Baseline Budgeting

Your personal budget is limited by how much money you make.  The idea behind sound budgeting is to spend less than your income so you can save money for the future and your retirement.  If you get a pay raise, you can increase the limit.  If you take a pay cut or lose your job, you have to reduce your spending accordingly.

Government spending has no such limits and the government almost never plans spending to fit within the taxes it collects.  Instead, it assumes that all federal programs will continue and grow in size indefinitely.  That growth isn’t limited to just inflation either.  These programs get bigger by adding more requirements, more bureaucracy, and more people to the entitlement roles.

How baseline budgeting works

Baseline budgeting is the starting point or baseline for the next year’s budget based on the previous year’s spending.  So even if billions of dollars are wasted this year, baseline budgeting assumes that the same amount will be wasted next year and every year after that.

In addition, more money is added on top of the baseline to pay for inflation and new spending requirements.  Federal programs are rarely, if ever, eliminated during this process, even if they have failed or are completely unnecessary.

The rising costs are automatic and on autopilot, resulting in higher spending as far as the eye can see.  This allows the government to spend more and more money every year without actually calling it an increase because it’s part of the “baseline.”

History

Baseline budgeting came to be in 1974 with the passage of the Congressional Budget Act.  It was done in response to President Nixon’s withholding of appropriated funds from federal agencies after the budget had been passed by Congress over his veto.  A furious Congress enacted legislation that created the Congressional Budget Office and established the Senate and House Budget Committees.

It also required the Office of Management and Budget to estimate future spending based on a continuation of all government services, virtually eliminating any thought of reducing spending.  Growing government became the rule, not the exception.

Example

Let’s say you are paying your child an allowance of $10 per month.  You decide to increase it to $11 next year to cover inflation, but she wants an increase to $15 because new things have come up and she needs more money to pay for them.

You decide to increase the allowance to $13.  In the world of government accounting, this is a budget “cut” because you gave her $2 less than what she wanted.  This is a surprise to you because you generously increased her allowance from $10 to $13.  So even though you are giving her $3 more than you were, you are guilty of slashing her budget.

It gets worse than that.  Now that you’ve upped her allowance to $13, she is going to base her next raise request on that number and add more to it.  So even if the reason for the first raise was total fiction, that doesn’t matter.  You are stuck with a new starting point or baseline that you can’t ever reduce.

Impact

Baseline budgeting permits the perpetual continuation of programs that aren’t working or are no longer needed.  The recent, supposedly one-time “stimulus” spending is now part of the baseline and will be included in the starting point for all future budgets.

Figure 1 below plots two lines.  The top line is actual government spending since 2000 as a result of baseline budgeting.  The bottom line is what spending would have been if only inflation had been added to the budget every year.  The difference between the two lines (maroon colored area) is real spending growth above and beyond inflation.

One critical note; Congress doesn’t consider the maroon area to be an increase in spending.  That may be hard to believe when you look at the upward slope of the line, but that’s the deception the government uses to perpetuate endless deficits.

SOURCE: www.whitehouse.gov and ftp://ftp.bls.gov

Government agencies have a built-in incentive to spend more every year because they know their future budgets will be based on what they spent this year.  In fact, when the end of a fiscal year approaches and they still have extra funds lying around, they will create ways to spend that money rather than return it to the Treasury.  If they don’t spend it by September 30, they run the risk of a budget reduction as a result.  That’s a risk that most government agencies don’t want to take.

Solution

The solution is to eliminate baseline budgeting and force the federal government to use zero-based budgeting, along with a Balanced Budget Amendment to the U. S. Constitution.  Zero-based budgeting would require every government agency to justify every dollar of its budget from scratch, every year.  Just like you do.  This is called “bottom-up” budgeting because it’s not based on past spending patterns.

We should require our representatives in Washington to prioritize spending to fit within expected tax revenues, the same way we do in our own homes.  Anything less will result in more and more debt, with no hope of ever balancing the budget.

Michael Sanibel (www.michaelsanibel.com) is a professional writer and communications consultant specializing in business, marketing, personal finance, law, science, aviation, sports, automobiles, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California, New Hampshire, and the U. S. Supreme Court.