WASHINGTON, February 3, 2015 — President Obama just submitted a $4 trillion budget for next year. Congress opposes much of what the President has proposed, but spending will increase this year, and the public debt will grow by another half-trillion dollars.
Zero-based budgeting would relatively painlessly reduce government spending and more easily balance the budget. How does it work?
Under the current budget process, an agency’s budget grows over the previous year’s budget along a baseline that rises with the expected inflation rate and expected increases in demand for its services. If baseline growth is 3 percent per year, then a 3 percent increase in that agency’s budget is treated as zero growth. If that agency’s budget is increased by only 2 percent, budgeters claim a 1 percent budget cut.
In aggregate, if baseline projections call for the federal budget to grow by $200 billion and instead Congress passes and the President signs a budget only $100 billion larger than last year’s, they will all take credit for cutting the budget by $100.
State and local governments set tax policy to raise sufficient revenue to cover the budgeted expenses. The federal government does not; the amount it raises in tax revenue does not have to equal spending. In 49 of the last 52 years, the federal government has had budget deficits; some, all in the last six years, have exceeded $1 trillion.
In every year since the 1950’s — with the exception of 2013, when the House of Representatives pushed for spending reductions — the federal government’s annual spending has been larger than in the prior year. The result is that the federal government is now proposing to spend $4 trillion in the next fiscal year, a 6.4 percent increase over this year.
To fund this level of spending, the government must keep raising taxes. Obama’s budget calls for an additional $1 trillion in taxes over the next 10 years, and still forecasts $474 billion deficit next year. Many people complain that they are “taxed enough already” and want their taxes reduced, yet government spending continues to grow. 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 Georgia state agencies. This technique required every agency to justify its entire operating budget — the baseline was zero — rather than justifying only the additional amount above last year’s spending. Although it ultimately took many years to fully implement, the result was a staggering 50 percent reduction in administrative costs to the State of Georgia and a consolidation of almost 300 state agencies into only 30.
President Carter tried to implement ZBB at the federal level in 1977, but there was considerable resistance. Critics claimed the technique was time-consuming and costly for the federal government, especially for use in annual budgeting.
Perhaps the idea should be revived.
The problem with the annual incremental approach is that it starts with the assumption that all prior spending is necessary. Hence increases due to inflation and normal increases in service due to population growth are warranted. Never is the prior year’s spending fully justified.
Additionally, each department is under pressure to spend all of the budgeted amount for the year or risk seeing a reduction in funding the following year. The result is that there is no mechanism to reduce unwarranted spending.
The federal debt now exceeds $18 trillion. That represents more than 100 percent of annual U.S. income. This is a level not seen since 1946, when the expense of World War II caused spending to skyrocket. However, once the war ended, government spending fell dramatically; President Eisenhower was able to balance the budget in the early 1950’s.
Perhaps a more realistic statistic is that the public debt represents more than 500 percent of the federal government’s annual income of $3.5 trillion. That’s like a person with a $100,000 annual income taking a $500,000 mortgage to buy a home. That level of debt is not sustainable.
While discussions about the negative impact of the public debt and the annual deficits have subsided, we continue to have a debt problem that not only puts heavy burdens on future generations, but may lead to serious budget and taxing problems in the not-distant future. Regardless of what some economists say, we 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. It may be too cumbersome to be undertaken annually, but applying a ZBB approach once every 10 years or so may make sense.