The numbers do not lie. States, the federal government and many nations around the globe are facing an existential threat in the form of massive fiscal imbalance between expected revenues and promised expenditures. Nations, states and cities alike are bracing before a tidal wave of red ink.
Our current trajectory has all the trappings of genuine monetary crisis -- complete with defaults, financial meltdown and even the potential for political instability.
The underlying threat is something we call "the gap." The gap is a twofold problem, consisting of a fiscal gap between revenue and expenditures, and a performance gap between the way government currently operates and the realities of the new economy. In a world of mobile capital, trans-border exchange, heightened competition and exponential technological change, democratic governments are mired in bureaucratic-age thinking. In order to close their fiscal gap, governments will also need to address the associated performance gap.
The road to fiscal sustainability won't be easy. Many of the expenditures baked into current forecasts are part of the established social contract between citizens and their elected government. Steadily rising costs for social security, old-age pensions and health-care benefits, together with significant demographic shifts, mean that incremental changes will prove insufficient. The kind of big changes that are needed, however, are difficult to achieve in light of the check-and-balance constraints of a democratic political system.
Getting from here to there will require concurrent navigation of three distinct phases that comprise one long, grinding journey: the conceptual stage, the political stage and the bureaucratic stage. These segments of the overall journey aren't entirely sequential -- in fact they need to be considered in parallel -- and there is no sure-fire recipe or step-by-step roadmap for reaching the desired destination.
Nothing is inevitable about the outcome of this journey. One thing is clear: our current path will lead us to a place no one wants to go.
The conceptual stage. Reality, it has been said, is the thing that keeps on happening even if you don't believe in it. The first stage in the journey to fiscal health is to move past historical misconceptions about why the U.S. and a host of other western democracies face such a daunting fiscal picture.
Explanations for the source of these challenges take on a distinctly local flavor. In the United States, blame is often attached to George W. Bush and his wars or to liberals and their social programs. In Great Britain, there are those who blame Gordon Brown, Tony Blair or the London bankers. California's meltdown is often blamed on a dysfunctional legislature.
But when failure of a similar type reoccurs in so many places, it makes sense to look for a shared underlying cause. From Greece to Spain, from Sacramento to Washington, D.C., we are witnessing a pattern of fiscal imbalance and dissatisfaction with the public sector's performance. Democracy is a victim of its own success. Rising standards of living have led to expanded social entitlement programs, longer life expectancy, earlier retirement and declining birth rates.
The conceptual stage will require a widespread, popular acceptance of several annoying and persistent 'realities' that cannot be wished away:
- The gap is real.
- The gap is large.
- The gap cannot be closed by merely cutting waste, fraud and abuse, or by eliminating some humorously unneeded programs.
- The gap cannot be closed by merely raising taxes.
- The gap, in many jurisdictions, is structural and will not go away when the economy finally recovers.
- The gap is based, in part, on a failure to put away sufficient funds to pay for promised benefits to seniors, including retired public employees who have contributed to and lived with an expectation of these benefits.
We have been living in collective denial. Acceptance is an important step in coming to terms with the difficult choices we now face. Our situation begs a critical question: What is to be done? Answering that question means embarking on a political journey.
The political stage. Even if you assume a universal acceptance of the conceptual stage's conclusions -- that our fiscal trajectory is unsustainable, and that the public sector is ill-equipped for its looming challenges -- it still wouldn't ensure moving forward in any particular manner. Agreeing that you have a problem is not the same as agreeing what to do about it.
In all likelihood, different governments facing a similar set of issues will move in different directions with varying degrees of success. The political stage tends to be much, much harder to navigate, prone to the unpredictable machinations of electoral and partisan politics.
The political stage features several realities that make progress daunting. While at times political leaders will place the public interest above any electoral considerations, the politics of democratic governance don't make such choices easy, for the following reasons:
- Special interest politics work against dealing with the gap.
- Current elected officials at every level tend to have a political incentive to serve their current constituents over future taxpayers. As a consequence, the best time, politically, to deal with the gap will always be: "Soon."
- In general, any party out of power has an incentive to exploit for political gain the hard choices the ruling party might make towards closing the gap.
- In general, any party in power has an incentive to move incrementally rather than get blamed for the pain associated with moving boldly to close the gap.
Strategies to help navigate the political stage mainly revolve around fashioning political mechanisms that allow the hard choices to be made jointly, with shared blame and credit. Such strategies include approaches such as the Base Realignment and Closure model, or BRAC, which helped depoliticize a necessary defense retrenchment in the 1990s. A professionalized, non-partisan entity can often have a positive influence, and both the Congressional Budget Office and the U.S. Office of Management and Budget have played a key role in the conceptual stage, and similar entities charged with closing the gap might assist the political stage as well. Other pain-sharing strategies include sunset commissions, semi-independent performance review boards, and targeted blue ribbon commissions. The track record of all of these, however, is decidedly mixed, but under the right circumstances could be helpful. Other techniques include priority-based budgeting, a technocratic approach or unilateral political action due to an explicit electoral mandate or large electoral majorities.
There is no silver bullet to navigating the political stage. Moreover, even if successfully navigated, the political stage can only provide a blueprint for moving forward. Carrying out that plan and actually closing the gap will be the work of the bureaucratic stage.
The bureaucratic stage. Even if the political stage serves up a sophisticated roadmap for what ought to be done, successfully altering a government's structures to deliver on that plan represents a daunting execution challenge. Transforming government and making it more efficient is much harder than launching a new program. On top of the typical execution challenges are all the political and cultural obstacles.
Several strategies can help governments navigate this leg of the journey:
- Identify opportunities (at the agency and enterprise level) for translating the political roadmap into concrete short-, medium- and long-term actions.
- Balance the need to realize short-term savings with the need to achieve long-term sustainability.
- Organize the effort in a manner consistent with goals and pragmatic considerations. The best mechanism for execution may be centrally controlled or by agency-top down or bottom up.
- Use idealized design to envision a smaller, less costly program or agency -- and then employ change management techniques to realize that vision.
Dealing with the gap will be the central challenge of democratic governments around the world for the foreseeable future. The goal is critical: to achieve a sustainable government that is fiscally balanced and structured for the realities of the 21st century. This will be a long journey, one that will require successfully navigating conceptual, political and bureaucratic issues.