Policy Initiative Spotlight: Multiyear Budgeting

The U.S. budget process has become increasingly dysfunctional, a large factor in Standard and Poor’s downgrading the U.S. sovereign credit rating in 2011. Budgets were always passed for each fiscal year from 1977 to 1998, but in the thirteen fiscal years since, Congress has failed to adopt a budget five times, including for FY 2013. A continuing resolution—a stopgap spending measure—was passed in late March to fund discretionary programs of the federal government through the end of September, the last month of the 2013 fiscal year.

In practice, the annual budget process is ad hoc, where crises often drive decision-making. While overhauling the budget process would not cure partisan rancor, multiyear budgeting could improve the process by forcing policymakers to adopt a longer term perspective.

Many experts have recommended that the United States embrace a medium term expenditure framework (MTEF). MTEFs have been successfully deployed in developed and developing nations, and are recommended by both the World Bank and the International Monetary Fund. Germany was an early pioneer, enacting a MTEF in 1969. More than 120 other countries have adopted some form of MTEF, many since 1990.

A properly designed MTEF creates a budget for the next three to five years based upon current forecasts and policy priorities. Under this framework, a budget can be modified in the intervening years to account for economic changes, unforeseen events, and forecast errors, but its broad outlines would limit how much could be altered.

This approach could allow the government to balance its books not just in the boom years, but over an economic cycle. A properly executed MTEF could also improve debt reduction planning by requiring policymakers to align budget decisions with the nation’s long-term financial outlook. Indeed, empirical analysis indicates that MTEF adoption is associated with greater fiscal discipline.

While the U.S. budget is a one-year plan, there are multiyear elements to the current process, such as projections and analysis issued by the Congressional Budget Office (CBO) covering everything from the ten-year cost of a proposed farm bill, to the long-term cost of the U.S. Army’s choice in ground combat vehicles.

Some federal agencies provide five-year budget plans, including the Department of Defense and NASA, though these are merely non-binding recommendations. Many other agencies—such as the Department of Energy and the National Institute of Health—do not submit multiyear estimates. Congress also has limited control over large sections of the budget. For instance, in 2011, mandatory spending—such as Social Security, Medicare, unemployment insurance, and veterans’ benefits—was $2 trillion of the $3.6 trillion in spending, or a majority of the budget. Additionally, some revenue is dedicated to a specific purpose, such as the federal gas tax which goes to the Highway Trust Fund.

Overall, the U.S. federal government’s implementation of medium-term planning techniques trails most other developed nations. In 2009, the OECD ranked the United States 25^th of 30 nations in its use of medium-term perspective in the budget process.

OECD Index comprised between 0 (no MT budget strength) and 1 (high MT budget strength).

The lack of long-term planning is particularly a concern for multiyear infrastructure and scientific projects. For instance, U.S. research labs face difficulty in collaborating with foreign research institutions on major scientific projects because their funding is set annually, unlike many of their foreign peers. Major initiatives already underway can be cancelled or restructured through the annual budget process, particularly after the election of a new president. For instance, the Obama administration cancelled NASA’s Constellation program initiated under the Bush Administration.

The 2014 budget process, which does not look promising, seems to underscore the nation’s accounting woes. The White House officially released its 2014 budget on April 10, almost two months after the legal deadline, while the Senate passed its first budget proposal in four years.