What’s a baseline budget?
Baseline budgeting is when you start with this year’s budget, add a cost-of-living adjustment, and voila, you have next year’s budget. It’s a quick way to get a bottom-line number, and it helps organizations plan what they can spend for repairs, maintenance, and upgrades. It differs from zero-based budgeting, where the organization has to justify each program every year. Baseline budgeting is better for planning, zero-based budgeting is better for cost-cutting.
But something pernicious happens when politicians get their hands on this process. Any downward deviation from the baseline becomes a cut, even if spending actually rises. In the current debate over the defense budget, it is rarely noted that the sequestered budget actually rises about 2% per year. Spending, adjusted for inflation, is constant.
But bureaucrats play games with zero-based budgets, too. One of the oldest is to put the important programs at the bottom of the page, and the smallest items at the top. Thus, most of the budget gets approved before you get to the hard decisions–those considered too crucial. So your eye moves back up to the middle of the list, where there are a couple of sacrificial lambs.
But that’s not the world we’re in—normal budgetary horse-trading. We’ve traveled through the looking glass to a land where budget increases get spun as program cuts, and where less spending on scientists and engineers at defense contractors is going to put us into the path of an incoming North Korean missile and double the unemployment rate at the same time. I don’t think so.
Baseline budgeting is another way that the “supper club” tab just keeps getting bigger. And the sequester approved at year-end may be the only way to deal with it.
Douglas R. Tengdin, CFA
Chief Investment Officer