Week 5: Deficits, Budget Balancing, Reforms Week 4 follow up: BCPs – look at samplesample Deficit politics – federal –questions raised by Kettl book –rationality in theory –reforms in practice –Kettl’s answers Deficit politics – state –Proposed reforms: ZBB; new commission Role of analysis Budget balancing strategies –class exercise Preview of week 6

Federal Deficit Politics Questions raised by Kettl –How important is it to reduce the deficit? –Why can’t we reduce the deficit if most people agree it should be done? –Is the deficit a sign of faulty budget process? –Is it possible to make budget process more rational?

Is/Should/Can the Budget Process be Rational? What is rationality? The economics/politics debate –do concepts of economic efficiency and rationality apply to politics? –do they apply to budgeting?

Rationality in Economics and Political Science Economics –individuals –fixed preferences –maximize expected utility –market mechanism Economic Rationality Applied to Politics –explains political outcomes as result of self-interested behavior of individuals –citizens/voters as individual consumers –politics is a marketplace –no collective goals or interests –no learning from others or situations –public interest is sum of individual interests

from Deborah Stone’s Policy Paradox: Critique of the Market Model of Politics

Critique of Rational Model of Policy Analysis Based on Lindblom: The “Science” of Muddling Through Rational-Comprehensive Method: 1. Clarify objective apart from policy choices 2. Ends-means analysis 3. Good policy is the best means to the ends 4. Analysis is comprehensive -- accounts for all relevant impact 5.Information is conclusive and authoritative 6.Outcomes projected with certainty Successive Limited Comparisons: 1.Objectives and choices are linked 2. Ends and means not distinct 3. Good policy is one on which agreement can be reached 4.Analysis is always limited 5.Information is ambiguous; subject to interpretation/framing 6.Outcomes rationalized afterward

Rationality in Budgeting: Assumptions of Rational Process economic, not political based on analysis comprehensive review of options orderly decision rules allocated funds where they are most needed by objective measures promote reallocation from lower to higher priorities

Critiques of rational budgeting Practical critiques: –comprehensive analysis is impossible –asks analysts to do what they cannot Normative critiques –budgeting is about choosing among values –political process does a better job of solving value problems –political strength of program = deserving of $$ support –incrementalism/bargaining is the most fair –process reflects political system – change system not process –analysis must serve, not replace, politics

Rational Budget Reforms Proposed to replace line-item budgeting – why? Performance budgeting –links inputs with outputs Planned Programming Budgeting Systems –link program goals/strategic plans with program costs Management by Objectives –links manager-driven objectives with budgets Zero-Based Budgeting –justify all costs above specified level Do the outcomes justify the efforts?

Reforms to Budget Process The search for an alternative to political struggle: Gramm Rudman I, II, III Line item veto Balanced budget amendment Biennial budget

Summarizing Kettl rationality fixes have failed –technique cannot substitute for political judgment –role of Congress must be honored –implementation problems process fixes have failed –procedures cannot substitute for political judgment –always a circumvention strategy –procedures cannot force unwanted decisions –creativity and game playing Other foils: –top-down, centralized process open to interest groups/closed to citizens –anti-tax sentiment –divided party government

Summarizing Kettl -- continued Solution: political leadership –confront controversy –promote vision and values –promote citizenship and sense of fairness –define the public interest –other characteristics of effective political leadership? Would a greater sense of fairness of tax and spending policies help? –disconnection between who pays and who benefits –should there be a closer connection?

Deficit Politics—State level Does the state face the same pressures toward deficits? Do process or rationality “fixes” have a better chance of success at the state level? Current deficit –what’s the constituency for budget balance? –what strategies (gimmicks) are being used? –real alternatives – who is proposing them? Proposed reforms –ZBB –Commission on Government Waste and Inefficiency

Role of Budget Analysis Are politics and analysis antithetical? –How can analysis serve, rather than replace politics? –What should analysis try to accomplish? –If analysis is rejected by decision makers, is it useless? –What should budget analysts try to accomplish? –Would unlimited analysis achieve rationality? LAO type of analysis v PPBS, MBO, PB, etc. More in Week 10

Balancing Budgets -- State and Local Balanced budget requirement More intense efforts to hide deficits Fewer macroeconomic issues to consider Greater influence of environment on balance/deficit Deficits don’t (usually) accumulate--problems more tractable Temporary, not structural deficits -- more fixes available Class exercise on balancing bugets

Preview of Week 6 Begin Part II: Context of Public Finance Readings –Rubin Chapter 2 on revenue politics –Primer on state taxes –LAO section on “perspectives on state revenues” Guest speaker, Brad Williams, from LAO –process (and politics) for projecting revenues –current issues in state finance