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Avoiding the Greek Tragedy: A Joseph Budget

by Dr. David Jay Green

The news from Europe, especially from Greece continues to be grim. People are facing a future where promises about pensions, employment, and public services are being broken. Government commitments are being shed as budgets are trimmed, spending cut. Nearly every country has had similar experiences. The Philippines has gone through periods of time in which public spending had to be severely curtailed after revenues were found wanting to meet earlier plans. Some part of this problem is unavoidable: every Government will make mistakes. The question is how to do a better job. I propose the Joseph Budget. Most readers will understand that I am referring to the dream sequence in the Biblical book of Genesis. In this cautionary tale, Joseph, in prison in Egypt, was asked to interpret dreams that troubled the ruler, Pharaoh. The dreams had stark images of seven healthy cattle being eaten by seven sickly ones and similarly seven good ears of corn or grain swallowed up by seven thin ears. Joseph explained that Egypt was facing what today would be termed a business cycle of poor times following upon good times. What was important he said, was to save during the good times for disbursing in the poor times. And Pharaoh listened. This story has something for everyone. It is soundly based on the Bible; it can appeal to dreamers and those who believe in dreams. I am not the only one to use Josephs story to argue for a particular fiscal policyi and before people start typing, I do know that the story doesnt end in a completely positive fashion. Joseph and Pharaoh used the subsequent famine and their grain stocks to consolidate their rule. OK, so the Pharaohic system of government has some real drawbacks. The first part of the story has some real wisdom. The Joseph Budget would call for rolling 14-year plans providing for increases or decreases in spending, taxation, and net borrowing depending on how the economy was doing.ii Increased calls for spending today could be met with specific plans to reduce future expenditures. Debated annually it would provide short-term comfort against such events as financial sector meltdowns as well as give long-term confidence that we are mindful of the economy our children inherit. A long-term, multi-year budget would provide for greater macroeconomic stability, encouraging private sector investment generally. The multi-year part is important to rectify the problem that many legally mandated programs call for spending without regard to revenues.iii A Joseph budget provides at least 14 years of consistency in spending and revenue. Admittedly 14 years is quite arbitrary, but we need to move towards planning over a generational time period. The annual debate is also an important part of the storywe need to build confidence in our economy, but also in the political decision-making process. Some countries do use a longer-term perspective. Germany, for instance uses a fouryear budget that is consistent with a conterminal fiscal strategy.iv Developing countries have sometimes experimented with medium-term expenditure frameworks that provide revenue and expenditure plans for several years. The Philippines for instance uses medium-term fiscal planning tools; however, the budget itself as a legal document focuses on the current years activities.v Overall in government budgets and budget debates there is little sense of a forward-looking, multi-year plan. Yet the substance of a budget has an impact over decades.

A Joseph Budget, David Jay Green

11 May 2012

To change would require work: the annual budget must include a variety of alternative plansit must incorporate contingency planning.vi For instance different infrastructure projects would need to be planned, prioritized, and readied for possible use. This feature of the budget would be technically demanding, but would make infrastructure spending a more powerful part of fiscal policy. Political and legal clearances would have to be given for projects on an annual basis: local political processes must also buy into the Joseph Budget. Conversely we must steel ourselves to put on hold spending projects if the economy unexpectedly shows robust growth. This is most difficult: self-denial is hard when the going is good. Debating and updating priorities for spending and taxes and the triggers to initiate changes are costly. At first it would be politically enervating.vii At first it would feel like science fiction. But science fiction has been the inspiration for many innovations in society. Overtime a multi-year budget offers the potential for shifting the scope of the debate from what we want today to what we think tomorrow should be. The expense of establishing a multi-year budget pales against what we pay when we run into troublewhen our short-term, annual budgets lead us into crises. In those periods decisions need to be made with limited fiscal flexibility and inevitably across a widening political divide. The current process leaves us poorer, there are more unemployed, and we are just plain grumpier than we could be with a Joseph Budget. The Philippines has a chance to take a bold step, steeling a march on regional comparators by being the first country to experiment with a Joseph Budget. Building on relatively good economic developments and policy steps, the public debate, the capacity building could have a positive impact on the countrys international credit rating.viii Certainly the international community would welcome the attempt to learn from current tragedy being played out in Europe.

Citations Asiamoney, as reported in Euromoney Country Risk web page, Philippines will be upgraded to investment level: ANZ, 26-Apr-2012, web accessed May 2012, http://www.euromoneycountryrisk.com/Analysis/-Philippines-will-be-upgraded-toinvestment-level-ANZ. Baucus, Max (Senator, Montana) Hearing Statement of Senator Max Baucus (D-Mont.) Regarding Trigger Budget Enforcement Mechanisms. Committee on Finance, U.S. Senate, News Release, 3 May 2011, Web accessed September 2011, http://finance.senate.gov/imo/media/doc/050411mb.pdf. Boex, L. J., Martinez-Vazquez, J. and McNab, R. M. Multi-Year Budgeting: A Review of International Practices and Lessons for Developing and Transitional Economies. Working paper 98-4, 1998, Andrew Young School of Public Policy, Georgia State University. Web accessed September 2011. http://aysps.gsu.edu/isp/files/ispwp9804.pdf. California State Association of Counties, Fact Sheet: 2011-12 Budget Trigger Reductions, Web accessed September 2011, http://www.csac.counties.org/images/users/1/201112%20Budget%20Trigger%20Reductions.pdf. Feldstein, Martin. American Economic Policy in the 1980s: A Personal View. In Martin Feldstein (ed.) American Economic Policy in the 1980s. National Bureau of Economic Research Conference Report. University of Chicago Press, 1995, pp. 1-80. Preview web access September

A Joseph Budget, David Jay Green

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2011. http://books.google.com/books?id=c7b-lYM_TcC&printsec=frontcover#v=onepage&q&f=true. Government of the Philippines, President Aquinos 2012 Budget Message: Message of His Excellency Benigno S. Aquino III, President of the Philippines, To The Fifteenth Congress of the Philippines. Web accessed May 2012. http://www.gov.ph/2011/07/26/president-aquinos-2012budget-message/. Penner, Rudolph G., and C. Eugene Steuerle. "Stabilizing Future Fiscal Policy: Its Time to Pull the Trigger." The Urban Institute, Aug. 2007. Web accessed August 2011. www.urban.org/UploadedPDF/411524_future_fiscal_policy.pdf. Pascua, Laura, Operationalizing the MTEF in the Philippines - a Key to Reducing Poverty, in Christopher Edmonds and Sara Medina (ed.), Defining an Agenda For Poverty Reduction, Proceedings of the First Asia and Pacific Forum on Poverty (Volume 1), Asian Development Bank, Manila, 2002, pp. 138-143. Peter G. Peterson Foundation. Understanding the Federal Budget Process: An Overview. November 09, 2010. Web accessed September 2011. http://www.pgpf.org/SpecialTopics/~/link.aspx?_id=A5790999A14E4A66A3D0A6D97CA5B9A0&_z =z. Philippine Department of Budget & Management (DBM), Budget Appropriations, Year 2012, Web accessed February 2012, http://www.dbm.gov.ph/index.php?pid=8&xid=28&id=1890. Tabarrok, Alex. "The Virtues of an Unbalanced Budget Amendment." SOLIDARITY USA. The Jon Garrido Network, 7 Aug. 2011. Web accessed August 2011. http://solidarityusa.org/the_virtues_of_an_unbalanced_budget_amend ment.htm>. United States General Accounting Office (GAO). Testimony Before the Committee on the Budget House of Representatives Budget Process: Evolution and Challenges, Statement of Susan J. Irving. GAO/T-AIMD96-129. 11 July 1996. Washington, D.C. Web accessed September 2011. http://www.gao.gov/archive/1996/ai96129t.pdf. U.S. Office of Management and Budget. Fiscal Year 2012, Budget of the U.S. Government. 14 February 2011. Web accessed September 2011, www.budget.gov/budget.

The author is a Research Fellow at the Asian Institute of Management; and Development Advisor, INVISIBLE Sisters, both in Manila, the Philippines. He is relocating to the United States where, among other activities, he will be teaching as an adjunct faculty member at the San Francisco campus of Hult International Business School. i Tabarrok(2011) treats the subject well, and also discusses the rationality of a Josephinspired budget. ii Some aspects of a multi-year budget are commonplace. For instance, the United States budget document formally contains revenue and spending projections for the following decade, in the case of the 2012 budget, through 2021. (U.S. Office of Management and Budget, 2011) Capital projects can receive multi-year attention. (Boex, et al. 1998, p. 18) However, there is little sense that there is an overall forward-looking, multi-year plan, rather there is a plan for the next few years and then there are projections of some of the implications of the short-term decisions. The Peter G.

A Joseph Budget, David Jay Green

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Peterson Foundation expresses it: While a budget only covers a single fiscal year, the budget process itself runs over multiple years as agencies spend money, plan for future activities, and undergo audits as required by Congress. This is, in Boex, et al. (1998) a multi-year perspective, but not a multi-year budget. The GAO has long noted the need to provide for budgetary consistency with respect to long-term macroeconomic trends. (1996, p. 8) iii Penner and Steuerle (2007). The authors also search for politically feasible methods of keeping budgetary expenditures from overwhelming revenues, focusing on the possible use of triggers to change spending programs without politically debilitating debates. Within most budgets there is little or no contingency planning on a scale to combat cyclical economic fluctuations. There seems little international experience with significantly sized contingent spending or revenue options. One issue is how to project prices, but this issue is faced in every long-term infrastructure project. iv Boex, et al. (1998) review the experiences of multi-year budgets in several OECD economies. v Philippines Department of Budget and Management. (2012) Emphasizing this, President Aquinos 2012 Budget report is almost completely about a small slice of the countrys life, the up-coming 12 months. (Government of the Philippines, President Aquinos 2012 Budget Message) Pascua (2002) reviews the use of a medium-term expenditure framework in the Philippines. vi Options or alternative budget provisions need to be based on events such as changes in unemployment or the budget deficit. David Stockman, former Director of the U.S. Office of Management and Budget, noted that in the 1980s it proved difficult to sell the related idea of a contingent tax. (Reported in Feldstein, 1995, p. 232.) However, it is not unknown to mandate spending contingent upon revenues. See, for instance, the use in California as reported by the California State Association of Counties. At the U.S. Federal level, Senator Baucus, mindful of the mid-1980s attempts at contingent taxes, notes issues that need to be resolved to ensure that contingency budget programs have a positive impact on the economy. (Baucus, 2011) vii Feldstein (1995) discusses an attempt to put contingent energy taxes in the 1983 U.S. budget (pp. 27-28 and 56). The difficulties that ended the effort have strong similarities to todays political scene. viii The Philippines has recently received credit-rating upgrades, but it still leaves the countrys paper short of investment grade. The size and trajectory of the public sector debt is cited as one issue. (Asiamoney, 26-Apr-2012)