Willful Blindness in Federal Budget-Making

By Scott Proudfoot, Principal, Hillwatch Inc.

Willful Blindness in Federal Budget-Making(PDF)

Executive Summary

The Federal Government has been on the debt track for most of the last 50 years. It is the inevitable consequence of a willful blindness built in the budget-making process coupled with a facility for ignoring the accumulating evidence.

This discussion paper attempts to identify the ‘blind-spots’ in the Federal budget process.

▪  A persistent trend of over-estimating economic growth and consequently government revenues;

▪  Never planning for recessions despite their inevitability;

▪  Tolerating large deficits while finding only small surpluses politically acceptable;

▪  Having no actual plan or commitment to reducing the National Debt; and

▪  Unrealistic expectations about Government’s ability to protect us from downside economic risks.

These blind spots, in concert with the structure of how the Federal Government spends money, place our public finance on a fiscally unsustainable path. This path can veer from risky to dangerous and damaging by future developments over which we have little control: too-short recovery periods between recessions; higher interest or inflation rates; a prolonged period of low growth; and/or political hubris.

The prescription proposed includes:

▪ A practical plan to pay-down the principal of our National Debt over time;

▪ The installation of a conservative and transparent forecasting methodology for economic growth; and

▪ Budget rules to recognize, accommodate, and channel the inevitable political pressures to spend surpluses.
 
Governments are always chasing the tail of economic growth. They never catch up and match their spending patterns to the actual patterns of growth in the economy. The by-products of this inability to sequence spending and economic growth are deficits and accumulating debt. Governments then try to compensate by making questionable bets about the future that only exacerbate the underlying problems.

This paper argues that the Federal Government needs to stop chasing the growth tail and organize its finances to deal with probable risk. It has been playing a game it is bound to lose more times than win. To reverse the odds, it needs to change the rules of the game!

Willful Blindness in Federal Budget-Making(PDF)


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