Hearings of the Committee on Rules
"Biennial Budgeting: A Tool for Improving Government Fiscal Management and Oversight"
Dr. Martin Regalia
Vice President of Economic Policy and Chief Economist, U.S. Chamber of Commerce
1. As a representative of many businesses, both large and small, could you elaborate on your point that biennial budgeting increases budget predictability and stability for those served by Federal programs and those who receive Federal money such as research grants, etc.?
In any budget system, the providers and users of public goods and services are subject to two types of uncertainty: planning uncertainty and outcome uncertainty. The first arises because the authorizers and appropriators may change their minds, and the second arises when factors beyond the control of the authorizers and appropriators change the economic environment. Clearly, a biennial budget cycle reduces the first type of uncertainty and should make it easier for both users and providers of public goods and services to plan ahead over the budget cycle.
2. One of the arguments against biennial budgeting is that the ability to make two-year projections is too unreliable. Do you have any thoughts on that contention?
As I said in the answer to the first question, there are two types of uncertainty. This question refers to our ability to predict or adjust to the second type of uncertainty – outcome uncertainty. Clearly, the farther ahead one attempts to forecast or predict the greater is the likelihood that conditions will change, and the poorer will be our forecast. The relationship between predictive accuracy and length of the forecast is not monotonic: for example, 10-year ahead forecasts are not simply twice as inaccurate as five-year forecasts. One must choose a degree of error that is acceptable given parameters, such as the political structure and the benefits of planning certainty. I believe that the benefits from reducing the planning uncertainty balance well against the somewhat higher predictive inaccuracy of a biennial budget, especially when one considers that we have a two-year political cycle.
3. In economic theory and in the private sector, is there anything inherently superior in an annual cycle as opposed to a longer cycle? Alice Rivlin has pointed out that the longer the cycle and view in budgeting, the better the benefits, but realizes that our political system has place a limit on how long we can actually set the budget cycle on discretionary spending with our biennial elections. Could you comment on this as well?
I would agree with Ms. Rivlin's assessment. As I said in my answers to the previous questions, the benefits from planning certainty, in my opinion, outweigh the problems in forecasting error when moving from a single year to a biennial budget cycle. I'm not sure that this would be the case if one were to go much beyond a two-year cycle to say a five or 10-year cycle. The fact that the two-year cycle coincides with an election cycle of the same length is an added benefit. The parties authorizing and appropriating projects in the first year will also be the same individuals reviewing and providing oversight in the second year of a biennial budget cycle, and I believe this would be a positive development.
