Emergency and Supplemental Spending: the Great Fiscal Scam

The natural proclivities of government are about concentrating the benefits (of government activity) in the hands of small groups in the short run and dispersing the costs over the populace in the long run. In short, government is about spending now and paying later. These proclivities manifest themselves in a very interesting way in the US budget.

Every year, there are two types of spending in the US budget: discretionary and mandatory (the distinction is a bit strange for those not accustomed to public accounting because that distinction is really a convention and nothing more: elected officials in Congress have the power to revoke any law they want including Medicaid which is part of mandatory spending). Every year, the US President submits his budget to Congress in February and by October the budget is voted. During that period, more spending can take place as part of the current fiscal year (whereas the budget under discussion is for the next one); this is what is called supplemental spending.

For decades, supplemental spending represented only a very small fraction of the total budget (around 1%). Supplementals were justified because of new spending that the Federal government had to incur and had not been accounted for in advance. In the last decade however, things have changed. More and more spending is qualified as supplemental (and in general “emergency” as well although emergency spending is not necessarily part of supplemental and supplemental can be non-emergency).

In a very good Mercatus Policy Series paper (see The Never-Ending Emergency), Veronique de Rugy explains why this is happening. Her take is that the US government faces lots of perverse incentives and as a result, spends more and more money outside the initial budget. Supplemental appropriations currently represent more than $100 billion a year and there are already supplemental in discussion for FY08 and FY09 that would be in the order of $178 billion (and yes it is unusual to have supplemental for the coming FY). Just yesterday, House Democratic leaders were looking to add $3 to $4 billion in domestic spending to the emergency war supplemental beyond economic stimulus and troop-related funds. That spending comes on top of $12 billion for both 13 extra weeks of unemployment benefits for those whose eligibility has expired and a boost in GI education spending that has broad, bipartisan support.

Supplementals are not part of budget caps and deficit accounting, rules that are supposed to constrain the natural proclivities of government. Supplemental enables agencies to get more funds without having to make difficult tradeoffs since these moneys are not voted as part of the general funds. Supplementals are akin to “off-balance sheet accounting,” which is why all this is ironical. Private entrepreneurs have gone to jail for not revealing unfunded liabilities and doing various accounting gimmicks. However, legislatures can vote unsustainable budgets based on weird accounting rules because they make the rules and have the power to print money (and to tax of course but even that power is becoming less and less useful).

The natural proclivities of government have no limits (I came across another interesting example recently and I’ll post something about it soon). It is frightening and the consequences could be lethal for Americans. Read Veronique’s piece, it is well-worth the read, as it is the best work available on the subject.

Comments

[Brian Pitt]

Excellent Post. The author of the paper does an excellent job of: (1) explaining the congressional loopholes of the (1990?) budget act to ensure "pay as you go," (2) prescribing ways to close those loopholes, and (3) giving descriptive info. on the increase in supplemental spending.

What is missing, however, is the role of public opinion. Please note that I am certain that the paper could not examine every (social-legal-political-economic) aspect of our spendthrift government. But is it realistic to expect government to reduce supplementary spending when public opinion strongly supports nearly every component of government spending?

[Earthceuticals]

Yes, the problem is the politicians pander to public opinion. It's almost like we are slipping away into some kind of third world democracy day by day where politicos pay for votes and power by giving favors to groups of the electorate. Point given the gas tax holiday. While those offering it know it won't have any effect save for symbolic in the short term... and in the long term will have a negative effect on highway revenues. At the same time the guy who realizes this point... is made to look insensitive or elitist for stating the obvious. Meanwhile every group has their collective hands out to the government for their share of the great cheese handout... while we write our future generations into a sub-standard existence.