Why don't governments use a % based way to balance their budgets?

[boufbowl]

When a government, like America for instance, decides how the tax money is to be spent and allocated to various governmental departments and subsidies and whatnot for the next year, would it not make more sense to do it in terms of the % of revenue taken in? Would this not solve all budget problems to simply say, the American government took in X money, 30% goes to military, 20% to education, 10% subsidies, etc… with further percentages of those to be further divvied up to their respective sub components?

For example, the amount of money we have to re-inject back into our economy is always 100% no matter if The USA makes 5 trillion dollars or 100 dollars. From there, as long as our re-allocating of this money adds up to 100%, or 99% if you want to save some money, you can never go over budget and get into debt.

The hard part, I suppose, would be to say to your constituents “we brought in 2% less in tax revenue this year, so even though you are still getting 5% of our total budget as usual, the amount in raw dollars is going down by 2%. Sorry about you not getting to buy everything that you had hoped for this year, just suck it up and innovate more so our economy can grow again soon.”

But I feel that this just a thing that markets do, if you are not selling what the people want, or the people just don’t feel like having your product at the moment, then your business will shrink. But that is good and sustainable, as opposed to propping up businesses with cash injections that have been printed up out of nowhere, further devaluing your currency and making everyone in your nation suffer through their weakened dollar.

Maybe the answer is to always spend within your means and never go over budget. We all need/want things like food, clothing, shelter, transportation, entertainment, infrastructure, etc… But when everyone has that, and the maintenance has been done on everything already, why do we need to artificially inflate our economy beyond that? Just because we believe it is our right to continue to grow economically at 5% over each previous year’s profit?

Isn’t that how bubbles, and their inevitable crashes, are produced? By conjuring up more money, injecting it into failing businesses and other things that the market, on its own, never asked for or wanted?

[Simplicio]

The thing is, for all the bad mouthing of the deficit, the ability to borrow large amounts of money cheaply is one of the big advantages of being a superpower. It lets you win wars, continue spending during economic downturns, invest in infrastructure that will end up increasing revenue down the line and provide counter-cyclical funding during Recessions.

It also means you don’t have to keep stopping and restarting projects as funds wax and wane. If the Apollo program stopped everytime there was a drop in federal revenues and then restarted everytime those revenues returned to normal, the total cost of the project would’ve been much larger then it ended up being. If the USGS has to keep firing and rehiring staff every year as budgets vary, then the department as a whole is going to end up being much more expensive and much less effective then it would otherwise be.

The problem with US budgeting isn’t that we run deficits on a year by year basis. Its that at somepoint we decided “deficits don’t matter” and instead of using deficits to bridge short funding gaps and or to fund projects that were limited in time, we started using them to fund open-ended commitments like the Medicare perscription drug benefit.

[code_grey]

because your suggestion is racist. Also, you are an enemy of all women (and lobbyists and government contractors too).

[XT]

When a government, like America for instance, decides how the tax money is to be spent and allocated to various governmental departments and subsidies and whatnot for the next year, would it not make more sense to do it in terms of the % of revenue taken in? Would this not solve all budget problems to simply say, the American government took in X money, 30% goes to military, 20% to education, 10% subsidies, etc… with further percentages of those to be further divvied up to their respective sub components?

Because the amount they bring in varies, and if you do it by strict percentage then multi-year programs that were funded before a recession started, or during a boom time would not be funded when the boom ends or a recession begins. That means even more people out of work, and even more waste, as multiyear projects lose the funding and have to be either put on hold or cut because revenues were down.

-XT

[Great_Antibob]

@boufbowl

When a government, like America for instance, decides how the tax money is to be spent and allocated to various governmental departments and subsidies and whatnot for the next year, would it not make more sense to do it in terms of the % of revenue taken in?

Bob: Hey, Ted, make sure we budget $1000 for widgets next year!
Ted: Sure thing.

One year later.
Ted: Revenue is down 5%. So, our budget’s getting chopped by 5%. Every budget item needs to be reviewed. You can lose 5% of your salary and only get $950 for widgets. Or you can lose all $1000 for widgets and only lose 1% of your salary.
Bob: WTF?

One year later.
Ted: Revenue is up 30%! That’s great. So, our budget is going up 30%. You don’t get a 30% raise, but we can spend $5000 for widgets this year. That should make up for last year, right?
Bob: Oh, I’m sorry. I wasn’t paying attention. I gave notice last week. I’m getting a job with budgeters who make sense.

[Little_Nemo]

Budgeting by percentages makes very little sense.

Look at it in terms of a personal budget. Suppose you spend 20% of your budget making car payments and 30% on your mortgage and 10% on food and 10% on utilities and 5% on your cable bill.

Now suppose your monthly utility bills get raised from $200 to $250, going from 10% of your budget to 12.5%. Does it make any sense to respond to this by increasing all your other expenses by 25% so that your utilities retain the same overall percentage?

Or suppose you pay off your car. Should you continue to allocate 20% of your budget to car payments even though there’s no longer a need for that? Are you going to go out and buy another car you don’t really in order to use up that money?

It obviously makes more sense to look at a budget as a list of things you want or need, each of which has a cost. Add up the costs and pay the total. Increase and decrease the money you spend on items as individual items (“gas prices went up so I can’t afford to go to the movies this month”) not as part of an artifical pattern.

[Saint_Cad]

@Simplicio

The thing is, for all the bad mouthing of the deficit, the ability to borrow large amounts of money cheaply is one of the big advantages of being a superpower. It lets you win wars, continue spending during economic downturns, invest in infrastructure that will end up increasing revenue down the line and provide counter-cyclical funding during Recessions.

Despite what Obamaites think, Keynesian economics is far from a proven economic theory so I’ll see your spending during a recession and raise you the supply-side economics that got us out of the stagflation of the 1970’s and early 80’s recession.

Also, one argument against social welfare programs is that it does nothing to promote revenue-generating infrastructure. The Republicans would argue that giving $10,000 to a business in tax break generates jobs and capital improvements while giving it to single mothers generates income for Colombian drug-lords as they buy crack with their welfare checks.

It may be the case that borrowing money is needed as an occassional stop-gap measure like paying for a war or a stimulus package but borrowing continually to make up a deficit as a normal course of business is a recipe for eventual disaster.

[Simplicio]

@Saint_Cad

Despite what Obamaites think, Keynesian economics is far from a proven economic theory so I’ll see your spending during a recession and raise you the supply-side economics that got us out of the stagflation of the 1970’s and early 80’s recession.

Well, I differ in your opinion on Keynesian vs supply side economics, but its not really relevant to my point. Only one of the points I mentioned had anything to do with Keynes, and if you want to go the supply-side route and cut taxes, you’ll still need to increase the deficit. So either way, we both appear to disagree with the OP.

Also, one argument against social welfare programs is that it does nothing to promote revenue-generating infrastructure. The Republicans would argue that giving $10,000 to a business in tax break generates jobs and capital improvements while giving it to single mothers generates income for Colombian drug-lords as they buy crack with their welfare checks.

Umm…OK. Thanks for the gratuitous swipe at welfare recipients (I imagine a good amount of business owners manage to use some of their gov’t provided tax-breaks to buy cocaine as well). I disagree, but its not really relevant to the OP in anycase. There’s nothing intrinsic to social welfare programs that involves deficit funding.

[code_grey]

the OP idea does not sound like a meaningful method of budgeting. But it can be thought of a “desperate measure for desperate times” type of action. E.g. suppose you get to be a dictator just for a day. You can do pass any budget related law or constitutional amendment, but you know that tomorrow you are out and the usual suspects are back in there wasting people’s money. Well, so maybe you would want to pass is something like that.

Or maybe you want to pass Balanced budget amendment - Wikipedia - hey, Germany already did this, without any magic dictators.

[Kent_Clark]

@Little_Nemo

Budgeting by percentages makes very little sense.

Look at it in terms of a personal budget. Suppose you spend 20% of your budget making car payments and 30% on your mortgage and 10% on food and 10% on utilities and 5% on your cable bill.

Or look at it like a business does. Suppose you spend 5% on R&D, 5% on marketing, 25% on production and distribution, 15% facilities management and upkeep and 50% on salaries and benefits.

If your sales decrease by 5% it may make more sense to mothball one of your plants and lay off those employees to rationalize capacity vs. demand. Or if your product is at the end of its lifecycle, it may make more sense to run your plants at full capacity but slash R&D and marketing, to maximize short-term profit. OR, you may even increase R&D and marketing, betting you’ll have a competitive advantage when business picks up.

In real life, you’re constantly choosing between cutting the number of widgets you buy vs. laying off the person who buys the widgets. You may only need 75% of the normal supply of widgets this month, but chances are you’ll still need 100% of the person who buys the widgets.

[Chronos]

Plus, if the government did budget by percentages, you’d end up with a plan something like 40% going to defense, 40% going to social security, 30% going to medicare and medicaid, 20% going to interest on the debt, 10% going to administrative costs, and so on. Sure, you can say “But just make sure that the percentages add up to 100%, and you won’t have that problem!”. But then, why do you need the percentages at all? Just say, instead, “make sure the dollar amounts add up to your total revenue”, and you also won’t have a problem.

[smiling_bandit]

@Simplicio

The thing is, for all the bad mouthing of the deficit, the ability to borrow large amounts of money cheaply is one of the big advantages of being a superpower. It lets you win wars, continue spending during economic downturns, invest in infrastructure that will end up increasing revenue down the line and provide counter-cyclical funding during Recessions.

I agree with this to an extent. I just wish they used it properly, not in a wildly profligate manner.

[Mgalindo13]

@Little_Nemo

Budgeting by percentages makes very little sense.
Or suppose you pay off your car. Should you continue to allocate 20% of your budget to car payments even though there’s no longer a need for that? Are you going to go out and buy another car you don’t really in order to use up that money?

That’s actually a great way to look at budgeting personal finances. If you continue to allocate 20% (in a savings account for example), when you are ready to buy a new car you will have enough for a significant down payment or to buy outright in cash. That is assuming you have been living off of that model successfully and not incurring debt.

Budgeting based on percentage doesn’t mean you HAVE to spend that money during that interval(month/year), it’s only allocated for that purpose. Surpluses can be used as a rainy day fund or put towards future purposes.

For example, I budget 10% of my net income for auto. That covers all insurance, maintenance, and payments (I categorize gas separately). At the end of the month I typically have a surplus, this is used if I need to purchase new tires, register my car or get a tune-up. Right now I don’t have a car payment but still put away the same amount as when I did. In a few years I’ll have enough to buy a new car without having to get a loan and pay interest.

I’m not sure that model holds true for government budgeting because there are many factors I am not familiar with at play, but it’s a good model for many people managing their personal finances.

[Great_Antibob]

@Mgalindo13

I’m not sure that model holds true for government budgeting because there are many factors I am not familiar with at play, but it’s a good model for many people managing their personal finances.

It really doesn’t hold very well with government budgeting. It sort of doesn’t hold for household budgeting, if finances are tight or income is unsteady.

The difference between an individual and the government is that the government doesn’t have a steady, reliable income and can easily borrow even in bad times. Basically, in severe recessions, revenue decreases massively. In good times, revenue is good.

So, let’s say your income was not very steady - you make $12000 this year and $19000 next year. But, on “average”, you make $16000. How do you budget by percentages? Even assuming 0% inflation, food and rent are fixed costs. You can’t decide to suddenly eat 30% less food this year, if your budgeting is based on an ‘average’ year. And, if it’s based on a bad year, you have to budget a much bigger percentage on these items and suddenly you’re running surpluses most other years and have less percentage left to allocate elsewhere. That’s incredibly inefficient.

Or you can adjust your percentages if times get particularly good or bad, but that defeats the purpose of using the percentages in the first place.

That’s the problem we’ve been facing lately. It’s been a ‘bad’ couple of years in terms of income (unemployed people pay little in income taxes).

Budgeting the federal government like a household sounds like a good idea, but it’s just an empty slogan when you think about it. It works, on the average, in the long run. But in the short run, you’ll have recessions or boom periods and need to adjust accordingly. For ‘regular’ folks, they’ll probably make about the same money year in and year out. In recessions or booms, most (yes, there are a few exceptions) don’t suddenly lose 30% of their pay or make an extra 30%.

[Little_Nemo]

Budgeting by percentages assumes that every item on your budget has an equal priority. The money you spend each month on going out to eat has the same priority as making your mortgage payment.

The second bad assumption is that every item in your budget has flexibility. You can reduce some items (like how many meals you eat out) but other items are fixed (like your mortgage).

If you’re budgeting by percentage and you come up a hundred dollars short this month, the “solution” is to reduce your mortgage payment by fifty dollars and your eating out money by fifty dollars. That’s obviously a foolish solution. You should eliminate the entire hundred out of your eating out budget and make your full mortgage budget. That’s priority budgeting.

[Mgalindo13]

@Great_Antibob

So, let’s say your income was not very steady - you make $12000 this year and $19000 next year. But, on “average”, you make $16000. How do you budget by percentages?

Very simply, you recalculate the budget. All budgets have to be revised from time to time, a percentage budget isn’t any different.

You may also consider that if you make more money the following year that money is simply added to the surplus. Later on this may allow you to afford a bigger house, better car, more meals out, etc. If your income has decreased then perhaps you should consider renting a smaller place, not buying a new car and eating out less.

I’m not saying that there is a simple percentage formula for a budget that works for everyone. It has to be tailored for each person/family. Someone who makes $30,000 a year may spend a higher percentage on a car versus someone who makes $500,000.

@Little_Nemo

The second bad assumption is that every item in your budget has flexibility. You can reduce some items (like how many meals you eat out) but other items are fixed (like your mortgage).

There is no assumption of flexibility, there’s an assumption that you budget what you will need and a bit more to account for variations. If my mortgage is $2,600 per month I set aside more to account for times when income was not as high. Admittedly my income is pretty consistent, others may not have that luxury. The idea is that when you are making more, you should save for times when you don’t.

Take a snowmobile salesman for example. He makes all of his money between October to January (only an assumption for the sake of a seasonal sales example). He can still assign a percentage to housing, auto, food, and so on each month. He keeps that money in reserves to last him through the summer months when he is not making as much money.

The fallacy that should be dispelled is that each month/year that percentage MUST be spent.

@Little_Nemo

If you’re budgeting by percentage and you come up a hundred dollars short this month, the “solution” is to reduce your mortgage payment by fifty dollars and your eating out money by fifty dollars. That’s obviously a foolish solution. You should eliminate the entire hundred out of your eating out budget and make your full mortgage budget. That’s priority budgeting.

If a person is spending the same amount on their mortgage and eating out (as your math suggests) then there are bigger problems at play than how they budget.

[Great_Antibob]

@Mgalindo13

Very simply, you recalculate the budget. All budgets have to be revised from time to time, a percentage budget isn’t any different.

Then, how is this different from the current budgeting process. Revenue in the US experiences much bigger swings than a household budget and would have to be adjusted nearly every year, anyway.

Let’s use some numbers.

Let’s assume a baseline $30000 a year budget for the household. Say $500 a month for mortgage. That’s $6000, or 20% of the budget. Say you budget an extra $600 (10% on top of your normal payment), just in case, or 22%.

Next year, your only make $26000. You can’t simply cut your mortgage payments. So, you no longer save that ‘extra’ $600. Guess what? That $6000 (without the extra) is now over 23% of the budget. So, even with that $600 you saved last year, you’re still short on the percentage. You have to make it up from somewhere.

Why such a big drop in income? It’s about the size of the revenue drop experienced by the US government from 2008 to 2009 (a little over 13%).

For the federal government, in the long term, income = spending. If there really is extra money to be saved in the long term, people would rather it be spent (maybe bolster Medicare or something) or returned in the form of tax cuts. They’d rather not see it moldering in a federal coffer.

And that’s about right. The US government can borrow at incredibly low interest rates. If all the other finances are in order, it’s financially more sound to use or return that extra money and simply borrow for the occasional shortfalls.

The problem isn’t percentages - it’s the fact that money is always borrowed in good times and bad and not just for the occasional shortfall.

[Mgalindo13]

@Great_Antibob

Then, how is this different from the current budgeting process. Revenue in the US experiences much bigger swings than a household budget and would have to be adjusted nearly every year, anyway.

As I stated in my original post, I don’t necessarily think this is a good way for a government to run its finances since there are much larger and complex issues to be considered. My original post was in response to the comparison to personal budgeting.

Percentages can give an individual or family some perspective on what they are spending/saving and financial experts often give recommendations about what percentage of your income to spend on various items such as rent (for example )

To use your scenario:

@Great_Antibob

Let’s assume a baseline $30000 a year budget for the household. Say $500 a month for mortgage. That’s $6000, or 20% of the budget. Say you budget an extra $600 (10% on top of your normal payment), just in case, or 22%.

Next year, your only make $26000. You can’t simply cut your mortgage payments. So, you no longer save that ‘extra’ $600. Guess what? That $6000 (without the extra) is now over 23% of the budget. So, even with that $600 you saved last year, you’re still short on the percentage. You have to make it up from somewhere.

In this situation, three things should be examined:

1. Why was there a decrease in income? If you’re in sales perhaps you should examine your technique, if you’re hourly then maybe it’s the number of hours you worked.

2. How can you make up that income? Perhaps a part time job, hold a quarterly garage sale, babysit the neighbors kids after school.

and lastly

3. Should the percentage be adjusted? Maybe the original percentage was just too low.

Using specific or unique situations to say why something won’t work is weak debate tactic. With that logic one could say, “what if I didn’t originally budget for children? Then what? I’m just not supposed to have kids because it’s not in the budget?” or “What if I’m out of work for 18 months, am I still supposed to spend the same amount on entertainment or dining out?” Obviously not, common sense has to take over at some point.

[Great_Antibob]

@Mgalindo13

As I stated in my original post, I don’t necessarily think this is a good way for a government to run its finances since there are much larger and complex issues to be considered. My original post was in response to the comparison to personal budgeting.

Ok, but the whole thread is about governmental budgeting. I thought that was the whole point. If we want to get into family budgeting, that should properly be done in a separate discussion.

I grant that I probably should have realized earlier you were limiting your discussion to personal budgeting, though. So, apologies if I helped to sidetrack the discussion away from government budgeting.

So, to summarize, I think it’s not an unreasonable idea for personal budgeting but a horrible idea for governments.