Zero based budgeting could solve government’s money woes

Zero based budgeting could solve government’s money woes

National debt clock in NYC

WASHINGTON, August 10, 2014 — Bloated government budgets at the local, state and federal level are causing problems in the U.S. economy. Most local and state governments require a balanced budget annually while the federal government is never required to balance its budget. On the federal level, for the past 50 years, annual government deficits have resulted in a huge public indebtedness.

The spending/taxing actions taken at other levels of government have also caused severe problems like bankruptcy, high property taxes and high income and sales taxes. Can these problems be resolved?

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The way the process works is that federal, state and local governments generally prepare a budget by determining and eventually justifying why an increase in spending above last year’s level is needed. Once this increase is finalized, it is added to the prior year’s spending to determine the total spending for the coming year. Then governments set taxing policy to raise sufficient revenue to cover the budgeted expenses. This is true for all levels of government, except at the federal level, where the amount raised in tax revenue does not have to equal the spending. In 48 of the last 51 years, the federal government has had a deficit, sometimes exceeding $1 trillion annually.

Since the 1950s, with the exception of 2013 when the House of Representatives pushed for a reduction in spending, the federal government’s annual spending has been larger than the prior year number. The result is that the federal government now spends $4 trillion annually. State and local budgets also continue to rise.

To fund this level of spending, federal, state and local governments keep raising taxes. Many complain that they are “taxed enough already” and want their taxes reduced. Yet government spending continues to increase. Is there a solution to this dilemma?

In the early 1970’s Georgia governor Jimmy Carter implemented a Zero Based Budgeting (ZBB) procedure for all State of Georgia agencies. This technique required all state agencies to justify their entire operating budget instead of justifying only the additional amount. Although it ultimately took many years to finally implement, the result was a staggering 50% reduction in the administrative cost of the State of Georgia and a consolidation of almost 300 state agencies into only 30.

President Carter tried to implement ZBB for the federal government in 1977. However, the implementation of ZBB within the federal government’s huge and complex budget proved to be difficult. Eventually the idea was abandoned and the federal government’s spending continued to increase.

The conclusion was that ZBB is a time-consuming and costly process and may not be possible for the federal government, especially if it is to be done every fiscal year. But perhaps the idea can be revived.

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The problem with the annual incremental approach, is that it starts with the assumption that all prior spending is necessary so that an increase due to inflation and normal increases in service due to population growth, is warranted. Never is the prior year’s spending fully justified.

The federal government’s total debt is now approaching $18 trillion. That represents almost 110% of annual US income. This is a level not seen since the 1940s when the expenses caused by  World War II caused federal spending to skyrocket. However, once the war concluded, government spending fell dramatically to the point where President Eisenhower was able to balance the federal budget in the early 1950s.

While discussions about the negative impact of the Public Debt and the annual deficits that cause the debt to grow have subsided, we continue to experience a debt problem that not only puts undue burdens on future generations but also may lead to serious budget and taxing problems in the not too-distant future. Regardless of what some economists say, we simply cannot continue to spend more money that we receive in revenue.

Although Zero Based Budgeting is a time consuming and costly process, it is cost-justified and should be considered once again. Perhaps this technique is indeed too cumbersome to be undertaken annually. But applying a ZBB approach once every ten years may make sense.

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