Baseline budgeting is at the heart of the problems with the national debt. The Office of Management and Budgeting (OMB) prepares a baseline based on estimates of spending, revenue, deficit (or surplus), and the public debt expected during a fiscal year under current laws and current policy. The baseline includes projections for 5 and 10 years into the future. Budget cuts at the Federal level are often mere adjustments to the assumed growth in government programs. Rosy projections of revenue streams and cost savings are assumed to be real and built into the baseline. Investments (spending increases) are self-supporting in the long-term and savings are realized through the elimination of waste, fraud, and abuse. Baseline budgeting is a smoke and mirrors process that is not founded in reality. It is an accounting procedure driven by assumptions and projections dependent upon still other assumptions and projections.
The Affordable Care Act (Obamacare) is a perfect illustration of the folly of the Federal budgeting process. Supporters of Obamacare claim that this new entitlement will reduce the deficit by $127 billion dollars over the next ten years. To reach this number the non-partisan Congressional Budget Office (CBO) factored in six years of projected benefits and four years of projected costs. The CBO also double counted $500 million in Medicare cuts that are highly unlikely to occur. The CBO is required to use the assumptions provided by Congress when it scores a piece of legislation. Under Generally Accepted Accounting Procedures (GAAP) and most any other set of accounting rules, this sleight of hand would be prohibited.
The battle lines are drawn as the deadline for addressing the Federal debt ceiling fast approaches. The Senate, House, and President Obama have agreed to a stop-gap measure that pushes the debt ceiling deadline out two weeks to March 18. The agreement includes $4 billion in discretionary spending cuts which were included in Obama’s 2012 budget proposal. Lawmakers, talking heads, and political reporters alike have characterized these relatively meager cuts as the first real Federal budget cuts in recent memory. The Republican House has already proposed $61 billion in cuts for the remainder of the 2011 budget cycle. Senator Reid says the Democrats plan to propose spending cuts of their own. None has been forthcoming so far. The Democrats and Republicans remain far apart and the possibility of a government shutdown looms. Budget cuts are institutionally discouraged under baseline budgeting. Momentum alone drives spending up unless legislation or rules changes get in the way.
Budget cut proposals often evoke howls from politicians and special interest groups alike. Democrats portray Republicans as evil grinches striving to punish the poor for the benefit of the corporate fat cats that bank roll their campaigns. It just is not fair to the kids, the elderly, the poor, the cops, the teachers, the firemen, and all the usual straw man suspects. Republicans accuse Democrats of protecting the interests of the public and private sector unions that fund their campaigns. It is not fair to the taxpayers who foot the bill. It is always easy to be generous with other people’s money.
The U.S. Government is $14 trillion in debt. The 2012 Obama budget is approximately $4 trillion, $3.7 trillion to be precise. The projected budget deficit for 2012 is a record $1.645 trillion. Federal discretionary spending makes up less than 20 percent of the Federal budget. Even if discretionary spending were frozen at 2008, pre-Obama levels, the Federal deficit would continue to rise as entitlement and defense spending grow. Neither the Democrats or Republicans have come forward with proposals to rein in entitlement spending. However, Republicans led by Paul Ryan plan to propose changes to Social Security and Medicare when the Republican 2012 budget is announced in April. Any changes to the sacred cows of FDR and LBJ will not happen without a fight. Yet altering the baseline will require some adjustments to these hallowed programs.
Zero base budgeting is a concept some throw around as an alternative to baseline budgeting. Zeroing out all budgets annually is not practical in any large organization, much less the Federal government. Baseline budgeting is here to stay. The best one can hope for is to alter the assumptions used to develop the baseline.
The conversation has started. The battle lines are drawn. The elections of 2010 have altered the landscape. Obama, Democrats, and Republicans are all talking budget cuts. In reality the parties are still largely talking past one another. Each has its own set of budgetary assumptions that would dramatically affect the baseline. There may never be a better opportunity to tackle the tough decisions necessary to truly bring government spending under control. This will require both sides to view the budget deficit and the national debt as the enemy. It is amazing how much one can accomplish if he does not care who gets the credit.
We, the taxpayers, are all watching. Fortunately we can alter the decision-making equation again in 2012. We will if our current leaders fail to do the right things. There is no baseline at the ballot box. The House is zero based every two years. One-third of the Senate faces the voters in 2012. Obama also gets his report card in November 2012. Change is coming one way or another.
A successful businessman offers his thoughts on the federal budgeting process!