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This is the pre-copy-editing text of the article appearing as: "Cutback
Budgeting" in Roy T. Meyers, ed., Handbook of Government Budgeting San
Francisco: Jossey-Bass, 1998.
CUTBACK BUDGETING
James Savage and Herman Schwartz
Government and Foreign Affairs
University of Virginia
Charlottesville VA 22904-4878
434 924 3192 (x3359 fax)
e-mail: hms2f@virginia.edu
http://www.people.virginia.edu/~hms2f
During the 1970s the financial plight of a number of urban areas, particularly New York and other northeastern cities, prompted the study of what has been called fiscal stress and cutback budgeting. In its simplest interpretation cutback budgeting refers to reducing spending, increasing revenues, and changing budgetary processes to meet fiscal constraints. Cutback budgeting, moreover, is a subset of a broader response to fiscal stress called cutback management (Levine, 1978). While various analysts have elaborated on this simple definition, cutback budgeting and cutback management typically refer to real and perceived revenue constraints, and to the actions taken by politicians and agency mangers to cope with these reductions in resources.
While fiscal stress and cutback budgeting initially applied to America's cities, since that time every level of government in the United States, as well as most countries throughout the world, have experienced fiscal constraints that forced significant changes in budgeting practices, financial management, the administration of public services, and even in the expectations of what the proper responsibilities of government are in society.
Before examining cutback budgeting in more detail, however, it is worth noting that both the academic study and the practice of budgeting have confronted resource scarcity in virtually all times and places. Rarely, if ever, have politicians and managers had access to all the revenues they thought necessary to meet various demands and needs. Perhaps only during the Gilded Age of the 1880s, with its huge budget surplus-producing tariffs, or the 1960s with its rapid economic growth, has the federal government truly been awash with excess funds. In most other years, governments have been significantly exercised in their attempts to balance budgets and perhaps provide for a small rainy-day surplus.
In one of the worst years of the Great Depression, for example, Clarence Ridely and Orin Nolting (1933) offered a practical guide entitled, How Cities Can Cut Costs, at the International City Manager's Association in Chicago. The two were heavily influenced by the Progressive movement's emphasis on strong mayors and managers, and by the routinized search for efficiency associated with scientific management and performance budgeting. After calling for administrative centralization, they identified economies in every major governmental activity. In the case of refuse collection, they urged that "costs should be studied to determine the most economical area of collection, the best route lay-out, and the most efficient combination of men and equipment." Despite the shift by some governments from performance to program and other reformed budget processes, many of Ridely and Nolting's recommendations would be echoed forty years later. Their preference for depoliticized ways to administer public programs cheaply also resonates with today's administrative environment.
Budgeting, therefore, has always been about the possibility of cutting, (re-)allocating, rationing, and making priorities in the use of funds. Budgeting has also involved managers creatively searching for new revenues, and, as Aaron Wildavsky (1964) described, employing strategies to defend their existing resources while perhaps asking for a little bit more in the way of funding. All of these elements may be found in what has come to be called cutback budgeting.
WHAT IS FISCAL STRESS?
Cutback budgeting is generally regarded as a response to fiscal stress, but what exactly this means varies among observers. In her review of cutback budgeting, Naomi Caiden (1990) expressed concern that scholars had failed to reach agreement on what truly constitutes fiscal stress, while practitioners often viewed it as little more than the need for additional revenues. Meanwhile, Allen Schick (1980) and Roy Bahl (1984) pointed out that even a balanced budget may not constitute a proper indicator of fiscal health. There are degrees of scarcity, each with its own set of problems and responses. Schick recommended looking at a government's ability and willingness to borrow, tax, and obtain other revenues, as well as its perceived need to spend. Bahl noted that some measures of government deficits and surpluses, such as the National Income Accounts, create distortions because they aggregate data.
Better objective measures, he suggested, include bond and credit ratings. In a review of eight of these measures and studies of urban fiscal health conducted during the late 1970s and early 1980s, including Standard and Poor's ratings and the Department of Housing and Urban Development's fiscal analyses, Bahl found that seventeen cities were identified in at least two of the surveys. Fifteen of these cities were located in the northeast or Midwest, which suggests that during this time period urban fiscal stress reflected a broader regional problem.
In addition, a more subtle form of fiscal stress arises when governments have adequate aggregate resources for programs but cannot reallocate resources to cope with shifting patterns of demand among those programs. In this situation, some programs may enjoy excess resources while others are severely cramped. Naturally politically popular programs are harder to cut, while those with low political profiles cannot attract additional resources even when the programs need those resources to function properly.
Spending which is protected by proporty rights, whether formal (e.g. interest on public debt) or informal (e.g. entitlements) are most salient roadblock in the redistribution of resources. Unfortunately both are strongly procyclic. Public debt costs typically rise with interest rates just in advance of a recession. Recessions also lead to more retirement and mordibity. As Pierson (1994) notes, universal entitlements are often the hardest programs to cut openly. Consequently discretionary spending is usually what gets cut during periods of fiscal stress. However entitlements have come under covert attack everywhere during the last decade, with cuts disguised as changes in eligibility (e.g. raising the retirement age for Social Security) or changes in inflation adjustments (e.g. in Canada the income level at which old age pension becomes taxable is only adjusted by an annual maximum of three percent for inflation).
THE CAUSES OF FISCAL STRESS
If fiscal stress may be identified be various objective measures, as well as by the perceived needs of politicians and managers, what are its origins? Sress has both socio-economic and political origins which often are present simultaneously, often interact and often exacerbate each other. Depending upon the specific government and time period analyzed one may be more important than others.
1. Socioeconomic Sources of Fiscal Stress:
Socioeconomic decline refers to a broad range of social and economic ills befalling a government, particularly urban ones. These include the economic decline of industrial inner cities, middle-class emigration, lower-class immigration, stagnant or shrinking tax bases, and increased demand for services. (Muller, 1975; Levine, Rubin, and Wolohojian, 1981; Rubin, 1982; Pammer, 1990.) The parallel international phenomenon is the erosion of domestic industrial bases through flight to low wage, newly industrializing economies and parallel in-migration of casualized workers (Sassen, 1988). All of these cause secular stagnation and sometimes declines in revenue, even though the same social problems are causing demands for services to rise.
Exacerbating both is the gradual shift of most economies towards services, which are harder to tax than industrial activity. Taxes on services have proven very difficult to enact in places as diverse as Florida, Japan, Canada, and Australia because of political resistance from the buyers of such services, particularly when they are businesses. Furthermore, to the extent that many personal services are carried out on a cash basis these taxes are also hard to implement administratively.
In contrast to secular declines in revenue, the business cycle, also often causes fluctuations in public revenues and expenditures (Bahl, 1984.) As Chapter X by Michael Wolkoff discusses this in greater detail, we will only note here that subnational governments' revenue flows are strongly pro-cyclic. International bond markets place similar constraints on the smaller European and Australasian economies. Only the US federal government has essentially an unconstrained ability to fund cyclic additions to its deficits.
Along with secular declines at the local level and cyclic constraints, the political concern -- bordering on obsession -- with international competitiveness has also become a powerful justification for constraining government expenditures and revenues, thereby inducing fiscal stress both in the United States and elsewhere. Just as the private sector has undergone downsizing in an effort to enhance productivity, efficiency, and profits, so too has the public sector. Where deficit reduction was once seen as primarily promoting domestic economic health through reductions in domestic inflation and interest rates, cutting back government is now seen as enabling countries to improve their economic standing in the world in terms of credit ratings, access to global bond markets, and inward investment flows. (Kennedy, 1987; Friedman, 1989; Sinclair, 1997). The concern for competitiveness and attracting inward investment has also led to tax cuts, which of course put further pressure on spending. In the most extreme cases, like Ontario, Canada, 20 percent cuts in income taxes were premised on similar cuts in spending. Because this kind of pressure is politically mediated, it is worth turning to more political causes of fiscal stress.
2. Political Sources of Fiscal Stress:
Political sources of fiscal stress can be divided into three categories: demand side causes, supply side causes, and ideological causes.
On the demand side, public officials are often vulnerable to constituent and interest group demands for services despite limited resources or a need to reallocate resources. Employee unions are particularly cited among these groups in US urban settings and in national level negotiations in other developed economies with strong social democratic movements. Moreover, the structure of government and particularly the rules controlling how government personnel may be used may itself may produce expenditure inefficiencies while limiting the ability of officials and managers to control costs or redeploy resources. (Meltsner, 1971; Stanely, 1972; Levine, Rubin, and Wolohojian, 1981.)
Politicians also routinely shift costs to other jurisdiction while taking credit for expanding services or transfers. During the 1960s and 1970s, the growth in federal transfer payments and grant programs encouraged state and local governments to expand their services and increase their expenditures. (Sundquist, 1969; Derthick, 1970, 1975). Park (1994), for example, noted that central cities are particularly sensitive to changes in federal aid, while counties and suburbs respond more to state assistance. When these programs were cut in the 1980s, they reduced a valuable source of revenue for these governments. (Nathan and Doolittle, 1983). Entitlements and mandates, meanwhile, impose required costs on all levels of government (Weaver, 1988; Kettl, 1992).
On the supply side are a whole set of bureaucratic pathologies with either malign or benign causes, depending on the theoretical orientation of the analyst. Public choice theorists, for example regard bureaucrats as revenue and expenditure maximizers (Downs, 1967; Niskanen, 1971; Meyer and Quigley, 1977.) In this view, the inability to redeploy resources flows from bureaucrats who seek to expand their status and power by expanding their administrative authority and turf, and who actively resist redeployment.
Where bureaucratic expansion model rooted in public choice theories view public actors as rational in their pursuits, the incompetent manager model sees politicians and public managers as often inept and unable to administer complex organizations. In some cases, as in Washington, D.C., a public agency like the city school district may receive more than adequate resources, but incompetent management may drive the agency into the red. (Stanley, 1976; Martin, 1982; Rubin, 1987; Curry, 1990; Powell, 1997).
Finally the ideological transitions that occured in developed countries during the 1970s also slowed revenue growth. Conservative attacks on activist government have largely focused on public spending and taxing. Populist "tax rebellions," such as Denmark's 1973 "Earthquake" election or California's Proposition 13, have restrained revenue growth, while similar efforts have capped expenditures through spending limits and balanced budget requirements. This kind of tax and expenditure legislation has crimped fiscal policy at all levels of government. (Buchanan and Wagner, 1977; Wildavsky, 1980; Kemp, 1980). A politics of controlling deficits and restraining government, which was most visible during the Reagan Revolution, has dominated federal budgeting throughout the 1980s and 1990s. (White and Wildavsky, 1989; Pierson, 1994). The core of this ideological transformation is a profound distrust of politicians and the political system, which is why these rebellions have proceeded through citizen referenda and culminate in tax and expenditure legislation.
RESPONDING TO FISCAL STRESS: THE PRACTICE OF CUTBACK BUDGETING
Politicians and mangers at every level of government have employed a variety of budgetary strategies and techniques in response to fiscal stress. These are generally labeled cutback budgeting, which in its simplest interpretation refers to reducing spending, increasing revenues, and changing budgetary processes to meet fiscal constraints. Cutback budgeting, moreover, is a subset of a broader response to fiscal stress called cutback management (Levine, 1978).
Cutback budgeting, of course, was practiced before academics coined the term. In his study of how school districts manage and seek out additional revenue sources, for example, Porter (1973) identified two strategies at work, "multi pocket budgeting" and "marginal mobilizing." When practicing multi pocket budgeting, school administrators first employed those funding sources on which higher authorities had placed the greatest number of administrative restrictions or which were dedicated to specific uses. Meanwhile, they saved funds with greater flexibility for later use as unforeseen and unfunded contingencies arose. Marginal mobilizing refers to administrators focusing their revenue raising efforts on the most likely sources of income. Schools that suffered from fiscal stress engaged in significantly different mobilizing activities than richer districts. Both multi pocket budgeting and marginal mobilizing thus refer to the creative ways in which managers confronted constrained and shrinking resources. The literature on local governments from the early 1970s also identified how managers engaged in privatization, outsourcing, and contracting among public entities as ways of responding to fiscal stress. Bish (1971) analyzed how local governments utilized these practices, and noted that in order for these governments to cope with restrained resources they had to overcome the boundary problems associated with decentralization. One solution rested with shared agreements among public agencies that essentially centralized such financial decisions as purchasing, while preserving the bargaining rights of smaller governmental units in the process.
The fundamental spending and revenue choices available to governments facing fiscal stress were outlined by Wolman (1980). Governments could reduce spending by cutting budgets by object of expenditure, by function, by program area, by transferring functions, deferring spending, or by defaulting. Revenues could be raised by increasing taxes and user fees, liquidating assets, and by seeking revenue transfers from other governments. One question raised by Wolman was, what are the most likely kinds of cuts that governments will make given fiscal stress? In a summary of research, he found that programs wholly locally funded would be the first to be trimmed, especially public works, parks and recreation, and sanitation.
The rules of cutting were also explored by Meltsner (1971), who found that budget analysts in local governments established their own lists of what should be cut. After following the incremental method of examining last year's spending, the analysts targeted the increment and then cut in the following order: personnel, equipment, previously cut items, new facilities, and departments with "bad" reputations. Still other researchers identified attempts at rationally prioritizing cuts. "Priority scaling," for instance, refers to one technique that rank-orders political and managerial preferences, thereby saving valued programs from reductions while intensifying cuts in other governmental activities (Algie, Mallen, Foster, 1983).
In addition to these studies of agency and local level decision making, the cutback literature produced broader interpretations of how fiscal stress influences budgeting practice and theory. In a series of three seminal articles, Allen Schick (1983, 1986, 1988) assessed the theoretical consequences of fiscal stress in the form of decremental budgeting, micro budgeting adaptations at the level of administrative units, and macro budgeting adaptations in terms of national budgetary systems and processes.
For Schick, the fiscal stress of the 1970s and 1980s signaled the end of incremental budgeting as postulated by Aaron Wildavsky. Where incrementalism depended upon budgetary growth for its familiar components of fair shares and growing budget bases, Schick argued that fiscal stress changed the nature of budgeting and rendered the incremental model obsolete. In the place of incremental growth, politicians and mangers faced decremental reductions. Incrementalism was distributive, where claimants received a slice of an expanding pie, stable in its decision making process, and calming in its affect on politics. Because decrementalism was redistributive, claimants fought for what they could get from a shrinking pie. This made decision making unstable, and exacerbated political conflict. Decrementalism shifted the focus of budgeting from the increment to the base. It thus changed then nature of politics from fights about distributing gains to fights over how to calculate the apporpriate baselines and inflationary adjustments for a static budget. Depending on the outcome of political fights over the appropriate baseline,cuts could be made in discretionary spending rather than in the more politically untouchable entitlements, while programmatic eliminations could be avoided even in discretionary accounts in favor of across-the-board reductions.
Schick's observations on micro and macro budgetary adjustments were based on widespread transformations taking place in western industrial countries, largely in response to fiscal stress. At the micro level, he identified many of the cutback techniques that had long been evident in the United States, namely budget freezes, across-the-board cuts, reduced hiring, marginal reductions in entitlements and transfer payments, costly user fees, the tightening of eligibility standards for program beneficiaries, the loosening of expenditure categories to enable greater flexibility, an increase in program analysis, and the rise of spending targets.
At the macro level, many European nations began to adopt many of the budgetary lessons Americans had painfully learned in the effort to control federal deficit spending through budget resolutions and reconciliation. In particular, Schick pointed to a growing centralization of budgetary processes, where fiscal norms and targets, spending ceilings, baseline budgeting with its long-term focus on inflationary and programmatic costs, and multi year budgeting all limited bottom-up pressures to increase spending. Moreover, in the preparation of national budgets, decisions were increasingly front-loaded, where fiscal targets, baselines, and spending limits greatly strengthened the role and power of finance ministers, as opposed to agency ministers. Schick's observations were verified by Jurgen von Hagen's (1992) study of European Community nations, where budgetary processes that centralized decision making in formal institutional terms, rather than simply depending upon broad norms of budgetary control, became the necessary conditions for finance ministers to succeed in their efforts in cutback budgeting. Finally, both Schick and von Hagen noted the shift from national policies that promoted Keynesian styled stabilization programs to ones favoring deficit control.
New proposals for budgetary reform, both in the United States and in Europe, continue this emphasis on processes that promote centralized control in conjunction with more operational autonomy. Vice President Al Gore's National Performance Review, for example, recommends a presidential budget resolution, biennial budgets and appropriations, and restrictions on congressional earmarked funding (Gore, 1993). Meanwhile, the Congress granted to the executive branch the line-item veto, a potentially powerful tool in budgetary politics and spending control.
CUTBACK BUDGETING IN COMPARATIVE PERSPECTIVE
The new methods of cutback budgeting described by Schick and others are operationalized through four interrelated changes taking place in the public sector. These four changes have in common the introduction of practices usually associated with the hard budget constraints of the private sector (Schwartz, 1994). All of these processes are intended to reduce the ability of distributional coalitions based on interest groups, public sector unions, and concentrated interests within legislatures, to impede budget reductions or reallocation of budget resources (Olson 1982). All place greater operational stress on managers while sometimes compensating them through increased operational authority.
Because the pace and degree of change overseas has sometimes been greater than that in the US, our discusion of these changes will encompass selected non-US examples. In US political parlance, cutting the budget generally means slowing the rate of growth of total expenditures, which continue to grow in nominal terms -- that is, before adjusting for the effects of inflation. Elsewhere cutback budgeting has actually involved nominal cuts, which of course are even larger when inflation is taken into acount. In the most extreme case in Canada, the provincial budget of Alberta has been cut 20 percent in nominal terms Fiscal Year 1993-94 through 1996-97, and thus substantially more in real terms. The rapid migration of ideas like public choice economics and of reorganization idea merchants like Ted Osborne and David Gaebler across borders means that policy change in the US is no longer isolated from broader world currents; Schick, for example, conducted a detailed survey of changes in New Zealand's budgeting practices in the mid-1990s that Washington think tanks rapidly incorporated into their solutions for controlling spending (Schwartz 1994; O'Quinn 1996).
Hard Budget Constraints
Hard budget constraints have been used at virtually all levels of government in order to slow the rate of growth of expenditure or to cut expenditure in response to revenue declines. These constraints, a combination of legislative and institutional changes, all limit the ability of politicians, cabinet or portfolio ministers, agency heads and sub-agency management to exceed pre-determined spending limits.
=Constraints on Politicians=
Eighteen US states and four Canadian provinces have some form of legislative limit on the imposition of taxes and more frequently on the growth of expenditures. In ten of the US states these limits are constitutional; in the remaining cases, including Canada, they are merely statutory. These laws generally limit spending to some defined fraction of per capita personal income in the state. These laws hinder the ability of politicians to fund agencies' budget overruns, even when this is politically desirable. They differ from balanced budget requirements in that they explicitly limit spending rather than simply mandating balance.
Many states and provinces have also adopted informal, cabinet level practices that also constrain ministers' ability to expand their department's funding. These generally take the form of formal or informal cabinet subcommittees which have the final say on all spending, and which also act to redistribute resources across programs. These inner' cabinets parallel the older, well established use of nominally apolitical control boards or the city manager system at the municipal level. At the national or provincial level, for example, Australia, New Zealand, Alberta, British Columbia and Ontario all have standing cabinet committees with central power over spending decisions. Of these, Alberta has the most interesting and elaborate system for disciplining politicians, and since it has held up through four years of cutting at levels unheard of in the US, it is worth examining briefly.
After election of a government committed to budget cuts in 1992, all ministries were told to prepare plans for two different levels of cuts, either 20 percent over four years or 40 percent over four years (Schwartz, 1997). All ministries were targeted for cutting, making it difficult for any one ministry or client group to claim it was being unfairly targeted. A small priorities subcommittee within the cabinet then shuffled funds among programs based on their political and substantive importance. Education received the smallest cuts, followed by health, but everything else took deep cuts. The 40 percent scenarios prepared by other departments allowed their budgets to be deeply cut, but since cuts rarely approached the full 40 percent level, there was also some "relief."
This budget exercise was linked to changes in the way ministries receive funds. The sixteen ministries are grouped by function under four Standing Policy Committees (SPCs). SPCs are chaired by backbenchers, membership is open to any backbencher, and majority vote prevails. Since many backbenchers were newly elected on promises of spending cuts and no tax increases, they have had an incentive to scrutinize department budgets and force cuts in order to be able to claim to voters that they had delivered on their campaign promises. The SPC structure allows backbenchers to gang up against specific ministers to force them to stick to their original budget targets by cutting what appear to be either politically or substantively marginal or unnecessary programs.
The SPC system isolates ministers as spenders, while converting the much larger number of backbenchers from individuals all seeking a share of the budgetary pie into a group with a common interest in disciplining spenders. Ministers meanwhile act as watchdogs on other ministers through their participation in the SPCs that did not monitor their own particular department, assuring that someone else does not expand their budget at the first minister's expense.
Tax and expenditure legislation and fiscal centralization are statistically associated with slower rates of per capita spending and lower interest costs for general obligation bonds. US states with above average growth in spending grew at below average levels after tax and expenditure legislation was passed, although the direction of causality is somewhat unclear (Poterba, 1994). The purpose of tax and expenditure legislation in cutback budgeting is to depoliticize the reallocation of budget shares allocation and to move the politics of relocation into the hands of a much smaller, strategically oriented group of politicians. Like the nominally apolitical control boards of US cities, legislatures and inner cabinets also have their own clients.
Recent research suggests that successful cutbacks are more likely to occur under right rather than left governments (Alesina and Perotti, 1995). Unsurprisingly right wing governments are more likley to cut in order to bring budgets into balance, while left governments are more likely to tax. However this research leaves open the question of institutional affects on how the policy choice to cut is actually implemented. Successful episodes of budget cutting in New Zealand, Denmark, Australia, Sweden and elsewhere in Canada were all accompanied by the centralization of authority of for the distribution of budget shares that was described above for Alberta. In contrast, in the US, were power over the budget lies in the legislature rather than the cabinet, different institutional arangements were needed to effect budgetary discipline. The cumulative effects of the US 1974 Budget Reform Act and its Gramm-Rudman-Hollings amendments, which set upper limits on appropriations through sections 602a and 602b and thus force zero-sum trade-offs on spending, appear to have functioned much lie the centralization of authority elsewhere (Savage, 1991).
=Constraints on Agencies=
The centralization of vetting authority over budgets into inner cabinets has been paralleled by a decentralization of operational authority to agencies. Basically, the trade-off here involves giving agencies hard, fixed budgets, but shifting from strict control over inputs to a focus on agency outputs through performance based budgeting. The British Financial Management Initiative of 1982 is the first modern incarnation of this system.
This form of budgetary control goes under various names, like "mission driven," "envelope," "block," or "global" budgets (Osborne and Gaebler, 1992). The idea, however, is simple. Agencies are given a block budget, or sometimes a block budget with sub-blocks for broad categories of expenditure like "personnel related" or "non-personnel related" expenses, for the year. They may spend from this budget freely -- input controls having been relaxed -- but they may not come back to the central government for more money if they run out before the end of the fiscal year. This shifts the risks of cost overruns from the central budget down to local managers.
The more subtle forms of block budgeting give agencies significant freedom to run themselves internally. Generally this involves decentralizing collective bargaining when it exists, pay scales, job titles, and other personnel decisions like hiring and firing to agencies. Many governments, however, still retain control over hiring in order to prevent an expansion of public sector employees. Finally, agencies can sometimes carry over budget surpluses from year to year, which may smooth spending, encourages agencies to look for efficiencies, and reveals "slack" to central decision makers.
Block budgeting is sometimes associated with formal contracts between service providers and the relevant ministry or department. Budget resources are tied to the outputs specified in the contract. This kind of budgeting allows the center more easily to substitute contracted out or privatized versions of service provision, because it has already freed itself from any need to monitor anything more than contract performance and payment. Monitoring contracts involves its own costs and difficulties, of course. In New Zealand and other polities that have used contracting extensively, Auditors General have seen their power and departments expand (Boston, 1995). At the same time, contracting out sometimes destroys an agency's ability to monitor contracts by eliminating personnel who carry the specialized knowledge needed to monitor performance.
Block budgets also make it possible to use across-the-board cuts more effectively. In the past, making these cuts in the context of line item budgets, produced all manner of problems, as agencies found it impossible to shift money from one area to another - a smaller scale version of the reallocation problems the center faced. Furthermore, the pay freezes associated with across the boards cuts demoralized the workforce. In contrast, block budgets make it difficult for agency managers to excuse their failures with reference to the center's overly burdensome regulation, supervision, or ignorance of the realities of personnel management. Instead, managers must make the choice between allocating increasingly scarce resources between pay and other necessities. In turn, the center is able to excuse its budget cuts by saying that managers freed from tight input controls should be able to make their units operate more efficiently. In Australia in the 1980s, for example, uniform, preannounced annual budget cuts were labeled "efficiency dividends." The practice is widespread, albeit under different and less opaque names.
Block budgeting slides seamlessly into contracting out. This widespread phenomenon, practiced most extensively at the municipal level by Indianapolis, Philadelphia, and Phoenix is only gradually spreading to other countries. If we compare countries operating at a scale equivalent to these US municipalities, however, contracting out sometimes rivals or exceeds these paradigmatic US cases. For example, New Zealand and Victoria, Australia, both of which in population and economic terms are roughly the size of metro Philadelphia, have extensively replaced internal public production with contracted or privatized services. When there are enough firms to support competitive tendering, competition tends to push down the real cost of services as wages -- particularly for unskilled and semi-skilled workers -- are reduced and as permanent jobs are turned into part-time and other forms of contingent employment.
=Constraints on personnel=
In many US municipalities as well as the highly unionized national or provincial public services of many other industrialized countries, union work rules, centralized collective bargaining and rigid pay scales have been accused of obstructing efficient use of government personnel or of making it difficult to hire high quality skilled workers of all sorts from the private sector. In varying degrees existing tenure, seniority, job classification and uniform pay systems in the public sector have given way and managers have gained the power to hire and fire, to set fairly individual pay scales--including incentive pay, to set flexible work hours and to determine individual job responsibilities. This change has extended to senior civil servants as well. However these changes are paradoxically more prominent in polities with relatively stable public sector budgets and less salient in those in which simple privatization has occurred.
Thus British Columbia, for example, has maintained relatively stable budgets and public sector aggregate employment in part because the use of enterprise bargaining, widespread redeployment and retraining of personnel and limited incentive pay in effect gives the center the ability to redeploy resources. In Alberta and Ontario, by contrast, the provincial government has simply fired double digit percentages of public employees, relieving pressure to get a more flexible workforce. In the US, cities like New York, Philadelphia, and Washington DC have seen very rigid union work rules give way in the face of budget crises.
Enterprise or agency level bargaining and individualized pay, of course, allow market pressures to impinge both upon management and the employee. Managers can offer larger salaries to retain skilled personnel with strong private sector demand, such as computer specialists. At the same time they can reward more productive employees. Explicit benchmarking of agencies against private sector equivalents, department or ministerial norms, or other public sector providers also provides an indication of the efficiency of agency operations. The Australian Bureau of Industry Economics now devotes itself to the constant benchmarking of an extensive array of public sector agencies against global norms; Alberta and Ontario have built quality of service indicators into their ministries annual "business plans"; and everywhere Auditor Generals have come into their own as the surveillance of contracted services has grown.
=Competition and user fees=
Many of these changes would be meaningless if agencies did not face real competitive pressures or have to compete for consumer dollars in a marketplace. These market pressures are ultimately what make it possible to deliver the same level of services with fewer resources. Either agencies find internal productivity gains, or by imposing user fees, generate revenues sufficient to cover the shortfall from their old budgetary levels.
User fees are now widespread and have begun to replace more general tax increases. US parks now charge substantial access fees, for example. Medical care financed by quasi-insurance like schemes like the US (federal) Medicare or the Canadian (provincial) medicare have seen premium increases, more and larger co-payments, and in some cases more queuing as care is "HMO-ized."
THE LESSONS OF CUTBACK BUDGETING
The overarching response of the public sector to fiscal stress in the era of cutback budgeting is the increasing centralization of the budgetary process at all levels of government, throughout the industrialized world. Whether the devices be spending targets, ceilings, or reconciliation, politicians who allocate scarce resources at the macro level have centralized the process to help insulate budgetary decisions from interest groups and other claimants, both inside and outside the legislative process. These new procedures impose constraints on decision makers, managers, employees, and other vested interests, all in order to create more fiscal and political flexibility in what is essentially the global public budget.
Cumulatively, these changes have made the public sector more closely resemble private sector enterprises. Private sector enterprises routinely have to bid for scarce investment resources from central management, are refused additional resources when they overshoot their budgets and run losses, and eventually go bankrupt if they cannot generate a clientele or compete against other providers.
In this sense, cutback budgeting exhibits a cultural side as well as a financial side. Cutback budgeting, particularly at the agency level, is about changing the culture of the public sector from a procedural, input control mentality to a customer service, least-cost-by-any-reasonable-means mentality. The budgetary and management changes associated with cutback budgets force managers to consider the real, long term costs of programs and their associated spending. On the other hand, only in a very few localities -- New Zealand being foremost among these -- have managers been asked to calculate rates of return for the capital invested in their departments. None the less, the critical similarity to the private sector is the introduction of competition for resources and clients and in some instances real fear that an agency will be shut down.
These changes make it possible to consider the financial tradeoffs among programs that in the past would have been subject primarily to political tests. Not surprisingly, in those places where budgets have been cut in nominal terms, the question "should government really be doing this" frequently arises. Private sector firms ask the same question every day. Cutback budgeting thus is simply the operational side of the general decline in both the power of the public sector and the primacy of "private" as opposed to "public" consumption that started with Proposition 13 in California in 1978.
Centralization, however, is a two-edged sword. On the one hand, greater concentrations of political and administrative authority are required in the budgetary process to confront this ongoing, hostile fiscal environment. This holds true even for line managers, who should attempt to centralize the resources under their purview in order to exert the same kinds of control over their subordinates as is imposed upon them. On the other hand, these managers require administrative flexibility to succeed in realizing their organizational goals. Flexibility is required to administer standard agency functions, such as personnel management and purchasing, but it is also necessary to select proper budgetary strategy, to determine, for example, whether there should be across-the-board cuts, freezes, or targeted reductions. Managers also require flexibility in their programmatic accounts, so that funds may be reprioritized to true areas of need. Finally, because raising revenues is often a more difficult political task than freezing or cutting spending, managers would also benefit from greater flexibility in their opportunities to create new revenue flows, an organizational trait that is also characteristic of the private sector.
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