Budget Baselines: comment by Jordi Baños-Rovira

Responding to my recent blog on budget baselines, Jordi Baños-Rovira of the Catalonia Budget Directorate (Spain) writes:  I totally agree concerning the importance of producing sound expenditure baselines projections (also called “continuation budgets” or “current services baselines”), not only for traditional annual budgeting, but specially for elaborating medium-term expenditure frameworks (which should be totally integrated with annual budget elaboration).

I’ve done a little research about this topic and I found that there’s not so much bibliography and technical methodological consensus, opposite what happens to the revenue side (there’s a lot of bibliography about tax forecasting).

The very first doubt that appears on baseline budgeting is “what’s a baseline budget?” I mean, we should consider this concept as the resources/expenditures needed in the future (3-5 years) to provide the same level of actual (base year) public services or we should also consider workload/output variations depending on the evolution of potential demand of those services (population, school-aged population, aged population, unemployment, immigration,.. )? I observed that some States in the United States use to elaborate their baseline budget including workload/output adjustments in order to maintain a similar level of covering of the demand, which, obviously, is not the same that maintaining the same level of public production/services.

The two options or approximations of baseline budget, although sharing a common part of methodology (adjustments, indexation, etc…), differ so much in their concept, complexity and results. If I have to recommend one of these approximations to a developing country, I would recommend the one which doesn’t include workload/output adjustment relating the evolution of the potential public services demands (that adds so many complexities to its calculus).

Relating the baseline budget calculus, for the approximation that doesn’t consider potential changes on services’ demand could be considered the following:

1. We can start from the appropriations or estimates from a base year (normally the actual/current fiscal year)

2. Then, if it’s necessary, apply to that initial estimates adjustments if any important policy change has been done (comparing the initial estimates)

3. After that, in order to show the real inertial part of the actual budget, the following adjustments should be done:

a. Elimination of all one-time expenditures (with no recurrence)

b. “Annualization” of the expenditures which has been included in the actual budget, but not on a full-year basis (only if these expenditures will continue in next years)

4. After doing these adjustments, we get what we could call as “adjusted base year”. At this point, the next steps will base on the projection/estimation for the medium-term of this “adjusted base year”. The estimation will proceed in different ways depending the following “blocks” of expenditures:

a. Legal mandatory expenditures (expenditures established on a concrete way by a regulation or law (unavoidable of without possibilities of modulating the supply of services)): for these kind of expenditures It will be necessary to estimate the numbers of potential beneficiaries or clients of these services and also to indexate or to price-update (CPI,.. or what’s established on regulations (if it is)) the individual cost of these services/benefits. Normally these services are transfers to individuals or families (unemployment subsidies, etc..). That’s the only kind of expenditures, no matter the approximation, where it should be necessary to estimate the level of output needed to provide in the next years.

b. Already multi-year committed or programmed expenditures: these expenditures normally are related to multi-year contracts or commitments that have been already approved or those which are programmed but not still contracted/committed (but there will be the approval). These are committed/programmed expenditures that impact in the future and are decisions taken in the base year or in the previous ones. For the next years you should forecast the amounts committed/programmed. Also, if there are multi-year commitments that end in the considered years are recurrent, a price updated renewal could be considered to include in the baseline budget.

c. Recurrent expenditures related to projects or investments that end in the considered years: when investments and projects end, they need to become operational and that implies the appearance of current recurrent expenditures. These expenditures, projected by actual standard costs/expenditures for actual services (indexated or price-updated) should be included in the baseline budget calculation.

d. Expenditures related to the renewal of assets needed to produce the actual level of public services: because of depreciation of assets, every few years a replacement or substitution or assets is needed in order to maintain the same public production capacity. These occasional expenditures should also be included (estimating future prices) in the baseline budget.

e. Rest of expenditures (non obligated and multi-year committed/programmed)

i. Personnel Expenditures: estimation of the general wage increases, promotions and employee benefits (needed detailed information of personnel)
ii. Operating expenditures: indexation or price-updating for the considered years using general (ex: CPI, GDP deflator,..) and specific (if needed) prices indexes (ex: fuel,..).

Although that’s a simple methodology it’s intensive of information systems and time-consuming. Simpler versions could be use, but just indexating or price-updating actual expenditures probably could be not recommendable.

Another interesting question about the baseline budget elaboration is which unit should be the responsible for its elaboration on its initial steps or implementation? Should be the Central Budget Office or the Ministerial/Departmental Budget Offices with the support of the first one? What is sure is that in this process collaboration and participation (sharing budgeting/accounting information) of both sides is indispensable.

I would like to ask and discuss with colleagues and experts around the would about the methodology for calculating the baseline budget, in order to find some common steps and orientations (general recommended practices?).

Jordi Baños-Rovira is an economist who works in the Directorate-General of Budget of the Government of Catalonia (a State/Regional Government of Spain) and is also an associate professor at the University of Barcelona, where he teaches public finance.

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