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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
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