Wondering how to control federal spending?

Have you ever wondered why federal spending continues to increase despite the ongoing economic downturn and in the face of all the bluster about the debt ceiling that came out of Washington this past summer? The hidden driver is something called “baseline budgeting.” More on that below.

In a household or in any business, budgets are formally or informally set based on income, projected over some period of time. In many households, that time frame may be as short as a month; for large corporations, it may be five years or more.

But in both small and large budgeting situations, mid-course adjustments are made when expectations change — for the better or worse. So if our income decreases, we reduce our spending on something. And we incorporate that reduction into our future plans. But not so the federal government.

Beginning in 1974 with the passage of the Congressional Budget Act, the federal budget was set up to effectively run on cruise control. The situation was exacerbated in 1987 with passage of the amazingly misnamed Deficit Control Act, which essentially accelerates the cruise-control setting yearly by adding a built-in inflation multiplier.

These laws put in motion a process that effectively locks in a level of spending for each year’s federal budget based on the level of spending the previous year, plus a built-in inflation multiplier, of between 3 and 10 percent. No further action required. The government just runs itself at a higher and higher spending rate year after year.

(For the purposes of this article, I am not discussing Social Security, Medicare and Medicaid. They require their own separate analysis. This discussion covers everything else: the Department of Defense, the EPA, the Department of Education, etc.)

Here’s how this works in current practice. The baseline federal budget for 2012 is $3.6 trillion (Yes, that’s $3,600,000,000,000.) Using the “baseline cruise control” method described above, the federal budget for 2021 is projected to be a mind-blowing $5.7 trillion. And it will rise to $5.7 trillion, automatically, because of baseline budgeting, without a meeting or a vote. It’s just baked in.

When one adds in all the years between 2012 and 2021, there are about $10 trillion of aggregate spending increases baked into future Federal budgets. Wild, right?

As crazy as the situation sounds so far, the next act is where the gimmickry really gets out of control. This past summer, a deal was struck to raise the federal debt ceiling by $2.5 trillion in exchange for $1 trillion in budget cuts agreed to in August and $1.5 trillion more scheduled to be negotiated by a House/Senate super committee over the next six months.

Because of baseline budgeting, the only cuts which are “real” are those, if any, made in the current year, because those cuts reduce the baseline upon which next year’s budget is based. Any cuts made in future years are nothing more than reductions in the built-in increases.

So if $2.5 trillion in “cuts” are agreed to be applied in years beyond 2011, the actual result is to reduce the built-in increases from the $10 trillion discussed above to $7.5 trillion.

That’s right! No cuts, just a modestly smaller increase. Gives you some idea of how we’re bankrupting the country, and doing so at an accelerating pace. Consider that a baked-in average multiplier of 5 percent, left to work its numerical compound interest magic, will double a budget in about 15 years.

It’s this crazy: If tomorrow Congress passed a bill that approved spending $5 trillion to cover the entire surface of the USA with yogurt in 2015, that spending becomes part of the baseline. If next year the “Yogurt Coverage Bill” were repealed, the Congressional Budget Office would report a $5 trillion cut in the federal budget.

Earlier I wrote about mid-course budget corrections. There’s a formal name for this process: zero-based budgeting. It’s based on common sense. The budgeting process begins by justifying whether a particular expenditure is still needed and affordable or whether it can be frozen, cut or eliminated over the coming year. Every program and department has to present its plan and that plan has to be approved.

This is how it’s done in the business world. In that world budgets are built from the bottom up, department by department. Implementing some form of this process is one realistic way of achieving substantial, vital cuts in government spending. At the state level, zero-based budgeting has already been initiated. New Jersey is one example where, out of fiscal necessity, a bipartisan effort is underway to control spending using this real-world method.

 Increasing taxes is not a solution to this country’s debt issues. In fact, it would make the problem worse by masking the real disease, which is baseline budgeting. Giving the federal government more money through taxation does not result in a cut of a single dollar of spending.

Neither the current administration nor past administrations have been the least bit honest about baseline budgeting’s cumulative output of spending demands. If the country is to move back toward fiscal sanity, we citizens need to push back on candidates and ask where they stand on such a vital issue.
 

Richard Shanley, CPA is a retired audit partner of the accounting firm of Deloitte & Touche. He lives in Salisbury.