Budgeting Prior to the Classical

Budgeting

Prior to the classical budgeting era that emerged in mid-19th century and continued till mid-20th century, we had another model of budgeting which was grounded in the concept of decentralization. But this model was found ineffective and when it came apart, its demerits were all too obvious. United States is heavily indebted to Britain and other western countries for shaping of its various institutions including the public budgeting system. The disruption of decentralization budgeting system paved way for classical budgeting model in early 19th century. The earliest records of the emergence of this system are found in the statements of Baron Louis who was the French minister of finance in the period right after the Napoleonic Wars. He was probably among the pioneers of classical budgeting when he announced in 1815 that previous financial structure would no longer be followed and thus laid the foundation of classical budgeting:

We are going to present the most exact evaluation of our needs possible, the sums necessary to operate the ministerial departments. Then we shall offer a proposal of the ways and means of meeting them. Each ministry is guaranteed the regular employment of the funds put at its disposal. These funds are in the most rigorous proportion possible to its needs for the services performed. If clarifications are necessary, each minister has to place before you all the elements necessary for you to form your opinion (Caiden, N. 1982).

Classical budgeting was based on four important concepts namely annuality, unity, appropriation and audit. The first characteristic i.e. Annuality meant that all budgets would be developed on yearly basis. Each year the country would determine the needs of various sectors and then allocate resources. Unity referred to a centralized body from which all resources would be allocated. As opposed to decentralized model that was previously in vogue, classical model favored central control. Appropriation was another interesting aspect of this type of budgeting. Classical budgeting endorsed legislative participation in disbursement of resources and taxation. It was believed that this would allow the system to be more transparent. The model advocated public scrutiny and hence accountability was stressed. Audit referred to the activity whereby all expenditures could be monitored, scrutinized and checked on regular basis.

This simple mechanism was highly effective for a long time since it was based on the sensible concept of "incrementalism." This system paved way for accountability and transparency in government departments. It was now possible for the public to hold the government responsible for excessive expenditures or for crossing the budget-determined line. Classical budgeting was based on the concept of incrementalism that was first identified by Aaron Wildavsky. Incrementalism is defined in many ways but the main characteristic is stability which was a vital part of classical budgeting. The allocation made to a particular sector in one year determined the budget for the next year as well with few adjustments. Wildavsky (1984) defined incrementalism as a procedure "where changes are small, alternatives resemble those of the past, and patterns of relationships among participants remain stable." (p. xii) Wildavsky's book, The Politics of the Budgetary Process, published in 1964 is now considered a classic on the subject of public budgeting in the United States. Classical budgeting had some positive as well as normative effects. Summarizing the positive ones, the theorist explained: "The largest determining factor of this year's budget is last year's. Most of each budget is a product of previous decisions . . . many items are standard, simply reenacted every year" (1988, p. 78). And that "... At any one time, after past commitments are paid for, a rather small percentage -seldom larger than 30%, often smaller than 5 - is within the realm of anybody's ... discretion as a practical matter" (1988, p. 78).

Wildavsky's was not critical of classical budgeting theory. He was more in favor of the concept of incrementalism that was a vital part of classical budgeting. He felt that incrementalism was superior to other budgeting approaches because it "increases agreement among the participants" (1984, p. 136) and also because it could reduce "burden of calculation" (1984, p. 136). Wildavsky went on to say that: "Clinging to last year's agreements is enormously economical of critical resources . . . which would be seriously depleted if all or most past agreements were reexamined yearly." (1984, p. 217).

The classical budgeting model proved efficient and practical for many decades but it lost its appeal in mid-20th century when a general trend towards excessive spending took over. This trend was observed all over the world and the main reason for the scope of government's responsibilities that had increased significantly after the two World Wars. Budgets began growing to alarming proportions and between 1965 and 1984 it grew 20 points in OECD countries. But revenues were not growing at the same rate. This was the case in the U.S. too where at the beginning of 1980s, federal budget was found "relatively uncontrollable" (Schick 1990). Social welfare measures had also had a serious impact on spending. These programs which began during the Johnson era were greatly expanded in 1970s thus causing serious burden on the budget. While an attempt to control these expenditures was made still by 1980s, Social Security as well as Medicare and Medicaid programs which had been started in 1965 consumed 6% of the GDP. Along with these, government was also unwilling to reduce domestic expenditure. During 1970s, Reagan refused to cut defense spending which went to a record high during his presidency.

Incrementalism failed to provide a sound theoretical framework in these conditions. The yearly model was widely accepted but the behaviors that were required to go with it were largely ignored and thus incrementalism was considered useless (Schick 1980, 22 -- 24). By 1970s incrementalism was completely discarded as budgets continued to grow excessively.