal Budget Process? Schick (2000) has argued that the federal budget process has a capacity for "self-correction." Neither the public nor politicians will tolerate deficits or surpluses very long and will take steps to bring the system into equilibrium. However, factors such as the economy or the financial condition of major programs such as Social Security and Medicare constrain this self-correction mechanism, as do laws passed by Congress or rules instituted by the President. While it is tempting to put forth solutions that appear direct (e.g., a Balanced Budget Amendment) such solutions may reduce the capacity for self-correction. The irony is that a good time to "fix" the budget process is when there is slack in the system--budget surpluses. With this in mind, the main approaches to reform the federal budget process include:
1) Balanced Budget Amendment--adopt a constitutional amendment that requires that a balanced budget be passed. Main issues: inflexibility to address economic downturns, accounting games to redefine what is on-budget and off-budget, "projected" balanced budgets do not mean actual balanced budget.
2) Entitlement Caps--entitlement programs are those programs where spending is determined based on eligibility and thus is not constrained by what is actually budgeted. Since this is the fastest growing area and the one most difficult to control, one reform approach is to put a ceiling on some or all programs. Steps such as across the board cuts for all participants in the program could be used to bring these under control. Major issues: automatic caps would mean budget balance is a more cherished goal than serving the needy.
3) Biennial Budgeting--reformers argue that having a budget process consumed with an annual focus leads to a crisis atmosphere and dilutes the very essence of budgeting--planning. Adopting a budget for a two-year period would reduce incentives to unnecessarily spend money before year-end to justify the budget base. Department and budget staff could also use the "off year" to more thoroughly evaluate existing and new programs. In essence, biennial budgeting would institutionalize a long-term perspective to budget decisions. Major issues: Are agencies capable of planning out this far? Would supplemental appropriations simply dilute the process? Does Congress lose flexibility?
4) Presidential Role in Congressional Resolution--the aim of this step is to reduce the lack of coordination and improve the timeliness in the budget process. The 1974 law gave Congress the power to establish a budget resolution. In practice, the President's assent is needed or programs approved by Congress may not be taken action on by the President. This step would force the President and Congress to meet early in the budget process to formulate a joint budget resolution.
The federal surpluses for the last several years surprised many students of budgeting. Schick's analysis incorporates recent history in an overall portrait of the federal budget process that could be argued to show that the economy generally gets the credit for budget balance while Congress and the President are usually recognized for imbalance.
The Federal Budget: Politics, Policy, Process can be ordered in paperback for $18.95 from Brookings Institution Press (www.brook.edu).
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|Publication:||Government Finance Review|
|Article Type:||Brief Article|
|Date:||Apr 1, 2001|
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