Linda Bilmes Takes on Big Budget Questions

Linda J. Bilmes is the Daniel Patrick Moynihan Senior Lecturer in Public Policy at Harvard Kennedy School and a leading expert on budgetary and public financial issues. She is a full-time faculty member at the Harvard Kennedy School and a former Assistant Secretary and Chief Financial Officer of the US Department of Commerce. She has co-authored multiple books and book chapters, including the international bestseller The Three Trillion Dollar War and has written extensively on the cost of war, veterans’ issues, national parks, municipal budgeting and financial topics. Her forthcoming book The Ghost Budget: Paying for America’s Wars, will be published in 2026. 

Professor Bilmes expressed both frustration and sources of optimism with government budgeting in America. At the federal level, she says “almost every single criticism of the budget process is valid.” However, she highlights other levels of government that are getting things right, especially in state and municipal governments. The challenge is to adopt some of these better practices at the federal level to improve both transparency and government efficiency.

The current state of affairs

Much discussion around the U.S. federal budget centers on budget deficits, and the inability to balance the budget. And it is true that the federal budget has shown a surplus (tax revenues exceed spending) only twice since the Second World War. The first was in 1969, the inaugural year of the Nixon presidency. The second was a four-year period during the second Clinton administration, driven by lower defense spending (the so-called “peace dividend”) following the end of the Cold War, and the dot-com boom. Bilmes served as Assistant Secretary and Chief Financial Officer of the U.S. Department of Commerce during this period.

But balancing the budget is only part of the story. An important question is whether the budget process itself is fair and transparent. Does it allocate scarce resources efficiently? Is it accountable to Congress and to voters? Does it have mechanisms that prevent waste and corruption? The budget in this sense is an important fiscal tool in reflects political preferences in what programs and activities are prioritized and which ones are not. Whether or not the budget is balanced, it should be able to address the basic question posed by political scientist V. O. Key Jr.: “On what basis shall it be decided to allocate dollars to activity A instead of activity B?” Why do we buy F-35s instead of school lunches?

The federal budget process that has evolved today falls far short of this ideal. A large part of the budget process is simply incremental: taking the prior year’s budget as the starting point and adding some amount to keep up with inflation. In other words, maintaining the status quo in terms of resource allocation without questioning whether the status quo is appropriate for the future.

Part of the reason for this is the sheer complexity of the legislative process in Congress. Prior to 1974, the budget formulation was primarily the responsibility of the executive branch. Congress’s role was to “tweak it, examine it, and kick it around.” In effect, the allocation decision was led by one person — the President. In 1974, budgetary reforms shifted the lead role in budget-making to Congress — moving the decision from one person to 535 members of Congress.

Those reforms created an “unbelievably complex system” in which budget committees are supposed to create long-term strategic plans for government spending. These committees produce non-binding resolutions, so they are basically toothless. They sit on top of the whole appropriations system that in practice manages the discretionary income, the fiscal committees that manage all the revenues and taxes, and the authorizing committees that manage the formulas for entitlements. “It’s exhausting even hearing about it, let alone teaching it,” says Bilmes.

This dispersion of power inside Congress has led to complete dysfunction and budgetary gridlock. The budget process “as it’s supposed to be done” has only functioned properly “four times in the last 50 or 60 years.” Since 1974, there have been 22 government shutdowns and over 200 short-term continuing resolutions — basically stopgap budgets. The economic and financial cost of these shutdowns in terms of government disruption is huge. Bilmes's current research shows that every time the government faces the threat of a lapse in funding, it costs billions of dollars in preparations, whether or not the government shuts down.

In addition to making the government less effective and less predictable, the budget process creates multiple opportunities for lobbyists and special interest groups to step in and influence where and how federal tax dollars are spent. Bilmes noted that the substantial growth in “political interests, parochial interests, special interests of various kinds and, increasingly, big money, distorts things far more than it did 20-30 years ago.”

The pattern is extremely hard to break. Bilmes points to the example of President Jimmy Carter, who tried to implement zero-based budgeting: rather than building the budget based on the status quo, he wanted to build the budget from scratch so each allocation decision had to be justified. It was just not feasible to do this, and needless to say, “this idea did not go down well with the vested interests.” The initiative ended up going nowhere.

The dysfunction in federal budgeting is preventing us from tackling the national debt held by the public – which is now over $31 trillion, due to expensive wars, tax cuts, growing entitlement spending and one-off expenditures like the Covid pandemic. “We borrowed for all these expenditures when interest rates were low, and today we are spending 14% of taxpayer dollars just on paying interest.” But doing so requires the federal government to generate enough income to pay for all its spending. We can’t do that unless we overhaul the budget system and adopt better practices.

Better ways

Government budgeting is not impossible to reform. We can borrow some best practices from state and local governments, that balance their budgets in most years. For example, Bilmes points to the many city and state governments that do capital budgeting and cost accounting.

Capital budgeting means budgeting differently for long-term projects, like building roads, tunnels and schools, and applying that long-term view to the budgeting process. Says Bilmes, “if you go to any small city in the country,” they plan out their expenditures on infrastructure or IT over a 5- to 10-year period, and they finance these investments over the life of the assets. This spending is separated from their everyday operating budget, which enables the local government to manage its spending better. By contrast, the federal government spends massive amounts on infrastructure projects and weapons systems all the time but they are funded largely through the same annual budget cycle that is used to pay for a mailroom clerk: “We build a veterans hospital people will use for 30 years but we pay for it the same way we pay for a cup of coffee.”

Cost accounting is another tool that some state and local governments have used effectively. These governments try to figure out the costs, including the indirect costs, of activities like filling potholes, recruiting teachers, and removing graffiti – which helps them decide whether to do them directly or hire contractors. By contrast, in the federal government detailed line-item budgets mean we can “drill down to figure out how much the Department of Homeland Security spends to buy each airport scanning machine. But such budgets are not very helpful in determining how much it costs to screen each passenger through airport security.” Overhead costs are often significant in federal departments, but they are difficult to allocate to specific tasks.

Looking at both the pitfalls of the federal system and the successes of local systems, Bilmes has four big suggestions for improving budgeting:

1. Understand the total cost of doing things: Think of government budgets grouped by measurable activities or specific projects, rather than a host of individual line items.
2. Limit the use of emergency spending: Beginning with the wars in Iraq and Afghanistan, and most recently with the war in Iran, Congress has allocated trillions of dollars to so-called “emergency spending.” By statute, emergency spending is meant to cover unforeseen events such as natural disasters. In practice, the “emergency” wartime spending mechanism continued even when the US had 400 bases and hundreds of thousands of troops deployed. This kind of budgetary procedure enables the Administration to circumvent the regular trade-offs in the budgeting process and spend without Congressional oversight, creating what former Defense Secretary Robert Gates called a “culture of endless money.”
3. Fund military spending with higher taxes and offsetting budget cuts: Without emergency spending, the enormous cost of defense and wars must be met by increased taxes and cuts in other government spending. This was how military spending was traditionally managed going all the way back to the War of 1812. In both the first and second World Wars, Congress raised taxes, (especially top marginal tax rates for higher income taxpayers). Such an approach forces accountability and budgetary oversight that has been lacking since 2001.
4. Simplify the tax code: The US tax code is notoriously complex, but it doesn’t need to be that way. Bilmes brought up her experience filing taxes in the UK, where she lived for 12 years. Most individual taxpayers file a simple form without the need of specialist tax filing services.

Government Culture

Good ideas are out there, and we have examples of systems that work. So why haven’t the good ideas spread to the federal government? Even when there is bipartisan consensus on the need for things like process reform, nothing is done. What is holding the system back?

Bilmes argues that both parties in Congress agree that the budgetary process is broken beyond repair. But they cannot move forward unless they have a statutory commission that forces them to redesign the 1974 budget law and vote up or down on proposed reforms.

Meanwhile, she feels that the federal bureaucracy is not built for innovation. Federal workers are given few opportunities to propose or make changes, and the incentives don’t promote it. Civil servants don’t personally benefit from recommending positive changes but they are often blamed if things go wrong. Moreover, the government is heavily influenced by a “lawyer mentality.” Rather than actively trying to make the system better or improve people’s experience with government, the incentive is to follow existing rules to ensure protection from litigation. While rules are an essential aspect of good governance, this culture reinforces risk aversion and makes systems defensive and slow to adapt. Bilmes initially hoped that Elon Musk and DOGE might help promote a more entrepreneurial spirit and culture of innovation in government. Needless to say, that hope wasn’t realized. Much work remains to be done to make the federal budget transparent and efficient.