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Budgeting Techniques

States are beginning to turn away from baseline budgeting, a method that has proven ineffective in keeping the size of government to a responsible level. They are moving toward zero-based and performance-based budgeting, which has proven effective in cutting deficits.

The Issue

Baseline budgeting merely builds on the government’s preceding spending base, thus providing no natural constraints on spending. Zero-based budgeting, by contrast, involves a start-from-scratch process in which each agency must prove the value of its services instead of automatically having them funded under an assumption of necessity.

Talmadge Heflin, former head of the Texas House Appropriations Committee, says with zero-based budgeting the “Legislature not only eliminated the state’s $10 billion shortfall in 2003 without raising taxes, but also cut general revenue spending for the first time since World War II and helped create an environment of low taxes and spending that spurred the Texas economy for the rest of the decade.”

Performance-based budgeting, or “budgeting for outcomes,” goes even further by measuring effectiveness. It involves identifying the core functions of government, requiring agencies to rank their activities based on priority, setting up effectiveness measurements, and then ranking programs according to their measured effectiveness. These budgeting techniques require more time and resources, so states typically analyze only a few agencies per year instead of all of them.

Bob Williams, founder of the Freedom Foundation and editor at State Budget Solutions, says, “by following this budget process, a government ‘buy list’ is created, directing the discussion away from ‘cuts’ to instead what outcomes are being purchased.”

Our Stance

Although neither approach is a silver bullet for ending a budget deficit, zero-based and performance-based budgeting can be effective in helping governments prioritize services and identify inefficiencies and waste.

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