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July 24 , 2003, 7:00 a.m. The Government Budget Folly Forecasting biases the current process toward more spending. By Joe Cobb

he federal government adopted the new idea of a “fiscal year” in 1890, and government budgets soon became a fad among the several states. More than 100 years later, it's about time we review what has become the government budget folly.

Americans today need to understand that there's a difference between a government’s budget and the budget of a corporation or a family. A budget is a planning tool. It is used to control expenditures, in comparison with expected revenues. A private company, or a family, uses a budget to measure actual spending and income against planned outcomes. But a government does not do this.

Governments pass laws to authorize state agencies to spend money. Governments also “predict” revenues. So it should not come as a surprise that every legislature also passes a new law every year — in the form of a “supplemental appropriations” bill — to allow it to spend even more money. So much for the “planning” detail.

Government expenditures are calculated from a “baseline” that includes some client population and cost-of-living increases. These always grow. Governments, however, never plan to downsize even if revenues fall short of expectations.

But they should.

Each year, on the eve of the new fiscal year, governments adopt a “continuing resolution” because their new budget is not yet agreed to. A continuing resolution says that whatever money was voted the year before can continue to be spent by the state agencies, but no new programs can be started.

This is a good place to start. Conflicts over government budgets begin with debates over new programs, or increases in old programs. Old programs are never cut. Milton Friedman once said that the nearest thing to eternal life is a government program.

But here's an idea — call it a new paradigm for government budgeting. Instead of a government budget as we now know it, what if every legislature, including the U.S. Congress, voted only to approve a “continuing resolution.” About six months later — the point at which the same legislature would normally be considering some “supplemental spending” bill — any increases in spending for the dozens of government programs that might deserve an increase would be evaluated. However, at that six-month point, it would also be easier to judge the amount of tax revenue that is actually coming in. Of course, the reason why governments run into deficit spending is because of errors in forecasting tax revenues.

Looking at it this way, instead of attempting to forecast tax revenues and then planning government expenditures, state and federal legislatures should attempt to constrain government expenditures and then match them up against actual tax revenues. This can only be done by using a “look back” method of fiscal policy.

The idea of government budgeting today is based entirely on forecasting and therefore it is biased in favor of increased spending and an expansion of programs. A better idea would be based on actual expenditures (the “continuing resolution” model), with “supplemental appropriations” for any necessary increases based on available revenues.

The first step in correcting a problem is to identify the mistake that has caused it. For more than 100 years, the fiscal problem with the U.S. government is that it has been “planning” for increases in spending.

— Joe Cobb served as fiscal officer of the Industrial Commission of Illinois (1970-77) and with the U.S. Senate Budget Committee (1987-90). He was also Republican staff director of the Congressional Joint Economic Committee (1990-91).