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ISSN 1608-7143 OECD JOURNAL ON BUDGETING ? Vol. 2, No. 2 ? OECD 2002

Does Budgeting Have a Future?

by

Allen Schick*

* Allen Schick is Visiting Fellow, Governmental Studies, Brookings Institution, Washington DC and Professor, School of Public Affairs, University of Maryland, United States.

OECD JOURNAL ON BUDGETING ? Vol. 2, No. 2 ? ISSN 1608-7143 ? ? OECD 2002

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DOES BUDGETING HAVE A FUTURE?

Budgeting is a work in progress. The process is never quite settled because those who manage it are never fully satisfied. To budget is to decide on the basis of inadequate information, often without secure knowledge of how past appropriations were used or of what was accomplished, or of the results that new allocations may produce. Most people involved in budgeting have experienced the frustration of having their preferences crowded out by the built-in cost of past actions. Budgeting is a deadline-driven process, in which sub-optimal decisions often are the norm because government does not have the option of making no decisions. When one cycle ends, the next begins, usually with little respite and along the same path that was trod the year before. The routines of budgeting dull conflict, but they also are a breeding ground for frustration.

Within this pressured world, those who make budgets or are affected by them yearn for a more rational and orderly process. Reform is the Holy Grail of budget people, their unending quest for a better way to parcel out money and plan the work of government. Sometimes they embrace big bang reforms, such as Planning-Programming Budgeting Systems (PPBS) and zero-base budgeting; usually, however, they strive for incremental adjustments in one or another element of the process. Tinkering is ongoing because the adopted changes rarely produce the promised improvements. In budgeting, the failure of one reform begets another reform.

If budgeting is a work in progress, does it have much progress to show? Have procedural reforms changed the way budgets are compiled or implemented? The clear evidence is that there has been significant change both in the budget practices of most OECD member countries and in their budget policies. In most countries, items of expenditure have receded in prominence and now are consolidated into broad categories. Nowadays, the budget has more information on programs and performance and its time horizon has been extended beyond a single fiscal year to the medium-term. Over the past two decades, budgeting has been more closely integrated with other financial management processes including accounting systems and financial statements. On the policy front, spending growth is slower than it was during the post-war period, but entitlements claim a larger share of central government financial resources. Nevertheless, revenues and expenditures are closer to balance in most countries, though few have

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DOES BUDGETING HAVE A FUTURE?

managed to sustain a balanced budget through an entire economic cycle. Reform has made a difference, but not a very big one.

My task in this article is to imagine how the practice of budgeting might evolve in the years ahead. As someone trained in data and detail, I find it difficult to contemplate the future without connecting it to the present and the past. Budgeting is incurably incremental, not only in the amounts allocated for particular purposes, but also in the adjustments made from time to time in its operating rules and procedures. To comprehend where budgeting is heading, one must know where it is now and how it got there. To facilitate discussion, the launch of the OECD Senior Budget Officials Working Party (SBO) in 1980 is used as a break point in the evolution of budget systems. The establishment of SBO not only provided a forum for the exchange of ideas, but was itself part of the movement to reconsider budget practices. If budgeting has changed, it is not because SBO exists; rather, SBO exists because of the impulse to change budgeting.

In considering how budgeting has changed, it is useful to distinguish between three types of innovation: macro-budgetary, distributive and microbudgetary reform. Macro-budgeting deals with the budget aggregates and with the maintenance of fiscal discipline; distributional issues pertain to the allocation of costs and benefits through budget decisions; micro-budgeting is concerned with the operation of government programs and agencies. This classification is similar to the three-level structure of budgeting devised by the World Bank that identifies the core functions as aggregate fiscal discipline, allocative efficiency and operational efficiency. With respect to each of these functions, the paper first describes and assesses recent innovations, and then contemplates how budgeting might evolve in the decades ahead.

My sense is that the next two decades may bring more fundamental change than occurred in the two previous decades, possibly through broad political and trans-national developments rather than through frontal efforts to alter budgetary procedures. Some changes will be the natural progression of developments already underway, others will emanate from changes in relations among governments. While discussion of the future is inherently speculative, evidence for most of the possibilities discussed here can be found in avant-garde ideas germinating in the fertile minds of budget scholars and practitioners.

The concluding section turns to the question in the title of this paper: Does budgeting have a future? The question may appear trite and the answer obvious, for unless governments fade away, government budgeting is here to stay. There is little reason to believe that government may be markedly smaller in the future; it is more likely to be somewhat bigger. Yet the question wells out of the analysis in the article. The trends and possibilities discerned

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DOES BUDGETING HAVE A FUTURE?

in the article suggest a future in which budgets may be bigger but budgeting weaker. This is a prospect that should concern those to whom the processes of budgeting have been entrusted.

1. Macro-budgeting: From stimulus to constraint

When the first SBO met in 1980, it was animated by a sense that one era in public finance had ended and another had just begun. During the previous half dozen years, OECD member countries experienced oil shocks, stagflation (low growth and high inflation), rising unemployment and escalating fiscal deficits. These adverse conditions were a marked departure from the buoyant conditions that characterised the post-war boom, during which economic growth propelled government expansion.

The post-war expansion is summed up in a few statistics. In 1960, the OECD's first year, total government outlays of OECD member counties averaged 29% of GDP; two decades later, these outlays averaged 40% of GDP, an increase of more than one-half percentage point a year. Most of the growth was in Social Security transfers which doubled from 7% of GDP to 14%. The huge expansion of government was not happenstance; it was promoted by governments which reengineered their budget practices to boost spending. Some national governments discarded or revised long-standing balanced budget rules, and many embraced the Keynesian doctrine that fiscal policy should aim to stabilise the economy, even if the short-run effect was to destabilise the budget. Many governments eased the line item controls they had imposed to constrain spending, and permitted or encouraged spending departments to actively bid for additional resources in the annual budget process. Virtually all developed countries weakened budget discipline by enacting legislation mandating the expenditure of funds on various entitlement programs. Not only did governments expand programs and spend more each year, but political leaders were expected to submit expansive budgets. In fact, the vigour of their leadership was often assessed in terms of the new and expanded programs included in their budgets.

Economic expansion fuelled significant increases in government revenues, but these often did not suffice to cover expenditures. When revenues were insufficient, many governments either raised taxes or ran small deficits. Neither course of action entailed much political risk, and neither was seen as fiscally irresponsible.

When economic conditions deteriorated in the 1970s, public budgets were still on an expansionary course. There was an unsustainable imbalance between the momentum of the budget and the capacity of governments to maintain a prudent fiscal course. This writer commented on the predicament in a paper presented at the 1981 SBO "force majeure rules public finance".

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