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October 21, 2013

How to Decide on the Budget: Set Menu or à la Carte?

Posted by Renaud Duplay

The recent debate over the United States federal budget, which led to a partial government shutdown, was at times hard to follow. Behind the debate over health care reform, lay also a more procedural struggle over the way to prepare the budget on Capitol Hill. Indeed, part of the butting of heads has resulted from a disagreement over what to negotiate on, in the first place. The US Constitution is relatively light on how the budget should be passed, so many legal options were considered in recent weeks, including: passing a continuing resolution to fund federal services and agencies; passing a continuing resolution linked with a defunding of the Affordable Care Act – Obamacare; funding individual federal agencies on a vote by vote basis; funding individual programs of federal agencies given expected adverse impacts of the shutdown, such as on cancer research trials. These options were, to make it even more complicated, linked to various stances on the federal government debt ceiling: separate decision-making, a linked agreed increase, or what resulted, a temporary suspension. In all this a new federal budget for the new budget year was not on the table. This is now on Congress’ to do list for the next three months.  

All of this is possible because the US federal budget works a little bit like ordering à la carte in a restaurant: you can skip the main course if you don’t feel like it and still end up enjoying the meal (or, more often, not really). Indeed, implementing a deal over the US federal budget requires selecting from a different menu of votes depending on the content of the deal. In addition, authority to spend can be given in various ways: either by appropriations bills – for federal agencies’ operating costs for instance – or by specific legislation that grants authority to spend on entitlement programs until this very legislation is modified or repealed. Those programs are called “mandatory” which by the way sets the tone for any future discussion on them.

Over the past 15 years, Congress has never been able to adopt a full budget resolution. Continuing resolutions have been regularly adopted to fund federal agencies. At the same time, legislation on the debt ceiling prevents the Treasury from borrowing money above a certain limit, with no certainty that this particular ceiling is consistent with other financial provisions; hence the legal uncertainty over what would happen in the event of the debt ceiling being hit.

This legal complexity is, without adding any ingredient of political partisanship, a perfect recipe for a stalemate. There is indeed a procedural advantage for anyone who favors not modifying a given mandatory program (whether to increase or reduce its cost): if you cannot find a majority to vote such a motion, the program remains unchanged and the money keeps flowing. On the contrary, not achieving a majority to vote on appropriation bills will result in a shutdown which – normally – provides an incentive to find a compromise. As a result, when debating the annual appropriation bills, there is an inclination to take off the table everything that requires a separate vote. As long as brokering a deal on the budget does not require a subtle compromise, building a budget à la carte can be efficient. When tough decisions are required, however, the whole process can be become unmanageable.

One way out would be to go back to three basic principles of good budget management: unity, universality and annuality. Those concepts were first introduced in the early 19th century. Budget unity and universality can be summed up in two simple propositions: all revenues and expenses should be recorded in one single document, the budget; and all revenues shall fund all expenses. Annuality brings discipline to the whole process by setting up a regular debate on the whole scope of government-funded operations, with a requirement to complete it by the beginning of the fiscal year, and to make decisions for a 12 month period.

In France, for example, the whole budget is enshrined in a specific law - an annual budget law - which is discussed following a clear and closed calendar. No expenditure can be incurred if the budget is not passed. Even in the case of “mandatory programs” which are defined by separate legislation, the absence of an approved budget means that no payments can be made. Indeed the Constitution provides the annual budget law with the sole legislative authority over spending. In this context, failure to vote a budget in time would result in a real and complete shutdown. This has happened only once, and then accidentally, in the past fifty-five years.

Presenting France as a model of budget unity, however, would hide some of France’s own dirty laundry. Indeed, while the expenses of the state cannot escape the authority of the annual budget law, some revenues do escape it, and can be used to fund specific expenses. Earmarking taxes and other government revenues to various entities, including social security or extrabudgetary funds, has been an increasing trend over the decades. Politicians like earmarking because it helps sell tax increases to voters and, because it is a nice trick to present a disciplined budget while actually increasing spending. To follow up on our dining metaphor, the French budget resembles a set menu, but the drinks are not included.

Recently, both government and parliamentary committees have understood how earmarking inevitably leads to poor performance in managing public policies. The amount of money allocated to these programs depends solely on the dynamics of the incomes earmarked for such spending. When a particular program is funded through different channels (earmarked revenue plus state and/or social security grants for instance) scrutiny tend to skip from what money is spent on to who pays what. During periods of budget consolidation, earmarked programs benefit from their isolation from the budget process. But dragging earmarked revenues back into the budget can be challenging. Similarly to mandatory programs in the United States, earmarking derives from permanent legal provisions which require a specific vote to be modified. Recent efforts have been made in France to cap and reduce the amount of money attributed to extrabudgetary programs. However, some powerful interest groups benefit substantially from earmarking, and have been particularly efficient at fighting any attempt to consolidating “their” revenues into the annual budget process.

Applying more stringently the principles of unity, universality and annuality is not without costs. Appropriating money for mandatory spending may require passing supplementary budgets to fund any slippage compared to the initial budget forecast. In the context of service delivery, denying own-revenues may demotivate efforts to improve cost efficiency. These potential drawbacks, however, do not outweigh the general benefits of a comprehensive budget which would cover the whole of central government and ensure consistency between revenues, authorized expenditure and the government’s debt servicing obligations. In the end, despite the frustration of not being able to select one’s favorite dessert, going with the set menu will always prove cheaper, and quicker in the kitchen, than ordering à la carte.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. 

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