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misleading measure of the deficit; for example, the current deficit measure

implies that taxpayers would bear the full burden of a road currently built,

rather than sharing costs with future beneficiaries. In addition, measuring the

cost of an investment over its life, it is argued, makes the deficit a more

accurate measure of federal consumption spending.

Opponents of capital budgeting argue that the budget should not be

accounted for in a way that makes some spending appear "cheaper" than other

spending. They believe that current accounting appropriately forces the

government to face the cost of programs when spending is controllable.

Perhaps even more significantly, they believe that it will be impossible to

determine which federal programs represent investment and which

consumption. Supporters of increased spending for government programs are

likely to argue that the programs they support are investment, since by doing

so, the programs will receive beneficial budgetary treatment. As a result,

opponents of capital budgeting fear many consumption programs will be

miscategorized as investment. These critics also claim that determining the

time period over which the costs of investments should be spread (or

depreciated) would be almost impossible. Since programs spread over longer

periods will appear to be cheaper in each year, they believe that many

programs will be said to last longer than they really do.

An alternative would be to maintain current accounting practices but

provide more information concerning the difference between spending on

consumption and investment. This information would solve the problem

created by the difficulty of measuring depreciation, but there are still likely

to be incentives to categorize many programs as investment.

Using Accrual Accounting for Government Insurance Programs.


government provides insurance against a variety of risks. The two largest

insurance programs are deposit insurance (insuring depositors against the

failure of financial institutions) and pension insurance insuring pensioners

against the failure of a plan's sponsor to pay pensions).

Accounting for the cost of these programs when cash is paid to the

insured, critics claim, does not accurately reflect the cost of the program when

the costs are actually occurring. Critics of cash accounting for these programs

suggest that this system allowed the government to ignore the mounting losses

of deposit insurance because the actual cash payments to depositors were not

going to be made until the future. By the time the budget began to record

the payments to the insured, there was no way to prevent paying on the losses

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that had already accumulated. Critics of the current system suggest that

moving to accrual accounting--as was done for credit programs under credit

reform--could be used for insurance programs. In such a case, an estimate of future losses, which would be used to count as outlays, could be made when

the insurance is provided.

Opponents of moving from cash-basis budgeting believe that a noncash

basis of budgeting for insurance will invite budgetary shenanigans, since

insurance costs would be based on estimates and not actual cash flows.

Further, they hold that the technical procedures required to estimate future

insurance losses, based on today's actions by the insurer, are not reliable

enough to be included in the budget. Moreover, they claim that the cost of

developing reliable noncash measures is far greater than any benefits that can

be provided. Finally, they believe that measures of the cost of providing

insurance are already available to the Congress in nonbudgetary related

documentation; the Congress can use this information to make responsible

decisions without changing budgetary accounting.

Performance Budgeting. Legislation that passed the Senate in the 102nd

Congress and has been reintroduced in the 103rd Congress would mandate

strategic planning and performance measurement for federal agencies, and

would require several pilot projects in agencies linking performance measures

to the budget process. Proponents of performance budgeting cite its potential

to bring about a basic change in the process of allocating resources by

concentrating not on inputs but on the results that government programs achieve. They envision a budget process in which line items are a thing of the

past and policymakers primarily focus on choosing levels of results, rather

than on funding levels.

Although one can hardly argue that government programs should not

measure and report results, opponents maintain that the payoffs associated

with performance budgeting depend on two conditions: the extent that this

concept would be extended to agencies that currently do not measure the

results of their activities, and finding a way to link the measures to budget

outcomes. There are limits to the ability of performance measurement efforts

to satisfy these two conditions. First, many agencies have already made

strides in measuring the results of their activities, rather than only the

activities themselves. Thus, the potential for additional improvement may be

less than is commonly thought. Second, the connection between performance

measures and resource allocation is not straightforward. For example, should

"bad" performance lead to additional resources (because past resources were

inadequate to meet performance targets) or budget reductions (because

resources would be better used elsewhere in the budget)? Past experience

with performance-based systems highlights this problem. One view is that

reforms such as zero-based budgeting failed in part because no one knew how

to make this connection.


Before drawing any conclusions, I would like to insert what may be an

unhelpful comment. Current budget procedures would look a lot better if we

were not staring a $300 billion deficit in the face. In a world where the

budget was nearly in balance, attention would be focused on the ability of the.

budget process to respond expeditiously to changing priorities at the margin

(shifting funds from defense spending to domestic spending, for example).

Although current procedures might not score an A+ even on this limited

agenda, the clamor for reform would be much quieter. I bring this up

because someday the budget deficit may be behind us--not because we

reformed the process, but because we adopted suitable policies. We will then

want a process in place that is suited to the marginal adjusting that is

historically the role of budgeting.

My advice to the Committee is to approach the possibility of making changes to the budget process systematically and carefully. First, avoid

diverting your attention toward outcome-focused reforms, such as a balanced

budget amendment or a cap on mandatory spending, for the reasons that I

have cited. Second, although the general structure of the budget process is

certainly an appropriate and potentially fruitful focus of your activity, you

should approach such ideas for reform with healthy skepticism. As my

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