Why It’s So Hard To Figure Out How Much Spending Was Cut

One of the biggest budget questions last week was how much spending did the agreement on the continuing resolution actually cut. The top line number — $31 billion, $38 billion, whatever billion — was the first big story because it was one of the ways the media determined who was doing better during the negotiations. Then the bottom line gave House Speaker John Boehner (R-OH) fits and made him scramble for votes to pass the CR when the Congressional Budget Office reported that spending would only be reduced by millions in 2011 rather than the billions he had proudly announced. And then the top line was questioned again when CBO reported that the total would be between $20 billion and $25 billion over 10 years instead of the $38 billion total that seemed to seal the deal.

The truth is that every one one of these numbers is correct in some way. It’s also correct to say that everyone always seems to be fooled every year when different people involved in the budget debate use the number that best suits their purposes instead of agreeing upfront on how things should and will be measured.

It all has to do with three of the most common but abused concepts in federal budgeting: the baseline, budget authority vs outlays, and this year vs multiple years.

Actually, and in spite of the rhetoric, none of these concepts are unique to the federal budgeting world.

For example, imagine what happens when a commercial airline in the U.S. announces that, because of bad weather, government regulation, or union activities it has to cancel a number of flights and, therefore, has lost $50 million. Although we tend to take that number at face value, it actually deserves to be questioned very seriously because, like federal budget numbers, the real change may be substantially different from what’s being announced.

The first question that always has to be asked is what’s the airline using as a baseline. On average, some percentage of flights are likely canceled every day because of mechanical, weather, or air traffic control problems. So is the airline calculating its losses based on the assumption that 100 percent of its flights would have flown that day, or did it assume that some percentage would not have left. This is important. The losses obviously will look larger if, contrary to reality, the comparison is based on the assumption that every flight would have taken off on schedule.

The second question is what’s the airline assuming for the number of seats that would have been filled on the flights that were canceled and what fares was it assuming would be paid. The losses obviously will look larger if it’s based on every seat being filled with full-fare paying customers and smaller if only a percentage of the seats are filled, many of the filled seats are occupied by those with discount fares, and still others are taken by those using frequent flier miles instead of cash.

The third question is whether the airline is accounting for changes in its schedule that it already planned to make during this period. The cost of a two-week cancelation of flights will seem to cost one thing if it’s based on the original schedule in place at the start of he year but something less if some of the flights that were canceled were going to be removed from the schedule anyway.

Every one of these airline-related questions exists in some form when the costs or savings from a federal budget initiative is discussed, criticized, or bragged about.

For example, the baseline, that is, the compared-to-what question, is one of the most traditional ways that the discussion gets both confusing and infuriating. In the case of the budget deal, the proposed cuts always looked higher when the spending levels were compared to what the president proposed in his fiscal 2011 budget instead of what was actually spent in 2010. The reason? The White House’s 2011 budget included overall increases in spending so comparing the proposed cuts to what was proposed made the reductions look larger.

The federal budget version of the-number-of-seats-assumed-to-be-filled issue is close to another perennial budget debate question: Should you use “budget authority” or “outlays” to determine savings?

Budget authority (BA) –the permission granted to an agency or department to make spending commitments — is what’s appropriated. The outlays (O) — what actually gets spent in any year — depends on what’s being purchased. They’re not always the same. Salaries and operating expenses, for example, typically spend out in the year in which the BA is provided, that is, when the appropriation is enacted. Other activities, like building an aircraft carrier, typically take multiple years to complete. The full amount of BA is appropriated in the first year so that everyone knows what the project will cost; the outlays occur over the time it takes to do the work.

Using budget authority almost always overstates the amount of savings in the first year because at least some of what’s being cut would have not have resulted in immediate outlays. That’s what happened when the CR deal was announced: The cuts were stated in terms of BA and many people expressed outrage when it became obvious that the actual impact on 2011 spending was going to be much less.

The federal budget version of what happens if an airline determines its losses based on its original schedule instead of the revised flights it had planned to put in place is what happens when cuts are made in spending that wasn’t going to occur anyway. There was some of this in the budget deal as well.

All of this is to say that there is no absolutely definitive response to the question of how much spending was actually cut in the fiscal 2011 spending deal adopted last week. Note that these two tables provided by CBO (here and here) correctly show both budget authority and outlays. That leaves it up to the user to determine which one they want to use.

Also, take a look at this CBO document about the deal. Here are the money quotes:

…CBO estimates that enactment of H.R. 1473 would produce federal outlays over the 2011- 2021 period that are between $20 billion and $25 billion lower than the amount of outlays that would be expected from having 2011 appropriations set at the same level as 2010 appropriations. That range of $20 billion to $25 billion represents the change in outlays…

The estimated range provided above is lower than the estimated net change in budget authority (the authority for federal agencies to enter into obligations) for 2011 that would result from enactment of H.R. 1473, compared with earlier continuing resolutions. For example, Public Law 111-322, which funded the government’s operations through March 4, provided (on an annualized basis) budget authority of $1,087.5 billion for nonemergency appropriations for fiscal year 2011—an amount that is relatively close to the funding level for 2010. In contrast, H.R. 1473 would provide net new budget authority of $1,049.8 billion, producing a difference of $37.7 billion. That difference reflects reductions in budget authority for BOTH regularly appropriated discretionary programs and some mandatory programs. Many of the reductions in budget authority for mandatory programs would have little or no effect on outlays in 2011 or future years. As a result, the estimated change in cumulative outlays under H.R. 1473 ($20 billion to $25 billion) is less than the reduction in 2011 budget authority ($37.7 billion).

Note that CBO talks in the first graph about outlays and that it is comparing everything to the amount actually provided in 2010 rather than the president’s budget for 2011. The second graph talks about budget authority and explains that some of what was cut was not expected to result in outlays anyway.

Ezra Klein had a good post on this subject last Thursday. Glenn Kessler provided some valuable additional information in a story in today’s The Washington Post about whether the size of the cuts made them as historic as some members of Congress asked us to believe.

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