Ferguson and Steinetz on Israeli two-year budgets

by on December 7, 2013 at 3:33 am in Economics, Law, Political Science | Permalink

…longer-term budgets have important advantages. They reduce uncertainty for the ministries, agencies and private companies that depend on government funds. Public investment in infrastructure is a good example; so are defense contracts. In each case, long-term engagements need to be made with contractors and the results take years to materialize. But the danger always exists of unexpected budget cuts that terminate unfinished projects at high cost to all concerned.

A more subtle advantage of longer-term budgets derives from the argument of the Nobel laureates Finn Kydland and Edward Prescott that rules are often preferable to discretion in the realm of economic policy.

…America’s fiscal problems will not be solved without some bipartisan agreement. Biennial budgets might just be the place to start. After all, this is an idea that was supported not just by Ronald Reagan and both Bushes, but also by Bill Clinton, Al Gore (leader in 1993 of the National Performance Review) and the current Treasury secretary, Jacob Lew.

Moreover, Israel’s experience has been a great advertisement. Not only did it enjoy an impressively rapid recovery from the financial crisis under the system of biennial budgets; more remarkably, when directors-general of Israel’s government ministries were polled in 2010, not one of them favored returning to what one called “the Dark Ages and the madness of the single-year budget.”

The NYT Op-Ed is here.  If you would like to read a criticism of the two-year budget, try this:

“There is no other country that has a dual-year budget. Why? Because it requires long forecasts,” Ben-Bassat told The Jerusalem Post on Monday.

The predictions for economic growth and tax collection for the past year’s budget were made two-and-a-half years earlier, in the summer of 2010. Simply put, Ben-Bassat says, “they were wrong. Very wrong.”

Ben-Bassat noted that although Israel’s hearty growth started consistently declining in the second quarter of 2011, the old estimates were not revised because of the inflexible budget.

“It doesn’t make sense for policymakers to tie their own hands,” he said. “The finance minister said he wanted to give certainty to the private sector, but he provided just the opposite. It actually created uncertainty.”

You will find another criticism here. You will note that the American states have been moving away from biennial budgets, partly because their revenues have grown more volatile.  Connecticut however uses a bifurcated system, where smaller agencies are on a two-year cycle.  In Washington state, the government enacts annual revisions to a biennial cycle (pdf).  In other words, the available space of options here is quite complex.

Overall I would not press a button to make this change happen.  That said, we Americans have not exactly been pivoting on a dime, with optimal changes in fiscal policy, in response to new economic data.

GW December 7, 2013 at 5:37 am

If the US were to go to a two-year budget, how would that best be scheduled with relationship to the House of Representative’s own two-year election cycle? If it was to be enacted as soon as possible, although a new congress would likely wish to put their own stamp on the budget, it would not allow sufficient debate and probably be left largely to the authorship of bureaucrats and lobbyists’ should the budget begin at the beginning of the following term, they would not face voters at reelection time with any working effects of their budget-writing, but they might be better disposed to take bolder steps in their budgeting. I suspect that the optimal timing would be for each new budget to take effect at the mid-point in the election cycle.

db December 7, 2013 at 6:13 am

2 year budgets? I’d be thrilled if we could do 1 year budgets. Given that the current budgeting practice in the US is successive continuing resolutions on a roughly quarterly basis, moving to actual one year budgets would be a boon for stability and the ability to plan.

Roy December 7, 2013 at 9:35 am

Yes, but how do we get there? Even if we passed a constitutional admendment specifically requiring an annual budget, who could enforce it on Congress?

Z December 7, 2013 at 11:27 am

My pet theory is that unlimited borrowing is what has rotted out the budget process in Washington. Borrowing for domestic consumption avoids debate of public policy. The “compromise” we always see is “let’s agree to do both.” Budgets, after all, are about setting priorities and deciding what gets funded and what does not get funded. It also is for deciding what gets taxed and by how much. If one party is giving away tax breaks and the other giving away goodies from the treasury, all financed by borrowing, why have a budget?

My solution, which can only come after the revolution, is to ban public debt of any kind, including pensions and entitlements. Perhaps a narrow exception for war – a declared war against a real country – for short term borrowing, but I’m not even sure that’s a great idea. Every year the legislature hashes out who gets how much from the treasury that year and who pays how much into the treasury for the year.

Larry December 7, 2013 at 1:41 pm

CRs are about as stable as you can get. Nothing changes!

Norman Pfyster December 7, 2013 at 9:29 am

Since Congress can authorize spending any day of the year untethered from revenue, a “budget” seems to be a quaint misnomer.

Roy December 7, 2013 at 9:39 am

Texas has a biennial budget and I can’t really see that changing, though the number of special sessions seems to be increasing. These sessions are however remarkably unpopular outside of the major cities in the state.

But then Texas has a culture that generally sees the legislature being in session as something of a threat and danger to the republic. They have a point here.

John Thacker December 7, 2013 at 9:59 am

That said, we Americans have not exactly been pivoting on a dime, with optimal changes in fiscal policy, in response to new economic data.

Of course not, that’s the responsibility of monetary policy.

Ed December 7, 2013 at 10:16 am

Second Reich Germany had multiannual (I think the period was seven years) appropriations for the army. Other than reducing the power of the Reichstag, this meant that every few years the government ginned up some foreign policy crisis to get the legislature to increase the appropriation. That worked out real well.

Yancey Ward December 7, 2013 at 12:17 pm

Honestly, this criticism of the US budgeting process seems a bit misguided to me. The way it actually appears to work these days is that budget seems more or less permanent with the occasional addition of a new entitlement. Baseline budgeting basically tells you what the US government is going to be spending money on five years from now, and how much roughly.

Larry December 7, 2013 at 1:44 pm

I like the idea of fiscal inflexibility. It’s a mistake to use the blunt instrument of fiscal policy, which has so many other constraints, not to mention the long lags of any changes other than taxes, to tune the macro economy.

Much better to use monetary policy. It can change on a dime, there’s no gridlock, and it has none of the other constraints.

This seems…obvious.

Øystein December 7, 2013 at 4:35 pm

Many people who are otherwise skeptical of government do not seem to notice that increasing the budget term increases the ability of those politicians in office at any given time to lock the state into their favorite activities.

Richard December 8, 2013 at 1:51 am

Why not have government collect revenue for a year, bank that money, and spend the known sum of the previous year’s haul? Or so the same for 2, 5 yeast blocks? Granted it would require officials not to get greedy about dipping into the stockpile, but constitutional amendments can take care of that.

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