Running Around the Bases

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

By |2013-02-06T10:00:07+00:00February 6th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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