How Transparent Is the U.S. Budget?

• Author: LIPFORD, JODY W.

In recent years, the federal government has experienced its first budget surpluses since 1969 and its first consecutive years of budget surplus since 1956-57. Further, the Congressional Budget Office (CBO) is forecasting budget surpluses of at least $4.5 trillion over the coming decade.(1) After decades of deficits, the federal government seems to have put its "fiscal house in order." Nevertheless, gross U.S. federal debt totals more than $5.6 trillion, or approximately 60 percent of gross domestic product (GDP), a figure down from the 1996 peak of 67.3 percent of GDP, but significantly higher than the post-World War II low of 32.5 percent set in 1981 (see CEA 2000, tables B-76 and B-77).

This debt and the recurrent deficits that created it not only call into question the viability, of estimated surpluses, but also underscore the need for explanations of the government's proclivity for debt finance. Alesina and Roubini with Cohen (1997, 230-40) provide summaries of some explanations, including hypotheses of fiscal illusion, debt as a constraint on future administrations, intergenerational transfers, partisan conflicts, rent seeking, and inadequate institutional constraints.(2)

One institutional constraint that may be inadequate is budgetary transparent, which I define as the ease with which the public can interpret spending and budgetary figures, measure current and future tax liabilities, and evaluate the benefits of government programs.(3) If the government can combine understated figures for spending, taxes, and deficits with overstated benefits of government programs, then deficits and debt are the natural outcomes as citizens express their desire for additional government benefits through the electoral process without full knowledge of the costs of these benefits.

To the converse, budgetary transparency may serve as a constraint on government spending and debt (Alesina and Perotti 1996), either alone or in conjunction with other restraints, such as balanced-budget rules (Buchanan and Wagner 1977), supermajority voting rules for higher debt limits and tax increases (Niskanen 1992), or spending targets (Schultze 1992).

In this article, I evaluate the transparency of U.S. budgetary practices of the past twenty years focusing on the first parts of the transparency definition. The insights gained from this analysis help not only to evaluate past budgetary practices, but also to determine whether common budgetary practices are likely to reduce projected surpluses.

First, I review the theoretical case for budgetary transparency, the rationale for political opposition to budgetary transparency, and evidence on the effectiveness of budgetary transparency as a means of fiscal discipline. Then, I analyze criteria that make a budget more or less transparent. Finally, I evaluate U.S. budget practices against the transparency criteria elaborated in the preceding section, an evaluation that yields a mixed review of U.S. budgetary practices. In the conclusion, I reconsider the question of budgetary transparency during an era of fiscal surpluses.

Budgetary Transparency: Effects, Political Opposition, and Evidence

To any U.S. taxpayer, the need for budgetary transparency may seem self-evident. Complex tax codes, continually manipulated by "omnibus budget reconciliation bills," combine with multi-billion-dollar spending programs with immeasurable effects so that individual taxpayers find the budgetary process and its effects incomprehensible.

On a macroeconomic level, transparency should lead to smaller spending and deficits. Buchanan and Wagner argue forcefully that "complex and indirect payment structures create a fiscal illusion that will systematically produce higher levels of public outlay than those that would be observed under single-payment structures. Budgets will be related directly to the complexity and indirectness of the tax system" (1977, 129). Simply put, budgetary complexities drive a wedge between the actual cost of government programs and the perceived cost of those programs. Voters suffering from "fiscal illusion" will support higher levels of spending and deficits than they would if budgetary transparency yielded full disclosure. Further, government debt offers opportunities for citizens to avoid future tax liabilities, perhaps through death, tax shelters, or other means, and thereby to transfer wealth from other citizens.

Nevertheless, an assumption of "fooled" or "irrational" voters is unnecessary in concluding that budgets lacking transparency lessen fiscal discipline. Because information is a scarce resource, some degree of voter ignorance is quite rational.(4) It is certainly plausible that politicians have an informational advantage with regard to the benefits and costs of their proposals, regardless of how "rational" voters might be. In discussing rational opportunistic models of the business cycle, Alesina and Roubini with Cohen offer an example that elucidates this possibility: "in an election year the incumbent government [may raise] certain transfers, claiming that no new taxes will be needed because a high expected growth rate will automatically increase revenues. Such a claim is quite hard for the average voter to check" (1997, 31). Similarly, Miller argues that the American people are ignorant of the budget in part because of the "propensity of politicians to mislead and obfuscate the budget for their own purposes" (1994, 124). Whatever assumption one makes about rational expectations, the link between complex and obfuscated budgets and fiscal excesses is apparent.

Facing voters subject to fiscal illusion or simply confronted with incomplete information, politicians may have strong incentives to distort the perceived costs and benefits of government expansion. These incentives are consistent with Leviathan and rent-seeking theories of government. If the government is a revenue-maximizing Leviathan, as Brennan and Buchanan (1980) suggest, politicians will want to overestimate the benefits of government programs and underestimate the current and future taxes required to pay for those programs. Similarly, special-interest groups and the politicians who do their bidding benefit from complex budgets that hide the costs of and expand the size of government programs that serve parochial interests. Findings by Mixon and Wilkinson (1999) that campaign contributions to members of Congress rise with the value of government spending and with reductions in the deficit that may threaten interest-group benefits are consistent with the hypothesis that interest groups favor large budgets. Simply put, if larger government outlays yield politicians greater power or prestige, greater gains from rent-seeking interest groups, or more opportunities to invoke their concept of the "public good," nontransparent budgeting will be politically appealing.

Although quantification of budgetary institutions and their effects is problematic, the nascent empirical work indicates that budgetary institutions, including transparency, are important determinants of fiscal discipline. Analyzing a sample of twenty Latin American countries, Alesina, Hausmann, Hommes, and Stein find that "on average, a country with budgetary institutions which contain constraints on the deficit, are more hierarchical and more transparent can be expected to have primary deficits 2.9 percentage points lower than a country with fewer constraints, and more collegial and less transparent budget procedures" (1996, 20-21). Additional empirical work shows that a separate "transparency index" is not a statistically significant determinant of a country's primary deficit, but its sign is negative and its index value suffers from measurement problems.(5)

The Means of Nontransparent Budgeting

Politicians possess many means of distorting perceptions of the actual cost of government. Charlotte Twight (1988, 1994) argues that politicians intentionally manipulate the transactions costs of voter monitoring and political action to increase the scope and size of government. Augmenting transactions costs to further political ends is especially attractive and easy when complex issues, such as public budgets, are under consideration. Obfuscating language that cloaks "tax increases as `deficit reduction' measures," "complex and indirect forms of taxation," misrepresented estimates of budget deficits, overstated baselines, misleading claims of statutory effects on deficits, and strategic use of off-budget revenues and expenditures provide politicians with ample means of lowering the perceived cost of government (Twight 1994, 208-11). In a similar vein, Alesina and Cukierman (1990) model how politicians utilize ambiguity to take positions that diverge from those of their constituencies and to avoid accountability.

Like Twight, Alesina and Perotti (1996) outline several means by which politicians may make public budgets less transparent, thereby raising the transaction costs of monitoring fiscal conditions for a public subject to fiscal illusion or incomplete information:(6) (1) biased macroeconomic...