Blue Line Budgeting

August 1, 2011

I asked several very smart people this week if they have ever heard of  “Blue Line Budgeting” and they had not. I was appalled. How are we ever going to hold the government accountable for their spending if we don’t know what they really do when they allocate the money?

Then I checked on the Internet and I had to go five pages deep on a Google Search to find a definition of it. Not even Wikipedia knew about it. Isn’t that strange, since Blue Line Budgeting is practiced by the Federal Government every year and is one primary reason for our ballooning debt. I had to look in my Economics textbook to get the best understanding. You will want to read on. This is fascinating.

In regular budgeting – whether your household budget, a small business, a major corporation or the government – it is simply a matter of balancing income and expenditures. If you spend less than you take in, you are in a surplus situation. If you spend more than you take in, you have a deficit. That is easy to understand.

The problem comes in when you cannot predict accurately what income you will have. For instance, a person who works on commission cannot be completely accurate about how many sales they will make. But they have to plan for their future expenses. So they make a budget based on one of three scenarios:

1. A Red-Line Budget: A budget that is largely pessimistic about the amount of income. The expenses, therefore, are based on this small amount.

2. A Black-Line Budget: This is where you take the average amount of income you have had over the past few years and assume this is your income for the next year. Your expenses are based on that amount.

3. A Blue-Line Budget: This is where you exaggerate (or are extremely optimistic about) your income. Blue line spending means you expect a very positive amount of money so you spend on that basis.

Companies budget using one of these three guidelines. Usually they have to take the state of the economy, the company’s health and success in the marketplace and the cost of materials into account. If a company makes widgets and the economy is going well, and there are relatively few widget makers, then they can propose a more Blue Line budget.

Since 1960, the United States Government has proposed a Blue Line Budget EVERY SINGLE YEAR! This means, no matter what happens with the economy, what wars we are fighting, what the tax rate is, we have set a budget forecast based on the Blue Line – the most optimistic view of the future. According to a noted economist, the Government has only had income coming close to their projections three times since 1960.

I say all of this to tell you how to read the phrase “spending cuts”. When you and I make a spending cut, it means we spend less. That is not how the Government does it. They look at their Blue-Line projected budget for Medicare. Let’s say they expect to spend 800 Billion next year on it.  That is up from 700 billion the year before. So, instead of spending 800 billion, they spend 780 billion. They then tell us they cut 20 Billion from Medicare. What they don’t tell you is they only spent less than their own rosy forecast. They actually spent 80 billion more than the year before.

That’s one of the ways we got into debt. Here is what twists my shorts. Everyone was worried that we would default on our debt tomorrow without a budget deal. If the government simply went to Black-line spending for two years, we would be fine. We would pay EVERY BILL.

Blue Line spending. Write your congressman and ask if they have heard of it. If they haven’t, I can send them my Economics textbook. It would make a great paperweight for their office.

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