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AWholeLotofAlliteration: SpendingSustainability,SufficiencyandSoundness ‘Tistheseason,forbudgeting.Andoften,forgnashingofteethandrendingof garments.Notsothisyear. IfyouhavefolloweddevelopmentssincejustbeforethispastChristmas,youknow thattheDelawareEconomicandFinancialAdvisoryCouncil(DEFAC),thebodythat forecaststheamountofrevenuesthattheGeneralAssemblyislimitedtospend,sent ourlegislatorsaholidaysurprise.Whilenottrimmedwithribbonsandbows, DEFAC’sforecastsforeachofthecurrentfiscalyearthatendsJune30andthenext fiscalyearthatbeginsJuly1wererevisedupwards,substantially. Inalittleunderstoodquirkofourbudgetingsystem,this$170millionbasketof goodnews,whilerealizedaboutequallyoverthetwobudgetyears,essentially createsadouble-windfallinthenextfiscalyear.Thatisbecausethisyear’sspending isalreadyfixedbythebillthatpassedduringthelastlegislativesession.Unlessthe GeneralAssemblyweretopassa“supplementalspendingbill”forthecurrentyear, unanticipatedmoniesthatcomeintoourcofferscannotbeexpendedthisyear,but areeffectivelyrolledintothefundsavailablefornextyear’sbudget. ThatiswhytheGovernor,inhisBudgetProposalinJanuary,wasabletoproposea morethan5%increasetoouroperatingbudgetfornextyear.Somequickly denouncedthisincreaseas“eye-popping”or“jaw-dropping”–implyinglackoffiscal restraint,whileothersimmediatelysettotalkingaboutthemanywaysto appropriatethisnewfoundwealth. Forthoserunningforre-electionthisyearoneithersideoftheaisle,theampedup budgetproposalprovidesaplatformfromwhichtoethercriticizelargesseor trumpettheallocationofthe“winnings”.ThequestionIgetposed,andlikelyone thatanynormalpersonwouldentertaingiventheseopposingviewsonour spending,is:“What’sreality?Whatisresponsible?” Hereweneedtotakeadeepbreathanddrawonalittleperspective.Ratherthan gettingcaughtupinaknee-jerkreactiontooneyear’sspendinggrowth,weshould haveameansofputtingourannualspendingincontextandansweringsomebasic questions: •whatisourlongtermtrendinspendinggrowth–isitsustainable? •isourlevelofspendingrelativelyhighorlow–isitsufficient? •doesourbudgetingsystemleadtosustainableandsufficientspendingover time–isitsound? Asthisisfartoomuchtocoverinonesitting,Iamgoingtoconfinethefollowingtoa discussionofthefirstquestion,addressingspendinggrowthandsustainabilityhere anddeferringtheequally,ifnotmore,importanttopicsofsufficiencyandsoundness tofutureupdates.You’llthankmeforthatbythetimeyouaredonereading. 1 FramingtheQuestions Inanalyzingourbudgetgrowth,twoconsiderationsarekey:thebaseandthetrend. Recognizethattheproprietyofa5%increaseisanissueoftrend;however,oneyear doesnotmakeatrend.Also,notethatthebudgetbasereferredtointhisinstanceis ourState’sGeneralFund.Butthatfundrepresentslessthanhalfoftotalstate spending.Thebettertestofsustainabilityshouldfocusonourtotalspend. Thequestionsweshouldbeaskingthereforeare:“Whatisourtrendrateoftotal spending?”and“Whatdowemeasurethistrendagainsttoknowifwecansustain it?”Or,inlayperson’sterms:“Isourspendingkeepingupwithourneeds?And,can weaffordourneeds?” Beforeweentertainthesequestions,recallthatourGeneralAssemblyisrequiredby lawtobalancetheGeneralFundannuallybylimitingspendingtoprojected revenues.Revenues,however,arebasedonthetaxsystemvotedonbytheGeneral AssemblyandapprovedbytheGovernor.Intheoryandpractice,asupermajorityof ourelectedofficialscansimplymandatehighertaxestopayforthespendingthey wanttodo.Onecannotdetermineatrendinsustainablespendinggrowthby comparingittoasetofrevenuegoalpoststhatthepoliticalclasscanmaneuver.A truestudyrequireslookingpastourpoliticallydeterminedspendingandrevenues toanobjectivesetofbenchmarksandtrends. So,let’sbeginwithtrend.Trendisbestexaminednotoverasetnumberofyears (i.e.,4quarters,10yearsorageneration),butoveraneconomiccycle–those periodsofexpansionandcontractionthatoccurregularlyifnotpredictably.Our lastexpansionpeakedin2007,theensuingcontractiontroughedin2009andthe currentexpansionisstillinprocess(ifeversoweakly). Ifwelookattheeightyearsofthecurrentcyclethrough2015,theaveragegrowth rateoftotalstatespendingis2.3%.Ofparticularinterest,totalstatespendinggrew throughtherecessionaryperiod,evenasGeneralFundspendingcontracted.This divergencehighlightstheneedtolookatthetotalityofthemoneywespendandnot focusexclusivelyontheGeneralFund. Butestablishingtherightbaseandcalculatingthetrendisonlyhalfoftheexercise. Toknowifthatleveloftrendissustainableoverthelongterm,weneedtohavea baseofcomparison.Our2.3%growthintotalspendingmaynotsoundlikealot,but whatistherightpointofreference? InflationandPopulationGrowth–AreWeKeepingUp? OnepositioncitedbyDEFAC’sAdvisoryCouncilonRevenuesadvocatestargeting spendinggrowthagainstatwo-parttestthatcombinesinflationwithpopulation growth.Thetheoryisthatgovernmentspendingshouldnotgrowmorequickly 2 thanthegeneralincreaseinthepricesofgoodsandservicesplusthenumberof peopleforwhomthegovernmentisresponsible. Delaware’spopulationgrowthhasaveragedroughly1%overtheperiodunder measurement.Thatmetricisstraightforward;thechoiceofinflationgaugesisnot. Dependinguponthemeasureofinflationthatyouuse,combinedpriceand populationgrowthaveragedsomewherebetween2.2–2.7%overtheperiodfrom 2008–2015(areasonablywiderange).1 TherecentlycompletedreportbytheExpenditureTaskForceCommitteeappliesa ratenearthemid-pointofthisrangetogrowthintheGeneralFundtojustifyits statementthat“thestatebudgethasshrunkbyanaverageof0.58percentperyear duringtheMarkellAdministration.”Usingthemorecomprehensivemeasureof totalstatespending,thereportmightmorefairlyclaimthatrealspendinggrowth hasbeenflatovertheperiod–ithaskeptpacewithpopulationgrowthandinflation. StateandNationalEconomicGrowth–CanWeAffordWhatWeWant? Asecondcheckonspendinggrowthinvolvescomparingthatrateofincreasetothe expansionofoureconomy.Afterall,anysystemofspendingthatisgrowingfaster thantherevenuebasethatsupportsitsimplycannotlastoverthelonghaul.Here again,wehavedifferentmeasuresagainstwhichtocompare. Atthestatelevel,moststudiestypicallylookateitherthegrowthinaggregate personalincomeorgrossstateproduct(GSP).While2015dataisnotavailable,the figuresfortheremainingperiodofcomparisonreflectagrowthrateof2.3–2.5%,a virtualdeadheatwiththe2.3%trendofincreaseintotalstatespending. Atthenationallevel,themostcommonlyusedandbroadestreferenceforeconomic growthisgrossdomesticproduct,orGDP.Overtheperiodendingin2015,nominal GDPgrewatanannualizedrateof3.2%,wellaheadofbothourState’seconomic growthandourtotalstatespending. SinceDelawarederivesrevenuefromsourcesbothinsideourStateandoutsideof ourborders,anidealcomparisontostatespendinggrowthmightuseablended revenuegrowthrate.Regardlessofhowyouconstructit,suchablendedratewould morethancoverour2.3%spendinggrowth. SummaryonSustainabilityandCaveats 1ThemostcommonlycitedandbroadestreferencepointforinflationistheConsumerPriceIndex (usuallytheCPI-U).Itisalsoworthnoting,however,thatinflationvariesbyregionandthatthereisa PhiladelphiaRegionalmeasureofCPIthatincludestheStateofDelaware.Moreover,government spendingmightbemoreappropriatelymeasuredbylookingatanarrowerbasketofpubliclyprovidedgoodsandservicesdiscountedbyanindexknownastheStateandLocalPriceDeflator. 3 Basedontheforegoing,wecansaytwothingswithsomeconfidenceasconcerns ourspendinggrowthoverthemostrecenteconomiccycle:(i)wehavespentan amountsufficienttomaintainourlevelofservicesand(ii)ourspendinghasbeen withinourmeans.Ofcourse,therearecaveatstotheseconclusions,atleasttwoof whichmeritmentionhere. First,thefutureisuncertain,andthisanhistoricalanalysisoverasingleeconomic cycle.Currenteconomicconditionsraisevalidconcernsregardingadownturnin Delaware’sgrowthwithoutacommensuratefallinthepricelevelsofanddemand forgovernmentgoodsandservices.Thereissimplynowayofguaranteeingthat economicgrowthwillequalorexceedinflationandpopulationgrowth. Second,thisisastudyofbroad-basedspendinggrowththatcanhidealarming trends.Eveniftotalsarecontrolled,thereisreasontobeconcernediflargeandfast growingareasofthebudget“crowdout”otherpublicgoodsandservices.Formal reportsfromboththeExpenditureReviewCommitteeandtheHealthFundTask Forcemakeitclearthattherearesignificantcomponentsofourspendingwith unsustainablegrowthtrajectories. Inshort,continuedcautionandmoredetailedanalysisarecritical,asthereisno guaranteethatthepracticesthathaveledtosustainablespendingoverthemost recentperiodwillcontinuetosafeguardoursolvency.Moreover,itistimetomove pastjustconsiderationsofsustainabilityandfocusourcollectiveattentiononthe areasofourbudget’ssufficiencyandsoundness. LookingAhead–SufficiencyandSoundness Asimportantasitistooperateinasustainablefashion,Iwouldsubmitthatthisisa necessarybutinsufficientcomponentofourbudgetsystem.Thedisciplinetolive withinourmeanssaysnothingaboutthevaluewegetinreturn.Thereisalso somethingfundamentallyunsoundaboutabudgetingarchitecturethatpermitsthe levelofvolatilityanddegreeofuncertaintyimposedbyourcurrentsystem.These featuresareeverybitasimportantifnotmoresothanasingularfocusonmanaging spendinggrowth. Inthefirstinstance,theamountofresourcesweconsumeandproduceasastate governmentandthereturnoninvestmentwegeneratehasenormousimplications forthehealthofoureconomy.Acrossallfunds,ourstategovernmentspendsor transferscloseto$10billion–morethan$10,000foreveryman,womanandchild inthestate,androughly1/6thofourstateeconomyasmeasuredbygrossstate product. Ifwearegettingagoodreturnonthatmoney,thenwecanreasonablyassumethat thoseefficiencieswillfiltertheirwaybackintoourDelawareeconomy,boosting productivityandgearinggrowth.Ifwefailtogetanadequatereturn,thenwe jeopardizethoseefficienciesandruntheriskofalowerstandardoflivinginthe 4 future.Thisrequiresahardlookattheamountwespendandthevaluewegetin return.Irefertothisassufficiency. Second,whileourbudgetingsystemhasproventoproducesustainableoutcomes duringthemostrecenteconomiccycle,thereisnoaccountingforthecollateral damageinspiredbyourprocess.Thisvariabilityishighestandmostapparentinthe swingsinourGeneralFund,fromacontractionofasmuchas6.6%inoneyearto growthof9.8%inanother.Year-to-yearchangesintotalspendingexhibitless variance,butstillmorethanthefluctuationsinoureconomyasawhole. Themannerinwhichwemanageourpublicfiscdirectlyaffectstheriskappetiteof ourprivatesector.Ifourgovernment’sbudgetingprocessescreateuncertaintyasto ourmeansofachievingsustainability,confidenceiserodedandinvestmentlevels fall.Weneedtoexaminenotjusttheends,butthemeanstosustainabilityandseek outmethodsandrulesthatfosterasounder,morecertainapproachtobudgeting. LeveragingDEFAC Thatsaid,themakingoftheannualbudgettakesplaceinapartisancruciblethat doesnotalwayspermit,muchlessreward,theexaminationoflarge-scale,long-term trends.Goodpolicy,however,shouldrestonasoundsetofassumptions.AsIhave previouslyobserved,itisonelevelofknottinesstohaveour62GeneralAssembly membersconceiveofcompetingpolicyresponsestoacommonlyunderstoodsetof facts.Itisanentirelydifferentkettleoffishtobeginwith62differentsetsoffacts. Theformermayproveintractable,thelatterimpossible. Fortunately,forDelaware,thereisabodywhoseveneration,capacityandmandate makeittheoptimalvenueinwhichtoexploreandexpoundonthesematters– DEFAC.Asoneofroughly30members,IhopetousemyserviceontheCouncilto encouragethisinstitutiontocontinuetoofferguidancetoourGovernorandour GeneralAssemblyonthesufficiencyofourspendingandthesoundnessofour budgetingsystems.AnddoingsoshouldnotalwaysrequireanExecutiveOrder. ThatassistancecanbeginwithagreatercontextualizationofDEFAC’speriodic revenueandexpenditureforecastsandthedevelopmentofamoremedia-friendly meansofcommunicatingtheCouncil’sfindings.Itcanalsotaketheformofan analysisofanysystematicbiasintheforecaststhemselves,withanaimofreducing thevolatilityofsuchestimatesandavoiding“surprises”,happyorotherwise. DEFACcanalsobuildontheworkoftheAdvisoryCouncilonRevenuesandthe ExpenditureReviewCommitteetodevelopageneralframeworkforaddressingthe sufficiencyofourstatespendingandestablishingameanstoevaluateourreturnon thatspending.Ideally,aswasthecasewithbothofthesetaskforces,thiswork couldbehandledinabi-partisanmannerandexpressedinnon-partisanterms. 5 Finally,DEFACcanandshouldexaminetheefficacyofourcurrentbudget framework.Mostofthisarchitecturewasputinplaceduringthelate1970sand early1980stoaddressandremedyasetoffiscalproblemsthatmaybedifferent thanthechallengeswefacetoday.Moreover,noonegetseverythingrightthefirst time,andIamnotcertainthatthefoundationalpiecesofourfiscalsystemshave receivedrobustreviewinthesubsequent35years.Thattheyhavestoodthetestof timesowellistestamenttotheiringenuity,butevengeniussuccumbstodiminution fromthepoliticalprocessoverfourdecades. Sortofputsa5%spendingincreaseinperspective. 6