Budget battle as fiscal year spurs wasteful spending at year's-end

CHICAGO, Oct. 1, 2013 /PRNewswire/ -- They're at it again. The stalled budget battle in Washington is nothing new.  In fact, it's the exception rather than the rule for Congress to pass an appropriation bill on time.  But a new study shows that such delays at the start of the fiscal year lead to even more wasteful spending when the year comes to a close. The report examines economic evidence that long-storied "use-it-or-lose-it" spending sprees are very real—with expenditures nearly 5 times higher than other weeks of the year—and details how budget delays can make matters worse.

"Faced with uncertainty over future spending demands, there's an incentive to build up a rainy-day fund over the first part of the year, followed by a rush to spend it on lower-quality projects at the end of the year," explains Neale Mahoney, of the University of Chicago Booth School of Business, co-author with Jeffrey B. Liebman of the new working paper from the National Bureau of Economic Research.  The study examined federal procurement data to confirm the existence of such year-end spending surges and the waste that results.

"There's a clear pattern in the data showing later appropriation dates result in a greater fraction of government spending occurring at the end of the year."  The authors claim that, to the best of their knowledge, this is the first economic analysis of wasteful year-end spending in government or the private sector. As part of their research to prove the problem exists, they were also able to reveal a potential solution.

"Our model confirmed three things," notes Mahoney. "First, an organization with a fixed period in which it must spend its budget resources­—like the federal government—sees a surge of spending at the end of the year.  Secondly, such spending is of lower quality, and third, permitting the rollover of spending into subsequent periods leads to higher quality." 

Currently, any money left unspent is not only lost for this year, but Congress may also be inclined to reduce future funding based on such leftovers.  By relieving the pressure to "use it or lose it," Mahoney says, the study's simulations show that, "Most of the inefficiency could be eliminated with relatively modest changes to budget procedures—for example, allowing agencies to roll over unused funds into the next fiscal year for use during a four-month grace period."

The majority of federal spending has little potential for a year-end spending spike (given that 78 percent is dedicated to mandatory programs, interest on the debt, and employee compensation). 

So, the study focused on goods procurement—about 15 percent of federal spending—and, in particular, Information Technology (IT) projects, which along with other office needs show significantly higher-than-average end-of-year spending rates and have flexibility in timing for maintenance and upgrades.  Since nearly all areas of the government carry out IT projects, the study could test hypotheses across a wide range of agencies. With information from a newly-public database (www.itdashboard.gov) tracking 27 of the largest federal departments, the study analyzed $130 billion worth of IT projects, determining that expenditures during the final week of the fiscal year were often of a "lesser quality," which the study deemed more wasteful. By positive contrast, the only agency with authority to roll over unused funds—the Department of Justice—showed that year-end IT spending spikes declined while project quality increased.

The authors acknowledge that a full assessment of potential policy reforms is beyond the scope of this paper, but caution that conventional wisdom that the problem was largely solved back in the 1980s is wrong. "Thirty years after Congress and the GAO (General Accounting Office) focused significant attention on the problem and despite reforms designed to limit it, the end-of-the year spending surge is alive and well—and it has real consequences," the study concludes. And, the longer an appropriation bill is delayed as this new year begins, the more wasteful spending may be expected when it ends.

CONTACT: Susan Guibert (773) 702-9232
                 susan.guibert@ChicagoBooth.edu

                 Ethan Grove (773) 834-5161
                 ethan.grove@ChicagoBooth.edu

SOURCE University of Chicago Booth School of Business