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YOU DECIDE: Is there a better way to budget?

March 20, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

North Carolina is facing a budget gap of several billion dollars for this and the next fiscal year.

Of course, this situation is mainly due to the severity of the recession that has hit both the nation and our state. The governor and the general assembly are making some hard decisions about spending and revenues to fill the budget gaps.

While these budgetary decisions won't be fun, some people look at the state's current fiscal problems as an opportunity to change some basic ideas about budgeting to make dealing with future recessions easier.

One of the oldest of these ideas is to enact a cap, or limitation, on the total size of the state budget. Particularly in good economic times, when the economy is doing well, government revenues often increase at a faster clip than in the private sector. This allows an expansion of state spending on new initiatives and programs.

However, it also sets up a potential trap.

When the economy turns and drops into a recession, the growth of government revenues slows and may actually decline. The state is then left with the inability to fund the larger amount of spending, resulting in spending cuts, higher tax rates or both.

One way around this is to limit the growth of spending during the good times.

There are several ways to do this. The most restrictive would limit this year's spending to last year's revenues. Another popular plan would be to restrict spending increases each year to inflation plus population growth. Or annual total spending could be held to some percentage of the total state economy.

The major issue with any of these rules is that they're arbitrary, and they remove decision-making from our elected officials. They don't allow public leaders to adjust revenues and spending to particular situations, such as the need to rebuild after a hurricane or the perception that a large increase in education spending is required to keep North Carolina's economy competitive. On the other hand, supporters of the caps say such special spending could still be undertaken with the caps as long as complementary spending reductions were found elsewhere.

Other budget proposals focus directly on spending.

One is called a "sunset provision." The idea is to limit all state programs to a set number of years. Once that time is completed, the program would be eliminated unless legislators specifically reauthorized it. The goal is to take public programs off automatic pilot and force them to go through periodic scrutiny.

A tougher version of this concept is "zero-base budgeting." In a traditional budget, only increases are debated each legislative session. The "base" is rarely subject to review. In zero-base budgeting, the entire budget of a program is up for grabs whenever the overall budget is being formulated.

There are downsides to both sunset provisions and zero-base budgeting. Again, discretion is taken away from our elected public leaders. Also, with entire programs subject to review, the length of the legislative session would likely expand, and arguments over program details could increase.

Another idea is to rank government programs.

Periodically - possibly each legislative session - all government spending programs would be ranked from highest to last in priority. Then, when a recession hits and revenues don't allow all programs to be funded, rather than cutting a certain percentage from every program, the lowest priority programs are cut in their entirety until the budget is balanced.

This ranking idea is appealing because it suggests government will continue performing its most important tasks even in the worst of economic times.

But there are two big downsides.

The first is getting elected officials to agree to the ranking. This is no easy task because every government program is important to some group of residents.

The second is the implicit assumption that government programs can be easily dismantled and then restarted. This can be difficult if long-term contracts or commitments are involved. Also, qualified workers may shy away from the program if they realize it could be temporary.

Times of economic difficulty are often associated with bursts of innovation and creative thinking. Therefore, now may be the perfect time to review some of our assumptions and procedures regarding the state budget.

But I think you'll decide that, just like balancing the budget, agreeing to a major budget overhaul won't be easy.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/


Posted by Dave at March 20, 2009 08:52 AM