Citizens For Tax Fairness put up a pretty easy to read, and humorous, description of incremental budgeting. The State of Utah uses this process (as does the Federal Government). I have pasted the majority of the document here but the full document can be found on the website in MS Word format:
Public Budgeting – The Parable of the Skunks
Ronald Mortensen, Ph.D.
Incremental budget: A budget prepared using a previous year’s budget with incremental amounts added for the new budget period.
State and local governments face serious revenue shortfalls this year. Increasing taxes at a time when citizens have seen their net worth fall like a rock and cut their family budgets to the bare bone doesn’t make a lot of sense. Bonding will only transfer current problems to future generations.
Therefore, this should be the perfect time for governments at all levels to get rid of out-dated, redundant and/or nice-to-have programs that have worked their ways into the budget over the years. This would minimize the impact on the core or legitimate functions of government such as public safety (law enforcement, jails, courts), public health (water, sanitation, air quality), and public infrastructure (roads, highways, water and sewer systems).
To understand why it is so important for government to clean out the dead wood every now and again, let’s look at how the incremental budgeting process works. We’ll use the example of five skunks.
The Parable of the Skunks
My skunks deserve public funding. They make children happy. Seniors love them because they remind them of their days growing up in the country. People come from all around to watch the skunks playing in my yard. While in the area, they go to restaurants and fill their cars with gas. Thus, it is clearly in the public interest for the taxpayers to open up their “family purses” to support my skunks. After all, they enhance everyone’s quality of life and they are a source of economic development.
“Utahans for Skunks” is organized. They hire a lobbyist, put up yard signs supporting public funding for skunks and they contact their elected officials. The Chamber of Commerce, elected officials, civic groups and major newspapers all support a taxpayer investment in my skunks. After all, it will only cost the average family the equivalent of a couple of pizzas a year in higher taxes and the rewards in terms of quality of life and economic development are immeasurable.
After a great deal of work, $1,000,000 in ongoing funding is approved for each of my five skunks. The hard work is done. No one will ever again ask why these stinkers are in the budget.
A year goes by. Officials are preparing the next budget. They have hundreds of millions of dollars in surplus funds to allocate. The skunks automatically get a 10% increase simply because they are in the budget. The next five years are good and now each skunk is getting well over $1,500,000 dollars.
Finally, the economy turns down and tax receipts drop like a rock. Rather than going after the skunks and getting them out of the budget, officials propose a 7% across the board cut in spending. After all, they don’t have the stomach to deal with the stink that the skunks would make if they tried to kick even one of them out of the budget. So, at the end of the day, just like legitimate, core functions of government, the skunks will each be 7% poorer but they will be in the budget for ever more.
This type of budgeting is used by many governments. Some of the identified disadvantages of this type of budgeting are quite revealing:
2. No incentive for developing new ideas.
3. No incentive to reduce costs.
4. Encourages spending up to the budget so that the budget is maintained next year.
5. The budget may become out-of-date and no longer relate to the level of activity or type of work being carried out.