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A New Approach to Budgeting

OMB Memorandum Promises More Resources for Programs that Demonstrate Effectiveness

SOURCE: AP/Charles Dharapak

Office of Management and Budget Director Jeff Zients briefs reporters at the White House in Washington regarding the budget.

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With the start of summer comes budgeting season, when federal agencies work up their budget submissions to the Office of Management and Budget at the White House. This year all agencies hope to persuade the office to let them keep their resources despite the fiscally tight climate and the possibility of sequestration.

Agencies normally budget by using the past year’s program allocations as a baseline and seeking to make only incremental changes. They often ask for a little more money for programs and think about ways to improve the case for programs. The Office of Management and Budget, Congress, and agencies then enter into a debate around how much change is acceptable—and in the end, few programs receive any significant change in their allocations.

It would be better if the budget process involved considering what programs are most effective and then seeking to direct more resources to them. Similarly, where programs are less effective, they should be candidates for significant budget cuts. Unfortunately, few governments work that way—not only is it more time consuming, but often data on the effectiveness of different programs can be hard to come by. What’s more, the culture of incremental budgeting is deeply rooted in agencies.

The Office of Management and Budget is trying to change that with a new memorandum on evidence and evaluation issued to all agencies in May. The memorandum asks agencies to invest more in evaluation and use research to help inform their decisions. In particular, it says:

OMB asks agencies to identify areas where research provides strong evidence regarding the comparative cost effectiveness of agency investments.

And then it offers this carrot of additional resources for agencies that play by the new rules:

OMB is more likely to support an existing resource allocation or a request for new resources supported in this way, and may feature the agency’s reasoning in the 2014 Budget.

I suspect few agencies will be that interested in being featured in the Budget documentation—it’s long and boring, and, really, only budget wonks read it. But many agencies will be attracted to the possibility of increased resources, given the fiscally tight budget context.

To be sure, culture change takes time, and the memorandum will not result in radical change overnight. But it does alter the incentives for agencies—so long as the Office of Management and Budget upholds its promise of rewarding more effective programs and penalizing those that are less effective. This approach could start a process of long-lasting change.

The memorandum also underlines the Obama administration’s commitment to so-called Pay for Success funding approaches, including Social Impact Bonds, where government funds are released only when predetermined outcomes are achieved. To date, the administration has only sought to use discretionary funds to support these approaches. But the memorandum raises the possibility of mandatory programs being used in this way. This is an important move, as many of the greatest savings to federal programs from Social Impact Bonds are likely to be for mandatory programs such as Medicaid.

Consider an arrangement between a state government and an external organization where funds are linked to reductions in homelessness. Not only will achieving the outcome lead to reductions in the state’s expenditures on homelessness services, but they will also reduce health care costs as people enter permanent housing.

The Office of Management and Budget deserves to be congratulated for its leadership in this area, but the Obama administration alone can’t secure change. Congress needs to play its part, as well. Members on both sides of the aisle should look to ensure that scarce public resources are allocated to programs and approaches that are genuinely effective. Later this year, as the administration passes the budget baton to the appropriators in Congress, they too should look to reward these programs with evidence showing that they are more effective.

Jitinder Kohli is a Senior Fellow at the Center for American Progress.

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