A Budget That Copes With Reality

Five years ago, I wrote about the possibility of dynamic budgeting.  I was reminded of this again recently after reading Stephanie Kelton’s eye-opening new book, “The Deficit Myth”.

Her argument is that, since the U.S. dropped the gold standard and fixed exchange rates, it can create as much money as it wants.  The limit is not an illusory national debt number, but inflation.  And in an economy with less than full employment, inflation is not now an issue.  Her explanation of the capacity of the Federal government to spend leads to her suggestions for a more flexible approach to dealing with major economic and social issues.

Although Dr. Kelton was the former staff director for the Democrats on the Senate Budget Committee, she doesn’t devote many words to the tools used in budgeting.  However, the argument that she makes reminds me again that the traditional budget itself has to change, especially shifting to a dynamic budget.

While states and localities are not in the same position as the Federal government, they also face unpredictable conditions and could benefit from a more flexible, dynamic budget.  Of course, in the face of COVID and economic retraction the necessity of re-allocating funds has become more obvious.

In an earlier blog, I wrote about a simple tax app that is now feasible and also eliminates the bumps in incentives that are caused by our current, old-fashioned tax bracket scheme.   This was not using some untested, cutting-edge technology.  Instead, the solution could use phones, tablets and laptops doing simple calculations that these devices have done for decades.

Similarly, what is now well-established technology could be used to overcome the problems with traditional fixed budgeting.  (By the way, the same applies to the budgets that corporations devise.)

So, what are the problems that everyone knows exist with budgets?

  1. They’re wrong the day they are approved since they are trying to predict precisely a future that cannot be known precisely ahead of time. This error is made worse by the early deadlines in the typical budget process.  If you run a department, you are likely to be asked by the budget office to prepare estimates for what you’ll need in a period that will go as far as 18 or even 24 months into the future.
  2. It’s not clear how the estimates are derived. Typically, there are no underlying rules or models, just the addition of personnel and other basic costs that are adjusted from the last year.  This is despite the fact that some things are fairly well known.  For example, it is fairly straightforward to estimate the cost of paying unemployment to an average individual.  What is harder is to figure out how many unemployed people there will be – and, of course, you need to know the total number of unemployed and the average cost in order to compute the total amount of money needed.
  3. Given these problems, in practice during any given budget year, all kinds of exceptions and deviations occur in the face of reality. But the rest of the budget is not readjusted, although the budget staff will often hold back money that was approved as it takes from “Peter to pay Paul”.  The process often seems and is very arbitrary.

Operating in the real world, of course, requires continual adjustments.  Such adjustments can best be accommodated if the traditional fixed budget was replaced by a dynamic budget at the start of the budget process.

One way of doing this is familiar to almost every reader of this blog – the spreadsheet.  The cells in spreadsheets don’t always have hard fixed numbers, like fixed budgets.  Instead many of those spreadsheets have formulas.

And Congress could also not so much the individual amounts for each agency or program, but their relative priorities under different scenarios.  Thus, in a recession there would be a need for more unemployment insurance funding, but that would recede in the face of other priorities if the economy is booming.

To go back to the unemployment example, the actual amount needed in the budget will change as we get closer to the month being estimated and can be more accurate in its estimates of the number of people who will be unemployed.

Of course, the reader who knows my background won’t be surprised that I think the formulas in these cells could be derived by the use of some smart analytics and machine learning.  Ultimately, these methods could be enhanced with simulations – after all, what is a budget but an attempt to simulate a future period of financial needs?

More on that in another post sometime in the future.

© 2020 Norman Jacknis, All Rights Reserved

Why Do We Need A Fixed Budget?

Ah, a boring subject – government budgets – except that the average American turns over a quarter or so of family income to the budget makers.  

And although most taxpayers haven’t thought about it much, to make matters worse, the standard approach that most governments use each year to prepare their budgets is, at least in the USA, almost a hundred years old.  Of course, a hundred years ago a budget was the latest reform 🙂

This is just the summary portion of New York City’s latest budget.


Typically, agencies are asked to start planning their budget proposals way ahead of the fiscal year.  So it’s possible they could be proposing a spending plan 18 months or more ahead of the actual time they need to deliver services – without knowing all the factors that could change during that time.  

Do they know how much snow will need to be removed?  How many people will need unemployment insurance?  Whether there will be an outbreak of the flu that affects everything from school attendance to public employees being able to work? How much money will there be from income or sales taxes in an economy whose future is not certain?

Is it any surprise that a fixed budget leads to mis-allocation of public funds considering the real problems that might exist at any moment after that budget is approved?  

This fixed budget process was developed in an era before readily available computer technology, “big data” and the frequent changes that government has to deal with today.

As I wrote about fixed tax brackets, technology now makes it possible fix the traditional fixed budget.  It is no longer the reform it once was – indeed, it stands in the way of running a more efficient and adaptable government today.

There have been variations on the theme, such as performance-based budgeting, zero-based budgeting, etc.  But not much has changed about budgeting in most governments for a long time, except that now the budgets are kept on computers instead of printed documents.

Experiments to get out from under the old fashioned budget have had various names – conditional budgeting, priority budgeting, flexible budgeting.

All of these approaches, in one way or another, try to match the priorities among the demands on government with its possibly changing revenues.

Perhaps the most interesting innovations have been around priority budgeting.  In its 2011 report, titled “Anatomy of a Priority-Driven Budget Process”, about Snohomish County, Washington State, the Government Finance Officers Association (GFOA) summarizes the approach.


This is an especially useful area for citizen input, including the use of web-based collaboration platforms.  The average person is much better at defining the relative importance of various outcomes to himself/herself than in understanding the implications of a dollar amount that sits on a line in a budget.
Some of the other associations of government officials have In addition to GFOA, the International City Managers Association (ICMA) and the National League of Cities have been trying to educate their members about priority budgeting.   They have been working with the Center for Priority Based Budgeting.

Variations of priority-based budgeting have been used in Boulder, CO which ICMA has reported on.   It has also been used in Cincinnati, OH among a few dozen other jurisdictions.

An important assumption underlying this more flexible budgeting is that government decision makers cannot foretell the future with precision.  So, even the priority-based budget may need to be changed during the course of the year as the public and its leaders learn from what they’ve spent on so far and as new needs arise.

Technology today makes possible a more dynamic approach to managing government finances than in the past because it makes these four key aspects of flexible budgeting feasible:

  • Identify the cost of delivering each kind of outcome the government has in mind
  • Prioritize those outcomes through some combination of public values and cost-effectiveness
  • To get things started, estimate the revenue expected to come in and the volume of demand for each outcome.
  • Adjust on a monthly basis

This obviously requires some flexibility in the allocation of human resources to.  Some aspects of government are not that flexible – for example, you can’t train a new police officer overnight – so there are bound to be some inflexibilities even in this approach, but much less than the entirely rigid traditional approach.

Besides, such a situation might encourage people in government to get creative.  If crime is going up, maybe people will realize that not all tasks assigned to police officers require an officer.  If crime is going down, maybe there are some on the police force who can work on other things.

But getting more creativity in government is a story for another time.  For now, please let me know if you’re aware of more flexible budgeting in the public sector or you want to explore this more for your government.

© 2015 Norman Jacknis


Smart Communities Can Do Something About The Recession

[Note: This was originally posted on a blog for government leaders, May 11, 2009.]

This week the Intelligent Community Forum (ICF) is holding its annual awards ceremony in New York from among the top seven communities around the world who have been the best examples of using broadband technology. While your community may not be in the top 7, many of you have some degree of broadband networks covering a majority of the residents in your area.

The theme is how the governments of smart communities can respond to a deep recession. I’ve been asked to give the keynote speech and so I thought I should devote this post to some of the ideas I’ll be presenting.

The overriding message is quite simple: take advantage of the data network that exists in your community. Using that network wisely can save money in the government, help your residents reduce their costs and even create more wealth in your community – which, of course, is the best way to get out of a recession.

Your government can save money in several ways. First, those organizations that have integrated the controls of their buildings and other physical facilities into their data networks have been able to achieve substantial savings. The State of Missouri, with a thousand buildings, has been able to reduce its energy costs alone by $20 million a year (about a $1 per square foot). 

You can get greater employee productivity by getting public employees out of the office so they can do their work, which is often in the field. The network lets them work where their tasks takes them – while managers can still observe and even participate in that work when necessary. While telecommuting has been a long standing program of many governments, it is time to think of mobile telecommuting instead.

The Internet and network connectivity you have also makes it possible to provide and to use the best, most cost effective software and services. If your government has strong IT capabilities, then offer these services to others so you can spread your IT costs over a larger base. If your government isn’t strong in IT, then use these services since they may be cheaper than trying to do it yourself.

Of course, readers of this blog will not be surprised that I also think that some paid-for government services can instead be provided for free by letting your residents use the Internet to help each other.

You can help your residents reduce their own costs, especially the time and money they spend in traffic and the money they spend on energy use. There are good examples of local governments offering all sorts of network-based services that reduce the time people spend in traffic. Some have even set up smart work centers, which eliminate the need for people to travel all the way downtown, but enable them to virtually participate in the workplace of their employers. You can also eliminate travel for your residents if government services are available over the Internet and on smart phones, instead of just in government offices. These services can now include videoconference meetings over the Internet and real collaborative interaction between public employees and residents.

Through the use of smart home energy controllers (and, beyond that, smart grids) your residents can save money on their energy use. In the Pacific Northwest, one recent trial found that just letting people use the Internet to know about their energy usage and to do something about that no matter where they were resulted in an average energy cost reduction of 10%.

In various ways, the investments that have been made in broadband have direct economic benefits. For example, one study found that every dollar in broadband investments yielded ten in economic growth. And broadband has direct impact on the growth and profitability of businesses. But you can help those businesses learn how to use the Internet better, even offering assistance with Virtual Trade Missions and videoconferencing. 

For many of you, the broadband network investment has been made. Now is the time to use to respond in recessionary times by reducing your government costs, your citizens’ cost of living and by ramping up economic growth.

© 2011 Norman Jacknis

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