Baseline budgeting, where a smaller increase gets reported as a cut

Let me tell you about the only town on earth where you can get a raise and be told you took a pay cut. You would think such a place would be a punchline. It is the capital of the United States, and the punchline is wearing a lanyard.

Here is how it works. You earned $100 last year. This year you will earn $103. A reasonable person calls that a raise. But a Washington budget analyst, armed with a projection that says you "should" have earned $105, announces that you have suffered a two-dollar cut. You walk out richer than you walked in, and the evening news says you have been robbed.

Folks, that is not a joke. That is the method, and it has a name: baseline budgeting. Let me explain it properly, show you the arithmetic, and then show you how to read the next headline about a "devastating cut" without losing your lunch.

What a baseline is

A baseline is a projection of what the federal government would spend, and collect, over the next ten years if current law stayed exactly as it is. It is not a prediction of what will happen, and it is not a proposal. It is a yardstick. Every new budget plan is compared to it, and the difference is what gets reported as an increase or a cut.

There is nothing sinister about having a yardstick. You have to measure a proposal against something. The trouble is in what the yardstick assumes, and in what gets said about the gap.

The baseline assumes that spending on most programs will keep growing on its own. For programs where benefits are set by law, such as Social Security, Medicare and Medicaid, it builds in growth in the number of people who qualify and in the cost of benefits as prices rise. For programs funded through annual appropriations, the baseline traditionally assumes that last year's funding continues, adjusted upward for inflation. So the yardstick is a line that rises every year by itself. Any plan that rises more slowly than the line is measured as a reduction relative to it, even though the plan spends more than last year.

Where it came from

The baseline idea goes back to the Congressional Budget and Impoundment Control Act of 1974. That law created the House and Senate Budget Committees and the Congressional Budget Office, the CBO, so that Congress would have its own source of budget numbers and not rely on the President's. Among its provisions was a requirement for the budget to be accompanied by "current services" estimates, a projection of what the existing level of government service would cost in future years.

The baseline then grew teeth. The Balanced Budget and Emergency Deficit Control Act of 1985, usually called Gramm-Rudman-Hollings, wrote rules for the baseline into statute, including the rule that the baseline for discretionary spending be the current year's level adjusted for inflation. Later budget laws kept that framework. So the concept of the inflation-adjusted baseline is not a trick someone played on the public. It is the law of the budget process, and it has been for decades.

How the CBO builds its baseline

The CBO publishes a baseline each year, and updates it, in its Budget and Economic Outlook. Its method follows the statutory rules, and it is worth knowing how they run, because the details make the headlines.

Mandatory spending, the programs that run on formulas written into law, is projected according to those formulas. The CBO estimates how many people will be eligible, how large benefits will be, how prices will change, and how the economy will move. A program whose cost goes up because more people qualify or because benefits are tied to inflation will show up in the baseline as rising, with no vote taken.

Discretionary spending, the part Congress decides each year in appropriations bills, is projected under statutory rules. In general, current appropriations are carried forward and adjusted for inflation.

Revenues are projected under current law, including the expiration of any tax provision written to expire.

The baseline is therefore a mechanical exercise. It is the projection of what happens if Congress does nothing at all. The assumptions are public, and the CBO publishes alternatives and updates. That openness is to its credit. My complaint is not with the CBO. It is with what gets said about the yardstick once it leaves the CBO's building.

The arithmetic, in a hypothetical

Let me show you with a labelled hypothetical. This program does not exist. The numbers are for the arithmetic.

Suppose a program is funded at $100 million this year. The baseline assumes that costs will rise 5 percent a year, 3 percent from inflation and 2 percent from growth in the number of people served. Congress passes a plan that increases the program by 3 percent a year, to keep up with inflation but not enrollment.

Year one. The baseline says $105 million. The plan provides $103 million. The headline: "Program cut by $2 million." The reality: the program received $3 million more than last year.

Ten years. The baseline grows at 5 percent a year, so by year ten it reaches $162.9 million, because 1.05 to the tenth power is about 1.629. The plan, growing at 3 percent a year, reaches $134.4 million, because 1.03 to the tenth power is about 1.344. The gap in the final year is about $28.5 million.

The ten-year total. Add up the ten annual amounts. Under the baseline they sum to about $1,320.7 million. Under the plan they sum to about $1,180.8 million. The difference is about $139.9 million, and it will be reported as $140 million in cuts over ten years. Meanwhile, the program's funding rose every single year, and in the tenth year was 34 percent higher than at the start.

That is the trick in miniature. A real increase in each of ten years is reported as a ten-year cut of $140 million. Not a dollar of the "cut" was ever taken from the program. It is a reduction in the increase that the yardstick had assumed.

Why the press loves the word "cut"

Now to the coverage, which is where I allow myself some fun.

A reporter writing about a budget fight has two words available. One is "cut," which is short, vivid and sounds like a crime. The other is "slower growth," which is long, accurate and sounds like a footnote. Guess which one makes the front page. The word "cut" fits in a headline, and it tells readers who the villain is.

I am not claiming every use of the word is dishonest. If a program's funding is reduced from one year to the next, that is a cut, and nobody should pretend otherwise. And if a program serves more people at the same total funding, the amount per person has gone down in real terms, and that is a fair thing to point out. The standard I would hold the coverage to is simple: say which yardstick you used. "A cut compared with last year's funding" and "a reduction from what the baseline projected" are different sentences, and a reader who is told only the second one has been told something that sounds like the first.

Watch for three tells.

• The phrase "cuts over ten years." A ten-year number is almost always measured against the baseline. Ask what the funding is in year one and year ten, in plain dollars. If it goes up, it is not a cut.
• The missing comparison. A story that gives you a reduction without telling you the starting and ending funding has left out the one thing you need.
• The scary round number. "A trillion dollars in cuts" usually means a trillion dollars below a baseline that rises by itself. It is not a trillion dollars out of anyone's pocket.

Notice that this cuts both ways. Politicians of both parties use the baseline when it helps. A party that wants to claim "savings" can describe a smaller increase as a spending reduction, and the claim has the same flaw. A budget gimmick that makes a cut out of an increase can also make a saving out of one. I would like the honest word used in both directions.

The steelman: "the baseline is the honest measure"

In fairness, let me state the case for the current method the way its defenders would.

One, inflation is real. A program funded at the same number of dollars each year buys less every year, so a freeze is in practice a cut. Two, population and enrollment grow, and a program that serves more people with the same money serves each of them worse. Three, a baseline that assumed no growth would make every increase look like a new spending decision and hide the fact that most of the budget runs on autopilot. Four, a baseline needs to be neutral, and "current law continues" is the most neutral assumption available.

Those are good points, and I do not want to throw out the baseline. A yardstick that is useful for the question "what does current law do to the budget?" is a useful one. But look at what the defense proves. It proves that the baseline is a good answer to one question. It does not prove that a smaller increase should be called a cut.

The answer, in numbered points

One: the baseline measures an assumption, not a payment. A cut is money taken away. A reduction from the baseline is money not added. They are different things and they should have different names.

Two: the autopilot is the problem. The deepest objection to baseline budgeting is not that the word "cut" is abused. It is that the baseline builds in growth with no vote. Most of the budget grows by formula, and the baseline treats that growth as the natural order of things and any restraint as an intrusion. For a country that spends more than it takes in, restraint is the thing we ought to be debating, and I explain the size of the problem in do the arithmetic on $40 trillion and the interest bill it carries.

Three: it weakens the incentive to economize. An agency that knows its increase will be called a cut if it falls short of the baseline has a reason to demand the full increase, and to describe anything less as a crisis. The structure rewards asking for more.

Four: the voters deserve plain numbers. Citizens can follow a statement like "this program rose from $100 million to $103 million." They cannot follow a statement about a gap between a projection and a plan. A free people needs to be told the real numbers by the people who work for them.

Five: it is a way to read the debate. You do not have to win the fight over the baseline to benefit from understanding it. Once you know it, you can read any budget story and ask the one question that matters: compared with what?

The Founders and the power of the purse

The Founders gave the power of the purse to Congress, and they gave it to the House first. Article I, Section 9, Clause 7 says "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." James Madison, in Federalist No. 58, called the power over the purse the most complete and effectual weapon with which a constitution can arm the representatives of the people, because by it they can obtain the redress of every grievance.

A weapon is only effective if it is used. Appropriation is supposed to be a decision, made each year, by members who must answer to the voters for it. A system in which most spending grows automatically, and in which any attempt to slow the growth is described as a cut, takes the decision away from the representatives and hands it to the yardstick. I have written about the tools Congress still has, such as the limitation riders discussed in None of the Funds, How Appropriations Riders Let Congress Say No to an Agency, and about how to read the official estimates in Read a CBO cost estimate yourself before you believe the headline. The earmark fight in earmarks came back, and the conservative argument over pork never ended shows how much of the budget fight happens at the edges while the autopilot runs at the center.

You can look at the numbers yourself on the numbers page, and follow your own representative's votes on the oversight page.

The case in brief

1. A baseline is a ten-year projection of spending under current law, and it assumes automatic growth from inflation and enrollment.
2. The Budget Act of 1974 created the CBO and "current services" estimates, and the 1985 Gramm-Rudman-Hollings law wrote the inflation-adjusted baseline into statute.
3. Measured against a rising baseline, a program that gets more money every year can be reported as cut, as the hypothetical showing a $140 million "cut" in a program that grew 34 percent makes plain.
4. The honest standard for coverage is to say which yardstick was used, and to call a slower increase what it is.
5. The real issue is the autopilot: when growth is built in and restraint is called a cut, the power of the purse stops being a decision.

What you can do: the next time a story reports a budget "cut," find the program's funding for this year and last year in the budget documents and see whether the number actually went down, then send the comparison to your representative's office.