HOUSE COMMITTEE ON RULES
The Subcommittee on Legislative and Budget Process
HEARING
ON
"A COMPARATIVE STUDY OF INTERNATIONAL MULTI-YEAR BUDGETING "
The subcommittee met, pursuant to call, at 11:00 a.m., in Room H-313, The Capitol, Hon. Lincoln Diaz-Balart [chairman of the subcommittee] presiding.
Present: Representatives Diaz-Balart, Bishop, Gingrey, and Hastings.
Mr. Diaz-Balart. The subcommittee will come to order. Good morning to all of you. I would like to thank you for coming to our first subcommittee hearing of the 109th Congress. I would like to welcome my dear friend, Ranking Member Hastings.
Mr. Hastings of Florida. Thank you, Mr. Chairman.
Mr. Diaz-Balart. I would like to thank him for all the help he provided already to this subcommittee and to thank him as we move forward with the hearing process.
Chairman Dreier told me -- we all know what a hurricane of the day it is in these last days before we are able to break for a few weeks -- that he would try to come by because he is very interested in the subject. I thank him, even in his absence, for insistence, his emphasis on the importance of multiyear budgeting, specifically biennial budgeting.
This hearing will examine the multiyear budget practices of the United Kingdom and Germany in order to assess whether their systems offer any possible lessons for our budget processes. Multiyear or biennial budgeting has been a topic of discussion -- and obviously for possible reforms -- since 1977 in the United States, while in the United Kingdom and Germany reforms have been instituted in with differing levels of scope and success.
On numerous occasions, Congress and government organizations such as the Congressional Budget Office and the General Accounting Office have studied State governments and their multiyear budgets. Fourteen States currently have a biennial budgeting system, though their legislatures meet annually, and an additional seven States utilize a biennial legislative session and budget cycle.
However, a comparison of budget practices between Federal and State governments does not, obviously, necessarily take into account important funding outlays such as national defense, emergency response to national disasters, and important items like national health care and retirement benefits, among other provisions. This subcommittee will focus on the experiences of the governments of the United Kingdom and Germany to comparatively study challenges that face developed nation states as they address national domestic and foreign policy priorities.
Both the United Kingdom and Germany utilize multiyear planning techniques to establish spending plans. While both maintain annual budgets to deal with short-term issues, much of their budget and appropriations work takes place in longer term, extensively planned frameworks.
Perhaps John Adams may have exaggerated a bit when he said, "While all other sciences have advanced that a government that is at a standstill is little better understood, little better practiced now than 3 or 4,000 years ago. But when progress has been made, it has been possible because policy makers have absorbed lessons from past experiences and applied them in ways that have improved our processes for governance."
Now, the budget process in the United States is capable of being quite effective, but I think the question lies, could biennial budgeting alleviate the burden that this Congress faces every year to meet multiple deadlines in both budget and appropriation processes? That is one of the questions that our hearing today will seek to answer through the testimony of our distinguished expert witnesses.
This hearing is not intended for the analysis of budget specifics, funding initiatives and priorities, but rather, if you will, to step back even in the midst of the most busy of times and look at the budget process and experiences of other democracies to see if possibly we can, through those experiences, through those lessons, provide for more effectiveness in our own process.
So I am looking forward to listening to our experts testify. At this time I would ask my distinguished friend and colleague, the ranking member of the subcommittee, for his statement.
Mr. Hastings. Thank you very much, Mr. Chairman. First I would like to thank our witnesses. If I could prevail upon the staff to provide one of our witnesses with some water. He is just coming in from out of that heat. I am sure he would appreciate it.
Mr. Posen. Thank you, Mr. Hastings.
Mr. Hastings. If we could get something for him, I would appreciate that.
I welcome our witnesses. I am sure that they will be chock full of information for us, Mr. Chairman. I have one other request, and that is Ms. Slaughter, who may visit us later, the ranking member of the committee, if I by unanimous consent could have her full statement included in the record.
Mr. Diaz-Balart. Without objection.
[The statement of Ms. Slaughter follows:]
Mr. Hastings. Thank you, Mr. Chairman. I thank my good friend and colleague from Florida for organizing and calling this hearing today and the privilege to serve as the ranking member of this subcommittee. I am pleased that we are meeting for the first time this year to discuss our current budget process and how it compares to the budget processes of other countries.
From the onset, while I agree that the timely enactment of budgetary legislation has long been a challenge faced by Congress, I am hesitant to agree that a shift to multiyear budgeting is the answer to our problem. Biennial budgeting has a long history. As you just said, Mr. Chairman, at least 20 States are currently operating with some form of a multiyear cycle. However, research has not shown any clear benefit yielded by the States under this system.
I am certainly sympathetic to those who argue that biennial budgeting provides departments, agencies and communities with increased stability as they attempt to plan for the future. However, I also believe that a more structured honest deficit budget process would also solve many of the problems which have led us to today's hearing.
Our Section 300 of the Congressional Budget Act establishes a budget timetable. Within that timetable are target dates set by Congress, including the presidential submission of a budget proposal to Congress on the first Monday in February, and an expectation that Congress will complete its work on a budget resolution by April 15th each year. Prior to 1986, the target date was May 15, 1 month later than the current timetable.
Despite this timetable, since 1974, Congress has met the budget resolution target deadline only six times, twice prior to 1986 and four times after. Even more, in the 7 years since 1998, Congress has failed on three occasions to even adopt the budget resolution, once with different parties controlling the executive and legislative branches, and twice with the same party controlling both branches.
Even more, until recently, Congress and the President prepared 1-, 5-, and 10-year budget outlooks. The system, albeit far from perfect, provided Congress and the executive branch with a solid budget perspective based on current tax policy and long-term financial commitments. The abandonment of the 10-year budget, the 10-year budget in the previous two fiscal years has not been helpful in assisting Congress and the executive branch plan for the future.
I realize I don't make these points in a partisan fashion. After all, Democrats controlled Congress for 20 of the 31 years to which I refer. We, in my judgment, are equally guilty of fuzzy math. Instead, I am trying to show that our branch of government has largely failed to implement the system we have set up for ourselves. I liken this, Mr. Chairman, to another committee that I serve on, the Select Committee on Intelligence.
Very recently, you and I were visiting overseas, and I visited members of the intelligence community. One of them said something to me that I say here. He told me, he says, it is interesting that you all are going to fix national intelligence, but are you sure you know what to fix? I couldn't answer that question, because I am not so sure that we know.
So, we need to go forth arguably about this system and give it a chance to succeed, and perhaps we ought to first fix what we are doing wrong before we embark on something new.
In the interest of time, I will address some of my more specific concerns, such as changing priorities, as you mention, possible limitations on changing national security threats, a new administration or Congress in the middle of a 2-year budget, and others, during the question and answer period.
Again, Mr. Chairman, I genuinely appreciate you calling today's hearing and look forward to the witnesses' testimony and thoughts, and would urge the Chair that it will, in my judgment, be helpful if this committee can travel to some of the jurisdictions and actually talk with our parliamentary counterparts and other government officials, not only in Germany and in the United Kingdom but in other nation states where this type of biennial budgeting or even multiyear budget might be utilized.
Mr. Diaz-Balart. Thank you very much. At this time I recognize the distinguished gentleman from Georgia, Dr. Gingrey.
Mr. Gingrey. Thank you, Mr. Chairman, I am glad that the panel is here and look forward to hearing your presentation and possibly will have some questions later. But thank you for coming, and we appreciate it.
Mr. Diaz-Balart. Thank you very much. At this time I welcome both of the distinguished members of the first panel, Mr. Barry Anderson and Dr. Adam Poser. Mr. Anderson is currently the Head of Division for Budgeting and Management of the Public Governance Directorate at the Organization for Economic Cooperation and Development, OECD. He is the former Deputy Director of the Congressional Budget Office. He has been kind enough to join us from the OECD headquarters in Paris.
Mr. Anderson, we welcome you, a privilege to have you here.
We also have Dr. Posen, a Senior Fellow at the Institute for International Economics. He has been a consultant to several United States Government agencies, including the Departments of State and Treasury and the Council of Economic Advisers, also, the European Commission and to the IMF, the International Monetary Fund, and we welcome Dr. Posen as well to the subcommittee.
At this time, I would like to request unanimous consent to submit the statement of our chairman, who has been tied up with the multiple legislative priorities and issues that we are facing at this moment. So I submit David Dreier's statement for the record.
[The statement of Mr. Dreier follows:]
Mr. Diaz-Balart. We will proceed first with Mr. Anderson and Dr. Posen. We welcome both of you. Obviously your prepared statements will be submitted in their entirety in the record. Welcome.STATEMENTS OF BARRY ANDERSON, HEAD OF DIVISION FOR BUDGETING AND MANAGEMENT OF THE PUBLIC GOVERNANCE DIRECTORATE, ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD), FORMER DEPUTY DIRECTOR, CONGRESSIONAL BUDGET OFFICE; AND DR. ADAM S. POSEN, SENIOR FELLOW, INSTITUTE FOR INTERNATIONAL ECONOMICS
STATEMENT OF BARRY ANDERSONMr. Anderson. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, thank you very much for giving me the opportunity to testify today on the idea of converting an annual budget process to a 2-year cycle. I know this committee has had an interest in biennial budgeting for a number of years, as I have testified before this committee on this subject before, specifically as the Deputy Director of the Congressional Budget Office. I appeared with CBO Director Dan Crippen to testify on biennial budgeting on March 10, 2,000.
However, I am in a much different role now than I was then. I am currently the Head of the Budgeting and Public Expenditures Division at the Organization of Economic Cooperation and Development located in Paris. I have been asked to testify today on a much different aspect of biennial budgeting than I was asked to testify 5 years ago. That is, today I have been asked to testify on the experiences of OECD countries, in particular, the United Kingdom.
Nevertheless, the general conclusion that I think I testified on 5 years ago is not really all that different from what I am about to testify on today; that is, if budget and nonbudget issues can be separated in the legislative process, biennial budgeting could help ease the demands that the annual budget process requires of lawmakers and thus provide more time for other functions of government, such as long-range planning and oversight, that are equally, if not more, important.
Mr. Chairman, I would like to summarize my written testimony, and I would like to, if I could, do it in four major points. The first point I would like to make is that there is little experience on biennial budgeting in OECD countries.
We at OECD do collect a database on budget process of OECD and some select non-OECD countries. In that database -- although we did not ask about biennial budgeting in specific -- we did ask about multi-term budgeting, and we found that there were half a dozen or so OECD countries who responded that they do some form of multiyear budget. We intend to update that database next year and to expand its coverage to well beyond the OECD countries.
But right now I would have to say that virtually no OECD country really does biennial budgeting with the possible exception of the United Kingdom, and that is my second point. The United Kingdom has the most experience in the biennial budgeting, and they have made a serious effort to do this beginning about 5 or 6 years ago. However, they have taken some time in implementing it, and they really don't have 5 or 6 years of experience with it. They really have a much shorter time.
Their experience, and I just spoke to some of their officials before I came here to Washington, their experience has been largely positive. But I must warn you on one thing, very important, and that is of all the OECD countries, the United Kingdom may be the worst example for the U.S., the worst example not in terms of the capacity of the officials of the United Kingdom government -- quite the contrary, they are very good. In fact, we at the OECD and my prior experience at the U.S., spoke more with the United Kingdom officials than perhaps any others. But, rather, it is the nature of their government. If one were to put the amount of intervention, the amount of action on the part of the legislative branch on the budget process at a spectrum, at one end of the spectrum I would put the U.S. having the most action in the part of the budget process and at the other end of the spectrum I would put the United Kingdom. All the 28 other countries of the OECD would be somewhere in between. That is, the United Kingdom Parliament has almost no interaction with the budget after their election and their election of the Prime Minister and the majority government.
So, although it is worthwhile looking at the United Kingdom, there are also very many substantial differences between the United Kingdom and the U.S.
My third point has to do not with biennial budgeting per se, but rather, as you mention in your opening statement, Mr. Chairman, more of the budget framework, the medium term expenditure framework, which is an element of the United Kingdom budget and very much related to a biennial budget.
By that I mean a medium-term framework, which gives some sort of limits on expenditures, is found in several countries. It is found in not just the United Kingdom but also Sweden, Switzerland, Chile and a few others. It was found in the U.S. That is, the Budget Enforcement Act of 1990, as was amended twice in 1993 and 1997, did provide spending limits or caps for 5 years. The first two of those laws, the 1990 law and the 1993 law, carried these caps through 1998. The third one, the one that was enacted in 1997, covered the years 1998 through 2002, but was largely abandoned by both the Clinton and Bush administrations and the Congress.
But when one looks at the impact of those spending limits over the 7 or 8 years in which it was effected in the first two rounds, and one looks at the spending limits in the United Kingdom and in the other OECD countries that have implemented it, they have all been largely successful in terms of producing a budget that enforces fiscal discipline as well as enforces longer term fiscal sustainability.
The relation that the United Kingdom has used -- and I believe is worthwhile for the U.S. to consider -- is between these larger, longer term expenditure limits and biennial budgeting. Obviously, if there is an expenditure limit that is firm and hard, it becomes an incentive to do subject budgeting for a year or two or even longer. I would also like to point out that what much of the European Union is now going through, and that is a medium term budget framework that is based on deficits as opposed to expenditures, has proven not to be effective. We in the U.S. did that too, of course, it was called the Gramm-Rudman law, and it went from 1985 through 1990.
The reason for that ineffectiveness, I believe, are twofold. First, it turns out that a spending limit works best when times are good, where a deficit limit doesn't have that same kind of impact. Second, as the Europeans have found out so strongly in the last couple of years, a deficit limit is inherently procyclical, where an expenditure limit is inherently countercyclical. Efforts to adjust the procyclicality nature of a deficit limit through some kind of adjustment for the cycle have proven to be ineffective.
My fourth point is to summarize what I said at the beginning of my remarks, and that is that I believe under the right circumstances biennial budget can help ease some of the legislative burdens of an increasingly complex and time consuming budget process. Although there is unfortunately relatively little experience in OECD countries to support the conclusion, I would also say that I am not aware of any experience right now to the contrary.
With that, I will conclude my oral remarks and be happy to take any questions you have.
[The statement of Mr. Anderson follows:]
Mr. Diaz-Balart. Thank you. We will wait until Dr. Posen has completed his remarks, and then we will have questions for both of you. Thank you very much.
Welcome, Dr. Posen.STATEMENT OF DR. ADAM S. POSEN
Mr. Posen. Thank you, Mr. Chairman, and my thanks to the Ranking Member Hastings for looking after my climate control.
Like my colleague, Barry, I would like to praise the chairman and the staff of this committee for taking an international perspective on these matters, especially when, as this hearing is premised on, you have so many other things pressing on you. There is only so much one can learn from just U.S. experience or pure theory. It is useful to have this input, not just because that is what I work on, I think the committee is to be commended for taking that on.
Let me juxtapose my remarks. I am supposed to speak mostly on Germany, which I am happy to do. But let me just pose sort of the general implications of my remarks with those of my colleague on the panel. In a sense, I start off where he does in that there really isn't an experience in Germany or elsewhere of the kind of biennial budgeting of the type you are raising. What there is in Germany and elsewhere are various and other forms of medium term fiscal planning, meaning a 2 to 5-year time horizon that have a real substantive impact on the way budgets are decided.
I would like to talk a little bit about some of the pros and cons of those, because in the context of what Judge Hastings mentioned, the idea of having a more structured, definite and concrete process I think these can be of use to our government to consider.
Germany is obviously a very nice parallel to the U.S. for several reasons. It is a vibrant democracy, it is a true Federal system like ours, where you have very large State budgets, what are called the Laender in Germany, the fiscal transfers between them. It is a very wealthy country like us, and it has no question about paying its debt.
Unlike the U.S., there are two key differences. One which Barry already mentioned in the context of the United Kingdom is, of course, it is a parliamentary system. If you think in terms of the specter he defined, the U.S. gets to have the most Congressional oversight initiative and the
United Kingdom has the least. Germany is about two-thirds of the way to the United Kingdom. So the members of the parliament, the members of the legislature do get some say, but the impetus is very much from the Ministry of Finance and Treasury.
The second major difference that is relevant between the U.S. and Germany is, of course, that our international exposures are very different. Germany has a political exposure, we have a financial exposure. In other words, the U.S. is busy borrowing a lot of money from abroad. We borrow billions of dollars every day to pay our public debts, you know this. That means that to the degree transparency, efficiency and other things matter, we are being judged to some degree in world financial markets, how much people want to hold our debt. In Germany's case, because they have so much domestic savings and they don't borrow from abroad, they are not subject to that constraint.
However, as mentioned in passing by Barry, they are subject to scrutiny from the European Union. They have a political constraint through the so-called Stability and Growth Pact, which I will mention later because I think it dovetails nicely with some of the experiences that the U.S. has had.
So let me just quickly make three sets of points, one on what multiyear budgeting in the Federal Republic of Germany actually does; two, what the Stability and Growth Pact did for Germany and other countries and what harms it did and what lessons we could take from that; and, three, where the suggestions we might go in the U.S. on this.
In terms of Federal budgeting in the Federal Republic of Germany, what I think is most important to recognize, which is going to the Grundgesetz, which is the Germany constitution -- or rather the pseudo constitution that the American troops put in place after World War II. It stated that macroeconomic balance, meaning growth, stable prices, sustainability of deficits is actually the first consideration in forming budgets.
Now, we all know realistically that expenditures are going to be driven very much by previous decisions, existing agencies and needs, but there is a more explicit statement than in the current U.S. Code that the macroeconomic implications, the overall fiscal stance of the country, has to be taken into account in budget decisionmaking, and it is not in a sense optional.
At times, various academics, or cranks even, have brought suits in German courts to suggest the German government was not living up to that obligation. This is an extreme incidence, but the point being it goes beyond simply the discussions as to, in this case, where members can bring in long-term budgetary implications or not as they see fit. It is an explicit obligation of government to direct us to that.
The second point is that they have a financial plan that covers a 5-year period that is renewed every year. It contains information on the current fiscal year, a draft budget for the following year, and then the three future years. They do not have a CBO like the U.S. benefits from having, which we like. So what happens is the government is making a very explicit forecast in terms of this year and the draft budget for next year and then makes a policy neutral forecast for the following 3 years.
In other words, you say for the next -- for this current fiscal year and the next fiscal year, let us assume, let us do the best macroeconomic forecast we can about what will growth be, what will tax revenues be, what will expenditures be, conditions, and then for the following 3 years, because we don't want to know what could change policy, because we just talk about the movement. So there is that a kind of compromise made.
Two interesting points about their immediate and long-term budget. They make a great deal of emphasis about coordinating between the Federal and State level budget processes. Legally, the Laender, the states in the Germany system are, of course, independent and autonomous. But in practice they have a large commission that meets twice a year -- we don't want to quibble, but any way, the state treasurer of the various states, representatives of their central bank, their Federal Reserve, to coordinate the overall stance on policy, which obviously, I think, has a lot of feasibility problems in the U.S. context.
But it is an important reminder that, A, the overall fiscal stance of the country depends as much on local and state budgeting as on Federal budgeting, and many of you went through this process when there were discussions of how to formulate the tax cuts and the stimulus projects of 2001 and 2002.
There were proposals like Howard Binder of Princeton saying maybe this should be done through State level tax cuts and rebates rather than at the Federal level. The point is not so much to advocate any specific policy. The point is to know that if you don't take into account some of the State level effects, you may be counteracting some of the intentions you do at the Federal level, be it through unfunded mandates, be it through shortfalls of matching expenditures through the States, be it because certain types of tactics are going to get a better response, like value-added taxes and taxes at the State level, than added Federal taxes, depending on what you want to do.
The second aspect of German multiyear planning, I think that is worth spelling out but which is more minor, is that they have a working party on tax estimates. That is their one sort of outstanding independent commission that really looks at forecasting tax estimates, and it very explicitly is a joint public-private partnership. They bring in people from research institutes, they bring in people from State governments, they bring in people from not so much the private sector but from the nonprofit sector to work with government officials and forecast the tax revenues.
This is an interesting way of getting more buy-in for the public and perhaps additional information. So these are the aspects that make the German long-term planning distinct. It is important to recognize what it is not. German financial multiyear planning is not a stripped biennial budget, it is an expenditure cap. It is not a fiscal rule. It is not anything that even explicitly links new expenditures with the tax expenditure situations. It is not like PAYGO is in this country or what PAYGO was. It is, however, this administrative effort to promote coordination and to bring in new sources of information on the tax code and, as well, place the macroeconomic implications of fiscal policy at the front.
Let me quickly make some remarks on the subject of the growth pact. It would only be half the story to tell you to look at Germany's domestic situation. Germany is subject to the rules of what is called the Maastricht Treaty. You are all probably familiar with this, but the basic idea is that Germany and the other members of the European Union who were joining the Euro, the zone and the continent were required to sign on to what is called the Maastricht Treaty, which among other things includes requirements on public deficits and public debt.
The idea was that if you are in a currency union and Italy comes in or Greece comes in, countries with a bad record on financial stability, and they come into Germany and France with their low interest rates and the interest rates drop in these other countries. They will say oh, boy, free lunch, and issue lots of new debt because they are suddenly getting much cheaper interest rates. And so the idea was you were trying to commit to keep these poorer countries from a free ride. Nobody thought Germany would be a problem at the start of this. Didn't work out that way.
So basically the rules are that governments should never have a public deficit that exceeds 3 percent of gross domestic product, and they should have a total limit, a limit on total outstanding government debt of 60 percent of growth domestic profit. Or if they were well above it at the time of their treaty, they should be making steady progress towards that limit. These are very strict limits, and they proved to be completely impractical. As with limits that we have seen in the U.S., when you have impractical limits, they get ignored. This is exactly what is happening.
So Germany, France, Portugal and now Italy have all repeatedly ignored these limits in the past few years. Because these limits -- going with what Barry said about procyclicality, that they tended to bind more when you were in more trouble. You had countries in very severe recessions like Germany in the last few years, being forced to try to do budgetary consolidation in recession. I have also done work on the Japanese fiscal situation. This is a bad idea. This is how the Japanese destroyed their economy in 1997, raising taxes in the middle of a recession.
So these governments sensibly said enough of this, we are not going to observe the law, or rather the treaty, but once you do it that of course erodes the reliabilities of the treaty and amounts to monetary targeting in the U.S. You announce the targets every year and don't do anything about it.
So stability under the growth pact was very constructive in the last 6 months. This is very useful for the U.S. to remember. The shift was -- Barry made the distinction between -- please excuse my familiarity, but we have known each other a long time. Barry made the distinction between rules set on deficits versus rules set on expenditure.
I completely agree with his critique on rules set on deficits. I don't agree with his idea that rules set on expenditure are necessarily good. If one is concerned about long-term stability, it is not so much about the stability that matters. The balance is between expenditure and income. In other words, it is a sustainability in your long-term debt that actually affects the viability of your economy.
What has been useful about the Stability and Growth Pact in the last 6 months is they have explicitly moved to a situation where they are easing the rules on deficits in times of recession, but the emphasis is more and more long-term debt evaluations. So, for example, Ireland, which has been a huge success story for the last 15 years, has a huge growth, has prefunded much of its pension system. They are being allowed to mount up more debt because they have a sustainable economy. Everyone believes they are going to be able to pay. It is the same thing as a growing company. You think the future will give you back more. Germany under the opposite direction is under more scrutiny.
Let me wrap up by making three suggested principles that I think come out of the Germany experience, and related to what questions, Mr. Chairman, you have put forward and Barry has talked about.
First, as the Stability and Growth Pact demonstrated and as the Germany budget system, only being an information guy also notes, strict budgetary rules do not work without political leadership or will to implement those rules. If you go to your own subcommittee's website, there is a nice quote from the CBO to that effect, and other research other people have done goes with that.
But Barry says these expenditure constraints, the spending limits did lead to successful budgetary consolidations. I would agree, but it wasn't the limits themselves that did it. It was people in the legislature using these limits as a tool, just as we saw with PAYGO late at night. When the will to do discipline went away, the rules got ignored, removed or rescinded. So it is useful to think of rules but not as rules or actors and the use of rules as tools.
The second point I would make is that it is important to think about the macroeconomic stance of budgets. Again, realistically, we all know that especially in a rich country like the U.S., budget is like sausage making. You all know the joke. Everyone puts in the scraps they want. At the end of the day you end up with a very fat, not very nutritious sausage.
At some point you have to talk about calorie counts too. This is where the macroeconomic aspect comes in. It is reasonable -- there is some mention in the ranking member's opening remarks about 1-, 5-, and 10-year budget outlooks. I myself get a little queasy when you start projecting out more than 5 years.
Nevertheless the idea that there should be a mandated outlook, I think, is a very constructive one. Germany bears that out. They were successful in navigating the huge costs of reunifying Germany in the early 1990s, which had huge political pressures on them, kept the budgets on track because of these long-term proposals -- not because of rules, not because of a mechanism, but because there was constant reminders in the process of the macroeconomic situation.
The final point I would raise, which is more a question for this committee to consider long term, is whether there may be indeed more benefits to looking into greater coordination or information exchange between State government spending and Federal spending. This, of course, has huge feasibility and legal problems. And, of course, it is easier for the Germanies to do this when they have one-quarter as many states as the U.S. does.
But the fact remains much of the effectiveness, particularly from a macroeconomic sense, of U.S. fiscal policy is constrained when State policies work to counteract intended fiscal policies -- excuse me, intended Federal fiscal policies. This is something that the Federal Government, Germany, has actually made some progress on and for which the U.S. and your committee might benefit from further investigation.
Thank you very much for your invitation.
[The statement of Mr. Posen follows:]
Mr. Diaz-Balart. Very interesting, very interesting. I appreciate it. Thank both of you. I guess I have one first overarching, if you will, question, because the multiyear budgeting practices of both of the countries that you have touched upon have come to me, obviously, now as first impression. So it is very difficult, as you can imagine, to really start getting a grasp on what they mean at this time. I mean, at first impression.
I guess, so the question that I have is we have -- you touched upon it -- each year when the budget is done we have a 5-year projection, that is part of the budget every year, discussion and debate. The practices that you have referred to, both Great Britain and United Kingdom and Germany, specifically, how do they differ from that 5-year budget projection that we deal with every time we prepare a budget here? Perhaps you could try to be a little more specific to try to give us a differentiation, in both instances.
Mr. Anderson. Well, let me start with the United Kingdom. First of all, their timeframe is 3 years as opposed to 5.
Mr. Diaz-Balart. Right.
Mr. Anderson. Secondly, they do try, and again this has been the case only for the last several years and really just solidifying now, they do try to set a biennial budget; that is, specific appropriations for a certain portion of their spending, roughly equivalent to our appropriations or discretionary spending, for 2 of those 3 years. Then they have a spending review to go back and change things on the third year. But they try and set up a goal for 3 years, and harder real appropriations for 2 of the 3 years.
I also have to say that they have, unlike the situation for many of the appropriations here in the U.S., where they are limited in terms of timeframe -- that is, the amount of budget authority -- may be obligated for 1 year only. They do allow carryovers between the years, number one.
Number two, there is a specific emergency fund that the Treasury withholds for things that can't be planned. Number three, there is also a differentiation between capital and operating budgets in there.
But what the United Kingdom does is really different. I do want to go back to the point that I made before though, and that when describing what I just did, my description refers to the United Kingdom Treasury. Parliament is really not part of this process.
Mr. Diaz-Balart. Right.
Mr. Anderson. It is the United Kingdom Treasury. I have now had quite a bit of experience with budget officials from not only OECD but non-OECD countries, and the United Kingdom officials are at the very top. They are very capable and dedicated and well informed officials. All countries couldn't do what they do.
Mr. Diaz-Balart. This financial plan -- you have referred to the Germany one, again, has differences from our 5-year projection?
Mr. Posen. I think the most important difference, Mr. Chairman -- again, in keeping with what Barry is saying -- is they don't have anything like our appropriations process. This is done -- there is almost no oversight from the legislature. This is done by negotiation between the Ministry of Finance with the respective other ministries.
So within the Ministry of Finance they have a budget bureau that looks like OMB where you have got people who shadow each particular subgroup. It is negotiated between them. Then this 5-year plan is publicized and submitted to the legislature at the same time they submit the actual budget for approval. But this plan is in no sense binding. This plan is not voted on by the parliament. This plan is not even reviewed by the parliament. It is simply provided for information. The parliament can try to push back on certain aspects of the line items, but the plan itself doesn't come up for discussion. It is just meant for actual background.
The other thing that the plan, actually, I am not sure this is a bad thing, is explicitly simplified, so in the full Germany budget there are, according to the Federal Ministry of Finance, 5,300-plus line items of expenditures. In the budget plan they break it down to 40 categories. They do not break it down any further. Internally, obviously, they have projections for each of them.
But for each of the members, the Bundestag, the others, they only release the 40 categories. Similarly there are 1,100, 1,100, 1,200 line items, and they break it down into like 12. So it is a very simplified guidance. So it is a very different thing than what we are talking about in the U.S. context.
You can make a case -- there is a trade-off, I think, between specificity and accountability and accessibility and the time stricture you were talking about.
One other difference that I would make is they are, in spirit, supposed to follow some of what the United Kingdom does in differentiating capital expenditures or investments from actual spending, but this remains merely a motion in the legislation that never actually made any meaningful work on this.
Mr. Diaz-Balart. If there is a government change now, is it assumed then and expected that the Federal, the multiyear plan is to be started all over again by the new government?
Mr. Posen. Yes.
Mr. Diaz-Balart. One thing I definitely want to follow up with you on after the hearing is to learn about this Federal-state coordination that exists in Germany, because we have touched upon something that may be very useful.
We certainly know the effects of state, provincial spending on economic disasters. I guess the one that comes to mind most is Argentina. They just can't get anything under control because they have never been able to coordinate with their provinces.
Mr. Posen. Exactly.
Mr. Diaz-Balart. We haven't had that problem in the United States, obviously, but it is something we should definitely be looking into.
One question on Germany, briefly. I know you can't at the moment go into much detail, but the states and the Federal Government, they share resources. In other words, do the states there have their own tax base like here?
Mr. Posen. Yes.
Mr. Diaz-Balart. Or is it like in other countries where the Federal Government gives the states allotments?
Mr. Posen. It is a hybrid as in most things because they develop over time, slow accumulation of legislation and precedent.
So there are certain specific taxes that are allocated at the state, allocated to be assessed by the various states. So parts of the value-added tax, for example, which is like our sales tax. There are certain real estate taxes.
Mr. Diaz-Balart. That is decided by the Federal Government though? We are going to give you this part?
Mr. Posen. It is decided way ahead of time. This is sort of longstanding precedent. In principle, it could be up for review every year but basically it is not up for review.
Then there is also -- Germany is one of the few countries that compares to the U.S. in terms of revenue sharing back and forth between states and between the Federal Government and the states. So it is very much a hodge-podge, I am afraid.
Mr. Diaz-Balart. I will look forward to coordinating with you on the Germany states issue.
Mr. Posen. Mr. Chairman, I don't mean to oversell it. They do not have it worked out perfectly.
Mr. Diaz-Balart. Of course. Well, human experience -- I think, of course, it is good not to oversell.
Mr. Hastings.
Mr. Hastings. Thank you very much, Mr. Chairman. I thank you both. Nothing more -- I sit here, awed by both your presentations and am mindful that I am not certain that I am intelligent enough to ask either of you any questions that are germane to the subject. I just am really not very good at following budgetary matters. I make that admission.
Just for a brief moment of levity, Mr. Anderson, knowing that you come from OECD, I am the President of the Organization for Security and Cooperation in Europe. It is amazing the number of seatmates that I have crossing the Atlantic either way who think when I say OSCE think that I mean OECD.
Mr. Diaz-Balart. Really.
Mr. Hastings. Yes. It is a part of the alphabet soup, you know, confusion. Then the parliamentary side versus the governmental side gets to be in another matter.
Mr. Anderson. Of course in France it is OECD.
Mr. Hastings. Is it really? I wanted to ask you as a point of personal information, is Connie Morella, our former colleague, there?
Mr. Anderson. She certainly is.
Mr. Hastings. I thought that --
Mr. Diaz-Balart. She is what now? She is with the OECD.
Mr. Anderson. She is the U.S. Ambassador to the OECD.
Mr. Hastings. Right. So if you have to leave Congress, it seems to me that is the way to go. But all of us are very fond of Connie's work here. I am sure she is doing a very good job there.
I would like to put a more direct question, rather than get into the things, you know, so much about economics and budget. Do you feel -- understanding that anything can be improved, but do you feel, either of you, that the American system, not so much compared to Germany or United Kingdom, is in such bad shape that it needs to be fixed to begin with? I am referring specifically to the methodology that we employ now as opposed to a potential multiyear budget process. I don't want to hold you to your answer, but I am just curious as to how you feel about it.
Mr. Posen. Do you prefer I go first?
Mr. Anderson. You can go first this time.
Mr. Posen. I think, Congressman -- I am concerned with the way things are coming out of the U.S. budget system at the moment. But I am not sure that it is systemically -- can be fixed through the tweaking of rules.
I think the kinds of things that can be fixed through rules or institutional changes or multiyear process movements are the kinds of minor but important things I pointed to in my written testimony, that there is in the end too little regard for some of the macroeconomic or business cycle-type implications of changing budget estimates and changing expenditures.
But these have a direct impact on the well-being of the country and on the well-being of the people in this country. There is no magic wand you can do to wave and make that so, but it would be nice to at least make some legislative initiatives to have knowledge at certain points of the process.
The second thing I mentioned to the chairman worth pursuing is whether it is worth thinking about whether the fiscal situation in the States sometimes works against the intent of the Federal Government. Again, I don't mean about specific programs, but I mean about what you are trying to do with fiscal policy, what you are trying to do with tax policy.
The chairman was absolutely correct. Argentina is the extreme case of this. But even in the U.S., there are instances where the States end up leaning against the wind in some sense. At times we don't intend to. So if the U.S. wants to cut taxes but the States are able to keep taxes up, that might be leaning against it. Alternatively, they might make things worse. There are some times when the Federal Government does budget cutbacks and then doesn't fully internalize the multiplier affect of when these cutbacks pass through the States.
Mr. Hastings. Right.
Mr. Posen. So just bringing into the process somehow a more accounting sort of thing, which is not easy.
Mr. Hastings. Right. I would add not only to the States but to the various localities.
Mr. Posen. Absolutely.
Mr. Hastings. A good Republican friend of mine that is on the county commission in St. Lucie County came in with the usual litany of things. At budget time that would be a proper function?
Mr. Posen. That is right.
Mr. Hastings. She said to me, when I talked with her about our constraints in this particular cycle, the likelihood is very strong that she won't be able to do any of those things? She said what are we going to do?
I said, Fran, I am not telling you what I am going to do, but I can tell you what you are going to have to do. You are going to have to raise taxes.
Mr. Posen. You are absolutely right. The chairman mentioned the national security context and your service on the Subcommittee on Intelligence. The Homeland Security side of this thing is a very key point and question of how you do these mandates.
The final thing I would raise in just my humble opinion about the overall U.S. budget process is that we end up -- and this is a strange thing to say -- we end up worrying too much about Social Security and too little about the short-term. The fact is, Social Security, despite the current attention to it, is a far more soluble problem than people recognize. We think that is a subject for another day. But fundamentally, there is a very sharp choice to be made about how you index people's benefits. Once you make the choice of index and people's benefits, then the problem goes away.
Mr. Hastings. Right, I have right here on record the chairman of the Budget Committee, Mr. Nussle, made the frank assertion in response to a question that I put to him whether Social Security was a bigger problem than Medicaid. Of course, he understood the dynamics and understood very well that Medicaid was a much more significant problem.
But what happens here, and it is unfortunate, and this is the nature of the beast that all of us work in here as partisans, but we could work these problems out if we were not in a political hyperbole and when everybody is trying to win something rather than sit down and really try to figure it out with experts like yourselves.
I am sorry, I cut across you, Mr. Anderson, in response to my first question. But I would add another thought, to both of you -- that would be with your permission, Mr. Chairman -- that you mentioned the Intelligence Committee that I serve on. I am greatly concerned that the needs of our national security and foreign policy may not be met through multiyear budgeting. Given that sometimes volatile and rapidly changing nature of geopolitical events, there are a myriad of foreign policy issues that need to be addressed on a yearly basis that seem to me to make multiyear budgeting inappropriate. Perhaps in certain circumstances -- and I was interested particularly in the United Kingdom and Germany, how they deal with these types of issues and in the United Kingdom, how did they deal with the most recent London bombings from a budget standpoint.
One of the things that just blows me away here is the fact that we don't have a set disaster fund to be able to move rapidly, and it gets caught up in this process that we go through here that is disagreeable and -- I will give you a good example. There were droughts 4 years ago that we have not funded yet, 4 years ago. And since that time we have had hurricanes and we have had the supplementals for the necessary activities in the war. I just made it as something there or nothing there to be said. I don't know.
Mr. Anderson. First of all, as I mentioned, they do have a reserve specifically in their process that is withheld by the Treasury. Whether the reserve has been tapped for the recent problems or not, I am not aware.
I would like to spend just a moment on your first question.
Mr. Anderson. I started my career in Federal budgeting in the early 1970s, before the 1974 Budget Act -- before the budget going back and forth -- of the other Reagan Administration, before Gramm-Rudman Budget Act of 1993 and 1997. When I started it, it was a 1-year budget and a 1-year budget only, nobody ever thought about years 2, 3 or whatever. This was also before the Greenspan Commission of 1983, when he was looking at Social Security.
Now, I entirely agree with Adam's comment here that rules are tools; they are. But from my practitioner's perspective, I think the tools that you have make -- can make a heck of a lot of difference, not independent -- I also agree you have to combine them with other things, but they can make a heck of a lot of difference. And the best example I know of that is David Stockman and what he did after he left the House of Representatives in early 1981 to join the Reagan Administration as the new budget director and how he took the rules of the 1974 Act concerning reconciliation and resolution and were able to accomplish goals. I don't know if they were your goals or the minority, but they were goals, clearly, that the President wanted to accomplish. And that has been -- since he really first started using it, I think that has been setting up a set of rules that have allowed certain goals to be obtained. If one of those goals is fiscal sustainability -- and I think that is one of them -- as well as the goals you are talking about with the intelligence community and the short-run problems.
But if one of those goals is fiscal sustainability, then my answer to your question is that I think our process needs help and needs a lot of help. I will plead guilty to my background, and that is that I was very much in the part, of the Reagan, Bush and Clinton Administrations, in writing these laws, so that I have a bias that I think those, as tools, can have an effect, again, not by themselves, but in the larger sense, but can have an effect. But do we need something? Absolutely.
Mr. Hastings of Florida. I hear you. Thank you.
Thank you, Mr. Chairman.
Chairman Diaz-Balart. Thank you, Mr. Hastings.
Mr. Bishop.
Mr. Bishop. If I might, let me follow up, I think Lincoln said -- and let's see if I heard this correctly -- the emphasis you put on the ability to make medium-sized budget projections, 2 to 5 years, that doesn't mean a byproduct of the election cycle is set, since one is basically 4 years; one is 5 years. And the way you have it, when you combine an executive and legislative branch, if you have the government's policy for that period of time. So is that one of the things that drives that length of planning?
Mr. Posen. It is a fair question. It turns out actually not to be the case.
You are right, that once these governments come in, they generally have a shelf life of about 4 years. There are two major reasons why this isn't the case. The first is, as you know, most of these countries -- including the U.K., but explicitly, certainly Germany -- have a public sector share of the economy twice ours, a far more generous welfare state, all kinds of public programs. And these just keep going. And so there is a vast share of the government budget that is relatively unaffected by the year-to-year turnover or by the 5-year turnover. The second reason -- and also, they don't have the Social Security balance like we do.
The second reason is that the U.K. government under Tony Blair and Gordon Brown is certainly an exception, but certainly not in Germany. These countries do not have governments that come in with fully explicit 5-year plans. For example, in Germany, even without a change in government, Schroeder, who is the current Chancellor for Social Democrats, came in -- I guess it was 1997 was his election. He initially came in for internal party politics, reasons for an extreme left prime minister, he basically let the first year of his government pass with whatever government budget he wanted, and then put in a completely new agenda starting in the second year of his first term.
So there is at least -- so again, there is this tradeoff: The more binding you make it, the more specific and accountable you make it, the less flexibility, of course. And in Germany, it is actually not very binding at all, the process, so there is a great deal of flexibility.
And if I could attach on a quick response to Judge Hastings on this matter of national security and quick turnaround, Germany in 1989, 1990, faced an enormous sudden challenge of integrating the former East Germany. They were 60 million people; they had to integrate an additional 15 million new citizens. And that process, it is close to, in fiscal terms, to a major stepping up in a war or something. They were transferring 7 percent suddenly. They were able to have a separate process to do that.
Japan, for example, has every year an explicit supplementary budget process that takes place in 6 months after the fiscal year budget is submitted. And they assess at that time whether they need to put things in -- it is, in a sense, the opposite of multi-year planning. So these kinds of projects do occur. It is not very much politically driven.
Mr. Anderson. I mentioned in my written testimony that the U.K. has two fiscal rules that they use, a golden rule and a sustainable investment rule. The sustainable investment rule limits spending to 40 percent so that debt does not increase by 40 percent of the GDP. Last week, I believe, Gordon Brown, the Treasury Secretary, looked at the cyclical adjustment to that rule and redefined it, redefined it so that the cycle began not 1999 but in 1997. By redefining it, it provided him $9 billion pounds of spending or some amount like that.
Does politics play a role in budgeting? Certainly, in every country. Nevertheless, I would go back, rules do matter and can have an impact.
Mr. Bishop. Let me also ask you, Dr. Posen, especially in Germany where they have the system of vetoing certain mandates that go down to the states, does that system have an impact, a significant impact, minimal impact -- I know that they are trying to reform it, I hope they don't, but they are trying to reform it -- does that have minimal or significant impact on the budgeting process?
Mr. Posen. You are obviously very familiar, Congressman, with the situation. The Bundesrat, the upper house of parliament that represents the states, has a more significant impact on spending priorities than on the structure of the tax code. They generally have had little overall disciplining impact on the level of expenditures. So it is generally when the Bundesrat has a majority of the opposite party to the Bundestag, which is not infrequent, which is the case now, they generally can mess with the government's, lots of the government's priorities, but they don't usually seem to have an effect on the overall spending. I realize that doesn't seem to make much sense but.
So, I mean, the classic example is, right now, the Christian Democratic Coalition that holds the majority of the upper house, Schroeder's government, pushed through some specific tax cuts for capital, for companies that sell capital stocks and other companies, and took the capital gains. The Bundestag has blocked that. And this is a small item. It is only a few billion euros. It is not a huge deal.
The general record across the countries, including Germany, divided government actually tends to lead to higher budget deficits, not lower deficits.
Mr. Bishop. Say that again, please.
Mr. Posen. Divided government in general tends to lead to higher debt levels, not lower. Again, the extreme example is Italy, where they have very fractured partisans, and they are unable to exert discipline. That is not always true, but it is a statistical regularity.
Mr. Anderson. I would only note that divided government has a little bit of a different meaning in other countries than it does here.
Mr. Posen. Yes, without question.
Mr. Bishop. But ours is the legislative branch. Those other countries don't, which means, even in states that have biennial budgets, there tends to be one group that evolves which makes the power decision, whether it is the executive, appropriations, emergency appropriations committee. And I guess I am hearing you; it is from the finance ministries of these two countries.
Mr. Posen. Yes.
Mr. Bishop. Let me ask you, then. In the late 1940s and 1950s, there was a reform effort in Congress to try and come up with a joint appropriations or a joint budgeting process between the House and the Senate, which many of our States actually do, at least my State does, which I think is pretty successful. There was actually a bill passed to do that. It was never implemented. Oddly enough, the Senate was in favor of that. It was the House that wouldn't meet with the Senate on that concept. Can I just get your impressions on what would happen if, indeed, we tried some kind of joint appropriations process or committee so that the Senate and House appropriators would meet together as opposed to doing it separate and then meeting in conference, which may be just streamlining the system so you get right to the conferences first, but --
Mr. Posen. Congressman, it is my impression that it would be constructive. I mean, it would not be absolutely transforming, but it would be constructive because the tendency is the more -- the political science, economics literature suggests that the more hoops you go through, the more levels of decision-making involved, the more veto points there are, the more there is people along the way who could extract something for agreement.
Mr. Bishop. I have never done that. I don't know what you are talking about. I am just a sophomore.
Mr. Posen. So the bottom line is, I think, it would be helpful, going right to the conference would out a lot of chances for side deals.
Mr. Bishop. Thank you.
Mr. Anderson. I agree.
However, I go back to my point that although I think that that would be a plus, I do think that the U.S. would benefit from some more binding kind of fiscal rules. I made my point that I think an expenditure rule in a larger context is the way to go, but right now, I don't see any kind of fiscal rules. And the GO political, GO financial situation is such that we are able to do what we are doing now, and we may be able to do it for some time, but how long that is going to exist is the question.
Mr. Bishop. Can I, Mr. Chairman, ask one last question, and this is a very oversimplified question. But oftentimes spending is driven by the taxes that you have. And sometimes taxes are driven by the amount of spending you want to do. In your two countries in which you are experts, do you see that in either way? When they come up with a budget, do you look at the money first and adjust the money, or do you look at the spending and adjust the tax rates to what you want to spend? And of course, the United States would just spend the tax and just not coordinate either of them.
Mr. Posen. In Germany, it is very definitely spending first, taxes later. And in general, the history in Germany and in Europe is, the only time you get budget consolidation is when you cut spending first. Limiting taxes generally does not have a sustainable effect on budgets, cutting spending first tends to a have more sustained effect.
Mr. Anderson. It is the same in the U.K. I just mentioned the fiscal rule, the sustainable investment rule that they were under. What the U.K. press was criticizing, Minister Brown up until he did this revision of the cycle, was that his current spending habits were going to result -- have to result in a tax increase, and so they were saying, wait until you get the Brown tax increase -- by the way, it was Brown, not Blair. But then once he did this adjustment, then he was doing this so he doesn't have to do the tax increase that his spending plans would have caused. But -- and, in fact, unfortunately, I think that, from my knowledge, spending leads just about everywhere.
Mr. Diaz-Balart. Two final points. Government spending in these countries is about 40 percent of the GEP?
Mr. Posen. Actually, in Germany, it is closer to 50 percent.
Mr. Anderson. And in the U.K., it is higher than the U.S. --
Mr. Diaz-Balart. Because here it is 19 percent.
Mr. Posen. In the U.S., it is 19 percent, and then you add a percent for the State and local government. But in the U.K., it is roughly 30 percent, but then there is still a few quasi-governmental businesses that aren't fully privatized. In Germany, it is much higher. Direct government spending is in the high 40 percent, and then you have got some other nationalized industries as well. I am not recommending that.
Mr. Diaz-Balart. And the rainy day fund in --
Mr. Anderson. In the reserve.
Mr. Diaz-Balart. In the U.K., the reserve, that has been around for how long?
Mr. Anderson. Well, it is part of this process that they instituted, the biennial budget process. So when they instituted it, it was a reserve that they instituted then.
I would have to note, though, again, from my OECD experience, and this gets to some of the questions that Congressman Hastings had, again, the U.S. is different from any other OECD country in terms of the spectrum, the variety of the kind of natural disasters that we suffer here. We can suffer drought and flood at the same time; you are not going to see that in most of the other OECD countries because they are too small. And the other ones that are big enough, Canada just doesn't have -- even though it is so close to us. It doesn't quite have the same geography. And then Australia has drought all the time. And then we have tornados and earthquakes and who knows what. And we had an OECD session on this, and the kind of natural disasters that the U.S. has is basically equal to the natural disasters of all the other 29 OECD countries combined. That is the nature of our job here.
Mr. Diaz-Balart. Thank you.
It has been fascinating here. We are very greatful to both of you. It has been a privilege to have you here. Thank you very much.
STATEMENT OF ROBERT M. MCNAB, ASSISTANT PROFESSOR OF ECONOMICS, DEFENSE RESOURCES MANAGEMENT INSTITUTE AND NAVAL POSTGRADUATE SCHOOL; AND MAYA C. MACGUINEAS, PRESIDENT, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET, DIRECTOR, FISCAL POLICY PROGRAM, NEW AMERICA FOUNDATION.
Mr. Diaz-Balart. I would like to invite now our second panel to the witness table, Dr. Robert McNab and Ms. Maya MacGuineas. And I would ask that they testify in that order.
Dr. McNab is currently an assistant professor of economics at the Defense Resources Management Institute Naval and Postgraduate School whose works include a wide variety of international economic studies, including one of the very few comparative studies of multi-year budgeting entitled, Multi-Year Budgeting and Review of International Practices and Applications for Developing and Transitional Economies, which you co-authored while at the Georgia State University Young School of Public Policy.
We welcome you today. And we will have your entire written remarks as submitted without objection in the record.
Ms. MacGuineas, also, welcome, and thank you for visiting us today.
Ms. MacGuineas is president of the Committee for a Responsible Federal Budget and the director of the Fiscal Policy Program at the New America Foundation. Her areas of expertise include the budget, entitlements and tax policy. Before coming to the New America Foundation, Ms. MacGuineas worked as a Social Security advisor to the McCain Presidential Campaign. Prior to that, she worked at the Brookings Institute and on Wall Street.
We welcome both of you and are extremely privileged to have you here and look forward to your testimony.
Mr. Hastings of Florida. Mr. Chairman, I beg the indulgence of both witnesses, I have to take my leave. It isn't a lack of interest, and I assure you I will follow the process. But while we are talking about reforming this biennial process, upstairs we also are talking about reforming the intelligence process. And we only have a 1-hour window for me to work up there. So I apologize, Mr. Chairman, and I thank you all so very much.
Mr. Diaz-Balart. Thank you, both.
Dr. McNab.
STATEMENT OF ROBERT M. MCNAB
Mr. McNab. Good afternoon, Mr. Chairman and members of the committee. I am an assistant professor at the Naval Postgraduate School in Monterey, and I have the privilege of working on public budgeting issues, specifically with the Department of Defense now, however, which has direct application with respect to this work and a question that is before the committee today.
The initiatives that I am talking about today share pretty much a common goal of the decision-making processes between the various branches of government, looking to enhance administrative and economic efficiency and increasing taxpayer accountability.
What is interesting is that the U.S. Department of Defense actually has extensive experience in multi-year budgeting and in biennial budgeting in particular. And I will touch on that at the end of my talk.
Basically, there are several distinct lessons that we can look at in general with respect to a multi-year perspective, and some of these have been touched upon already. And a multi-year dimension in the budget process can improve the process in a variety of ways, as was talked about before. Having a medium-term fiscal framework is one way of improving the decision-making process by improving the flow between the executive and the legislative branches of the United States.
There is, of course, in the President's budget, some middle information, what I would call, on current law expenditures and revenues 5 years out, but it is for information only. If we are concerned with fiscal sustainability, there is no binding commitment there; the President can choose to change these 5-year projections very quickly.
Perhaps most importantly, a medium-term expenditure framework as we are discussing here and perhaps biennial budgeting, biennial appropriations more specifically, could help address the problems of Social Security and Medicare and Medicaid.
One would argue that if Congress had more time to do program review and to consider the implications, longer-term implications of budgetary decisions, that this could rationalize the budgeting process and avoid what some have termed as the train wreck in September, that is essentially when Congress rushes to get through appropriation bills in the fall. And program review sort of falls by the wayside, and there is not a lot of time to actually ask the questions that I believe the Congress would like to ask.
As you have heard today, also, a second lesson might be that there is no one single multi-year budgeting approach. There are a variety of approaches within the United States, and there are a variety of approaches within OECD and within developing and transitional countries. These differences occur because of institutional frameworks, differences in rules, administrative capabilities and so forth. In fact, I would argue it would be extremely unwise to merely take the structure from another country or state and drop it into the Federal level of the United States. It would be certain failure, to be blunt.
A more advisable approach -- and I think you have heard about this also this morning -- would be to carefully consider the home budget institutions and the goals and objectives of what you are trying to achieve in biennial budgeting. If the objective is to improve congressional oversight, one might argue that the annual appropriations process does that; it forces the executive departments to come here and answer questions for you. You hold the power of the purse, and that can be quite a hammer, if necessary. If, on the other hand, Congress is looking to improve administrative and technical efficiency, then a biennial or multi-year budgeting might be helpful here.
On a side note, the multi-year budgeting framework, this medium-term expenditure framework that I mentioned earlier, is actually part of the World Bank Poverty Reduction and Strategy for Growth Program. So the World Bank is currently going around to the developing countries around the world, and part of qualification for World Bank loans is they develop a 3- to 5-year meduim-term expenditure framework. So there is actually in-residence knowledge here in Washington, D.C., with World Bank on the plusses and minuses of that approach.
Obviously, one can learn from the experience of other countries, and just to touch on lightly what this might mean: Biennial or multi-year budget reform just cannot be successful unless you reform other institutions. Congress can give multi-year appropriations, and it does so in, for example, procurement accounts. But as we have seen in previous attempts at budget reforms in the United States, merely rushing to enact a reform that sounds good on the surface usually does not work. Why? Because you have to invest significant amounts of money in personnel and in information technology. If you are going to request that the department submit biennial budgets, you should expect that they have multi-year projections with that. That would be, for some departments, a change of procedure.
And then what you have heard previously is that evaluating authority in the budget process is a natural outcome of biennial appropriations in the multi-year budgeting framework. A Congress that gives departments 2-year appropriations, even if they are single blocks, is essentially giving more leniency in terms of expenditure authority to these departments, and then Congress will have to shift its focus to oversight. Rather than being able to use the appropriations hammer for every year; that can only be used every 2 years. So what do you do in the off years? How do you make sure that these departments remain on course?
The side note to that of course is that this does not mean that Congress gives up its oversight. I think previous comments before the committee had said that biennial budgeting necessarily means that Congress loses power relative to the executive branch. I believe that this is not really a problem because Congress really does hold the power of the money. It can compel executive departments up here at any time to engage in oversight, and that demolution of power really does not mean that Congress would lose power relative to the executive branch.
What can we learn from our own past? And I have touched upon this briefly. I return back to President Johnson's attempt to put planning, programming and budgeting into effect for the entire U.S. government back in the late 1960s. This is an outgrowth of a system brought by Secretary of Defense McNamara for the Department of Defense. And PPBS, the Planning Program Budgeting System, encouraged multi-year discounting and a multi-year planning framework. Why did it fail? Well, part of its failure was the lack of preparation of executive departments and Congress. To be honest, what happened was that the annual budget cycle, which you are concerned about, placed too much pressure on the analytical capabilities of departments. And so this pressure meant that you felt -- you saw that the departments spent more and more time merely trying to satisfy annual budget requirements, and when you put the annual requirements and analytical requirements of a multi-year framework on top of that, they weren't able to do their job. They essentially were drowned in paperwork.
And so what happened? Well, even though the intent was to create a multi-year budgeting framework and trade-offs across departments so you could focus on the outcomes of governments, what you ended up with, because of the annual budgeting framework, was incremental budgeting. That is a base expenditure level that wasn't changed and merely tinkered around the edges.
Now, what we have seen, actually, in the last 4 years within the Department of Defense under Secretary Rumsfeld was a move away from this. And the Department of Defense, which has been doing 5-year expenditure plans as one might say in the future years defense plan, has really emphasized a return to biennial budgeting. It is now a 4-year budget cycle where programming is done in the first year. And in the second year, you have program review, program change proposals, that is. There is not much done to restructure existing programs. That only occurs in the first and third year. In the second and forth years, off-years, you have reviews, and you have minor changes.
Just to answer one question with respect to judge Hastings, who had asked, well, is it possible to do multi-year budgeting with respect to national security institutions? I would argue we are already doing it. If you look at the Department of Defense, we were actually engaged in a reform now called capabilities-based planning. The idea here is to shift the planning focus, that planning, strategic goals and objectives, from 5 to 15 years to develop capabilities that will still program across 5 years. Our biggest constraint, I would argue, at the Department of Defense, as a researcher, is the annual appropriating process; that, when we look pack at the fiscal 1988 and 1989, when directed by Congress to submit a biennial budget, DOD actually did this, but only received a 1-year authorization on appropriation. So essentially what was directed was, do 2 years of work but for only half the benefit.
Still, even though this occurred, the anecdotal evidence tends to suggest that program managers within DOD felt that they could do more of the hard questioning of what we are supposed to do rather than trying to get caught up in the annual budgeting cycle.
My last comment is directly related to, if such an experiment or program would want to go forward. And I would point the committee to the government performance results, that here we had Congress attempting to link performance information to expenditures, but Congress did not want to mandate this for the entire Federal Government at once. So it was piloted. It was fine-tuned over time and then instituted on a government-wide basis. If the committee decides to recommend and go forward with this course of action, a pilot program would be appropriate, and it would appear that the Department of Defense would be best positioned to pilot biennial appropriations and report on it back to Congress.
[The statement of Mr. McNab follows:]
Mr. Diaz-Balart. Thank you very much.
Both of your statements will be, without objection, submitted in their entirety for the record.
Ms. MacGuineas.
STATEMENT OF MAYA C. MACGUINEAS
Ms. MacGuineas. Thank you. Good morning, Mr. Chairman.
Good morning, Congressman Bishop.
I am testifying today on behalf of the Committee for a Responsible Federal Budget. I am the president of the organization, and our board is made up of the previous directors of OMB, CBO, the Federal Reserve Board and the Budget Committee, and our board includes Barry Anderson.
Today I have been asked to speak on biennial budgeting in the U.S., and it is a privilege to testify.
Not along ago, the committee issued a report on the budget process. In a collaborative process, with members both inside and outside of government, we developed a number of budget process recommendations, one of which was a move towards biennial budgeting. There are other recommendations I have submitted in my written testimony, but I will just emphasize that I also think spending caps on a single-year and multi-year process are critical to the process.
The committee favors biennial budgeting for a number of reasons. First of all, the present budget process is simply not working. Budget resolution deadlines are regularly missed. Appropriations fall behind schedule, and gimmicks are regularly employed. The result is a budget process that has become less meaningful.
We see moving to a 2-year budget cycle as a way to free up resources, both time and money, for other more productive purposes. Congress spends a significant amount of time trying to meet specific deadlines and slap together what often amounts to ad hoc policy responses. Furthermore, Congress spends too much time during the annual appropriations process repeating work that it did in the previous year. And our co-chair, Leon Panetta, has pointed out in previous testimony it is ongoing spending needs rather than careful evaluation of programs that tend to drive decision-making. Both Congress and the executive branch face this dilemma.
An additional year in the process would free up substantial time for members to focus on program review, strategic planning, oversight, evaluation and reform. Under biennial budgeting, one can imagine a pattern where, in the first session, Congress lays out its priorities and sets forth its funding levels. And in the second, it focuses on reviewing the existing programs and planning how to make necessary changes.
For example, you can take the recently released scorecard from the Office of Management and Budget. There is a wealth of information in this document that could be used to help better allocate resources if only there were more time and a process to contemplate and implement the findings. Budgeting shouldn't feel like being trapped on a sped-up treadmill. It should allow time for thoughtful contemplation and analysis of the best use of limited resources. The budget is, after all, a reflection of our national priorities. However, impossible deadlines currently stand in the way of maximizing the outcome of such an important process.
Biennial budgeting also would allow for better planning under the current process. Final appropriations levels are determined at the same time that the agencies -- who are often operating under continuing resolutions -- are determining their own budget requests for the following year. As a result, there is too little information on which to base important decisions, reflecting the fact that the current sequence is too compact to be effective. And furthermore, organizations that receive government funding, such as basic research, would be helped in their planning efforts to have longer budget cycles.
A longer cycle would create better managerial incentives as well. Currently, agency heads face pressure to spend all of their budgetary allotment so they don't end up at the end of the year surplus, the conventional wisdom being that having money left over at year's end undermines the ability to ask for similar or greater funding levels in the following year. With a longer cycle, managers will be able to spend their budgets in accordance with their needs rather than a race against the clock. This would likely lead to overall lower levels of spending, a critical component of budget control.
Finally, on a topic near and dear to the committee's heart, biennial budgeting could help to improve deficit reduction efforts. Deficit reduction targets over longer time periods allow for more gradual phase-ins of the changes, which in turn makes them more likely to be adopted and adhered to. Furthermore, there are fewer opportunities in the cycle for special interests to lobby for budget-busting exemptions and special projects.
All that said, there are certainly some legitimate arguments against the 2-year budgeting. Some degree of flexibility would be lost, for instance, as agencies were required to make their budgets farther in advance and thus with less information. It is also possible that the agencies would be less responsive and accountable to Congress once their budgets were in place and protected for the following 2 years.
And there is a well-founded concern, I believe, that we would see a dramatic increase in the number of supplemental appropriations bills. We believe that to avoid this backend way of moving back into what would effectively be a single-year cycle, strict restrictions would have to be adhered to on what qualifies for supplemental spending. Supplementals should only be used in the case of emergency, not as a means of increased spending in general budget areas.
As recommended in our report, which would apply whether or not we shift to a different cycle, Rainy Day Funds should be included in the budget to provide for unforeseen spending needs. Fund levels would be based on historical emergency spending levels, and what constitutes an emergency would be carefully and narrowly defined.
Finally, as Barry pointed out in previous testimony, it would be necessary to separate budget operations into budget and nonbudgetary activities, and that will have to be determined.
While recognizing these reservations, we believe that shifting to biennial budgets, appropriations and tax cycles would be advantageous. The past few years have not been good ones for the budget process. While the Committee has recently released statements commending the House for passing its appropriations bills in a timely and relatively gimmick-free fashion, the bigger picture is quite bleak. Budget surpluses have been replaced with structural budget deficits. The debt is growing at an alarming pace, the baby boomer's retirement is only 3 short years away, and there is no indication that Congress will implement the Social Security reform plan, let alone start to deal with the even more daunting problems of Medicare. To top it all off, we are still moving in the wrong direction as the budget that was passed this year actually enlarged the deficit.
So biennial budgeting is not going to resolve any of the real budget challenges. Just as Germany and Britain have had to take action to deal with, for instance, their own domestic pension crisis, the United States has other difficult policy choices to face up to. No amount of process reforms will replace the need to grapple with and address these challenges.
However, once Congress and the administration come together to confront the hard choices that they must make, the budget process can provide both procedures to keep the budget on track as well as useful enforcement mechanisms. Relying on a more rational time frame for budgeting is one of those process changes we believe will have positive results. So thank you, again, for asking me to testify.
[The statement of Ms. MacGuineas follows:]
Mr. Diaz-Balart. Thank you.
Thank you both very much.
I appreciate your testimony, superb and very specific. And the question I guess I had was, Ms. MacGuineas, during your testimony -- I read it first, and then I was thinking about it again. And I guess a key question is, having seen that even with an annual process, we have had a significant number of supplementals in recent years, I wonder, I wonder if we instituted a 2-year cycle if we would be condemned to at least as many as we have seen in recent years.
You have been specific in stressing the need to define in a narrow way what the emergency is, but of course, that is really tough. That is really tough because we all know how many things become emergencies, and a definition of an emergency for one member obviously could be very different for another.
But your points are certainly well taken, and I agree with them. I don't know at this point how, but for the realization that we need to be specific in the definition of emergency, how we could take care of the problem, which seems to be very evident and looming, and that is the recurring nature of the supplementals. I don't know if you have any additional thoughts on this, but --
Ms. MacGuineas. Well, other than that I certainly share your concerns because I think supplementals will be the kind of things that will inevitably creep back into the process no matter what.
I think we probably all agree, biennial budgeting is not a cure-all or even close to a cure-all for the many challenges that we face. To be in a situation where we have included things like census and emergency spending, we clearly have a problem with this, and we will whether we shift or not.
I do think that there is an opportunity that is presented when you start to look at broader reforms. It is sort of the same as tax reforms. When you look at a broad-sweeping reform, there is an opportunity to start fresh, clear out some of the old. And then it will build back. If we move to this, certainly, down the road, there would be too many supplementals. But that major shift will begin and sometimes brings you back to where you want to begin. And that is why the reform process is always an ongoing process. You are always trying to stay ahead of the problems that continue to present themselves. This won't be resolved on its own because the pressures that exist today would still be there under biennial budgeting. But it might be kind of a one-time shop to clean up some of the really irresponsible things that do get pushed in supplementals.
Mr. Diaz-Balart. I agree. And I think that a clear and very important goal needs to be to increase the time and the ability of Congress to engage in oversight and in review and thus the possibility for the reform. That is something that is evident in terms of being needed and the need to move away from incremental budgeting, which you both referred to.
And Dr. McNab, I am very interested in your Defense expertise. You know, we, in Florida, now are in the midst of this significant Everglades Restoration Program, and the Army Corps of Engineers is the main actor in that program. And so I know that the Army Corps of Engineers has to have significant multi-year planning ability because these programs that they are engaged in in Florida obviously cannot be finalized in 1 year. So I would like you to talk to us with a little bit more specificity about existing Defense programs, how they deal obviously with, you know, not only Army Corps programs, but other Defense programs that can't be finalized in 1 year. So the fact that we already have been very successful, DOD has been very successful in multi-term -- multi-year planning and getting those plans, making them a reality, if you could be a little bit more specific on existing DOD programs like perhaps what the Army Corps does in terms of multi-year planning.
Mr. McNab. Well, Mr. Chairman, every year, the DOD, what it used to do every year was go through essentially an annual process of planning, programming and budgeting and execution. This would involve actually creating a 5-year planning and programming and execution plan for every major program in the Department of Defense.
As you can imagine, this is quite an onerous task because you are trying to repeat the same process over and over again. It is kind of analogous to what Congress is doing for most of its expenditures. So when Secretary Rumsfeld came in, his experience directed -- when he was previously Secretary of Defense -- led him to direct the Department to return to a sort of on-and-off budget cycle. So what we are doing here in the on/off budget cycle over 4 years is to plan and program in the first year.
So, for example -- and I am not exactly familiar with the Army Corps of Engineers, but it would follow the same general methodology. In this year, for example, we are just in the middle of a fiscal 2008 memorandum. So right now, sitting here in 2005, we are building budgets from 2007/2008 through 2010 and 2011. And so we are actually looking at what programs we will need across those years. And for many programs what you will see is what is needed not in terms of an appropriation category, but what is needed in terms of expenditures related to the objectives of the program. So for the Army Corps of Engineers, the program proposal would be actually related to what the outcome would be.
Now, when that comes back to the Department of Defense at the Secretary's level, it kind of has to be reoriented into the appropriations process -- military construction, operations, maintenance, research, development, training and evaluation. And those -- that is what Congress sees are those appropriation categories.
So, essentially, we cross -- we have a budget designed this way, and we have crosswalked it and submitted the budget to the President, which comes to Congress as a single-year appropriation, we lop off 1 year, send it to Congress.
Mr. Diaz-Balart. Recycled approach.
Mr. McNab. Right. So for the majority of programs, it doesn't change. You are just kind of piling them on year on year on year. But what the annual budget process forces you to do is, every year, even if you don't have a lot of change, you are kind of going through the same motions again. And even though we have moved to biennial budgeting, we are still stuck in this, okay, we have got to submit a budget to Congress this year, so you slice off that pie, and you go through the process. You submit it to Congress, and it comes back. And then when the money comes back, you are executing, but you are also going through the same bill again for the next year and next year and next year. So the Department of Defense is kind of stuck between the best and worst of both worlds. It is having to run like its multi-year planning and programming, but it is also stuck in this annual budget cycle. So I don't know if that exactly answers your question or not.
Mr. Diaz-Balart. No, it does. And I certainly think we should try to get it done, to go to a 2-year system and see how it would improve. I thank you both.
Mr. Bishop.
Mr. Bishop. Thank you. I appreciate it.
When we were talking here, you used the term budget and appropriations. We are talking about the same thing; they are not the same thing, but we are talking synonymously about it.
Ms. MacGuineas. We would suggest that you should be moving -- one should move to a 2-year cycle for the budget and appropriations and --
Mr. Bishop. It is the same thing; we are using those words synonymously.
Ms. MacGuineas. In most of this testimony, yes.
Mr. Bishop. And this is, once again, just an oversimplified question. When we were talking about, if you move to 2-year cycle program, less accountability; if you keep 1 year, you have more oversight accountability, less time for program review: What should be the goal of the budget? If you can say in one sentence, what should we be wanting to do by budgeting? What is our purpose?
Ms. MacGuineas. I think the budget should be a fluid reflection of natural priorities. So I think you want to craft a budget that continues to reflect what we believe the government needs to be doing. I think there are real concerns that so much of the budget is pre-allocated and on automatic pilot, that we are in a situation where as new needs and opportunities arise, we are not nearly as nimble as a nation as we should be in responding to those. And I think that that is one of the indications that the budget is not doing as good a job as it should be able to do.
Mr. Bishop. So the budget should be a reprioritization project.
Ms. MacGuineas. I think it should be a reflection of national priorities. And in order to keep that current, you have to continue to reprioritize, I think.
Mr. Bishop. In one sentence, what is my goal?
Mr. McNab. That is actually the first thing that you should ask in any budget process: What are you trying to achieve? And what we found out in many instances, an annual budget process does not lend itself to that because you are too caught up in the process of getting the budget passed to actually step back and say, is this money I am spending in Florida in the Everglades actually achieving something worthwhile, or are we merely spending this money because we spent it last year? And there are many instances I am sure one can pull out where you can find items of expenditure that are merely continuing year on year because nobody really has had the opportunity to step back and ask the hard question, what are we actually trying to do? What are we trying to achieve?
Mr. Bishop. So do you agree that the budgeting should be a prioritization process?
Mr. McNab. It should be a reflection of the strategic priorities of the President and the Congress.
Mr. Bishop. I actually have three questions. I will try to make these as quick as I can.
One of the concepts that you talked about was the fact that the single-year budget we do in the appropriations process is, as one person said, is a train wreck in September. If we did it in a 2-year cycle, would that lead to a larger train wreck every other year?
Mr. McNab. There is distinctly the possibility that you would still have a train wreck, but instead of a train wreck every year, one might argue that you have it every 2 years.
Mr. Bishop. So there is a comparative advantage.
Mr. McNab. I would argue that the experience I have seen in other countries, that the train wreck will shift. It will no longer be trying to rush to get through appropriations at the end of the year. I would argue you will start arguing about the hard questions rather than trying to merely get through the process. Maybe that is too much work. Maybe that is just very difficult because then you are going to have people arguing, should we be spending X amount of dollars on national security versus Y amount of dollars on interior? What is the cost and benefit of that? What are the outcomes we are trying to achieve? I think those questions are lost in the process today.
Ms. MacGuineas. If you are voicing that as a concern, it would be a concern that we certainly share. On sort of just a very personal level, I think we are all familiar that if you get an extension on something, you still are up the night before trying to finish it because an extended period of time just means we take our time doing things.
The opportunity here I think is, if we built into the process a general pattern of more oversight, more planning, that becomes a part of the process. It will then -- there are more things that we need to get accomplished, and so that longer period would accommodate the additional things we are trying to build in. So I think one of the priorities here is not just to give more time, because I think you will just expand it to the time -- I mean, the Supreme Court is always up to the last minute, too. I don't think anybody is good at getting their deadlines done well in advance. But if you have additional parts of the budget cycle that are important, such as oversight and planning, and they become more common and more thorough, I think that will become more permanent, and that is the potential advantage.
Mr. Bishop. I tend to agree with that. I think the idea of waiting to the last minute is simply because these issues are not easy; otherwise we would be dealing with them. There is no perfect answer.
Can I ask one other specific question -- actually, I have two questions, one specific one that deals with the assumption that if you have a 2-year cycle, that some of the bureaucratic agencies would have a better chance to use their money wisely, plan ahead, they wouldn't be trying to spend the surplus. And I guess it is the same kind of question, would you then have a 2-year cycle to try and spend your surplus?
It seems to me the nature of any organization is to grow and make your job better. That is natural. If you are not trying to do that, something is wrong with you in the first place. Does the 2-year cycle actually help us in trying to control the growth of programs and agencies as they expand to do more and take more in and increase their stature, like getting more money and doing more things? Is that an advantage over 1-year cycle?
Mr. McNab. I would tend to argue that what we see now in the annual expenditure cycle is the rush in September to buy office furniture and to go to conferences and to essentially expend every last penny of your budget because your money, in most cases, for discretionary operations, money doesn't carry over year to year. And the ability to reprogram funds across appropriations is also very limited and subject to congressional oversight.
Would that still occur in a 2-year cycle? Probably. But what would be interesting to see is whether or not it would remove this spike we see now in every year at the end of the fiscal year, the spending that probably does not have much to do with an agency mission. In other words, do we need to go around buying furniture yet again merely to expend our existing budgeting authority? If we had those funds and they went over years, then one might argue that you would see gains in efficiency in the spending decisions of government agencies.
With respect to overall efficiency and decision-making, my experience in the Department of Defense would tend to suggest that if you increase the view of agencies to a multi-year perspective, you garner better outcomes, whether that results in tighter spending control is probably a function of the oversight of Congress, whether or not -- if we are getting better outcomes, have higher spending. What.
Congress might be really concerned about is having time to do overview and oversight and saying we are spending all this money, but the outcomes we are getting are very poor, then we could cut spending rather than putting the spending before the outcome.
Ms. MacGuineas. I do think there is the opportunity to spend your funds better over a longer period. I think about this just in terms of my own job. Running a nonprofit, or anybody who runs a business, there are a lot of things that don't fall into the 1-year cycle. So there may be projects that go beyond that 1-year time frame and to some extent will allow for better planning in those instances; I don't want to oversell it.
Secondly, I think there may be some benefit in a longer period reflecting economic cycles. Now it is clearly not the same as a 10-year business cycle, but if you are dealing with agencies in 1 year where you are really in the bottom of a recession and the second year when you are in a recovery, you have to look at your resources very differently. Spreading those things out just means long-term planning has some advantage. Is it going to be extreme? Probably not, but there is some advantage to it.
Finally, your point about, are there incentives to grow? The government, again, is similar to that of a nonprofit, where, in many ways, agencies, departments areas and nonprofits, your business, your objective is to put yourself out of business because you are going to resolve the problem. In reality, nobody wants to do that. In my world, good budgeting, I don't think I would put myself out of business immediately, but there is this tension between wanting to grow and wanting to make your problem less important and need less funds. The reality is, there will always be the incentive to grow as best you can. I think what we would like to see is that, as a result of programs and policies that are effective, as seen by the more extensive overview, that hopefully you could permit some time for -- just because things are done this way or they were done this way last year, there is really no time to think it through.
Mr. Bishop. This is the last question. And I realize this is probably unfair as well. Our purview is to discuss whether biennial budgeting is better than annual budgeting. I have problems with just the structure of the way we do things because I have been in the legislative process. I sometimes look at the way we budget here as it is basically Christmas as a nonappropriator. I am the kid that goes to the appropriators and asks for my list of goodies, and he is Santa Claus. If I have been good, I get most of my goodies. If I have been bad, I don't get any. And I don't care what the overall budget is as long as I get some of my goodies for my district.
I don't see in the system much incentive for me to be frugal. How do you build incentive for members to be frugal with the overall budget process? I am sorry, that is an unfair question.
Mr. McNab. The dead silence on the panel is a dead giveaway.
Ms. MacGuineas. No, it is the most important question that there is.
In many ways, my group, and I think Congress, we often focus more on budget process and budget rules than the real policy choices, because this stuff, while not easy, is a little easier than the real choices we confront. Budgeting should be prioritizing and figuring out whether something is worth doing, is worth paying for. This is not a sophisticated answer, but the clear way to do this is to link what government does with the cost of government. If something is important enough to go ask appropriators for funding, we need to figure out how to pay for it also. And then it is a lot easier to figure out whether a prescription drug program or a small bridge in a small town is worthwhile if tax payers have a sense of how much that costs. And I am in no way arguing that things aren't worth doing. Many things are, many things are worth doing, if people don't have a sense, the government does.
But I think what we lack today is a real sense of transparency between, A, what government is doing, both in the discretionary and the mandatory side of the budget, and, B, what the cost of those different areas are. And if budgeting could be a way to link both the value or the outcomes of some of these programs with the cost, I think that would help. It is a very difficult challenge, and I think your questions go to the heart of these matters.
Mr. McNab. If I may, the incentives; I don't think we can change the incentive structure of the authorization or appropriation process. Congress and Congressmen and women have a duty to look out for their districts. The best we could do with biennial budgeting may be to inform Congress and the executive branch as a whole about the costs of their choices. And so, perhaps, we cannot go to every Congressman or woman and say, if you build that bridge in that district, you will deprive people over here of a school, but an aggregate biennial budgeting can give us a sense of the linkages between expenditures and outcomes.
And so, again, returning to the point we have stressed here I think today, is that part of the President's Management Agenda has been an attempt to link expenditures to outcome through the GEPRA, through the PART process and so forth. Biennial budgeting would, in essence, allow Congress to take part in that management agenda by giving them more program review and oversight. Can you stop Christmas time at the appropriations process? I have no answer for that, sir.
Ms. MacGuineas. Could I add one more thing? Because your question really has me thinking.
This, in many ways, is a question I live with: How do I get Members of Congress to really care about the big macro budget challenge issues? And it is a difficult thing to do because it doesn't involve a lot of easy choices. It is not a lot of things that people like going home to their constituents and talking about tough choices. But I think that there is some potential for reform to be looked at for how we do baselines in budgeting. I think that there is, in effect, where we have a top-down budget, and if you start to talk about engaging from the bottom up, building the budget, is each State continuing to ask whether each thing that we are doing is worthwhile. That would be an exercise that would make those questions again link to the cost of things and be more reflective of the needs at the time of the Congress and the country, rather than things that have been in place for so long that we don't rethink them on a regular basis. But I think the baseline is one of the places that there is some potential for reform.
Mr. Bishop. I think those have been great answers to those questions. Thank you. In the back of my mind, I think there are still structural links of the legislative bodies which have the ability to buy into the overall budget as opposed to compartmentalize significantly, especially on the House side where the committee assignment becomes your life. And I think there is -- which is not the purview of this committee, but in the back of my daydreaming mind, abilities of restructuring things to try to get a bigger body to buy into the overall budget, not necessarily a small budget.
Mr. Diaz-Balart. Thank you, thank you very much.
Dr. McNab and Ms. MacGuineas, you have honored us with your presence and illuminated us today. And we will continue thinking and working along the lines of the matters that you have brought out. Thank you both very much for visiting us today.
And that concludes our hearing. I thank everyone who has helped so much to make this hearing possible, and we will continue -- the subcommittee will continue its work. I am very pleased with this hearing, I think it has been a very good beginning, and the subcommittee is now is adjourned.
[Whereupon, at 1:00 p.m., the subcommittee was adjourned.]
