“Budgets are not the solution to a multivariate resource allocation optimization problem. Rather at each decision point, they represent a temporary equilibrium of the views of the salient actors and salient voices at that stage of the process.”
–Professor Phil Candreva, Naval Postgraduate School
Today, the President released his budget for fiscal year 2015. In it, NASA is “budgeted” for $17.5 billion. Now is as good of a time as ever to talk about what a “budget” is, and what it is not.
Most of us think about budgets in terms of our household finances. That is, we categorize our past expenses into categories, such as food, mortgage, gas for the car, whatever. The process of building a good household budget is rooted firmly in economic decisions. How much did I spend last year on gas for the car? How much do I think I will drive next year? And so on. The purpose of a household budget is to guide our spending so that we stay within the limits we established, so that we can achieve the goals we set forth in the budget (such as save for a new car, or to go on a vacation). Used in such a manner, a household budget is a very powerful personal finance tool.
A public budget created by the federal government is not like this.
Instead, a public budget such as NASA’s serves many purposes. According to the Navy Budget Guidance Manual, a budget is defined as “a document that expresses in financial terms the plan for accomplishing an organization’s objectives for a specified period of time.” Furthermore, a public budget serves as “an instrument of planning, performance measurement, decision-making, and management control, as well as a statement of priorities.”
That’s a mouthful. What does that mean? Basically it means that the functions of a public budget are different and more nuanced than a household budget[1]. First, a public budget serves as a contract between the legislative and executive branches of government once it is enacted. It also serves as a contract between layers of the executive branch (for instance, between the White House and NASA). A public budget is also an expression of expectations and aspirations – you have no farther to look than the introduction to the NASA budget for fiscal year 2015 to see an example of this.
A public budget, for better or worse, also establishes a precedent that influences future decisions, because once something gets budgeted, it is extremely difficult to remove it from the budget. A public budget is also a call to stakeholders to mobilize support for what is in the budget. It is a reflection of choices, priorities, and relative power of the stakeholders and influencers of the budget. Lastly, a public budget is an influencer of the economy.
Does your household budget do all that? (Mine doesn’t.)
There is one more important difference between a household budget and a public budget. As I mentioned earlier, a household budget is built based mostly on economic decisions. We’d like to think that a public budget also results from a similar comprehensive, rational economic process.
But if we thought that, we’d be wrong.
Instead, because of all the functions of a public budget, the decision process is much more complicated. Sure, there is an element of economic decisions in the process. However, those economic decisions are often overshadowed by other concerns. Public budgeting is primarily political. It is a group decision-making process where members of the group represent competing and often conflicting interests. Yet somehow, every year, we have a public budget.
So as we listen to the various opinions on the President’s budget for fiscal year 2015, I urge you to keep in mind that a “budget” is more than a “budget.”
[1] I’m indebted to Professor Phil Candreva at the Naval Postgraduate School for his lecture notes on public budgeting.
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