Last week US federal agencies were in a hurry to spend the last of their annual budget. Agencies that don’t spend all of their budget not only don’t get to save it for next year, next year’s budget will likely be reduced by the unspent amount. And the manager sacked. This last minute burst of spending is usually less carefully considered, and less useful, than other spending. (More about it all
So being allowed to carry over money to the next year reduces end-of-period spending. Now the question is, does it also reduce total spending?
I just added to this post.
Does this not happen in the private sector?
I don't know why so many of the other folks here seem to be either misunderstanding or ignoring both your and my clear and logical explanations which are derived from direct experience.
Fair question, since after rereading your post with a little more care, you have an interesting hypothesis. I think the answer to why it was ignored, generalizing from my own experience, is that you buried your main claim, which I take to be this: "If they then receive the authorization to spend the $, but fail to do so, their earlier claims (for both the need for the $ and regarding their abilities to assess situations accurately) lose credibility."
In other words, failure to spend all your money signals lack of credibility because it contradicts earlier claims.
But this explanation is rather limited in depth. It doesn't explain why institutions haven''t adopted procedures (like those Kirk Holden described) to change the incentives.
"Now when you spend only $15 million, you make the politician look like a fool."
I do not agree that's necessarily true. I think the American system (mostly it being district-based) and American culture are geared towards that view but in some European countries politicians win votes by informing the public that something cost less than previously budgeted. In those countries people intuitively expect error margins for budgets and there is no drive for showering local constituencies because the elections are not district-based, plus people expect contractors to be devious, yet at the same time see an active government as fundamentally necessary (less enthousiastic about corporations and more supportive of the state than Americans) so they cheer everytime the government comes out on top.
I'm not sure this is really overspending.
Each year managers known that they will have to allocate money on various things, some of these things are mandatory, others are important, others are rather optional.
Since managers have uncertainty about the actual costs of these things, they will naturally want to spend first on the most important ones, so they are sure they will not run out of money, and save the less important things for the end of the fiscal year to spend on if they have any money left.
It's purely anecdotal evidence but it does seem like politicians from countries with national voting systems do seem a lot more eager to announce some program cost less than previously budgeted. That is not seen as a failure to plan.
Maybe the issue is that if you get $20 million, some politician had to argue hard about why you need exactly the $20 million and not less. If that politician showed some uncertainty and said "maybe they will need $20 million, and maybe only $15 million", you would most likely get only $15 million. So you received $20 million because some politician spent their time arguing that $15 million just isn't enough.
Now when you spend only $15 million, you make the politician look like a fool. That's not good for him, and therefore not good for you.
(The point is that at some moment "not making the politician who argued for $20 million look like a fool" becomes more important, at least for the politician, than saving $5 million. This is another value in the equation, not included in the naive calculation.)
You nailed it from experience. Folk sit on committees that are of import to their locals and send pork that way. You not spending that pork fully goes against their purpose.
Folk forget it's not the civil services job to be prudent with allocated tax dollars but to spend what was allocated by the political class. They, not you, determine how much is to be spent, you simply execute their will to the best benefit of your program. Congress doesn't care if you buy one $1000 wrench or one thousand $1 wrenches as long as you spend that $1000. Your leeway as the civil servant is to determine if you want the one wrench or the thousand.
Yes, I agree. And I consider your view to be fully consistent with my earlier comment on this thread. (In the past, I also dealt with it daily -- not relating to Congress per se, but in the DoD). I don't know why so many of the other folks here seem to be either misunderstanding or ignoring both your and my clear and logical explanations which are derived from direct experience.
More generally. Stupid public policy doesn't have a market test. I'm sure private companies throughout history have tried stupid techiques for managing budgets but then made less money and changed their behaviour. In government there are so many equilibria because a dumb policy can be imposed for no real reason whatever and have a lot of inertia.
Maybe it's yet another disadvantage of district-based election systems (the representative or senator wants to shower their district with federal money)?
Local optima is the logical economic actor answer. If I spend the last 20% of my budget for only 5% improvement (i.e. end-of-year spending is only 25% effective), I still improve 5% versus 0% for not spending it. There are absolutely no incentives to not spend. There is also a disconnect between ability to spend and ability to measure improvement. In government spending, especially at the lower-organizational levels, there is no way to directly measure improvement due to lag in the improvement and general lack of organizational ability to measure its own output. So when you say end-of-year spending is less useful, that cannot be proven. I also agree with the comment that sometimes end-of-year spending is for longer-term initiatives that are important but not urgent. Organizations tend to metricize what is easy - especially when the mission of the organization is not well-defined or easy to measure. Dollars are easy to measure and are always a primary metric. Usefulness of spending is not easy to measure and tends to become absorbed into the process - you don't get funding unless you can justify it. Funding is justified by plans (often too high level to show spending details and not taking other things into account) and spending is real and allowed to be re-allocated (re-programmed) when plans need to change. So, the ability to find something (presumably useful) to do with all the money becomes roughly equivalent to how skilled you are at adjusting your plans and spending. As we saw above, you can't really measure usefulness; so if you spend it all your boss may think you know what you are doing - but if you don't your boss knows you don't know what you are doing.
The question is *why* Congress gets mad at one thing, and not at the other.
"If needs and opportunities vary in time, spending that varies in time seems appropriate. Perhaps incompetent managers who just can’t plan induce more spending fluctuations. But is that really so much more likely than varying needs and opportunities?"
It's precisely because the higher-ups DO know there will always be natural fluctuations that they can't do much about last quarter overspending (they'd have to prove it was overspending instead of a natural fluctuation). Plus what Vaniver said: it's normal to wait to spend on long term stuff when you first have to ensure there's anything left after spending on short term stuff.
All of this is of course equally applicable to corporations and let's not forget that many departments in governments are severely limited in their 4th quarter binge spending (for example they can't book phantom unemployment benefits), so the 4th quarter overspending may be relatively small compared to the total budget. For solutions I'd recommend not to reinvent the wheel: surely many governments and corporations have looked into the problem already.
The body of Theory of constraints by Eli Goldratt rails against all sorts of decision making guided by local optima. Budgets are just one example. TOC suggests using constraint based accounting or throughput accounting as a measure to overcome this.
Another place where I read that budgeting as a practice needs to be revised is Science of success by Charles Koch. If I remember correctly, he believes that instead of strict budgets, people should be able to pull in money for anything that can noticeably improve the bottom line. I don't remember the details, but when I had read it, it sounded similar to throughput accounting.