There's an old saying about how you really don't want to know the ins and outs of making sausages—or laws. That venerable axiom is doubly true when it comes to the messiest of laws: a budget. Just look at what happens inside the Beltway when the White House and Congress start divvying up taxpayer money. Defense programs get approved because they are in key lawmakers' districts. Tax breaks get passed because they benefit powerful corporate lobbying groups. Then there are those now infamous earmarks—money spent on pet pork projects—that are quietly inserted into the federal budget by lawmakers of both parties. Last year they may have gone too big when $223 million was earmarked to construct a bridge—the infamous Bridge to Nowhere—connecting a small Alaskan town to an island with just a few dozen inhabitants.
Is it any wonder the U.S. is running an $8.5 trillion national debt and unable to get its annual budget under control? Yet despite the messy process, the American economy is still the world's largest and is expanding at growth rates that make rivals such as the EU and Japan envious. But those nations aren't really America's key competitors of the future. That honor goes to fast-growing China, expanding at over 10% a year, and India growing at around 8%. Together, Asia's super giants have a combined population of 2.4 billion and a nominal GDP of some $3 trillion. Think their budget process is any more efficient?
Debt and special interests—India-style.
Don't count on it. Take India for example. "It's not as well managed as the United States," says Arvind Panagariya, an economics professor at Columbia University's School of International & Public Affairs. "For one thing, India is running very large deficits, and the only thing preventing this from turning into a crisis is that the debt is primarily domestically owned." Despite strong growth, India's combined state and federal budget deficit—the best way to figure things for India, economists say—is running at approximately 8% of GDP. (The Indian union-only debt is 4% of GDP.) By contract, the U.S. federal budget deficit is less than 3% of GDP. India's total national debt is close to 90% of GDP compared with 65% for the United States. So where's all that money going? Interest payments absorb 21% of government revenues, central plan functions (everything from science investment to rural development) 19% and defense spending 13%.
Clearly, something isn't working right. And it's a problem that most Americans can relate to: a financially profligate government satisfying powerful special interests with national dollars. In short, money for votes. Around three-fourths of India's population is rural, so it's not surprising "that a very large chunk goes for expenditures targeted toward the rural poor," says Panagariya. Not that they don't need the dough. The World Bank estimates that around a third of the Indian population lives on less than $1 a day, but that percentage is probably much higher for the rural poor. So in 2005, India passed the National Rural Employment Guarantee Act. It's a New Deal-style program that FDR would have loved. The law promises wage employment to every rural household in which adult members volunteer to do unskilled manual work. Through this measure, the government is trying to eliminate extreme poverty by assuring at least 100 days of employment per year. What's the bill for this largess? By one estimate, it could cost nearly 2% of India's GDP.
The Indian government also rewards powerful domestic interests just like American pols do. It runs a massive subsidy regime for everything from water to electricity to fertilizers to grain. It accounts for nearly 10% of all government spending, and about 0.7% of GDP. "There is a huge amount of waste in these programs," Panagariya says. "Only 20% of the money actually gets down to the people."
But these programs provide sweet deals to politically-connected producers who sell their wares to the government at huge markups. And guaranteed rates of return to fertilizer manufacturers, for instance, have allowed companies with costs two to three times the price in the world market to stay in business, according to an analysis by S&P. The rating firm estimates that between food and fertilizer subsidies, eliminating the subsidies would be equal to more than 1% of GDP. All in all, it's a relationship reminiscent of the Pentagon and its contractors, who are often awarded cost-plus contracts where the government agrees to pay for any cost overruns. However, when the Indian government presented its budget earlier this year, the country's finance minister did vow to "take up the task of re-structuring the subsidy regime."
A different story for China?
So, the more you poke at the Indian budget system, the uglier it gets. But at least you can examine it in detail. Not so with China, says Minxin Pei, director of the China Program at the Carnegie Endowment for International Peace in Washington, DC. "The Chinese budget is a black hole," Pei says. "It's not transparent at all. They really don't itemize very much at all." He says that economists estimate that the Chinese government reveals only about a third of the money it actually spends. And annual budget reports only give a rough sketch of spending.
One example of this lack of transparency is the defense budget. Calculating just how much money the government spends on the military has become a bit of a parlor game for the West. The RAND Corporation, for instance, thinks defense spending could run as much as 70% higher than what China says, or about 3% of GDP. Other groups, like the Stockholm International Peace Research Institute, come up with other figures.Like the former Soviet Union, China has a highly structured government—at least on paper. In addition to the presidency and National People's Congress, there are all sorts of vice premiers and councilors and ministers. But Pei says it's the wide and vast bureaucracy that really influences how money gets spent—as has been the case with China for thousands of years. "The legislature is really just a rubber stamp," Pei says.
And as a result of handing power to the bureaucrats across multiple ministries, "you have a lot of off-budget funds," explains Joydeep Mukherji, an analyst with Standard & Poor's. "For instance, if you buy a railway ticket, you have to pay a tax on the ticket. But that money goes to the railway ministry, not the central treasury. Aggregating all this money from different parts of the system and making it part of the common pool is an ongoing struggle."
The country currently has a budget deficit of around 3% of GDP and a total national debt of around 24% of GDP. And not all the spending comes from the central government. Unlike Indian states, Chinese provinces have the right to collect corporate income taxes levied on enterprises they own. They also get a share of the national value-added tax. In the provinces are growing calls for local government accountability which may at some point translate into more openness in Beijing. And if the budget process in Beijing works anything close to the way it does in Mumbai and Washington, people aren't going to like seeing how the sausage gets made. Not that they would want to anyway.
About James Pethokoukis
James Pethokoukis is a senior writer for U.S. News and World Report.
