The right call on the budget for the wrong reason

THE move by the House of Representatives to reject an initiative by the Duterte administration to switch to a cash-based system for the national budget could be sending next year’s proposed P3.757-trillion appropriations back to the drawing board.

What is ironic about that decision is that the reason for the legislators’ rejection of the proposed budget was based on precisely the sort of government inefficiency the cash-based budget is intended to prevent.

In a cash-based budgeting system, the entire allocation of a government agency or department must be spent within the one-year budget period, or it is returned to the treasury. That is in contrast to the current obligation-based system, in which the budget allocation must at least be earmarked for specific expenditures, even if the funds are not disbursed within the budget period.

The “use it or lose it” nature of cash-based budgeting is the reason representatives have balked at supporting it. Many local “pet” projects of lawmakers would be slashed, as these typically must wait for the concerned agencies to handle their national-scale initiatives first, and are not completed in the same budget year, although funds are allocated to them.

That tendency of funds to accumulate in obligation-based budgets is one of the things cash-based budgeting seeks to avoid. Funds that are obligated but not disbursed are potential sources of corruption, besides inefficiency, and represent resources that might be better used elsewhere.

On the other hand, obligation-based budgeting does offer the advantage of some flexibility with respect to longer-term initiatives that may legitimately require more time than the budget term allows.

In cash-based budgeting, the three main steps in the expenditure process – allocation, obligation and disbursement – must all be completed before the effective period of the budget expires (one year under Philippine law). The rationale behind this is that government agencies will work much faster to fully carry out their programs, with services and new developments consequently reaching the people much more quickly.

The congressional resistance to cash-based budgeting smacks of avarice, because it was plainly characterized as concern that implementing the system will result in the loss of funding for “their” projects. That is not an honorable reason for any congressman to be opposed to a measure of national importance.

Even so, it unintentionally reveals a very good reason for rejecting cash-based budgeting.

In practice, cash-based budgets often result in a great deal of waste and needless expenditure, as numerous examples from the US and other countries where it is commonly used show.

Since the concerned agency is likely to have its budget for the following year reduced by the amount that goes unspent in the current year, it is common practice to find ways to spend the entire budget, even if the expenditures make no practical sense.

The famous Alaskan “bridge to nowhere” highlighted by then-vice presidential candidate Sarah Palin in 2008 is one famous example of such an expenditure; there are thousands of others, from ghost employees, to purchases of huge amounts of unnecessary supplies, to pointless construction projects, and more.

Congressional pet projects – P2 million basketball courts, waiting sheds on lightly-traveled roads for commuters, resurfacing perfectly usable concrete roads with asphalt – are precisely the sort of dubious endeavors that would be used to soak up unused budgets.

By proposing a cash-based budgeting system, the administration gives the impression of side-stepping the issue of management inefficiency in government departments – highlighted by records like the DPWH’s only managing to spend about a third of its allocation last year – rather than addressing it directly. No budget system will work well if the concerned agencies lack the capacity to absorb, plan and efficiently deploy resources.

Rather than suggest a radical restructuring of government finance that is sure to lead to a whole new set of problems, the administration ought to focus on the basics of budget performance. If it can make progress in that, then any kind of budget system is likely to work well.

The post The right call on the budget for the wrong reason appeared first on The Manila Times Online.

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