The Value of Performance Budgeting Today

So, does performance budgeting have value? And equally important, is it here to stay? The answers to these questions are interrelated.

As the Hoover Commission report demonstrated, the concept of performance budgeting isn’t new. But why is the idea coming the forefront now? What’s different today that gives performance budgeting both value and staying power that didn’t exist in the past?

We are at a historic turning point in the realm of federal budgeting for two principal reasons. First, entitlement programs are mushrooming, consuming ever larger portions of federal spending. Legislators are squeezing discretionary budgets like never before. Second, information technology has increased the visibility of government activities. The explosion in the number of media news outlets means more and more eyes are serving as watchdogs over government spending.

Dwindling Discretionary Funds

Consider the makeup of federal spending in 1966, depicted in Figure 1-1. Interest on the national debt amounted to seven percent of total spending. Other mandatory expenses, including Social Security (15 percent), Medicare/Medicaid (one percent), and miscellaneous other categories such as government retirements amounted to 26 percent. Thus, all entitlement programs plus interest represented just one-third of federal spending. That left the other two-thirds for discretionary programs, that is, funding for the federal agencies to run the government. Defense used 43 percent of all federal dollars, while the rest of the government consumed the remaining 24 percent.

Figure 1-1 Federal Spending Breakdown in 1966

Now compare the fiscal spending breakdown in 1966 with that in 2006 (Figure 1-2). In 2006 interest accounted for nine percent of spending, Social Security was up to 21 percent, and Medicare/Medicaid was a staggering 19 percent. Total mandatory spending had reached 62 percent of all spending, leaving just 38 percent to run the government. In 2006, defense spending consumed 20 percent, while all non-defense agencies were left with just 18 percent. The defense piece of the pie has shrunk by more than half since 1966 and the non-defense piece has been cut by one-third.

Figure 1-2 Federal Spending Breakdown in 2006

This trend is continuing. Entitlement programs, especially Social Security and Medicare/Medicaid, continue to grow faster than the rate of revenue growth. Changing demographics, reflecting the impact of aging Baby Boomers, promises an explosion in entitlement spending.

Projections by GAO indicate that without a change in either the entitlements legislation or the tax code, entitlement spending will consume 100 percent of all tax revenues by 2030, and by 2040 will consume 30 percent of the gross domestic product (GDP). This leaves nothing to operate the government—except deficit spending. The magnitude of deficit spending needed to fund government operations would be untenable, both politically and economically.

What does all this mean? In short, agency budgets are under enormous pressure, and that pressure will continue to grow. Discretionary budget dollars are becoming increasingly scarce. This leads to more competition for these dollars and more scrutiny over how we spend them.

Decision makers (e.g., agency heads, OMB, the President, Congress) will be forced to make tougher and tougher decisions on which programs to fund with these scarce discretionary dollars. Performance budgets give the decision makers the information necessary to make rational, informed allocations. Agencies that conduct performance budgeting well have a decided edge over those that don’t. Good managers would gain an advantage by embracing performance budgeting.

Media Scrutiny

Performance budgeting also makes agencies accountable for achieving the results promised in the budget. This heightened accountability places a lot of pressure on agencies to succeed. Agencies that document meaningful and realistic objectives in their performance budgets and later meet those objectives can avoid criticism and negative publicity. The government watchdogs will move on to agencies who put forth unrealistic or meaningless objectives, and those who fail to meet their objectives.

Examples of media scrutiny abound. In 1995, not long after passage of GPRA, USA Today published an article about the lack of accountability in governmental accounting. The article cites accounting errors in Department of Defense (DoD) of $200 billion, NASA with $500 million, and Social Security Administration with an unreconciled balance of $65 billion, and it goes on to state:

In past years, the government’s solution to this problem has been to ignore it. Once a budget is enacted, the financial focus shifts to the next year’s budget. How the money currently is being spent and what results are being achieved are incidental. Although taxpayers foot the bills, they receive virtually no accounting of how their money is managed or spent. What reports do exist largely are unreliable. In the corporate world, this would be intolerable.

More recently, Stephen Barr, writing for the Washington Post, reported that entities such as the IBM Center for the Business of Government and the Government Performance Coalition have initiated discussions on ways the next administration can capitalize on previous initiatives and continue to improve performance. Barr cites professor Steven Kelman of Harvard University as stating that the federal government, driven by GPRA, has taken a “performance turn” and that linking budgets to program performance has become more common.

Lack of results and accountability in maintaining security of private data drew a lot of criticism in the press. In an editorial, USA Today assailed the IRS, Department of Agriculture, Transportation Security Administration, DoD, Veterans’ Affairs, and other agencies for the loss of both employee and taxpayer private information. The article’s subtitle read: “As agency foul-ups multiply, it’s time for some accountability.”

Whether agencies are successful or fail to perform, their results will be recognized, reported, and given notoriety.

Given the competition for discretionary dollars and the level of scrutiny over government spending by the media and others, performance budgeting will increase in importance over time. Changes in administration or political persuasion should not deter what is a sound, very common-sense way of budgeting.